Updated: Nov 17, 2022
Many times, when other investors overreact to the “crisis du jour,” they drive down stock prices, thus providing long-termers (us) appealing entry points to buy stocks… even the stocks of the most steadfast companies around.
Nearly seventy percent of Americans own real estate… mostly via homeownership. Just over fifty percent invest in the stock market. Meanwhile, stocks historically have outperformed real estate on an apples-to-apples basis. There are clear benefits to homeownership that
you don’t get with stocks, but just looking at the performance of each investment, stocks do better over time. If this is the case, why do so many more people participate in the real estate market than in the stock market?
My theory: many people who know a wealthy investor know them as a person who has gained these riches via real estate, not stocks. Therefore, people want to follow the real estate investor playbook. Makes sense to me.
For many reasons, real estate investing works (i.e., debt financing, physical asset, etc.), but the driver of this success is that people are forced to hold their investment for the long term. You can’t go online, submit an order to sell your 4-unit apartment building and seconds later have confirmation of your sale. Hence, it’s a requirement to be a true investor… long-term.
This same playbook works with stocks. Again, there are different reasons why stock investing works (i.e., diversification, economic growth, great American companies, etc.), but the riches of the stock market are reserved for those willing to stay invested for the long term. Without this fortitude, you will succumb to emotions and your irrational behavior will lead to what we call… short-termism.
Our current crisis produces many opportunities that can only be explained by people selling under the auspice that the global economy will never rebound. While we can slightly understand how some high-flying tech stocks that carry a greater level of volatility may exasperate investors, our minds are (happily) blown when investors sell off a solid company… something we’ve seen a lot over the past year.
Let me introduce you to “the toll road in the sky” … the Otis Worldwide Corporation (OTIS). If the name is unfamiliar, the next time you are in an elevator, look down at the name on the door and there is a good chance it will say, Otis. Yes, this company manufactures and, more importantly, services elevators and escalators. They are one of three companies that dominate this industry, creating an oligopoly of sorts.
Next to healthcare, you would be hard-pressed to find a more needed service than that of the elevator maintenance business. Think about it, people living & working in urban settings greatly rely on elevators always working properly…. To put it another way, new buildings are getting taller, and we put our safety in these motorized boxes to get us up and down!
So, in summary, OTIS operates in a needed industry that is dominated by three companies and continues to see growth as more people across the globe live and work in urban settings. And by the way, they have been in business since 1853. You would agree; solid attributes for even the most discerning investor… right?
Then why in the world did the stock recently trade nearly 30% below its one-year high… a level not seen for more than two years? Short-termism… that’s why! Suddenly, investors lost all sense of reality and must have thought high-rise buildings would start to force visitors to use the stairs to go up 30 floors. Or the global construction of new buildings would screech to a halt, thus no longer needing elevators.
We have been investing for over two decades and it still amazes us to see the short-term mindset that kicks in for many folks. Yes, we understand stocks go up and down, and sure, the elevator servicing business might slow down a bit if the economy slows. But does that mean a company is suddenly worth 30% less?!?! This argument could be made for a stock that has a lot of unknowns but for one that is nearly 170 years old and provides a rather important service. I don’t think so…
We’ll stay in our lane, buying stocks for the long term… and unless something drastically changes, that lane will have a portion of our portfolio invested on the toll road in the sky.
Note: Nothing in this letter should be considered investment advice, research,
or an invitation to buy or sell any securities.