Whatever your impressions of Mark Cuban, owner of the Dallas Mavericks among other business ventures, you should read what he has to say at blog maverick. Several years ago he posted an entry called "How to Get Rich." When a billionaire offers that brand of advice, my ears tend to perk up. His advice did not disappoint. I'll quote liberally...
"The 2nd rule for getting rich is getting smart. Investing your time in yourself and becoming knowledgeable about the business of something you really love to do...Before or after work and on weekends, every single day, read everything there is to read about the business. Go to trade shows, read the trade magazines, spend a lot of time talking to the people you do business with about their business and the people they buy from. This is not a short term project. We aren't talking days. We aren't talking months. We are talking years. Lots of years and maybe decades. I didn't say this was a get rich quick scheme. This is a get rich path.
Now you wait for times of uncertainty and change in your business. The time will come. It may come quickly, it may take years and years. But it will come. The nature of our country's business infrastructure is that it is destined to be boom and bust. Booms are when the smart people sell. Busts are when the rich people started on their path to wealth. You will know when that time is here for you because you will know your business inside and out. You will be ready because you will have been saving up for this moment in time...
...Booms and busts happen in every industry. The question is whether you have the discipline to be ready when it happens for you? If you do, you will find out what it feels like to get lucky."
He speaks of developing deep competence in an industry by coming to know it intimately...understanding its rhythms, its cycles, its strengths, and its weaknesses. It supersedes number crunching and other forms of strictly quantitative analysis, so it's the sort of knowledge that tends to evade Wall Street pros. It's awareness that bolsters your confidence to push your chips in when others are folding and heading for the exits. Because you've studied this industry. You recognize what customers want and when customers buy. You have learned when a dip in earnings is signal of actual trouble for the business and when it's just a temporary blip...just part of the cycle.
Investors are well-served getting to know particular industries as Cuban describes and making bets when they know the odds are stacked heavily in their favor. And while most of us don't have the luxury of being quite so parsimonious with our investments, the spirit of this as a mental model can be applied to our own disciplined approaches.
Two things come to mind as I think through the Hasbro opportunity. First, can I sift through the avalanche of input that represents my research on the company and tease from it the few relevant pieces of information that give me the best shot at understanding its future? These are the business drivers...the variables that have an outsized impact. Second, can I buy it cheap enough that the low price - in and of itself - reduces my downside risk? This I need in case I didn't identify the right drivers or somehow convinced myself I was operating in an area I could comprehend when in fact it was beyond my abilities.
My Hasbro research will take me through several years worth of annual reports, financial statements, investor presentations, quarterly earnings update transcripts, and media features on the executive team. In my experience, if you dive into all this data without a goal of what you're trying to understand, it will confuse you, confound you, and otherwise leave your head spinning in all directions.
To develop a baseline of competence on Hasbro and the toy industry in a reasonable amount of time, I must start with some questions or themes to frame my research. That's where we go next...
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