When I was a young portfolio manager in Philadelphia, I commuted by train to the office. Each morning, arriving in Center City, I walked up the steps from the train station to the smell of a street vendor making breakfast sandwiches. Egg and cheese on a roll for $1.50 was too good to pass up—hot, tasty, convenient, and inexpensive—and, as it turns out, high in calories. That first year, I put on ten pounds— “the reward” I told myself for studying on the train for the first of three Chartered Financial Analyst exams.
After two years, I became an analyst and, as I stood in line each morning waiting for my turn, I thought about the business of selling sandwiches on the street. First, it’s a cash business—they don’t sell breakfast bagels on credit. Second, the business has regular customers who value its product. Third, the business is protected from its competitors by boundaries (streets) and permits. And, lastly, the business is capital-efficient since its inventory of eggs, bacon, and bagels is turned into cash within a few days of stocking it.
While it never occurred to me to go into street vending, it did challenge me to think about what makes one business better than the next—loyal customers, low or no debt, productive assets, and profitable sales—all creating a regular income for the business owner. These characteristics aren’t revolutionary, but they also weren’t universal. The year was 1998 and the internet bubble was in full form with unprofitable companies making unrealistic promises to their shareholders. I bought a camera and took photographs of several street carts, had the photos framed, and put them on my office wall. I did it to remind myself that a successful long-term investment is dependent on the quality of the underlying business.
Today, when I think about what I am looking for in our portfolio companies, I want all of these same qualities. I want to own stable businesses run by good, hardworking people with repeat customers. I look for businesses whose revenues cover their expenses and that return excess profits to their shareholders by paying dividends. I prefer businesses with competitive advantages that result in consistent sales, margins, and growth and that can afford to, and choose to, be good corporate citizens.
When we identify businesses with these characteristics, we label them as enduring businesses—enduring meaning we have confidence they will be around in good times and in challenging times, serving their customers, and creating income for their shareholders.