I recently spoke with Michael Samuels about my book and investing in general. Michael is the portfolio manager of Broome Street Capital, a fund that specializes in m&a and event-driven trading.
I’ve done half a dozen podcasts at this point about the book, and this was easily my favorite discussion. Michael is in the business, so it wasn’t just a question followed by an answer, but rather a discussion, which I really enjoyed.
At the conclusion of the interview, Michael asked five questions, and one of them left me thinking afterwards. He asked me something to the effect of if you could only pick one stock to give to somebody as a gift that you couldn’t touch for the next 25 years, what would that be?
I am not a stock picker, so I sort of froze on this one. The first answer that came to mind was Amazon. As I was walking to the subway, I was thinking about this answer. My initial internal reaction was embarrassment. Did I really just recommend the second biggest company in the S&P 500? One that is trading at 228 times trailing twelve month earnings? A company with a market capitalization of $880,000,000,000!?! God, what a terrible answer. But then, of course, the rationalizing monster inside of me started thinking, maybe this actually is a decent answer.
To flesh this out a little, the answer would depend on how much money we’re talking. If you’re going to buy $500 worth of stock for a new-born, you might as well throw a hail-mary and pick some tiny biotech company and hope it’s the next Regeneron. But if it’s decent chunk of change, say $10k, then maybe you’re a little more careful. In that case, you’d pick a company you think is likely to be around in twenty-five years, and one that will at least grow in line with the overall market. But this doesn’t really make the question any easier.
This exercise requires you to bet on things that won’t change, as opposed to betting on things that will make the future look different than the past. Going through the list of the top fifty S&P 500 names, this was more difficult than I thought it would be. Now again, I have only a surface level understanding of these companies, so maybe this is not as challenging for people who are more familiar with these businesses. Anyway, here were my thoughts.
- It’s easy to make the case that fossil fuels are not the future, crossing Exxon and Chevron off the list.
- With the rate of change in technology, it’s hard to bet on companies like Apple, Microsoft or Intel or Cisco or Oracle.
- Google and Facebook currently capture the lion’s share of ad dollars, but who’s to say that Facebook is the social network of tomorrow. And Google just got fined by the EU, again, and it wouldn’t shock me to see government intervention at some point in the future.
- Do financial service companies of the future look like those of the past? You could make a case that banks best days are behind us. But if they weren’t, I certainly wouldn’t know whether to choose Bank of America or Wells or, or go with a company like Visa or Mastercard.
- Content is a tough business. Comast? Netflix? Something else? Pass.
- Consumer choices are constantly changing, making it hard to select Nike, or Pepsi, or Coca-Cola, or Philip Morris or McDonald’s.
I still can’t pick just one stock, and of course this is not a recommendation of any sort, but if I had to select a few companies that will look fairly similar tomorrow as they do today, it would be:
Disney (kids will always be kids)
Home Depot (I don’t think dwellings will look very different in 25 years)
Boeing (We’re still a few centuries away from beam me up Scotty)
Amazon (I think they’re just getting started with disrupting traditional retailers. Valuations though could make this tricky, even with a 25-year runway).
I would have selected a total market index fund if that were an option, but that’s a pretty boring answer. However, I view Berkshire Hathaway as the closest thing to a tax-efficient version of an index fund. They’ve done well investing in things that don’t change, so if I had to pick just one, this would probably be my choice. Disclosure, I do own Berkshire Hathaway.
It’s easier to bet on things that people need versus things that they don’t know they want, but this exercise proved to me that neither is easy.
Anyway, this was a really fun conversation, which you can listen to here. Follow Michael on Twitter at @accordtosources
On this week's ATS podcast:
Author Michael Batnick @michaelbatnick and I discuss Wall St.'s greatest missteps, blunders and lapses in judgement from his latest book "Big Mistakes".https://t.co/S8nA2FmTpb pic.twitter.com/p9wqAWVJHQ
— According To Sources (@accordtosources) July 23, 2018