Phase Two: ALL the Companies

Color Commentary

1. Learning ALL the Companies

Recently, I was struck with a wild idea—to create a survey of every company in the stock market.

By survey, I mean a wide-ranging study of a particular topic—like the way an Art History 101 course attempts to cover pretty much all of art…which is a ridiculous task that can only scratch the surface, but at least you get a sense of the basics of art and how it developed, so you know what specific areas you want to study in greater depth.

I want to get a sense of the basics of what stocks are on offer, generally, so I can use that info to pinpoint specific areas I want to study in greater depth.

I got the idea from one Mr. Warren Buffett. (So, maybe not so wild?) Buffett has said that when he was first starting out, he would read stock reports by studying the list of companies on the stock exchange because, at that time, paper reports were the only source of company information. Munger has also talked about how much time he and Buffett spent reading reports about all sorts of companies, in those early days. They probably didn’t memorize them in detail. And I haven’t heard or read them saying exactly that they learned every company. But from the way they talk about that time, it sounds to me like they familiarized themselves with pretty much every listed company. Probably just enough, so that when they read the name, they knew what the company did and nothing more. But even THAT creates a huge amount of perspective on a given company’s industry and the market overall.

They were developing their overall knowledge of publicly traded companies. They were learning the market. I can only imagine that doing so helped them develop their circles of competence.

I’ve been thinking a lot of about what exactly IS my circle of competence, and struggling to define it. Perhaps one reason it’s been to define is that I have some sense of what’s easy for me, but almost no sense of what’s beyond it. At the recent Berkshire shareholder meeting, Buffett and Munger made the point that knowing the EDGE of their circles of competence was key to staying out of investing danger. The only way to know how to define the edge, it seems to me, is to know something about what’s beyond that edge.

I keep remembering when I was debating starting investing, and trying to find reasons not to learn. I did NOT want to learn this stuff. I was afraid of the investing monster, and the biggest monster was what felt like the vast plethora of random companies I would never know, could not predict, and that felt like they would inevitably take me down. I know I’m not alone in that feeling. The first thing that helped me tremendously was when I recognized that I did NOT have to learn every company, or even most of them. I could simply focus on companies I already knew and had opinions about. Mind. Blown. That was the start of my Investing Practice.

So, this wild idea of mine feels a bit like Phase Two: The Sequel: Even More Invested. Now comfortable with companies of which I’m well aware, I can get a sense of what else is out there. I will follow the modern-day equivalent of what Buffett and Munger did. There’s no better example to emulate, right?

2. Acid-Free Paper Needed

As I sat down at my computer to get started, I had a vision of finding a list of thousands of public companies on some easily-found website, printing the list out on acid-free archival quality paper, and then looking them up one-by-one to find out what that company did. It would take months, and that was ok with me. This investing practice thing ain’t quick.

I could put a checkmark next to a company once I had its basics, and maybe write a short description of what it does next to the name, and keep it all in a fancy binder with plastic sleeves covering each precious page for future reference. I could SEE the binder in my head. Beautiful.

Or should I keep it on a spreadsheet on my computer, for easy access? I wasn’t sure.

I paused at the search page and pictured all the beautiful plastic-sleeved papers I was going to create. What color ink would I choose for my handwritten notes? Surely I’d refer to this magnum opus for many years, so should I go buy special acid-free paper today?

STOP IT. Just do it.

“Don’t let the perfect be the enemy of the good,” I told myself.

First, I needed a list of all the companies. I debated starting with the world index, but that seemed ridiculously overwhelming. What, then? I’m American, I talk a LOT with my dad about the S&P 500 index, so I decided to keep it simple and go with the companies on that index. 500 companies was plenty, and a bit more realistic than thousands.

However, I thought, was I keeping myself from knowing about great companies that were too small to be listed on the S&P 500 index? I couldn’t even remember what the standard was to be included on that index, so I searched online for “criteria for s&p 500”. My instinct had been correct: the S&P 500 index is the 500 largest companies by market capitalization on the New York Stock Exchange and Nasdaq.

I debated whether I should learn those giant ones – what about interesting, cool, innovative smaller companies? I’m probably more naturally interested in those anyway. I like learning about new ideas and growth.

If I learn smaller companies without learning the bigger ones first, though, I will have skipped the behemoths in any given industry, and thus will have skipped over the context that I want to gain. I decided I have to become familiar with the big companies first. Then, I can go on to the smaller ones, with a strong understanding what exactly they’re up against.

