When Second Best is Better - The Case for Patient Quality Over Bravery (if you have a job)

Having a job is great, but its good to have extra income sources as well. A common one is to buy some rental property, but they have always seemed like a hassle to me. For one thing I do not have the handy man skills and for another my friends who do own these properties constantly lament the calls that come in at the most inopportune times - Friday evening boiler goes out, Thanksgiving plumbing problems and so on. On the other hand, I guess there's always stocks.

John Authers posted a follow up video to his excellent article - "Be brave, and patient, to make a fortune in value investing." In it he uses some research by Andy Lapthorne of SocGen to explore two schools of value - quality and value. You can think of these in terms of patience (quality) and bravery (value).

Both quality and value have a lot to recommend them in terms of beating the market.

Being brave and buying the cheapest stocks and holding them until their prices reflect true value is clearly the way to earn the best returns. You have to have the stomach for it, because events like 2008-9 will really come a cropper. That level of volatility is enough to ensure that most people will not get the results out of a deep value strategy, because they will sell out in March 2009 instead of buying more.

I enjoyed the buying opportunities of 2008-9, buying companies for 50 cents on the dollar was a memorable experience. I still like bargains, but  I have come round to another reason why quality is preferable even when you can stomach the value volatility and that's this - a job.

As the disclaimer says I am not a finance pro, I do not do this for a living. Many times I am busy at work and do not have time to check in on stocks every day or every week. In a deep value strategy a lot of the companies are under pressure, the companies face all kinds of risk. in theory you can buy cheap and forget about it. But in reality, decisions can come your way at very unpredictable times - operational issues, earnings misses, and events of all kinds. These kinds of events can whack double digit percents off the stock price, which may be a great time to buy more. Or maybe run for the hills if the event is very serious. Or maybe hold and do nothing. If you have a portfolio stuffed with a bunch of lower quality companies, there is a lot of news and movement to digest and react to.

Don't get me wrong I enjoy this decision making process, its just that I do not always have the time to 1) gather and absorb the information 2) come to a conclusion and 3) act on it. If things are busy at work then many weeks can go by and a good time to buy or sell can be lost. I suspect this is the case for the majority of people who are not full time finance pros.

That's where the quality focus comes in. The real benefit to this approach is the pace of decision making. Its pretty unlikely that Coke or General Mills or Kimberly Clark is going to bombard you with many time sensitive decisions in a given year. Just the opposite, these are companies that put you to sleep just thinking about them - ahh...paper products....For someone with a full time job, being a part owner in this kind of low maintenance business is a dream come true.

Let's take a real world example, Russian stocks are selling for low single digit P/E. Cheap, cheap, cheap.  Would it make sense to hold your nose and buy these stocks? At the same time, you do not really own these stocks, the government does. So you're not an equal partner. Beyond that, there is all manner of geopolitical and market risk. At a low enough price you are compensated for taking those risks, but you still have to deal with wide array of events at wildly unpredictable times. Compared to that the evergreen nature of quality companies, like say, a Coca Cola look pretty good.

Its not that the investing opportunity in the abstract is superior for quality over value, rather its the individual's ability to extract the most from the opportunity. And that comes down to decision making process and the pace at which those decisions need to be made. A good goal for an individual investor is to align as much as possible the relative expected amount of decisions with the time that you have to put into analysis. For most investors this is as low as possible, because there are lots of other things to do in this world.

So all else equal I would rather own boring quality than potentially higher rewarding deep value. I do not want the Friday evening call with 3 decisions to make when I am busy with something else. I am perfectly happy to let the plow horse plod along. Second place is not such a bad place to be in this game. When I look at the SocGen indices, I think its hard for most individual investors to replicate the Value index, but the Quality Income strategy is one where the individual in the proper going in mindset is well situated to earn returns that match the Quality Income index.

High Yield Reads - 3/29/14

Summary of recents posts and pieces of interest, sometimes enduring, to dividend investors:

• Brooklyn Investor continues the series on Buffet with 10x Pretax earnings. "It's amazing how so many of the deals cluster around the 10x pretax earnings ratio despite these businesses being in different industries with different capital expenditure needs and things like that."

• Todd Wenning on Getting Better at Selling - Almost every investing book is focused on buying stocks. That's obviously important. But to use an aeronautic example, its as if everyone focused on getting the plane up in the air, but the plane spends way more time in the air than taking off, and that is important, too. So books focus on when to buy but what about when to sell? As income investors, we'd like that to be as close to never as possible. Todd gives ideas on how to get better, the pre-Mortem, in particular, makes a lot of sense to me.

