Charlie Munger, the vice chairman of Berkshire Hathaway (BRK.B), has a quote he likes to use that I really enjoy. Munger says: "If you want to ruin your life, try spending time changing your spouse."
The business parallel, at least to Munger, is plainly obvious. Marrying someone to change him/her is crazy. Equally crazy is thinking you can invest in a business and try changing bad management into good.
Trying to turn a good management team into a good one rarely, if ever, happens. On the other hand, replacing bad management with good management is typically the option. By doing that, however, you can place good management into a difficult business. Sometimes it works, more often it does not. Remember J.C. Penney (JCP)? At the time, its largest shareholder Bill Ackman replaced old management with Ron Johnson, arguably one of the best retailing executives at the time. Johnson had great success at Target (TGT) but became a legend in what he did at Apple (AAPL) building its retailing operation. At JCP, he didn't last a year. During the course of his tenure, his approach failed and JCP suffered.
So the simplest and easiest investment you can ever make is buying quality businesses that are well run. And you should be willing to pay a fair price for those businesses as opposed to waiting for bargain prices. Fair price is the key element and understanding what that price is what matters. Clearly, Amazon (AMZN) is a fantastic business, but its price is anything but fair.
On the other hand, when I advocated more than a year ago the buying of Chipotle (CMG) shares when they were trading at 25x earnings, that was, in my view, a fair price for a high quality business. Shares are up over 50% during that time.
That's all there is to it. Find the good, easy-to-understand businesses that don't require a lot of change to succeed. Call them the Coca-Colas (KO) of the world. Businesses like Deere (DE), Wells Fargo (WFC), AutoZone (AZO), Visa (V), or MasterCard (MC). These are businesses with strong franchises, that don't necessarily demand significant change to succeed and have operations that can earn attractive returns on capital. I would even place smaller names like Raven Industries (RAVN), Darling International (DAR), and Fastenal (FAST) in that category.
Value is created through the generation of cash flows. Quality businesses with sound operations are, by definition, consistent cash flow generators. It's that consistency that enables them to deliver shareholder value over the long run. And it's why even the most basic investor can do quite well if he sticks to easy ideas.
