Sam Walton's investing approach
As investors we have read how warren buffett approaches investing, through his annual reports and speeches where buffett famously quipped "I am a better investor because I'm a businessman, and a better businessman because I'm an investor" that made me look at how businessman approach investing. Sam Walton founded Walmart and created massive wealth for shareholders, and most of his personal investments was only in one company Walmart.
Sam Walton founded Walmart in 1962. As of 2020 the company has 11510 stores globally. Walmart began as a variety store but it was not until later that Sam found the idea of retailing from Herb Gibson - a barber who started his stores with a simple philosophy : Buy Low, stack it high, sell it cheap. Seeing him sell more goods Sam Walton knew he needed to get a piece of the action in the new trend called the "Discount stores". That was the foundation of the idea of Walmart now a retail giant.
The company went public in October 1970 listing with 300,000 shares at a price of 15$ and was listed at 16.50$, the IPO was well received though the shares weren't widely held, they had only about 800 shareholders. The company's growth was phenomenal and it was a definite growth story. The wall street misunderstood the concept of discount stores and did not pay attention to the company's growth but the ones who understood made a killing by investing in Walmart.
Sam Walton in his autobiography says " I dont subscribe to fancy investing theories, and most people seemed surprised to learn that I've never done much investing in anything except Walmart. I believe the folks who've done the best with Walmart stock are those who studied the company , who have understood our strengths and our management approach, and who like me, have just decided to invest with us for the long run"
As a business owner Sam approached investing like a owner, knew the strengths and the size of the opportunity, he did not invest anything out of Walmart. Most business owners are single stock owners. They had the belief in the business and the execution and held onto the stock for a very long term which created enormous wealth in the long run. This approach is the most rewarding form of investing where we get to know the companies long term prospects and management and invest into it for a long time , ride the companies ups and down during the volatility.
Sam Walton says " Our long term shareholders are happy because we have consistently rewarded them with one of the highest returns on equity in American business. From 1977 to 1987, our average annual return to investors was 46%. And even in the middle of the recession, in 1991, we reported a ROE of more than 32 %"
As evident Walmart had the twin barrels to a very successful business and a highly rewarding returns for shareholders, a very high ROE and growth for a very long period. These are the twin engines for a rewarding wealth creation process. If we can find companies like Walmart and hold it for long periods it will create enormous wealth and such opportunities doesn't come very often. Guess what would have happened to a speculator who would have bough Walmart in the IPO and sold it at 16.50$ for a meagre gain. So it takes fortitude and vision to see the company’s growth ahead, and speculation has its own perils.
There is a difference between how an analyst and a owner approaches business, here's what Sam Walton says - " As business leaders, we absolutely cannot afford to get all caught up in trying to meet the goals that some retail analyst or financial institution in New York sets for us on a ten-year plan spit out of a computer that somebody set to compound at such-and -such rate. If we do that, we take our eye of the ball" This is so true and when investors who have a owner mindset follow this approach to investing, who tend to always have a cast of mind to find out what happens in the business rather than the next quarter performance their returns as a shareholder will be hugely rewarding.
If you need an excel sheet to project what a business will do in the next 1 year or 3 years and take a decision based on that its highly misleading, In the short run the market is a voting machine and in the long run a weighing machine further Sam Walton adds "If we fail to live up to somebody's hypothetical projection for what we should be doing, I dont care" An investor approaching stocks as a piece of business requires the same mental habit. we shouldn't care about any short term hypothetical projections rather the focus should be on the long term business prospects.
Along with these challenges the business owner has to face criticism and skepticism along the way which is very much true to an investor, when a company misses a estimate for a few quarters we tend to look at selling the company for non-performance but a business owner never sells his business because of a small glitch in performance. An owner - investor mentality has to accommodate the skepticism and setbacks.
" Along the way, we always had lots of people waiting for us to fall- especially Wall street types. They said we'd never be able to keep doing things our way after we reaches 1bn$ in sales. But we did, and kept right going on. Then they said everything would fall apart at 10bn$ because you couldn't manage a company that big with our little down-home management philosophies. We roared past that, and then hit 20bn $ and 30bn$, and in the coming year we should hit around 53bn$" - Sam Walton
Years 1960 1970 1980 1990
Sales 1.4 Mn$ 31Mn$ 1.2bn$ 26 bn$
Profits $ 112000 1.2 Mn$ 41 Mn$ 1 bn$
stores 9 32 276 1528
Above is the evidence of the phenomenal growth of the company and that was the result of a few basic principles with which Walmart operated 1. Keep the cost down 2. Teach our folks to take care of our customers 3. Working our tails off. The investors like Sam Walton who had an owner mindset and long term approach would dismiss analyst views and short term views and look beyond.
When Walmart was growing it attracted a lot of competition, As the saying goes " A fat margin always attracts competition" but how did Walmart compete with all of them ? Sam Walton records his thoughts on why taking care of the customers and product is so vital to the business - " I read in some trade publication not long ago, 100 discounters were there in business in 1976, 76 of them disappeared. Many of them started with more capital and visibility than we did, in larger cities with much greater opportunities. They were bright star for a moment, and then they faded. I started thinking about what really bought them down, and why we kept going. It all boils down to not taking care of their customers, not minding their stores, not having folks in their stores with good attitudes, and that was because they never really even tried to take care of their own people"
" Most of these early guys were egoistical people who loved to drive big Cadillac's and fly around in their jets and vacation on their yachts"
As an investor what's essential is not to focus on what the stock price is doing, but to find out if the company is taking care of the customers? are they doing what will delight the customer ? Wal-Mart under Sam Walton were doing the right things that a retailer needed to do - Focus on the customer and provide them with lowest price. These principles were what drove the success of Walmart. Managements who grow Complacent never tend to grow, their vision and focus changes from business to buying expensive toys.
Lets see what lessons Sam Walton's approach as a businessman can teach investors, how the owner-investor mentality can create wealth for investors
Wal-Mart focusses on purchasing goods at the lowest cost, and low pricing leads to more customers which leads to more business - Investors can opt for the "Lowest cost producer" which is a scalable Moat.
Invest in business with secular long term growth and high ROE.
Investors should focus on what the business will be doing in the next 3-5 years as opposed to short term market fluctuations and stock prices.
Approach business with a Owner-investor mindset which helps you to stick with the company through thick and thin.
Invest in managements that doesn't Diworsify.
The main principle of any business is to serve its customers, Look to invest in companies that always takes care of its customers (Companies in cyclical and very high competitive environment should focus on "Low cost" )
Sam Walton did not invest outside his company, likewise as investors we can find great companies at fair prices and keep invested for long periods, diversification leads to dilution of returns, but concentration leads to higher peaks and lower valleys, make the trade-off.
Think of stock as a piece of business, always focus on the business and how the management is executing and as long as management reinvests the excess cash prudently stay invested.