Investing Beyond The Noise: Identify predictable stocks

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Warren Buffett shares a fun moment at Fisher College of Business, Photo by Aaron Friedman, Flickr

Hi, my name’s Tim Clarkson. I’m a vice president of investments at Van Clemens. I’ve been doing these podcasts to help teach people the basics of investing. In my previous podcast, we talked about three cornerstones of successful investing. These three ideas: staying with your winners, buying undervalued stocks, diversifying your investments, are very simple and easy to understand. 

Identify predictable businesses

The final cornerstone is identifying what qualities make a great stock. Warren Buffett taught me this idea, but it took me a while, five to seven years, to really get it. Within three years of getting it, I became very successful in helping make many of my clients wealthy in the process. The key idea is that you can only predict what’s predictable, or that you can only predict the predictable stock. I was reading the book The Money Masters by John Train, a Harvard-trained investor who wrote an excellent book on investing. He had a chapter on Warren Buffett, and I just could not get it. I read the chapter 17 times. I knew it was important. Warren Buffett was and as you know, one of the most successful investors of all time, in fact, most people think he’s the most successful. Well, the seventeenth time I read the chapter, I finally got it. What Buffett does is separates the world of investing into two groups: predictable businesses, and unpredictable businesses. Then, he only bets on predictable businesses, and then only when they’re cheap, which is generally during periods of fear. Human beings are both remarkable and flawed. 


:49 – Identifying what qualities make a great stock

3:00 – Warren Buffett finds one of the most ‘predictable’ businesses in Minnesota and buys it


Wait, how many businesses are actual ‘predictable’ performers??

The one flaw we all have that we need to be careful of is that we think we know what in fact, we do not know. Truth be told less than 5% of the businesses are really predictable. All the stock market is making bets on future profitability. We think we know how much a company will make when we really don’t. One simple way to think about this is predicting the weather, say, three months out. If you had to be right, would you bet on what the highest temperature is going to be on March the first in Minnesota, or in San Diego? Of course, you’d want to bet on San Diego because it’s 65 to 75 degrees there every day. In Minnesota on March the first it could be 70 degrees, or it could be minus 10 degrees. Most businesses are more like Minnesota than San Diego. What makes a business predictable is this sustainable competitive advantage. Next podcast, we’ll talk about what that means. How did I know I really understood this idea?

Warren Buffett buys ‘predictable’ Minnesota business

About 25 years ago, I was looking at a local company, Dairy Queen. Their earnings went dollar, dollar fifteen, dollar thirty-five, dollar sixty-five. And I said well, that’s a Warren Buffett stock. If it ever gets cheap enough, I bet you Buffett would like it. The stock fell for some reason to a good price at 15 times earnings. And guess what? Buffett bought the whole company! I had predicted Buffett based on understanding what a predictable business is. Now my brother lives in Las Vegas and he likes to gamble. He read a number of books on sports gambling. Less than 3% of the people who bet on sports, football games with spreads make money. Of course, most betters think they can predict the Vikings. Investing is a form of betting on the future. We need to stick with what’s predictable. Next podcast, I will talk about what makes predictable stocks. I want you to really absorb this one idea. The whole scientific method which separates true from fantasy is based on how hard it is really to predict what truth is. Plato said that we see reality like shadows in a cave. We invest like cavemen; we’ll end up living in the caves. I want to invest like Buffett and buy predictable businesses. 

Special offer

Today, I want to invite people who are listening to me to call me. I have one idea that I think is excellent in artificial intelligence. They’re already doing business with some of the best and biggest technology companies in the world. This week, I’ll charge only a $25 commission on any size order to get some new investors started. My number is 612-758-9150, and this is Tim Clarkson, vice president of investments at Van Clemens. 

Listen to Investing Beyond The Noise – Episode 1

Listen to Investing Beyond The Noise – Episode 2 

Listen to Investing Beyond The Noise – Episode 3 

Disclaimer

The discussions contained in and referred to in this podcast are provided for educational, information, and entertainment purposes only. The information, statements, comments, views, and opinions expressed or provided are not necessarily those of Van Clemens and may not be current. Van Clemens does not make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views, or opinions contained in this podcast. Any liability, therefore, is expressly disclaimed. Van Clemens does not undertake any obligation whatever to provide any form of update, amendment, change, or correction to any of the information statements, comments, views, or opinions set forth in this podcast. You should not make any decision, financial, investment, trading, or otherwise based on any of the information presented in this podcast without undertaking independent due diligence and consultation with a professional broker or financial advisory. You understand that you are using any and all information available on or through this podcast at your own risk.