Learning From Stocks You Will Never Invest In

 | Feb 27, 2013 | 1:30 PM EST  | Comments
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Warren Buffett, who will turn 83 later this year, made his first investment more than 65 years ago. I would guess that, since that time, Mr. Buffett has invested in perhaps 400 to 500 securities if we include his personal trades, special situation investments, stocks, bonds and so on. My guess could be way off the mark -- but my point is that, even after nearly 70 years of investing, Buffett has invested a mere sliver of the tens of thousands of securities that are available. What makes him a brilliant investor, I believe, is the fact that he has a working knowledge of thousands of companies, even though he will never invest in most of them. 

Most of us mortals will also invest in just a handful of stocks and bonds. Nonetheless, successful investing requires a constant willingness to learn, and that means reading, analyzing, and researching other companies in which you may never, ever invest.

For example, I've never invested in Wal-Mart (WMT), but I learn a lot from reading its annual report. I've learned that the company is often always the biggest customer for consumer-products names. I've also learned that Wal-Mart knows how to use its buying-power leverage to extract better pricing terms from its suppliers. In other words, over time, companies like Procter and Gamble (PG) -- which counts Wal-Mart as its single largest customer -- will face margin pressure as it tries to keep Wal-Mart happy.

 Today, there are plenty of stocks going through significant events that will offer attentive investors what I believe to be very valuable business lessons. Among these, one of great interest to me is J.C. Penney (JCP), which is attempting a turnaround of epic proportions. For years, the department-store chain has lured consumers via aggressive coupons and heavy discounting. CEO Ron Johnson, brought in from Apple (AAPL) a couple of years ago, is attempting to completely change Penney's model by eliminating these coupons and creating a store-within-a-store model.

Based on share-price performance, the strategy hasn't worked so far, but Johnson claims it'll yield results later this year. If he succeeds, shares of the company stand to double. Retailing is an inherently tough business, so it will be very interesting to observe J.C. Penney and learn from what it does here. 

Away from this, if you want to learn about such things as first-mover advantage, pricing power and market share, pay attention to Apple, Google (GOOG) and Microsoft (MSFT). If want to learn about whether asset monetization is truly a useful valuation tool, pay attention to Chesapeake Energy (CHK), the natural gas giant that has spent the past decade taking on huge leverage in order acquire a unique collection of energy assets. Chesapeake is now working to monetize those assets and unlock shareholder value.

If business school or books have convinced you that low prices always work in a highly competitive industry, study Whole Foods (WFM) and Chipotle (CMG). These companies have proven that they were able to increase prices and continue drawing in more consumers. 

So, while I admit that I'm guided by the principles of a value-based investment approach, this kind of investing does not advocate a "one size fits all" methodology when it comes to valuation. Rather, successful investing demands a constant working knowledge of the many dynamics that actually transpire day to day in the real business environment.

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