In 1993, Warren Buffett used $433 million in Berkshire Hathaway stock to purchase Dexter Shoe. In his 2007 letter to shareholders, Buffett explained that this poor decision was magnified because he used the company stock to make the purchase. Warren wrote, “To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future — you can bet on that.”
It’s easy to reflect on all the “what if” investments that each of us have missed. Economist Larry Summers summed it up best with this quote, “Most investors want to do today what they should have done yesterday.”
It is always clear to look back at the “misses”. This week marks the 20th Anniversary of Amazon going public. A $1,000 investment on the day of May 15th 1997 would be worth around $638,000 today. A few weeks ago, Buffett was asked on CNBC why he didn’t buy Amazon shares, and his answer was simple, “Stupidity”. Amazon’s amazing success has disrupted the business model of the entire retail industry. First, it was the bookstores, and then they bankrupted countless other competitors. This earnings season especially the market has been punishing many retail companies that are showing signs of slowing revenue. It is not uncommon to see companies lose over 15% of their value overnight.
Numerous investment lessons can be learned from studying Amazon’s phenomenal success. There is one in particular that I believe is critical to investment success.
A company that continuously grows revenue is much more valuable than a company that is generating profits but has no revenue growth. There are many retail companies that pay above average dividends; however, these stocks have been decimated because of lost revenues to Amazon. On the contrary, Amazon pays no dividend and has never shown any real profits. They reinvest all of their profits back into the business to generate even higher revenues.
There are many investments that appeared cheap on valuation, have substantial cash flows, strong balance sheets, and great dividends. In spite of these justifications to purchase these stocks, I would consider them value traps. With no revenue growth, falling profits will not be far behind. I consider avoiding these types of investments much more important than making decisions based on the daily political games being played out in Washington. I remain much more focused on which investments offer the best future revenue growth.
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