Dr. Seuss Nailed a Key Investment Principle
Without a doubt, I set a personal record for the number of times I read the same book. You see, Sylvie, my two year old daughter, has really caught on to Green Eggs and Ham and insists that I read it to her before her afternoon nap and at bedtime. As a result, I must have read this classic over 50 times since last month – easily! And then it hit me (around the 30th time) that Dr. Seuss nailed a key, yet simple investment principle.
The following overlaps with my previous thoughts on Moneyball and the Broken Plate tendency. In the book, a character (that goes unnamed) steadfastly refuses Sam’s repeated advances to try a plate of green eggs and ham. After giving in, the character realized his biases were wrong, and that he in fact really liked the dish.
The Truth vs. Expectations
The key learning here is that the truth can run completely counter to our perceptions. If Dr. Seuss’s character could be compared to the market in general, one can see that his expectations were set low before trying the dish, probably because of its appearance. Actually, it’s possible that the green eggs and ham weren’t that good. The bar was just set so low that any satisfactory result was bound to outperform his expectations.
Green Eggs and Your Portfolio
In investing, incorrect perceptions or temporary problems can lead to companies being viewed as undesirable for investment. Think boring but profitable industries or a scandal that draws a large amount of media attention. Of course, the operative words are “incorrect” and “temporary” – being wrong in those assumptions can be disastrous. Great investors have the courage to think independently and go against the grain, even if it means having to look dumb for a while before being proven right.
Flip it Around
One need not be such a contrarian and intentionally seek out ideas that others view as toxic waste. As an investor, you can benefit from Dr. Seuss by consciously shying away from stocks that have ample expectations built into their prices. Be defensive and live to fight another day. If you have been neglecting your portfolio, take a look at each stock and ask the question, “What kind of growth needs to play out in sales and earnings to justify the current price?”
But High Quality Companies are Never Viewed as Green Eggs
With the exception of severe bear markets, quality usually trades at a premium. This may be so, but it still doesn’t warrant disregarding how much you are paying for growth, ever. Just think about what it would be like to pay a premium price for a dozen fresh farm eggs, only to realize that they are anything but fresh!
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