• John Authers, Be Brave, Be Patient to Make a Fortune in Value Investing - mines the intersection of qualitative and quantitative.

• Oddball Stocks - You Need an Investing System. This post is a good example of Authers' article in practice and shows the importance of consistency.

• Great week for bank shareholders, well unless you own Citi. A side note that I found it interesting that the Fed rejected plans from Santander, HSBC, and RBS considering they are not US banks. 

In closing a great piece from Jason Zweig on his work with Daniel Kahneman, perhaps best known as the author of Thinking Fast and Slow:

"While I worked with Danny on a project, many things amazed me about this man whom I had believed I already knew well: his inexhaustible mental energy, his complete comfort in saying "I don't know," his ability to wield a softly spoken "Why?" like the swipe of a giant halberd that could cleave overconfidence with a single blow.

But nothing amazed me more about Danny than his ability to detonate what we had just done.

Anyone who has ever collaborated with him tells a version of this story: You go to sleep feeling that Danny and you had done important and incontestably good work that day. You wake up at a normal human hour, grab breakfast, and open your email. To your consternation, you see a string of emails from Danny, beginning around 2:30 a.m. The subject lines commence in worry, turn darker, and end around 5 a.m. expressing complete doubt about the previous day's work. 

You send an email asking when he can talk; you assume Danny must be asleep after staying up all night trashing the chapter. Your cellphone rings a few seconds later. "I think I figured out the problem," says Danny, sounding remarkably chipper. "What do you think of this approach instead?"

The next thing you know, he sends a version so utterly transformed that it is unrecognizable: It begins differently, it ends differently, it incorporates anecdotes and evidence you never would have thought of, it draws on research that you've never heard of. If the earlier version was close to gold, this one is hewn out of something like diamond: The raw materials have all changed, but the same ideas are somehow illuminated with a sharper shift of brilliance.

The first time this happened, I was thunderstruck. How did he do that? How could anybody do that? When I asked Danny how he could start again as if we had never written an earlier draft, he said the words I've never forgotten: "I have no sunk costs."

To most people, rewriting is an act of cosmetology: You nip, you tuck, you slather on lipstick. To Danny, rewriting is an act of war: If something needs to be rewritten then it needs to be destroyed. The enemy in that war is yourself.

After decades of trying, I still hadn't learned how to be a writer until I worked with Danny.

I no longer try to fix what I've just written if it doesn't work. I try to destroy it instead— and start all over as if I had never written a word.

Danny taught me that you can never create something worth reading unless you are committed to the total destruction of everything that isn't. He taught me to have no sunk costs."

Analytical Toolbox

This page lists useful tools for finding and tracking Wide Moat Dividend stocks.

• Dividend Compass by Todd Wenning. Goes miles beyond the dividend payout ratio to give a nuanced view of the health and sustainability of a company's dividend.  The Dividend Compass goes into the nooks and crannies. Bonus: Todd makes the tools available to download and use. With a little practice you can run a company through the Dividend Compass in about 5 minutes or so.

• Quality, Valuation, Growth Framework by Vitaliy Katsenelson. This is more conceptual than the Dividend Compass and its not even directly focused on dividends. But with some slight tweaking QVG makes a great way to analyze dividend investment opportunities.

• Safer than a Ten Year Screen by Jim Grant. Simple, useful screen on balance sheet safety, yield, price (p/e) and quality (ROE)

First Pick in WMD Portfolio - Coca Cola

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I am launching a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. Portfolio page with goals and tracking is here.

 The first selection was pretty straightforward - Coca Cola. I have written a couple of times about Coke. Its a company that does not ever get too cheaply priced, but its seems fairly priced to me now. What's driving that price? Is it slowing consumption of soda in the US or moderating emerging markets growth? Or more likely both?

On some level those issues are washed away by Coke's quality, safety, and growth. Consider:

• Debt/Equity: 0.6
• Dividend Yield: 3.2%
• 5 year dividend growth: 8%
• Payout Ratio (FCF): 63%
• Return on Equity: 26%

There is a lot to like with Coke - at $38.44 its look undervalued by double digit percentages, with room for continued growth, and dividend growth. Its a bit nerve wracking putting stock picks on paper (ok on a post) and then tracking them - especially starting this whole thing at an all time market high - but I believe in the process of buying above average companies at below average prices. Coke gives investors both of those things at today's price. So Coke at $38 feels like a great place to start a journey in search of wide moat dividends.

