Flash back to 1966 when the entire Disney company was for sale at $80 million (currently it is trading at $258 billion). Disney had a back catalogue of 200+ films that could be re-released over and over in order to keep generating future profits. They also owned a 300 acre amusement park (Anaheim) that attracted 9 million customers a year and brilliant executives with significant inside ownership. Importantly, it also traded at a dirt-cheap price. Warren Buffett identified this opportunity and invested $3.9 million in order to buy a 5% stake.
The reason for the dirt-cheap price? Back then, Wall Street had no interest in the company since most of Disney’s earnings came from Mary Poppins. Nothing of substance was in the development pipeline, so profits were predicted to go over the cliff edge after consumers were bound to grow tired of Mary Poppins singing ‘’Supercalifragilisticexpialidocious..’’
A year later Buffett sold that stake for $6 million, netting his partners a respectable 54% return. In retrospect, he said selling too early was one of his worse investment mistakes. Had he remained invested, that same stake would be worth approx. $13 billion today. Additionally, today’s Disney owns significantly better intellectual property (IP) than Mary Poppins. Unlike traditional oil companies, where they can only profit from extracted oil once, Disney can continue to re-release and capitalise on its ‘oil’ – which is its IP. Some examples are: Marvel – and all their superheroes, Lucasfilm and its Star Wars Franchise, Pixar with the Toy Story characters, ESPN, not to mention the old favourites, like Mickey & Minnie Mouse, Donald Duck, Goofy, Bugs Bunny, Tweety Bird, Road Runner, Cinderella, Snow White & the Seven Dwarves etc. Additionally, they own new distribution channels like Disney TV and the recently launched Disney+ – their streaming service set to compete with Netflix. Of course, their amusement parks also feature their own characters, which are incorporated into various rides, restaurants etc. This provides a positive reinforcement loop that keeps increasing the value of their intellectual property.
There are two lessons to learn from Buffett’s Disney investment:
- The trick is to make sure you aren’t overpaying for an investment. Write the cheque when the price is too high and it’s like buying a Ferrari stuck in the mud. It would take many years to recoup your investment through the company’s earnings having to grow into the price you paid. Buffet, initially, got it right by not overpaying for a quality business. Currently, a lot of the good quality major tech companies and traditional ‘blue chip companies’ listed in the US are trading in excess of what they are worth, as speculators don’t care what they pay to access these business models. Contrastingly, good quality businesses listed in cheap emerging markets have become cheaper.
- Once a quality investment trades at a steep discount, invest and then remain invested despite experiencing significant volatility along the way. Don’t sell too soon, as Buffett did with Disney, and miss out on significant potential returns.
Some businesses are better than others. What makes it difficult is that these good quality businesses typically sell at high prices (in excess of what they are worth). If all you had to do was figure out which businesses were better than the rest, then anyone could make a lot of money. The key is to be patient and avoid overpaying. Overpaying typically results in permanent capital loss. Only invest in good quality businesses when they are trading at steep discounts (which only happens on rare occasions) and then remain invested once you are invested.
The underlying managers in the Fintax Funds have avoided overpaying for good quality investments. In effect, managing our investors’ risk of permanently losing capital. Their increasing exposure to cheap companies, that have become cheaper, and underweight to increasingly overvalued companies listed in the US, have detracted from shorter-term performance. Longer-term investors have, however, continued to enjoy top quartile performance.
As always, we welcome any comments, queries or questions you may have.
Kind regards
Amédi