One of my regular readers, Jon, asked in the comments what stocks are on "our" watch list... so I thought I'd better remind everyone that "we," collectively, don't have a watch list. I have one. You have one. And some of the companies might be the same, but probably not entirely.
The reason "we" don't have a list is entirely based on Rule #1: Don't Lose Money. In order to not lose money, what we buy has to have Meaning to us, individually. For a business to have Meaning, we have to understand what it does well enough to know it is a business that is going to be doing well 20 years from now -- and that it doesn't violate our own moral code. "We" don't have a moral code. You do, and I do.
But "we" don't.
In addition, we need to know not only how a company competes but also how it protects itself so it doesn't have to compete. We call this a Moat.
We have to make a personal judgement that the Moat is wide and deep. We also have to know the Management, in particular the CEO, well enough to know we'd love to marry her or him because we trust her, she shares our values, and in particular, she is not empire building. We know she is all about creating a high return on surplus cash and if she can't, she'll give us the surplus.
And finally we have to buy this wonderful business at a very attractive price - we start buying at about half of what it's worth - and that gives us a huge Margin Of Safety. 4Ms. Meaning, Moat, Management, MOS.
We can automate some parts of the 4Ms: The Big Five numbers that verify the Moat and MOS are easy enough. But we can't automate Meaning and Management. Those are individual judgments. Therefore you have to make your own judgment about what and who you love enough to vote with your money.
And there is another reason "we" don't have a watch list: as much as I love you all (in the love-your-neighbor sense of the word) I am also an investor and don't want you guys mucking up my deals. For example, if I determine that a business is wonderful but not available at an attractive price and I write it up or put it on a watch list here on the blog, some of you fund managers reading this will go out and buy it up every time it starts to be a little bit below Sticker. But if you do that I never get a shot at buying it with a big MOS.
Remember, I'm a business consumer, and as such I want to consume at low prices. Sure I want the thing to go up, but it inevitably will if I've done the 4Ms right. I don't have to hype it up to make it go up. Mr.Market will eventually discover his error and reprice my business without any push from me. Cream will always rise to the top, especially if you quit stirring the milk. But buying at half price requires Mr. Market to do something ignorant. I'm not going to help the Big Guys get smarter by listing the wonderful businesses I want to buy. I'll tell you about some of them when I know the MOS is huge. Then I'm fine with everybody jumping in on the deal. But waiting for the business to be repriced with a big MOS is an exercise in patience and silence.
So shhhhhhhh. Go play quietly.
Phil