Follow the progress of the WMD Portfolio here.

WMD Portfolio

For tracking purposes, I am launching the WMD Portfolio - a journey in search of Wide Moat Dividends.

This is an idea tracking portfolio, rather than just tracking ideas as tickers its more interesting to simulate the process to see weight and growth over time, and so I will track purchases and sell of shares that would cost around $1,000 at time of hypothetical purchase.

WMD Portfolio Stock selection process identifies equities with the following characteristics:

• Wide Moat - stocks selected for the portfolio should exhibit a durable competitive advantage to protect the company's shares and the ability to payout dividends

• Income - A higher than average dividend yield. At the time of this writing the current yield for S&P 500 stocks is around 1.9%, the WMD Portfolio generally looks for companies with the ability to pay at least 50% more than the current S&P 500 yield

•  Safety - Low payout ratio  (generally less than 60% of earnings and free cash flow) of their overall profits as dividends. This is to protect the dividend in the event of downturns.

• Dividend growth - stocks selected for this portfolio should be able to support a dividend growth rate that combined with their current yield exceeds 10 percentage points. For example, a stock paying 3.5% dividend yield should be able to grow its dividend by at least 6.5% or more each year

The primary metrics that I will use to measure the performance of the WMD Portfolio are as follows:

• Total Return: the combined return of the stocks’ capital gains plus the dividend income received

• Current Yield: the “look through” yield of the portfolio as a whole

• Dividend Raises and Cuts: tracking the total number of the Portfolio companies’ dividend raises and cuts over time

Portfolio Selections:

1. Coca Cola
2. GlaxoSmithKline
3. IBM
4. Raven Industries
5. Tupperware
6. Spectra Energy
7. Occidental Petroleum
8. Diageo
9. Rolls-Royce Holdings
10. Exxon Mobil

High Yield Reads 3/22/14

Happy Spring. Summary of recents posts and pieces of interest, sometimes enduring, to dividend investors:

• Jason Zweig: on the downsides of share buybacks. Looking at the Russell 3000 he reports that after the index went up 33.5% and trades at a P/E of 17, buybacks increased in 2013 by 21%. This is more evidence in the ongoing debate that buybacks are certainly not always better than dividends.

• From his fund, one of Neil Woodford's largest holdings was Astra Zeneca. From trailing its peers for years, in the last six months its stock has been on a tear. Yielding 4.4% it now trades much closer the richly valued Roche (another one from Woodford's stable). 

• What is the world's riskiest stock market? No surprise here - Russia. So far this year $600M has exited Russian ETFs. At the end of February, the P/E for Russian companies is 6.5.

• Jason Zweig shares the greatest investing cartoon of all time.

• Dividend Growth Investor analyzes spirits maker extraordinaire Diageo. Its the kind of high quality company that unless we're talking 2008-9, never really trades for a cheap valuation. But the quality metrics are flat out great - 30+% Operating Margins, Return on Equity from the high 30 into the 40s. And its delivered growth - an annualized return of 12.4% over the last decade. They raised their dividend by 8.8% which makes 15 years of dividend increases. With a P/E at 17, that does not seem super high for the level of quality and sustained growth Diago provides

• Todd Wenning sold Tesco for a loss. Like engineers, investors can learn a lot from mistakes, especially if there is a pattern that you can recognize and avoid in future. Losses are no laughing matter, but have to wonder if Todd was worried about Tesco's recent Red Headed League issue. (Note: Kidding)

• Base Hit Investor on pricing power. Pricing power is a key factor in quality and its important to understand both its power and the limits - all good things must end 

• Good story on Buffett & Quicken's Billion Dollar Bracket. Reilly estimates that Berkshire received $15M which Buffett indicated was close. The contest did not last long, all perfect brackets eliminated before end of the second day of the tournament.

Analyzing Dividend Stocks with Vitaliy Katsenelson's Quality, Valuation, Growth Framework

Vitaliy Katsenelson has written two books,  that cover a similar theme: how to deal with flat, range bound markets that sort meander around nowhere in particular. The first is called Active Value Investing and the follow up The Little Book of Sideways Markets.

