Monday, June 30, 2008

Lunchtime Thought: "Wonderful Companies"

"It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Warren Buffett bestows that nugget of knowledge upon us peasant investors. I believe that it's very important to reflect on such a quote during current market conditions.

I must admit that I dream of investing home runs; finding a company and having it double quickly, or appreciate many times over during a longer period of time. I have had a few such successes; a lucky timely buy of Vonage last year was one such trade.

However, chasing out-of-this-world performance usually does more harm than good. Whether due to a value trap or just a dumb investment, I'm down more than the market since my portfolio's inception due to some bad calls while hoping for huge gains.

Why not settle for solid appreciation from a great company? And Buffett's quote is now, more than ever, like a lighthouse's beacon, leading investors through this troubled sea. There are so many great blue-chips on sale - I'll focus on two - that long-term investors can buy now and (likely) look back in five years and realize how they pillaged Mr. Market.

GE is the American blue chip. It has made everything forever. More importantly, the company is trying to tackle future problems - its current portfolio of products include water purification and desalinization units, clean, efficient locomotives and aircraft engines, wind turbines, and more. It's possibly looking to drop its mature brands - like appliances - to free up cash, streamline the business and focus on its future prospects.

There are issues that GE faces in the short-term, namely its financial arm, but it won't cripple the business. But the toxicity of anything financial, coupled with an overall market downturn, has ripened GE's stock for a long-term thinker. The dividend yield, now nearly 5%, is enough of a reason to invest - earn a better yield than you would in a CD while exposing yourself to the possible capital appreciation.

The second company I'll mention is Toyota. Toyota looks like it will become the world's biggest automaker this year, as GM's horribly gas-guzzling lineup is passed over in favor of smaller vehicles. Once again, Toyota faces issues - a maturing (or mature) US auto market, competition from Honda, Nissan, Kia, Hyundai, and the American auto makers (if they can become competitive once again). Honda is releasing a Prius-like vehicle soon, but as of now, Toyota sells the number-one hybrid in the world, and backs it up with a popular lineup of reasonably-sized cars like the Camry. Though its trucks may currently be a burden on business, there will always be a market for trucks, and weakness in American companies' operations (like Ford delaying the new F-150) will benefit that part of TM's business, too.

So, in conclusion, diversified blue-chips do face challenges in this tough economic environment. However, specific issues (GE Finance) and overall market skittishness have probably pushed these gems down farther than they should be. Do what Buffett would do - buy great brands when they are at reasonable prices - instead of chasing bottom-feeders and dead cats.

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