The Grandma Approach
Summary Don’t be afraid to take a long-horizon approach to investing. Invest in what you know and understand. Always do your due diligence. Introduction Recently I’ve had several conversations with my grandma that caused me to question everything I’ve ever learned about investing. My sweet grandmother is an incredibly intelligent and humble lady. She has the unique ability to light up any room with her infectious smile and unassuming attitude. On Saturdays she spends time at garage sales looking for deals, and on Sundays she attends church, likely praying for the well-being of her rebellious family. Before she retired, she was a communications professor at the University of Texas. What was she not? She is not a financial guru or valuation genius. I don’t think she knows what a price to earnings multiple is, she doesn’t know what EBITDA stands for, and I can definitively say she doesn’t build her own DCF or comps models. Regardless, my grandmother and grandfather took up investing after retiring from professional life. My grandpa primarily is a dividend investor who averages about 4-5% returns year over year on low beta stocks. My grandmother on the other hand has been very willing to take on risk, and she has averaged an absurd 35% average annual return over the last 20 years. In the last year and a half alone she has made a 100% return. When I heard this, I first apologized for spitting out my coffee all over my shirt. Then as I did my laundry, I ruminated over my disbelief and resolved myself to conduct an independent research study on my grandmother. I was determined to know how someone with almost no financial background could so handily outperform some of the most seasoned investment professionals. The Grandmother Approach After hours of discussion, I determined my grandmother has three main criteria when investing She must personally like and use the products or services of the underlying company regularly in her own daily life She doesn’t focus on quick profits, valuation theory, or macro-economic hearsay She buys and holds a stock as long as she likes what the company sells or provides, and she subsequently liquidates her shares when she no longer cares for whatever product or service the underlying company peddles And that’s about it. She might hold a stock forever if she likes what they do. She has no timetables, and she doesn’t really care much about balance sheets. She is a firm focused trend investor with the patience you might expect from a teacher and a mother of three children. You can scoff at her approach, but the truth is she has outperformed the market for the last 20 years. So, for the sake of money, let’s give grandma the credit she deserves and maybe try to learn from her approach. I’m going to go into more detail now about her historical picks, why she decided to buy, and when she finally decided to sell. Hopefully I’ll verbalize an actionable way we too can follow in Grandma’s footsteps. Grandma’s Winners I have decided to include a select sampling of certain stocks she has owned. If this article garners interest, I may choose to included more of her stock picks. It is true that I noticeably am covering a time frame exemplified by ever increasing stock valuations (and possibly artificially inflated returns), though it should be noted that grandma outperformed the market from 2008-2010 as well. Cracker Barrel (NASDAQ: CBRL ) Enter : April 11, 2012 @ 56.20 “Grandpa and I always love to eat at Cracker Barrel when we take road trips. Their service is very good, and the parking lot is always full. Also, Cracker Barrel is always full of people like grandpa and I.” I believe the “people like grandpa and I” comment meant elderly people. After talking to grandma, I did my own due diligence to check if she was correct. The parking lot was in fact completely full, and the target demographic was indeed, shall we say “a little greyer.” I received my chicken and dumplings within 10 minutes, had some coffee, paid for my food, and left within 30 minutes. Granted I visited only one Cracker Barrel in the middle of rural Georgia. However, My grandmother and I reasoned that she had visited around 90 unique locations and assured me her experience was similar each time. 90 of 500 locations within the US is an 18% sample size which frankly was large enough to equal a statistically significant sample group in my own mind. It was official, Cracker Barrel did operate like a well-oiled machine, and my grandma had recognized this fact and capitalized on it. Exit : July 9, 2015 @ 154.65 “I really like Cracker Barrel still, but grandpa has been telling me that the stock is overpriced. Jim Cramer didn’t seem too optimistic either.” It will be hard quantifying a statement like this, but let me try. I believe what she was trying to say is that she felt like she had realized a generous return on her initial investment and was satisfied with what she had returned. When everyone is saying a stock is overvalued, it may be prudent to listen to what they have to say. Result : 171.18% ROI over 3 years and 3 months before a 3.2% dividend. This translates to a 52.67% avg. annual unrealized return without dividend reinvestment. Takeaway : Remember, the grandma approach involves patience, a long horizon, and recognizing solid business. Cracker Barrel checked all these boxes for my