An Investment Garden

It’s about that time of year when whatever faint feeling of guilt I have about not gardening starts to fade.  Granted, the feeling was never that strong in the first place, but I am happy each year when it goes.

Just this past week, I noticed a 6 ft. tall weed in our backyard (it also has friends).  I have done nothing to encourage or assist in the cultivation of this particular growth, however, I am happy to take credit.

Over the summer, my in-laws hosted a beautiful wedding reception in their backyard.  The desert conditions of Utah are not hospitable to my form of gardening–also probably not the landscape their daughter had in mind.  Twice daily, 30-60 minutes of watering and countless hours of on-your-knees gardening (I am sure someone was counting?)…That’s what I call capital expenditures.

When it comes to companies, I look for companies that are more like weeds than beautiful flowers.  Granted their appearances may differ, but let’s not take this metaphor too far.

Below are two companies, numbers in millions.

Last 10 Years
ZINC Housewife Inc.
Operating Cash Flow 407 2,755
Capex 763 249
Net Cash Flow -356 2,506

 

Horsehead Holdings (ZINC) produces speciality zinc and zinc-based products.  Horsehead recently spent a lot of “watering efforts” on building a new zinc facility in North Carolina.  You can see from the numbers that Horsehead has produced negative net cash flow over the past 10 years.  It has increased its debt from $45m to $355m and its share count from 20m to 48m.  In other words, a lot of money has been going in and not a lot has been coming out.

This isn’t rocket science.  I didn’t use my advanced accounting degree (I have none) to tease out these figures.

On the other hand, the housewife business, of which some of you are familiar, has produced $2.5B of net cash flow over the past 10 years.  Not surprisingly, this company’s share count is roughly 55% of what it was 10 years ago.  In other words, a lot of money has been going out to shareholders, almost zero money has been going in.

Investing should be simple, maybe not easy, but simple.  I don’t need to populate hundreds of excel tables and talk to multiple “industry experts.”  Just create a garden of investments that are more similar to weeds than beautiful flowers.

 

 

 

 

 

More to Explore

Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

This Post Has 2 Comments

  1. Would like to know Mr. Pabrai’s thoughts on this, afaik zinc is currently his largest holding…

    1. Fabian,
      Yes, I know this is one of Mr. Pabrai’s largest holdings. It will be interesting to see if he sells prior to the new plant actually producing Zinc or if he holds on to see if the new plant can produce Zinc at a sustained profit. You can make a lot of money buying companies that go bankrupt every decade if you buy and sell at the right times, I just don’t think they are great businesses.

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