The author has a knack for illustrating concepts with examples such as using Tevye the milkman to look at how to value a business. Vitaliy Katsenelson is a very good writer, but what appeals to me the most is the clarity of his thought in developing frameworks for how to think about investing. Like a chess teacher explaining big picture strategy (opening, middle game, end game) and connecting them to little picture tactics (forks, pins), the clarity Active Value Investing comes in how the author distills investing strategy into an overall strategic framework and then illustrates how to analyze each area. So its a mix of top down and bottom up.

The main framework that he uses is called QVG - Quality, Valuation, Growth. The basic idea is to use these three factors to manage the effects of range bound markets - avoiding P/E compression and so on.

I think the basic components in the QVG framework are useful beyond value investing, they serve well in analyzing dividend stocks, too. In fact, one the themes of the books is on the role of dividends in range bound markets.

In terms of the value of dividends, the Active Value Investing book shows some compelling data on the source of total returns and the role that dividends play.

Source of Total Returns for S&P 500 from 1/31/1900-12/31/2000

• Price: 4.6%
• Dividends: 5.5%
• Total Return: 10.4%
• % of Total Return from Dividends: 45%

Those numbers highlight the importance of dividends in long term investing. Now let's look at QVG framework as an analytical tool for how it can inform selecting better dividend stocks.

The overall approach in range bound markets in Katsenelson's view, which I agree with, is to remain defensive. Losses always hurt, but in a bull market you can make it back in theory. In a range bound market, a loss can really gut your returns. To protect against losses, Katsenelson factors in three adjustments:

1. Increasing the required margin of safety
2. Increasing earnings (cash flows) growth rates
3. Increasing dividend yield requirements for stocks in the portfolio

The analytics used in QVG are defensive in nature. Some of them apply directly to dividends, others indirectly, and the overall approach dovetails quite nicely with analysis a dividend investor needs to do. Let's dive in.

Quality

For Katsenelson, quality begins with having a moat - a long term competitive advantage. He discusses many of the major types and why they matter. That's probably the biggest factor, its qualitative though, what about quantitative factors? In terms of quality metrics: 

• Predictable earnings - look for companies with recurring revenues. A great example is Becton Dickenson, even in 2008 hospitals didn't reuse syringes! Use, throw away, reorder. Rinse, repeat - that's recurring revenue. 
• Strong balance sheet - Katsenelson makes allowances for companies to have debt assuming they can afford it - meaning stable earnings and cash flow with high return on capital. He does not discuss Clorox but that seems to me to be a good example of a company high debt that meets the other requirements. Otherwise, seek to avoid companies that have the combination of high debt and volatile cash flows.
• Free Cash Flow  - here we come to the single most important metric for dividend investors. Katsenelson describes other benefits of FCF - ability to weather economic storms, not relying on outside financing for operations, and relatively low capital intensive. The main thing for dividend investors to add to QVG is the FCF Cover for the dividend
• Return on Capital - high return on capital is a good indicator of a strong competitive advantage

Each of the quality metrics and the moat concept should be factored in to any dividend investing decision. We are off to a good start with using QVG to analyze dividend stocks, let's look at Growth.

Growth

Quality is sort of intuitively obvious that its something dividend investors should care about, but growth? Growth? That's for biotech investors! 

Well not exactly. As Neil Woodford said, dividend growth matters:

"In the short-term, share prices are buffeted by all sorts of influences, but over longer-time periods fundamentals shine through. Dividend growth is the key determinant of long-term share price movements, the rest is sentiment."

In the short term in range bond markets, Katsenelson finds that the importance of dividends quadruples. So even in the short run, you can have cases where most of the total return is from the dividend. He also describes the tradeoffs of buybacks and dividends, concluding that the former can be beneficial but only if certain conditions, i.e. cheap price, are met.

Valuation
Valuation depends in large part on margin of safety. Katsenelson shows two distinct properties that are derived from the margin of safety. First as a source of returns. Assuming you are correct then the price should return to somewhere close to your estimate. And second, as a risk absorber.

Active Value Investing describes is an in depth analysis of the Absolute P/E and margin of safety to arrive at a Buy price (on a P/E basis).

Of course,  unless we are talking March 2009, its not very likely that you can find a high quality, high growth, low price company. Mostly we are talking about tow out of three at best. Active Value Investing makes the case that one out of three QVG factors is a non-starter. Quality and Growth by themselves are worth considering. Quality and Value as well. However, the most dangerous combination is Valuation and Growth, this is the combination to avoid and may indicate an eroding moat, over leverage, and/or undependable revenue stream.

