Two famous companies went public in 2004. One was a worldchanging high-tech icon: Google. The other was a run-of-the-mill fast-food chain: Domino’s Pizza. You can probably guess which one did better.
Except you would probably be wrong. Contrary to what just about everybody thinks, the well-weathered purveyor of pepperoni and tomato sauce has churned out better results for investors than the lusty young tech giant. Since August 2004, Domino’s has produced a total return—that is, both share-price gains and dividends—of about 31% a year. Google (which relabelled itself as Alphabet Inc.) has achieved only 27%.
Jeff Padrick - Klug Studio Inc.
This surprising victory by an apparently mundane company offers important lessons for any would-be Warren Buffett. The most obvious takeaway is that it’s not just the tech sector that produces big winners. For all the glamour that surrounds Silicon Valley, humdrum industries regularly spawn some of the market’s most dazzling performers.
In Canada, for instance, utility-pole purveyor Stella-Jones Inc. and convenience-store operator Alimentation Couche-Tard Inc. have been among the biggest gainers of the past decade. Remember them the next time your eyes glaze over when reading about a prospective investment.
The problem, of course, is trying to identify which of today's ho-hum companies will turn into tomorrow's superstars. Plenty of people will tell you they knew Google, Domino's, Stella-Jones or Couche-Tard was going to be a huge winner. Strangely, though, it's difficult to find much record of these soothsayers' optimism at the time.
Take it from someone who was there: I remember being seriously tempted by Google's initial public offering, but every professional investor I spoke to suggested it was an intriguing but overvalued company that would likely fade once bigger players got serious about this weird Internet stuff. As The New York Times sniffed back then: ''Only time will tell if the company can fend off efforts by Yahoo and Microsoft to build superior search engines.''
The folks who failed to recognize the impending greatness of Google—or, for that matter, of Domino’s, Couche-Tard and Stella-Jones—weren’t being dumb or malicious. They were simply being human. Great opportunities become great precisely because most people don’t regard them as being so wonderful at the time. It’s the element of surprise—and often the lack of competition—that allows companies in the right areas to reap huge profits.
So what should an investor do? One common-sense approach is to invest part of your portfolio in an index of small-cap stocks. This will ensure you own a piece of up-and-coming businesses before any of them get huge. Small-cap stocks tend to produce higher returns than larger ones, according to many researchers, so this approach may boost your overall results. It will also give you the psychological satisfaction of knowing you will invest at least a little in tomorrow's superstars while they're still in their high-growth phase.
Even better, though, might be to go in the opposite direction and deliberately not search for the next big thing. The logic is that many investors lust for stocks with lottery-like payoffs. These giddy buyers are often willing to pay more than a business is really worth because of the small chance it will turn into another Google. By choosing not to play this game, you avoid overpaying for opportunities that, in most cases, won't turn out to be so hot after all.
This is the theory behind low-volatility investing. A growing body of research indicates that, despite what most people think, you don't get better returns by taking on more risk. In fact, buying relatively stable stocks tends to produce better returns over time than betting on the wild and wonderful. A 2016 note from TD Asset Management argued this happens because low-volatility stocks suffer much smaller losses in down markets than their more high-flying counterparts.
Many firms now offer low-volatility funds that seek to take advantage of this anomaly. They're well worth a look. No, they won't give you a piece of the next Google or Domino's pie. But they are likely to produce better results over the long term than endlessly seeking the next unpredictable superstar.
Ian McGugan is an award-winning Globe and Mail writer. Reach him at imcgugan@globeandmail.com or on Twitter @IanMcGugan
Ian McGugan