In life, we generally try to avoid things that bore us as much as possible. But how can an investment in boring companies actually work to our advantage?
“The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name.”
– Peter Lynch
We’re all brought up to believe that boring is bad. That’s exactly why Hollywood movies about Wall Street focus on the more dramatic side of stock investing.
We never see an astute investor pouring over the quarterly reports of a company with a name so boring you’d probably have already forgotten it. No, what we see are crowded market floors, screaming traders, and colorful characters who buy and sell millions on a whim. They even manage to elbow Leonardo Dicaprio or Ryan Gosling in there too for good measure.
But you don’t need me to tell you that real-world investing can be boring sometimes.
Boring doesn’t necessarily mean bad though. In fact, one of the real superstars of the investing world loves boring companies, and even uses mundanity as a key indicator for great investments.
Crown, Cork and Seal
Ok, so it might be a bit misguided to call Peter Lynch a ‘superstar’. But he’s certainly one of the greatest investors the world has ever seen, and the approach he takes towards finding new investment opportunities is unconventional, to say the least.
Crown, Cork, and Seal – ever heard of them?
Unless you’ve read Lynch’s One Up On Wall Street, I’m willing to bet that you haven’t. And for good reason.
Crown, Cork and Seal was a company that produced cans and bottle caps. Today, the company’s known as Crown Holdings, but they’re still in the same game. They claim to manufacture one out of every five cans used in the world, but that doesn’t really make them much more exciting. I think we could all pretty much agree that it’s a boring-sounding company in a boring-sounding business.
Perfect for Lynch.
You see, Peter Lynch believes that the more unattractive a company sounds, the better of an investment opportunity it is. At the time of his writing of One Up On Wall Street for example, Crown, Cork and Seal stock had gone up an impressive 280 fold in the previous thirty years.
Granted, the book was first published back in the late ‘80s. But since then, the newly named company has gone up another 241% in price.
Clearly, the fundamentals behind Lynch’s tactics still apply. But what makes boring companies like this so lucrative?
Avoiding the Chatter
Time and time again, we’ve written about the double-edged sword that is financial news.
Any investor worth their salt will stay abreast of the latest business developments. But they also know that you should never take everything you hear as gospel. Broadcasters have a lot of airtime and column inches to fill, so once they run out of hard news to talk about, they’ll resort to speculation and over-analysis.
It’s typically only the companies in exciting industries that draw such frivolous attention though.
Boring companies, no matter how profitable, don’t make the headlines all that much. There’s only so much good television you can make about the field of real estate development trusts or human capital management solutions.
So instead of being washed under a tide of speculation, less-exciting companies are allowed to let their balance sheets do the talking. If they’re in a boring industry, you can bet there won’t be many people talking about them needlessly.
What’s more, when you do hear news about them, you can bet it will be actual news. This means that you can get an altogether more honest and unbiased idea of their real prospects.
Take the recent Snap Inc IPO for example. The “biggest tech IPO since” Facebook has, so far, turned out to be nothing more than a company who had made a pretty app and not a whole lot of money. But if you had based its prospects on the amount of airtime it got, you would have sold your house just to get in on the action (hopefully you didn’t).
Excitingly named companies in exciting industries will always draw media attention, even when there’s nothing of worth to talk about. Unexciting companies with boring names can avoid the hubbub and get down to what really matters – return on your investment.
Monopolizing the Field
One of the main signals of a great investment is an economic moat.
An economic moat means that the company has an unrivaled competitive advantage in their particular industry. This could come as first-mover advantage, a patent on a product or service – or in the case of boring companies – doing something that nobody else wants to do.
A company like Crown Holdings is extremely unlikely to see a hot new startup storm into the bottle cap manufacturing market and challenge them. It’s a boring industry that has been sewn up long ago. To try and move in on their market share would take more time, money, and effort than it was ever worth.
We use tins and bottle-caps though, so we’ll still need someone to make them. And so Crown Holdings will continue to produce like they have done before, facing no rivals that could undercut them.
That’s a very boring, but extremely profitable, moat.
Or to use a more morbid example, Peter Lynch frequently spoke about Service Corporation International – a funeral company that he described as a sort of “McBurial” service. SCI bought up vast amounts of funeral parlors, cemeteries, and flower shops, and essentially monopolized the burial business. There aren’t many things people want to avoid more than death, but someone has to do it and SCI’s approach worked.
Above all else, one thing was certain – they’ll never run out of customers.
Stock Market 101 tells us that the more people who want to invest in a company, the higher a stock price will rise. It’s basic supply and demand economics. If a company is doing well, more people will want a slice of the pie.
Boring companies in boring industries allay this type of price inflation to some degree however. Again, going back to our first point, not a lot of people want to hear about a company that provides machine vision systems for the use in automated processes of…. well, you get the drift.
Or to be more accurate, no one wants to hear about them until they’re absolutely crushing every quarterly report.
But by then, it’ll be too late to get good value on your investment. The big institutions will have moved in to hoover up stock and prices will be skyrocketing.
Keeping an eye on less interesting companies, no matter how much of snooze-fest their investor reports might be, is exactly how you can invest in a company when the price is right.
Admittedly, having some sort of insider advantage like working in the industry (or maybe even with the company itself) will increase your chances of getting on the boring-business wagon first.
But the real lesson you should take from this is that you shouldn’t just dismiss what you find boring.
Companies are a lot more than the public persona you see on channels like CNBC and CNN. Remember, for all the talk about how a bright new start-up in an exciting new field is going to change the world of tomorrow, there has to be actual figures to support it. Financial analysts can’t predict the future any better than you or me.
Edgy companies can indeed be a great investment, but they don’t have to be flashy to make money. Remember, for every Tesla Motors or Netflix, there’s a Brown-Forman who have seen their stock price go up more than 150% in the last 10 years.
Or Markel, an insurance holding company. Their share price has almost doubled in the last ten years from around $490 to its current high of $990.
What about Intuit, a company that develops software for financial and tax preparation? Most Americans dread tax deadline day, but if you’d invested in the company that automates the process, you’d be up over 280% in the last ten years.
Not bad for a boring business.
Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions in Facebook, Tesla and Netflix.