Applying QVG to Dividend Stocks
While QVG wasn't designed an income investor framework, with some minor tweaks and additions, I see QVG framework as extremely applicable to dividend investors. Its a great addition to the analytical tool box. Dividend coverage and dividend growth specifically need to be brought in, but they fit in well alongside the other quality and growth metrics.

Active Value Investing is a very well written, well thought out book. The author's clarity of thought shows through in the framework, and the practical experience is demonstrated in the numerous detailed examples. The author clearly has "time in cockpit" with the many concepts as is evidenced by the discussions of second and third order effects that fall out of various decisions taken. The framework can be used to improve a portfolio's defensiveness and long term total return through value and income.

High Yield Reads - 3/15/14

Summary of recents posts and pieces of interest, sometimes enduring, to dividend investors:

• "The Most Important Metric for Dividend Investors" by Todd Wenning. Put this one in the enduring interest category. Investors of all stripes need to know which numbers to focus in on. For dividend investors, spoiler alert,  the answer is FCF Cover, but Todd explains the important why and how.
• High Quality, High Fees by Abby Woodham at Morningstar. Breaks down the First Trust Value Line Dividend Index. The holdings are pretty interesting and I wondered upon seeing TIm Horton's is it Todd Wenning's Dividend Compass come to life as an ETF?
• DirecTV by BrooklynInvestor - ok its not a dividend paying company, but its the largest non-Buffett Berkshire Hathaway holding. Todd Combs and Ted Weschler own $1.5B worth of shares (4.2% of the company). Its not a dividend payer, but they do return cash to shareholders through massive buybacks. Management has bought back 65% of shares outstanding since 2006, and with a FCF yield of 10% (see previous article) this looks set to continue.
• U.S. Risks National Blackout From Small-Scale Attack (WSJ) - 9 substations stand between nationwide power and nationwide blackout. Hardening substations alone seems unlikely to solve this problem. The FERC is looking to modernize the grid, Those type of projects fit into the business model of ITC Holdings which is a bit of a unique animal in the utility space. Because they are administered by the FERC they are allowed to earn 15% Return on Equity which is well beyond what most utilities earn 
• The Startling Human Progress that Economists Fail to See by the great John Kay. "
  Militiades did not imagine that what he really needed was a fibreoptic cable."
  
  
  And finally, the tweet of the week from Manual of Ideas
  
  
  
  I was pretty surprised to see last fall to see the cautious Jim Grant so exuberantly embrace standing in front of the propellor, i.e. buy Lukoil and Russian stocks. For me this fails the first rule of investing: remember you are buying a part of a business. Who want to be an owner in name only with no rights? Safety first, Mr. Grant!
  
  
  
  

Brands Matter More Not Less

James Surowiecki posits that brands are in decline. There is no doubt an issue that brands are not evergreen, Jordache jeans or a Pierre Cardin suit anyone? But a lot of this is not "death of brands" as much as creative destruction aka business as usual in a capitalist system.

Surowiecki's main example is Lululemon which is 1) a new brand and 2) riding a very specific trend. I am not sure the notion that Lululemon is in decline means that all other brands are toast. In fact, in the course of making his argument, Surowiecki cites many brands - Consumer Reports, JD Power quality rankings, PWC, CNet, and more.

We're not in the industrial age, we're in the Information age and what a brand means is different now, but its still there and you can make a good case that its even more important. Brands are about things like customer loyalty, the ability to charge higher prices, knowing your customer better than your competition (Bezos calls this being customer obsessed).

For the consumer the sources of information that you trust are a brand. Surowiecki writes:

"“In a world where consumers are oftentimes overwhelmed with information, the role a brand plays in people’s lives has become all the more important.” But information overload is largely a myth. “Most consumers learn very quickly how to get a great deal of information efficiently and effectively,”"

Ah but this is precisely the point - the only reason we are not in full time information overload is that we get our information filtered through brands like NY Times, Fox News, HuffPo, Yahoo, Google and the like. Why do you go to one and not the other? There is a customer relationship that the network has established with you. So the brand has not disappeared, its migrated upstream.

So yes brands still matter a great deal. They matter in new ways in advanced economies due to how people interact with networks and what they deem to be authoritative sources of information and better service providers. Why do Verizon and T-Mobile charge different rates? Why do you buy something at Amazon without checking 16 other online services? Brand matters a great deal in an information economy. There are more layers and with layers more trust and trust comes from brand.