The S&P 500 it is. The process of HOW exactly to go about my survey, though, I wasn’t sure. I decided to let go of thinking about it for a few days and allow my subconscious to ruminate.

3. Market Cap Vocab

The “market capitalization” or “market cap” of a public company indicates the SIZE of the company simply by calculating its PRICE on the market to buy the entire company.

Beware: when you look it up online, most websites will define market cap as the VALUE of the company, but we know that price does not equal value. Isn’t it fun to notice when you disagree with how something finance-y is characterized by those who “know”? The thrill of contrarianism. I’ve got it BAD. This Investopedia article explains it pretty well, though.

For me, these sorts of definitions are just good to know about in the rough so that when finance-type people hear that you’re learning investing when you’re at a cocktail party, and try to impress you by droning on about small cap and mid-cap and micro-cap, you can nod knowledgeably that mid-cap companies are in the low billions and then remember that you don’t really care and go get another mini quiche.

I made a quick rundown for myself so I’d know what I was getting with the S&P 500:

Large-cap stocks are more than $10 billion (Amazon (AMZN) – $900 billion, Ford Motor (F) – $40 billion, Molson Coors (TAP) – $12 billion)

Mid-cap stocks are between $2 and $10 billion (TripAdvisor (TRIP) – $6 billion, Mattel (MAT) – $4 billion)

Small-cap stocks are between $500 million and $2 billion (Pacific Biosciences (PACB) – $1 billion, Pitney Bowes (PBI) – $878 million)

Micro-cap stocks are between $50 million and $500 million (Lumber Liquidators (LL) – $317 million, inTEST (INTT) – $55 million)

Anything below $50 million is a nano-cap stock

I always try to remember that typically, the market capitalization roughly correlates to the number of times the stock is traded per day, which is called liquidity. And I like liquidity because when the crash happens, it’s going to be hard to sell the less liquid stocks because there just won’t be buyers out there. There will probably be someone who wants to buy some Amazon stock as the market crashes, but it’s unlikely anyone will want to buy a tiny penny stock they’re not sure will still exist after the crash bottoms out. That’s liquidity in action, and it’s not totally correlated to market capitalization, but they are connected. There are even charts that tell you the liquidity of a given stock day-by-day, so you can check and see how many times per day the stock is traded.

Other than that, I’ve already forgotten all the market cap categories because numbers simply do not stay with me…I’ll just totter off to find a mini quiche, thank you.

4. My Survey

A few days later, I was reading Barron’s. (I opened Barron’s up on purpose – I subscribed a while ago and haven’t really used the subscription much, so I’ve been trying to read it more. Debating keeping it for a while longer or letting it go.) An article about a few Japanese companies sparked my curiosity because the Japanese stock market has famously languished for something like 20 years. In a world of Americans who think the stock market always goes up eventually, that is something I try hard to keep in the back of my mind to (a) reduce the expectation that the market as a whole will go up eventually, and (b) remind myself why doing the work to understand individual companies is worthwhile, in the event of a market that goes nowhere over 20 years and, correspondingly, index funds that go nowhere over 20 years.

However, just because the Japanese stock market hasn’t been growing doesn’t mean there aren’t individual companies doing well, and in this article, the fund manager, Masakazu Takeda, lists a few he likes (paywall: Barron’s).

Takeda is a Buffett acolyte. I love finding people I haven’t heard of before who are Buffett followers and seem to be successful fund managers. I have no clue about this guy other than what I’ve read in the Barron’s article, but he sounds like he does seek out wonderful companies with management with integrity that are selling at a good price. He owns, among others, the clothing brand Uniqlo’s holding company Fast Retailing, and the human resources company Recruit Holdings, which bought the job search website Indeed in 2012.

The point is NOT those companies in particular, though they are certainly interesting to review. (Especially Uniqlo. I get excited when I find one of their stores! I feel like they’re weirdly elusive, like the snow leopard.)

The point, dear reader, is that after reading the article, I went in the kitchen to cook lunch, and as I was chopping up red peppers decided that I’d pursue a two-pronged approach to my survey: 1) list the companies in the S&P 500, and 2) keep a separate running list of smaller companies or non-US companies that I wanted to remember.

