Right after high school, I used to buy & sell cars. I would pour over classified ads looking for cars at discounted prices. Most of the time they were fixer uppers, but I knew that after some work I could sell it for a similar price to recent transactions of similar cars.
I bought my first car for a few hundred dollars, fixed some small things, listed it for sale, and made a few hundred dollars profit.
Given the return on my investment, I was hooked.
I went on to sell more cars and eventually got my dealers license – moving up to big auctions where you’re given a couple of hours to actually test the cars, weigh your input costs, while keeping in mind what you think can sell it for in a reasonable amount of time.
It was a frenzy. There were some great investments and there were some losers.
I once bought a Honda based on a few pictures online. It looked great and Honda’s are always so reliable, right? I thought I could buy it for a couple thousand and sell it for a few hundred-dollar profit quickly thereafter. Wrong.
The transmission slipped. Turns out that part failed in this particular model of Honda made in a particular year range. That made supply low and demand high and the transmission itself would cost a couple thousand dollars. Why didn’t I just do the research? I could have googled “common problems with this model Honda” and known to pass or do more research.
Welp. I debated my options (fixing it or maybe parting out the car), but in the end took it to an auction and sold it for a loss.
There was also a Jeep I found at auction that wouldn’t drive. On top of that, it was a complete mess inside (I’m talking nasty). No one would touch it. Since it was listed as immobile, they didn’t even drive it through the auction, only had it sitting in the parking lot. However, I noted a simple piece wasn’t actually hooked up that was making the car immobile. Most people probably quickly assumed a fix would cost what they could sell it for (much like my Honda experience), and so no one bid. I bid $300, fixed the part, and sold it for a few thousand in a short period of time.
The point of this story is you have to do your homework. Oftentimes you think you know something well, skip steps in your diligence process, and it goes against you. It’s through hard work and diligence where you find a left-for-dead investment that ends up being your best winner.
Why am I giving this background story?
I hope this sheds a little light on my background and what I think about when investing. I now have moved on to investing professionally, but there have been key lessons from my experience buying and selling cars.
- Do your homework, know what you are buying
- Be prepared for unforeseen events
- Opportunities can present themselves when no one wants an asset (the Jeep)
- Investing is about keeping emotions grounded – its easy to lose grip and for greed to overcome fear
In most cases, I try to find investments few people talk about or write on message boards. I prefer to buy ones that have yet to be discovered.
I do not just look at a P/E ratio, I want to understand what company’s competitive strategy is that will drive shareholder returns in the long run. Many times, companies are thrown out just because they operate in a certain industry that doesn’t seem sexy. I tell those people to go look at the fastener company Fastenal – which literally operated in small towns selling screws and went on to be a monster stock performer.
At the same time, I believe sometimes you can have a bad industry, a bad company, but a great security. Typically I want that investment to be supported by strong cash flow, which is the best margin of safety provider. While I care about returns on capital a company can generate in the long run, I care more about returns on my capital.
I also think owning 15-30 stocks you’ve vetted and meet your criteria will outperform owning 500 names that you know very little about.
In sum, if my goal in investing is to grow my assets in excess of what a large basket of stocks could do, I must:
- Buy great businesses that are being underappreciated by the market
- Buy businesses that can generate high returns on our capital
- Ignore short-term thinking, instead thinking about long-term risks to the businesses we own