The Joy of Investing in Familiar Companies

The Joy of Investing in Familiar Companies

There are a lot of good reasons to invest in familiar companies whose products and services you are familiar with.

Warren Buffett has suggested that investors stick to simple business that they understand. Warren is considered the greatest investor ever, so it makes sense to listen to his advice. It’s easier to understand consumer oriented businesses that we patronize as customers than it is to understand a lot of businesses that we never encounter in our daily lives.

Peter Lynch, another extremely successful investor in his famous book, One Up On Wall Street, suggested that ordinary investors could beat Wall Street by investing in companies that make some of the hotter new products that they see in stores. Cabbage Patch dolls flying off the shelves?, then think about finding out who makes them and investing in that company. Sony becomes the gold standard in electronics?, maybe we should invest.

Consider how many people invested in Nortel and ENRON and JDS Uniphase and Yahoo and many others without really having a clue what those companies did or how they made money.

Recently I have found myself investing in some profitable companies that are either local or that have stores and offices in my City. I chose these companies because they were profitable, and available at a reasonable price to earnings ratio and I have generally made good returns. I also found that I was better able to analyze these companies as investments because I was familiar with their products and services.

I am finding that I get a certain enjoyment out of owning these companies. I own shares in the company that owns Tim Hortons and I definitely get some enjoyment out of seeing how busy their stores are and how many stores there are. Similarly, I own shares in a local property developer and it’s enjoyable to walk through their development that is close to my house and see the new houses going up, knowing I am benefiting from that. When I owned shares in Sleeman’s I found myself buying their beer. It’s not like my purchase was going to come back to me in profits, but still it’s enjoyable to buy from the companies that I own. I recently bought shares in the company that owns all those MACs convenience stores. So now when my kids want to stop there for a “Slurrpy”, I actually might prefer if there is a long line up in front of me. The list goes on. The next time I am in Quebec I will make a point of visiting a restaurant chain called “Le Cage Aux Sports” because I own shares in it.

There are many examples of familiar companies that are obviously making lots of money. These include Canadian Tire, the big banks, Loblaws, the big gasoline retailers, Shoppers Drug Mart and many others. It’s not immediately clear if these companies are good investments at their current stock prices. However, because you are familiar with these companies it will be easier for you to either analyze them yourself or to interpret an analysis report or recommendation from someone else. In contrast it will be much more difficult for you or anyone else to analyze the likes of Nortel, a mining company, a biotech company, a forestry company, any commodity based company, an aerospace company and many others. Most of these companies sell products or services to other companies. Most investors would be unfamiliar with the prices for their products or any of the factors that determine if they make money.

Being familiar with companies can also help you avoid the bad ones. Over the years I have never been impressed by The Bay. My experiences as a customer helped me to avoid investing in a company that in fact has not done well on the stock market. I don’t know who owns the Arby’s fast food chain, but I would not want to invest in it because I can plainly see it has few customers (and I know I never go there). I avoided airline stocks because I can observe as a customer that the prices are generally much lower now than they were 10 years ago and its hard to imagine that costs would be lower. In terms of private businesses my experience as a customer is that investing in a private single location business would be very dangerous. For many decades now the various chains have taken over almost every type of business that serves retail consumers. It is apparent that it is very difficult to compete against the chains.

In summary it can be a very good investment strategy to focus on investing in simple businesses that you patronize as a customer. You will still need to analyze their financial statements or find someone you trust who has done that for you. But you will be a ahead of the game because these businesses are simply easier to understand than all those unfamiliar business that you have no interaction with. As a side benefit you will find a certain joy in being a part owner of these businesses that you tend to encounter often in your daily life. I call this a “psychic income”. It will also allow you to feel like you are more on top of your investment portfolio.

END

Shawn Allen CFA, CMA, MBA, P.Eng.
InvestorsFriend Inc.
May 7, 2005