A Simple Strategy for High Returns?

Morgan Housel presents some interesting data at The Motley Fool but draws the wrong conclusion:

…the single best stock to own from the 1950s to the early 2000s had nothing to do with computers, or technology in even the loosest sense. It was Altria (NYSE: MO ) , the maker of Marlboro cigarettes, which returned nearly 20% a year for 50 years. During a period when new industries transformed the lives of nearly everyone in the developed world, the most money was made in a company that stuffed tobacco into paper tubes the way it had for more than a century.

…Microsoft’s profits have grown 16-fold since 1995. Yet once again, the best stock returns may surprise you. With dividends, Microsoft has returned 511% since mid-year 1995. But Clorox (NYSE: CLX ) returned 560% during that time — so bleach actually bested the last leg of the computer revolution. Colgate-Palmolive (NYSE: CL ) returned 651% over the same period, so toothpaste did, too. As did garlic powder: McCormick returned 642%. Ditto for hamburgers, with McDonald’s (NYSE: MCD ) adding a 540% gain. Hormel Foods produced a 544% gain over the same period, so Spam was actually more profitable than computers during the big boom. Our old friend Altria scored a 1,300% gain, nearly trebling Microsoft’s return.

Admittedly, I’ve cherry-picked the dates to make my point. Back up a year or two, and Microsoft wins. But the fact that any period — a 17-year period no less — can be found during which a company with a virtual monopoly on a booming industry underperforms the dullest of products is extraordinary. It also underlines two important investing lessons…

One lesson Housel draws is that “simple products that rarely change often make better investments than those undergoing breakthroughs.” Rubbish. (Did Housel even compare simple products with breakthrough products? No. He just found some winners over a particular time frame.) The real lesson is that expectations, good and bad, are baked into prices so winners and losers are always unexpected. Unless your name is Warren Buffett, you should index.

Hat tip: Newmark’s Door.


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