By grouping the second prong of my survey by industry,I can easily keep track of companies that compete with each other. That way, I won’t leave out non-US companies simply because they aren’t on the stock exchange list.

The idea flashed me back to when I FIRST put together a list of companies I was familiar with, using my dad’s Venn diagram of (1) what I spend money on, (2) how I make money, and (3) what I’m passionate about. (It’s in Chapter 4 of Invested.) Industries, sectors, related companies – at the time, I felt like I was overwhelmingly mired in the mud of too many unknowns. Where to begin?

Begin with ONE, my dad, Phil Town, told me. He talked me through it. I liked yoga, so he showed me yoga companies. As you get to know the companies, the yoga world starts to become clearer. Gaia, Lululemon, Prana (owned by Columbia Sportswear), Athleta (owned by Gap), and a bunch of privately-held companies like Manduka and Outdoor Voices. This is what I want to develop for myself: a database of grouped companies that I can refer to when I find out, for example, Uniqlo is public and want to compare it to its peers.

Now, there is no standard “yoga” industry that I can look up on a stock website, but I recently learned that there IS a site called Owler, which gives competitor information for any company you type in. (You have to pay for the deep research reports, but the basic information is free with a login.) Owler pulls its info from an algorithm, so doesn’t always return completely accurate competitors, but it’s a great starting place to get a picture of a company and its public AND private competitors. As I begin to understand the industries and sectors better, and as I go through all the S&P 500 companies, I can make connections I probably wouldn’t have otherwise made without this kind of wide research. At least, that’s my hope.

So, HOW exactly to go about my survey? I had ruminated, and a memory surfaced. When I was studying for the bar exam (the US qualification exam to practice as a lawyer), I encountered all sorts of commercial study aids. You can buy racks of flashcards for every possible question. I did buy some of them, actually, but I found that running those flashcards, with their typed words and too-perfect wording, was really hard for me to remember. I have a poor memory. I’m starting to wonder if I have a secret brain tumor pressing on my memory cortex. Honestly, whatever. PRESS ON, TUMOR, I’ve got all sorts of ways to get around your attempt to make me forget things! Like, I TAKE NOTES. So there.

Anyway, I ditched those prefab bar exam flashcards and ended up making my own. Hundreds of them. Each one written out by longhand in a way that I could remember, and it was the writing out, of each and every one, that made me memorize them more than anything else.

Like making flashcards, the benefit is in doing the work on these industries myself.

Why mess with what works? I decided to make my own flashcards of the S&P companies. One side is the company name, the other side is a short one-sentence description of what they do. In addition, I’m also making a spreadsheet with the company name, that one-sentence description of what they do, their Mission, and whether or not I find the company intriguing enough to come back to it later and really study it.

I have no clue how this survey will go – that’s the fun of this practice! Maybe I’ll change my plan up yet again. For now, I’ve started with the beginning of the alphabet on the S&P 500 list, and I’m not anywhere close to being out of the companies that start with “A”. I’ve made about twenty flashcards – a few per day. So far, I’m loving going company-by-company. A few have been really boring, but most have been intriguing. I’ve noticed that when I read news articles now, already I notice companies mentioned that I would not have noticed before; for example, Activision Blizzard, which makes video games like World of Warcraft and all the attendant movies, toys, and general accoutrements. (Yes, that is pretty much my one-sentence summary and all I know about it, but that’s a lot more than I knew before!)

Phase Two: The Sequel: Even More Invested gets two thumbs up so far.

LET’S GET PRACTICAL:

LET’S GET PRACTICAL

Here is a list of the 500 companies on the S&P 500 – with the caveat that companies rotate on and off the list. Quite a few are household names, which makes them quite easy to familiarize myself with because, well, I’m already familiar. And only 500? No biggie.

I definitely wouldn’t have expanded my practice to do this survey until I felt very comfortable researching an individual company. Think about what feels right for you in your practice at this time. Would doing a survey of hundreds of companies be useful to get a sense of what companies are out there? Or is it a waste of time, better spent diving deeply into only a few companies? There is no right answer. I’m not even sure what my answer is, but I’ll tell you in a few months after I spend some time on this (possibly harebrained) survey idea o’ mine!

This is the practice. Try things out. See if they work. Keep the stuff that does and ditch the stuff that doesn’t, focusing on my reactions, emotions, and mindfulness during the ride.

Ownership Disclosure: Danielle Town owns shares in Berkshire Hathaway (BRK) .

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