Adam Smith (George Goodman) (1972): Supermoney: "Anyway, we sat at the great man’s knee, and then we went out to apply the theory...
...We would wait tensely while the mentor graded our papers. I bring this up because I remember bringing in a stock that provides the perfect example of what an individual can do by himself. The mentor had bid us study Gillette. The mentor held up a pack of Blue Blades, very dramatic. “This will double, and if you know a double, you can do better than that.” People used up the Blue Blades, threw them away, and bought more. Gillette dominated its market with an army of salesmen. Its displays were on every drugstore counter, and it was going into other grooming items.
What else was like Gillette? We were to go out scouting. I took a careful walk around a drugstore, and then I went to the manuals, and then I brought my stock to the mentor and waited for my very good grade.
I had a stock called Tampax. It had no debt, no preferred, and plenty of cash. Its product was a leading product. It was like Gillette in that you used it, threw it away, and bought more. It had flexibility in the pricing. Its profits grew every year. I wanted an A for my idea.
I got a B, and I protested. “It’s a very good little company,” said the mentor. “I suppose Kimberly-Clark or Scott could compete with it. But what is so unique?”
“What is unique is that when people go to the drugstore, they don’t know the name of any other product,” I said. “Like Kleenex. Tell me the name of what else competes with Kleenex. A generic name is better than patents.”
The mentor wouldn’t change my B to an A. “It’s a solid B,” he said. But the earnings grew perhaps 15 percent a year; we were looking at technological companies whose earnings grew 50 percent a year, making oscilloscopes and particle accelerators and other patented, super-sophisticated stuff, protected by patents and by technical staffs with hundreds of Ph.D.’s in physics.
“Yours is a population-growth stock,” said the mentor. “I don’t see why it’s ever going to grow considerably faster, although that fifteen percent could compound. Texas Utilities and Coca-Cola increase their earnings every year too, and those stocks are already on the approved lists of all the banks.”
So I didn’t buy Tampax at 5, adjusted for splits.
The mentor was right for that time: the technology stocks moved much faster. A couple of years later the pace accelerated, so that their patents were no protection, and then there was price-cutting in some of the products. Some of those technological companies are far bigger today, and some are treated as cyclical companies. But Tampax is around 120. I feel dumb every time I think about it...
#shouldread
