Ever heard of the “Stupid Person” theory? Sir David King, the Government’s chief scientist, is guilty of using it. So says a professor from California.
Sir David predicts a three degree rise in global temperatures, leading to 400 million deaths and jeopardising the water supply for no less than 3 billion people.
But we will only face such disastrous consequences, says the American academic, if everyone living on coastal plains stays put when the tides of melted arctic water sweep across them. Food supplies will only run low if we continue to plant crops which cannot cope with warmer temperatures – instead of switching to those that can.
In other words, climate change will provoke a change in where people live and what crops they grow. Either that...or we’re all stupid!
Now, I am no expert on climate change. But I do like the idea of The Stupid Person Theory. You can see this at work in the stock market, too.
Clever investors realise that the world is moving on and do something about it. Stupid investors, on the other hand, do nothing. Change leaves them behind.
Are you crazy enough to buy Woolies’ shares?
Recently I was in Waltham Cross, visiting Red Hot Penny Share favourite Sectorguard. To kill time before my appointment I had a coffee in a rather dreary café, and wandered round the local shopping centre. Eventually I found myself in Woolworths. Frankly I could not get out quick enough.
The store looked as if it had not seen a decorator or interior designer since the 1960s. The lighting was gloomy. The staff looked bored – no surprise with hardly any customers to deal with. The aisles were piled high with cheap compact discs, flimsy toys, sweets, pots and pans, children’s clothes...and the general atmosphere was one of decay.
Why would anyone want to invest in the shares of Woolworths? I have simply no idea. Out-of-town parks, super-aggressive discounts, the trend towards meeting the aspirations of increasingly wealthy customers...every development in retailing seems to have passed Woolworths by.
This is more than just a case of bad management. Woolworths suffers from “shrinkage” – the polite term for customers helping themselves without paying. It also has a large estate of High Street properties from which it must be difficult to escape now that out-of-town supermarkets rule the retail market.
And the simple fact is that we wanted Woolies back in the 1950s. Today we could easily live without it. Someone should tell the shareholders.
Unsurprisingly, Woolies’ share price has been going nowhere for years. Yet it has 37,000 shareholders with £500m of their cash riding on its fortunes. Of course, with this much money at stake, Woolworths has highly paid directors and advisers, keen to convince us that a new winning strategy is just around the corner. All I can say is that this seems a massive triumph of hope over experience.
Woolworths’ investors deserve all they are getting, which is nothing at all.
The 2-to-10 year test
Legendary investor Warren Buffet once famously said “Our favourite investment holding period is forever.” To prove it he has held shares in companies like Coca-Cola for several decades. But companies with the ability to go on and on, relentlessly growing year after year, are few and far between. More typical are companies that never make it at all, or those that enjoy only a temporary period of success.
This honeymoon normally lasts for more than two years, but less than 10. During this period the company will find its products easy to sell, will have a dynamic management team and a lack of real competition.
But like all easy money, it doesn’t last. Sooner or later the product looks out of date. The market becomes saturated. The dynamic management retires and is replaced by bureaucrats, or the directors are persuaded that their skills could work elsewhere and so they make dubious acquisitions.
Since its glory days in the 1950s, Woolworths has suffered from all of these failings. The only surprise is that it still struggles on. But for investors like you and me, there are three other mistakes we should describe as “stupid”.
Are you guilty of investing in a company with a massive pension fund liability? That problem isn’t just going to vanish, you know! Perhaps you’ve also invested in British businesses making clothes or textiles – the kind of industry, which has been in decline for 30 years or more. It’s clearly failing to match overseas competition.
Or maybe you have simply denied the evidence of your own senses, such as that received by your short visit to Woolworths. That should tell you all you need to know about its investment potential. If you can’t understand how a company still struggles on, don’t be stupid enough to buy into it.
Avoid doing these stupid things, and you are more than half-way to becoming a very successful investor. And if you hold Woolworths, or shares in any other failing giant, don’t sit around waiting for a miracle.
Instead, buy new companies run by bright, talented people. In this issue you will find three terrific examples. Their bosses are all smart, ambitious and absolutely committed to business success. But above all they have a proven business model which is still in the early years of delivering rapid growth.
Look ahead to the future, not backwards to the past. You know it makes sense!
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