Friday, January 10, 2014

Lake Wobegon Investing

"Some luck lies in not getting what you thought you wanted but getting what you have, which once you have got it you may be smart enough to see is what you would have wanted had you known." - Garrison Keillor

Tim McAleenan points to a great interview with Don Yacktman of his eponymous fund.  Yacktman's son describes his approach in a way that is immediately recognizable to dividend growth investors - "Basically, what you are saying is, if you buy above average businesses at below average prices, then on average, it is going to work.

That's a very useful way to think about investing. The above average (Lake Wobegon) businesses is somewhat subjective, especially trying to sort which ones will remain so over a decade plus. To get the below average price, there are many ways to look at the price to determine relative cheapness.

Not that there are many bargains lying around these days. Yacktman mentions Procter and Gamble, Coca Cola, and Pepsi. Consuelo Mack rightly says these are a yawn for most people and no doubt this is true.

One thing that is not a yawn is the long term total return from businesses such as these. There was a time earlier in my career when I thought investing was about finding the next great tech or biotech company. Nowadays when I start to think that an idea seems to be boring, I think I am probably fishing in promising waters.

One thing that tends to make these "boring" stocks more exciting is to head over to Long Run Data and see what would happen if you hold these over the long haul

Annualized Total Return 10 yrs $1,000 invested 10 years ago Annualized Total Return 25 yrs $1,000 invested 25 years ago Annualized Div Growth 10 yrs Annualized Div Growth 25 yrs
KO 7.8% $2,113 13.5% $23,648 9.8% 11.4%
PEP 8.9 2,341 13.3 22,452 13.5 12
PG 7.7 2,098 13.9 26,025 10.6 11

Sure the companies that Yacktman mentions are boring, but the total returns are anything but.

In light of the above table,  the returns go from good to great in the 10-25 year window when the compounding really starts to kick in. Given that I will add one thing Yacktman's strategy - Basically, what you are saying is, if you buy above average businesses at below average prices, and hold them for a long time then on average, it is going to work.

Sure you can say there is hindsight bias in these examples, but I don't think anyone investing in Coca Cola, Pepsi or P&G, if they bought in 2004 or 1989 felt that they were taking inordinate risk or had a genius insight to pick these companies.

That's all the news from Lake Wobegon where the holding times are long, the yields are good looking, and the business models are all above average.


  1. Great post - thanks for this! I agree that looking for long term total returns rather than the next big splashy tech or bio firm is the best philosophy for wealth creation. Something I'm focused on this year is making smart purchases for the long term and ignoring a lot of the noise that can really be nothing but distraction.