The Golden "Golden Arches"
Below is a chart showing the performance of five of the biggest Dow stocks going all the way back to 1980. As shown, McDonald's (MCD) has absolutely blown the four other companies (GE, DIS, IBM and XOM) out of the water with a gain of 8,640% (not total return).
Source: Bespoke Investment Group
Check out the Bespoke article to get a good look at the chart.As Bespoke Investment Group notes, that 8,640% gain excludes dividends so this number understates the total return produced by quite a bit. Over that same time frame, you'll find that total returns that are 10,000% and higher among the likes of Coca-Cola (KO), Pepsi (PEP), Colgate (CL), and Altria (MO) among many others.
In many ways, McDonalds is a very different business from the consumer staples listed above. So what do they have, at least mostly, in common besides excellent long-term returns? Well, these all sell trusted consumer brands, have meaningful advantages of scale, and strong distribution capabilities.
Things, in combination, that often create a formidable economic moat.
From this USC Business School speech by Charlie Munger:
"And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz's chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don't know anything about Glotz's. So if one is 40 cents and the other is 30 cents, am I going to take something I don't know and put it in my mouth which is a pretty personal place, after all for a lousy dime?
So, in effect, Wrigley, simply by being so well known, has advantages of scale what you might call an informational advantage.
Another advantage of scale comes from psychology. The psychologists use the term 'social proof'. We are all influenced subconsciously and to some extent consciously by what we see others do and approve. Therefore, if everybody's buying something, we think it's better."
Munger later added...
"The social proof phenomenon which comes right out of psychology gives huge advantages to scale ‑ for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it's available almost everywhere in the world.
Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup which is slowly won by a big enterprise gets to be a huge advantage.... And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you."
The question is this. Are similar enough forces in place that will produce above average returns from these businesses going forward. More from Charlie Munger:
"We've really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money's been made in the high quality businesses. And most of the other people who've made a lot of money have done so in high quality businesses."
You never know but, if bought at reasonable valuations, I'm thinking the higher quality businesses will do just fine on a long run risk-adjusted basis despite all the noise in the macro environment.
Adam
Related previous posts:
Munger on Elementary, Worldly Wisdom - Part II
Munger on Elementary, Worldly Wisdom
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