Speaking of mobile networks, which one do you use? How did you select it? Did you go out an inspect the towers, did you see if one runs fiber to its towers? Did you ask to see the data center and what servers are in use? No, you bought on which one has supposedly better coverage, which one is 3G or 4G (are you sitting down? Those are marketing terms) or which one has the phone brand you want. Sure it may not be yoga clothes or pet rock flavor of the month brand but its brand all the same. 

Surowiecki writes that all is not lost for brands "brands retain value where the brand association is integral to the experience of a product (Coca-Cola, say), or where they confer status, as with luxury goods." Agree on both, and Coca Cola has more to teach us about brands. This may come as a surprise to the New Yorker but most people do not live in the developed world. Population centers are in emerging markets. As they come up the curve, they do not have the same "first world problems" as the US. As a tweet posted the other day (cannot remember who) we live in a world where people want music and movies for free but will pay up for organic dog food. But that's not the rest of the world.

The rest of the world has more basic problems like - can I trust this water to drink? Yesterday Unilever announced the purchase in a leading Chinese water purification company - Qinyuan. Why?

China's state-run Xinhua News Agency has reported that 55% of the country's ground water is polluted and 60% of pipes in urban areas are corroded, leading to secondary pollution.

"Consumers are worried about whether they can trust what comes out their tap even for cooking or cleaning," Mr. Stocker said.

As emerging markets develop, brands will play major role in consumer trust just as they have in US and Europe. In networked economies brand plays a role in trust across layers in the system.  And so far from dead, we have a world with both 21st century "networked brands" and industrial age, old school brands still in effect across the globe.

Tech Cliffs

Over on Twitter, Joe Magyer asks a great question:

I have an answer here. I do not think its about being cool. I think its firstly about admitting one's limitations which I find refreshing. This is unique to value investors. Whereas lots of investors try to predict the future of solar or nanotech or biotech, value investors are ok with saying "I don't know." To Joe Magyer's point we should not revel in ignorance, but as investor its certainly good to know your limitations.

Next, I think when many value people say "I don't know tech" what I think they really mean is - I cannot predict who will win. They feel comfortable that P&G and Pepsi will still be selling Tide and Frito's but who will win the Cloud? Hard to say ten years out.

Consider the Dividend Compass Cup (a hypothetical competition for ranking dividends), the two finalists were Microsoft and Baxter. Cash cows today with shades of gray on the horizon.

I think you can look at a lot of tech like pharma. And its no coincidence they trade for similar valuations. You look at GSK, Baxter and the like and you compare them to Microsoft, Cisco, and the like and what do you see? Low valuations, great margins, nice dividends. Why is that?

I think in both cases you have a "cliff" problem. With big pharma, the patent cliff is a very well known problem, when generics come in, sales and margins get hit. What about tech? With tech there is not a FDA imposed cliff, but there are cliffs for sure - competition.

Look at Cisco. They have problems with growth in emerging markets in general and in China specifically. They have the threat of very smart competitors like Juniper. They have the threat of shrinking IT shops (i.e the Cloud). They have the threat companies like Google and Facebook building their own gear from scratch. That is a lot of threats! The certainty of an FDA cliff which you can at least plan for, looks enviable by comparison.

So I don't think its so much of case of willful ignorance as much as it is recognizing that its a hard space for anyone to predict. Having said that Buffett bought into IBM. Makes sense, its as much an Accenture-services type play as a tech company these days. Buffett commented that once he saw how entrenched IBM was at BNSF that was a factor. And Don Yacktman's been buying up Microsoft, Oracle and Cisco (though he says he likes the other Sysco better). So it looks like for the opportunity and the right price exceptions are being made by value investors.

But I think Yacktman is right to prefer the other Sysco. There is value in big tech today but it makes sense to remember that tech cliffs are out there. When was the last time you used a Wang computer? How are DEC sales these days?  To stay ahead leaders are forced into all manner of deals, look at WhatsApp, look at Google and Waze. Some will work out, but its hard to know at the time. And forget about speculative deals, just look at Blackberry's run from ubiquity to irrelevance.

Tech is a business where you are riding the bear, you cannot tell it where to go, all you can do is hold on. Tech is a massively important industry for society but for investors it deserves a discount to account for the inability to predict too far out where cliffs are and which ones to worry about.