Monthly Newsletter – November 2022

Learning from The Best

Last month I read a great biography of John D. Rockefeller, the richest man in the world 100 years ago. “Titan” by Ron Chernow is a titanic book, weighing in at around 800 pages, and it is without doubt overly detailed and much too long.

However, it paints a terrific portrait of a very unusual man, and a very unusual period in American history. There are lots of lessons to be learned from his life, and many of them seem particularly relevant right now.

The collapse of the cryptocurrency exchange FTX, and the related sudden disappearance of something like $35 billion in market value raises a lot of questions, and I thought it would be interesting to think about how Rockefeller would have approached the whole area of cryptocurrency and the highly speculative public companies which have crashed so spectacularly (Peloton (PTON) down 92%, Beyond Meat (BYND) down 94%, Zoom (ZM) down 87% just to name a few).

Rockefeller was, above all, about hard work and discipline. He noted every dime he spent in a notebook. He thought long and hard about every important decision.

He had a deep-rooted distrust of phonies and fast-buck artists, probably because his own father was literally a travelling snake-oil salesman and fake doctor. Rockefeller was tough to fool and when he invested, he pretty much always got it right.

Here are some rules that Rockefeller followed and which I think are still worth following today:

1. Invest in companies that make things people want and need. When crude oil was discovered in Pennsylvania, Rockefeller did not buy any oil wells. He saw the series of price spikes for crude oil followed by crashes each time a new well came in, as a horrible business. Instead, he built his initial wealth as a refiner. He wanted an orderly, steady source of income. He understood that refining was the key chokepoint in the oil industry between the producers and the consumers (at this point kerosene for lighting was the key product). He wanted his business to be indispensable regardless of the price of crude. People didn’t want or buy crude oil. They wanted and needed kerosene. That’s what he sold.
2. A good investment has barriers that keep competitors out and defend its profit margin. Rockefeller was famous as an utterly ruthless crusher of competitors. Nobody today would admire his tactics, but his reasoning was strong. The best business has a wide moat defending it. He made Standard Oil’s refining business impregnable, allowing him to make unbeatable profits. At the moment, there are over 9,000 active cryptocurrencies. Nothing stands in the way of creating another 9,000. There are no barriers to entering the industry, and as a result, no profits to defend.
3. Good investments create cash and reward their shareholders. In the 1920s, Rockefeller had dividend income from Standard Oil of over $50 million per year; equal to about $1 billion today. At the end of the day, we invest in companies to share in their success. There is nothing more tangible than a cash dividend. Companies that have no profits (let alone those with no established product) are by definition speculative, and in our view, not suitable for serious investment. An example that comes to mind is marijuana stocks like Canopy Growth (CGC) (down 91% from its peak in February 2021).

Some of you know that I am a moderately skilled amateur musician. Sometimes when I listen to consummate professionals I become disconsolate, knowing I can never approach their level of skill.

But then I realize that I don’t need to. I am quite comfortable being pretty good. None of us is the next John D. Rockefeller, but we don’t need to be. We can learn from those who are the best. Imitation is not only the most sincere form of flattery; in the investment world, it is generally quite profitable.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.