grandma, so she invested (and committed to regularly eating/monitoring the performance of her company). I believe there is lot to be said for patience and commitment. Starbucks (NASDAQ: SBUX ) Enter : May 31, 2010 @ 13.26 “Grandpa and I go there all the time. I noticed that it was always full of young people, and I like that I can get little gifts. It seems like there are Starbucks everywhere!” This is largely hearsay and un-technical, but as a “young person” I can attest to the fluidity and convenience of Starbucks’ daily operations. This is largely intangible, but they also offer highly convenient free wifi, they pursue environmentally and socially conscious movements, they offer seasonal beverages (ex. hibiscus tea, pumpkin spice latte’s), they employ thousands, and personally (warning the following comment is highly subjective) I think there coffee is pretty good (albeit overpriced). I think personally, Starbucks’s successful high growth, socially conscious strategy has paid off well over the long term. Strictly from Grandma’s point of view though, Starbucks is: popular, convenient, and widely available. Currently Owns : October 31, 2015 (Present) @ 62.57 Recently, I’ve had conversations with grandma in which she has expressed concern about its value. She believes it is almost time to exit, but she does in fact still own all of her shares. She cited reasons such as its 52 week high, Jim Cramer, and (of course) grandpa. To be fair, SBUX is trading at a 35X P/E multiple with a mere 1.02% dividend. SBUX’s domestic growth opportunities are decreasing, and it will be interesting now to see how SBUX pursues global growth strategies. Considering the vast uncertainty regarding Starbuck’s future growth, it isn’t entirely unfair to see why grandma might have a point here. Result : 371.87% split adjusted return, annualized 68.65% return before its 1.02% dividend. I must say, I was blown away when I crunched the numbers. Cashing out would not be such a bad thing at this point. Takeaway : Popularity, patience, and positive customer experience. These key intangible (yet important) metrics indicate a well-run business/investment. There are hundreds of other reasons why Starbucks has been so successful, but for grandma I believe the three I just mentioned sum it up fairly well. Apple (NASDAQ: AAPL ) Enter : Nov, 1 2005 @ 9.69 “Your father bought me a fancy IPOD, but I couldn’t figure out how to use it for the longest time. I saw so many people buying them though that I knew it must be something special. I thought about it for awhile, and I read up on the company before I decided to buy shares.” It’s honestly hard to say she didn’t luck out on Apple. Apple is a fantastic company that has performed incredibly well. Right now I still think Apple is in value territory and could likely continue its seemingly endless upward trajectory (my opinion). I’ll assume she did her research well and realized Apple’s R&D/marketing was a true differentiator. Honestly I’m more blown away that she never decided to sell. Currently Owns : Presently 119.50 Honestly, holding a stock for 10 years seems like an eternity to me. Grandma calls Apple her “cash cow” and has never seen any reason to sell it. I think it’s fair to say that Apple makes just about anything look good. Apple products have transcended into status symbols in many cultures, and you’d be hard pressed to find someone who does not know at least what Apple is. At a current P/E multiple of 13x, you could argue that Apple is value stock still. Result : Split adjusted return 1,300% before 1.78% dividend over a 10 year horizon. Takeaway : If the quality and desirability of a new technology is apparent in the eyes of a grandmother in her 70s, it’s possible that it’s something special. On a higher level, sometimes jumping on the bandwagon, with a long-term horizon in mind, is not necessarily a bad thing. However, it is important to remain diligent and continually research the performance of the business, the products it is offering, and the desirability of its largest cash producing offerings. The One That Got Away: Facebook (NASDAQ: FB ) What Happened? I mention Facebook because my grandma wanted to buy Facebook from the very beginning, and to this day she is angry that she did not. She was convinced (as many were) that the valuation when Facebook IPO’d was too high, so she chose not to buy in. However, Facebook (even at it’s initially high price @ 38.23 in 2012) has seen a 166.73% price appreciation as of today. Tips for Investing Like Grandma Don’t get too caught up in the noise (CNBC, Fox Business, family), instead remain patient and maintain realistic expectations Don’t be afraid to take a long-horizon approach to investing Focus on companies you understand (and like!) Do your due diligence and spend time getting personally invested in the products and services your company offers Conclusion That’s it! The grandma approach to investing takes patience and personal devotion. Just like you would put time into spouses and family members, get invested in the culture and products of the company you own. Forget the “analyst opinions” and the “most recent news” and focus on what the company you own does for the world. Don’t trust me? Luckily, numbers don’t lie and I believe even the most veteran money manager can learn a thing or two from “investing with grandma.”