At Baskin Wealth Management we never stop learning. We always strive to improve our investment approach and to learn from our mistakes as well as the mistakes of others. However, in our lifelong pursuit to become better investors, we strictly adhere to one important rule: Always think like a business owner.
In investing, the temptation to think short-term can be overwhelming:
“That stock keeps going up, maybe we should buy some?”
“That stock has done so well, maybe we should sell it and take our profits?”
“That stock has been a dog! Let’s sell it. You can always buy it back cheaper.”
Any of those actions might turn out well in the short-term. We can only know for sure in hindsight. However, if we always think like a business owner, we stop concerning ourselves with the short-term. Instead, we think of the big picture and focus on what really matters over the long-term.
Acting as long-term investors is what works best for us and our temperament. When you think like a business owner, you tend to gravitate toward businesses that have superior economics and which are run by management teams that have an excellent track record of creating value. Especially during uncertain times, we believe that owning quality businesses will provide the best protection for our clients’ portfolios. A great investor who we admire, Terry Smith, once said “high quality businesses have nothing to recover from”. If we look at some of the best performing stocks in our portfolio during 2020 (Apple, Amazon, Microsoft, Constellation Software, FirstService and Blackrock to name a few), their businesses performed well before and during the pandemic. We also expect these businesses to continue to improve going forward.
Apple was our best performing stock in 2020. Its price went up a staggering 80% last year. Did its business improve by 80% in 2020? No. And we certainly do not expect its share price to go up again by 80% in 2021. A non-business owner may be tempted to sell Apple’s stock because of its terrific gains (“Why not take the profits and move on?”). But we think like business owners. A business owner thinks about what will happen to the business going forward, not just what the business has done in the past. We expect Apple’s earnings to increase by double digits over the next few years. Even though its stock has already had a tremendous run, we still think the business is reasonably valued for its potential growth and we are buying even more shares for new clients.
Unfortunately, not all our investments performed as well as Apple did in 2020. American Tower is one example. American Tower owns over 180,000 cell towers worldwide and it makes money by renting out space on its towers to telecom companies like Verizon and AT&T. After reaching an all-time high of $269 a share in late July of 2020, American Tower’s stock dropped by almost 20% by the end of the year. This stock had a disappointing return for our clients in 2020 and for many clients we paid what now appears to be too high a price for the shares. Fundamentally, American Tower had a great year in 2020. It increased its dividend by 20%, it signed a new long-term deal with a major client, and it continued building and buying more towers around the world. In fact, we believe American Tower’s business has become more valuable as a result of the pandemic; it should be a prime beneficiary of the growing demand for mobile and cellular data. We think the eventual global adoption of 5G will require telecom companies to put more equipment on cell towers which will allow American Tower to increase its rental revenues.
A short-term investor may be tempted to say something like, “That stock has been a dog! Let’s sell it. You can always buy it back cheaper.” However, instead of looking in the rearview mirror, a business owner sees a very bright future for American Tower, and the recent under-performance of its stock is an opportunity to buy more shares of a high-quality business.
Stock markets give us the ability to buy and sell shares of companies very easily and on short notice and one can be tempted to take a short-term view. Business owners know that real value is built over time, sometimes years and sometimes decades.