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quinta-feira, 11 de agosto de 2011

The "One Decision Stock"

Everyone wants to find a "one decision stock".Do you know what that is?

It's a company you can buy and just hold. One you never have to sell.

Warren Buffett is a member of that club - he
has famously said his favorite holding period
is forever.

Let me give you an example. Microsoft was a "one decision stock".

If you had put $10,000 into Microsoft Corp in 1990. A decade later you'd be sitting on $966,000.

One decision. Then sit on your hands.It's easy to look back with 20/20 hindsight and imagine picking winners - But there areother one decision companies and they dominate industry today... Wal-mart, Berkshire Hathaway, Dell, Apple, Google.If you analyze these one decision companies they all have similar traits.
1) Owner Orientated Management

Wal-mart had Sam Walton, Apple has Steve Jobs,Dell has Michael Dell, Berkshire Hathaway has Warren Buffett.

All of these companies had rock stars leading them - Figures so powerful their reputations eclipsed their companies.

Each of the above "rock stars" are

A) Brilliantpeople but more importantly B) Are owners not just managers.

Each of them dedicated their lives to their business. They have their entire net worth and ego invested their business.
There is a big difference between a manager and an owner.
Look for family owned companies where management own 20%+.I'm always amazed at how big a factor owner orientation is.
2) Durable Competitive Advantage or MOAT

In days of old, castles were protected bymoats.The wider a moat the more protected a castlewas and the harder it was for invaders tobreach the castle.Think of a business as a castle and itscompetitive advantage as the moat.Companies like Wal-mart have huge bigmoats. Wal-mart's moat is that it isa low cost operator, nobody can beatthem on price.Coca-Cola's moat is its brand, in tastetests Americans prefer Pepsi because itis 4% sweeter - But Coca-Cola sells farmore because of the brand.Apple's moat is the quality of its products.Dell's moat is its low prices due todirect selling to consumer - This moathas proved not to be as strong as thought.If you buy a "one decision stock" you'rebuying with the intent on holding it forever.With that in mind, what becomes important,even more important than growth is thatthe company is still around in 20 or 30 years.When you buy a company you're buying itsfuture earnings stream.If that stream lasts 10 years (think AOL)the company is far less valuable than aCoca-Cola which has been throwing off cashfor 100 years and will probably be here inanother 50 years.3) High ReturnsIn the long run the growth of a companywill equal its return on capital.Read that line again.It's important.Say you have a business that can earn20% on incremental capital (a high return).That is for every $1 they add to theircapital base they'll add $0.20 to earnings.In the long run the business will growearnings at 20% a year.This is because growth will come purelyfrom retained earnings.So if they earn $1m in Year 1, in Year 2they'll earn $1.2m.Why?The extra $200,000 is the 20% return onYear 1's retained earnings of $1m.And so on and so on until in Year 10the business is earning $5.1m a year!What's important is that the companyactually has places to reinvest the money.Companies like Google and Microsoft arenot good at this.They have huge cash reserves because theyhave nowhere to reinvest their earnings.An example of a business that CAN reinvestis fast food franchises.If a fast food franchise works well inArizona it'll probably work well inNew Mexico and Texas...This type of company can just keep plowingtheir earnings into opening more andmore restaurants.In other words you can see exactly wherefuture growth will come from.Responsible owner oriented management,a durable competitive advantage andabundant growth opportunities.Use these three pointers to look for"one decision stocks".

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