I try to watch Market Call Tonight as often as I can. For those of you unaware, Market Call Tonight is an hour long show on BNN (Canada’s CNBC) that features a manager of a mutual fund/hedge fund/whatever. Viewers call in and ask this expert questions about certain stocks, and the fund manager tells everyone what they think of it. At the end of the show, the guest gives everyone their top 3 picks, and then a year later they revisit those past picks to see how they’ve done.
I’m not sure why I typed out that last paragraph, since it doesn’t have a whole lot to do with this post. Oh well. Editing is for chumps.
One of the companies discussed during an episode last week was Roger’s Sugar, a longtime holding of mine. There are all sorts of reasons I like Roger’s Sugar and I’m happy to hold. The company pays out a steady 6% dividend. The sugar business is mature, revenues basically grow with inflation each year. Canada protects the domestic sugar industry by imposing steep tariffs on imported sugar, meaning Roger’s has only one competitor, privately held Redpath Sugar.
In Canada, the sugar business is fantastic. Sugar prices obviously fluctuate, but Roger’s is able to keep margins pretty steady because they’re essentially just taking a fee for turning sugar beets into refined sugar. Sure, demand suffers a bit when prices are high, but for the most part, sugar demand is pretty constant. If you’re a bakery, you’re not going to stop baking cakes just because the price of sugar has gone up. You’re just going to charge more for your cake and be done with it. People will pay because everybody likes cake, dammit.
As Warren Buffett likes to say, the sugar business has a moat. Foreign competition is non-existent, and will probably continue to be forever, thanks to the developed world having a habit of protecting farmers. The cost to set up a new plant is astronomical. Roger’s already has contracts with all the big farmers and agreements with all the big grocery stores and restaurant chains. The chances of legitimate competition hurting Roger’s are lower than my threesome chances with the two sexiest ladies who read this blog.
Sugar is a boring business. What would you rather own – shares in Apple, or in Roger’s Sugar? Come on, don’t lie. We all know the answer is Apple. Apple is sexy. Everybody’s talking about iPads and the iCloud and whatnot. There’s still the odd girl out there who might even be impressed by the size of the storage on your iPod, if you know what I’m saying.
And yet, this boring stock is up over 50% since I bought it approximately 6 years ago, plus I collected an average of a 10% dividend per year until it converted back to a corporation last year. It’s been a terrific performer for me.
What can Roger’s Sugar teach you about investing? It’s simple. Whenever you can, invest in businesses that dominate their space and businesses that have Buffett’s legendary moat. Yeah, I know this, on the surface goes against my contrarian heritage, but hear me out.
First of all, most of you will never even get close to being true contrarians. It’s nothing against you, most people just don’t have the stomach to buy something when everyone else in the whole world is advocating selling it. By buying into businesses like Roger’s when they get temporarily beaten down (like I did back in about 2006) you can cherry pick a great company trading at a good price.
These days, Warren Buffett looks at the moat first and foremost. Coca-Cola is the undisputed leader in soda sales. Pepsi tries, but Coke is the king in the arena. Pepsi, meanwhile, is the king of the potato chip business. (And I’m not just saying that because I happen to work for that part of Pepsi) Buffett also holds significant positions in IBM, Proctor and Gamble, Wells Fargo, American Express, and so on. Each of these stocks has a fairly easy to see moat.
When you’re ready to hit the buy button to buy a stock, take a moment and ask yourself what the company’s competitive advantage is. When I bought RIM, the answer was simple. The company still dominates the enterprise server market, and Blackberries are much cheaper than iPhones, which will help sales in the developing world.
Compare that to Imation, one of my picks in the stock picking contest with the ridiculously good balance sheet that makes portable data storage devices. They have no brand power, since consumers will just buy whatever’s cheapest. They have no pricing power, since there’s nothing exciting about their technology. They’re basically on a race to the bottom – whoever can make the cheapest stuff will win. This is not a winning formula for investing. So I won’t buy any.
Want another example? How about book stores? I go into the local Chapters and browse the books I want, taking pictures of the ones that interest me. (Note: turn your phone to silent so the shutter noise doesn’t piss off the angry 19 year old lesbian who’s obviously a little bitter her job is going away soon. Let’s not talk about how I know this.) I can use my smartphone to order those very same books from Amazon (or my local library if I’m feeling frugal) at a significant discount WITHOUT EVEN LEAVING THE STORE. It’s cute how bookstores think they’ll still be around.
You’ll hardly ever get the chance to buy an actual monopoly. There are a few duopolies out there, but not many. It’s just too competitive out there for that. The closest you’ll get is waiting until the stock of a company with a good moat goes on sale, and then pulling the trigger. You should do that. And then buy me a sandwich with your profits.