Tactics vs. Logistics: Military Wisdom for the Long Term Investor
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As the military adage goes, “amateurs talk tactics, professionals talk logistics.” An interesting bit of wisdom that reminds us that we can win the battle, but still lose the war. How does this apply to investing? What kind of stocks would come out on top if we applied this yardstick to the market?
In investing, tactics are the daily noise of ticker tape commentary, articles on why the market moved a fraction up or down on any given day, and forecasts on what the stocks will do in the near term. That doesn’t mean the information is wrong or useless, but for investors, these data points are short term clutter.
Companies, too, can have this tactical outlook. Peter Lynch advised avoiding companies that presented ceaselessly on the investor conference circuit, since they often had more hype than substance. Similarly, no investor should want a CEO who juices quarterly results to get a bonus tied to short term targets. Perhaps meeting that quarterly target is tactically wise, but it can be logistically shortsighted and paint the company in a competitive or financial corner in the long run.
In an inversion of the military quote, the amateur investor is wise to leave the tactical level to the so-called professionals. Let traders and high frequency algorithms urgently make millions of daily bets against each other, and instead look years ahead. Investing in farsighted, superior companies can lead to market-beating returns with no sleepless nights. The officers of this class of company don’t think in quarters, they think in multiyear business cycles.
One of the companies with the strongest long term vision is Nucor (NYSE: NUE). It has a strong financial balance sheet and uses it to be countercyclical by investing in capital equipment and making acquisitions during downturns. The no layoff policy isn’t charity, it is a smart long term business plan to hang onto skilled labor in order to be at full capacity for the upturn. Perhaps no move illustrates their over-the-horizon planning better than breaking ground, in the depths of the recession, on a huge new facility and locked in cheap natural gas to power their operations with a decades-long contract with Encana. Importantly, Nucor has a strong track record of getting it right, since it is possible to get the long view wrong, as evidenced by ThyssenKrupp's painfully orphaned state-of-the-art steel mills in the US and Brazil. When the steel cycle finally turns, I do not profess to know, and a question best left to the tacticians out there.
Another obvious behemoth in this category is Intel (NASDAQ: INTC). Intel’s buyback history is consistent and has proven well placed, unlike companies that have haven spent huge sums on buybacks when their stock is at historical highs. Intel has stumbled, and lost market share to more than one nimble competitor, but their massive R&D budget and capital spending for future capacity inspire confidence that Intel is anything but static. Intel is a different animal than some others in the tech space, such as Dell or Hewlett Packard, which have been hobbled by commoditization or muddled business goals, and may never recover.
A third company that meets the criteria is lesser known filter-maker Donaldson (NYSE: DCI). Its mobile and industrial filtration products add value with their premium quality and a smaller footprint, a big consideration as engineers vie for efficiency in tight engine designs, or plant managers organize the shop floor. Donaldson declares itself a technology driven company--probably not the first thing that comes to mind with filters--and they mean it; their R&D goals stretch out for several years. They look years ahead keep a technical lead in a niche that some would call boring, but I would call mission-critical. As icing on the cake, their executive compensation policy ensures their officers and directors have skin the game with ownership policies that align their incentives with stockholders for the long term.
Could I be wrong? Of course, and with any investment you need to keep on top of developments at the company that would undermine your original thesis. Should I buy more now? The prices that these stocks become a good buy are debatable, but buying when they are at multiyear lows will always be a good move, and in this vein I've been adding to my position in Intel. What the stock price will do in the short term is a question to the tactical experts; I'm holding on for a decade or longer.
Anthony Reilley owns shares of Intel and Nucor. The Motley Fool recommends Intel and Nucor. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!