You won’t hear about it in the mainstream media… and very few people want to publicize this idea… but it’s one of the safest, easiest ways to make great investments.
In the interview below, S&A Editor in Chief Brian Hunt reveals all the details behind this powerful investment secret… including the reason nobody wants to talk about it…
Stansberry & Associates: You often say one of the great investment secrets – a source of giant investment returns – comes down to “investing in habits.”
What’s the story here? How can it lead people to great investments?
Brian Hunt: One of the truly great investment secrets is the idea of owning companies that sell habit-forming, or even addictive, products. I’m talking about things like soda, fast food, candy, cigarettes, and alcohol.
I often tell people that if they only knew this secret of investing, they could ignore just about everything else. It’s that powerful.
Although it can lead to gigantic investment returns, it’s not a popular idea. TheWall Street Journal isn’t going to run a regular column about this idea. Mainstream magazines aren’t going to run monthly features on it. Many folks are just not comfortable with owning businesses that sell habit-forming products. And if they are comfortable owning them, they are often very uneasy about publicizing it. It’s not a popular topic at dinner parties or cocktail receptions.
S&A: Let’s talk about some real life examples.
If you look at the list of the 20 best-performing S&P 500 stocks from 1957 through 2003 that kept their general corporate structure intact, you’ll note many of them sold habit-forming products. It jumps right out at you.
For example, Phillip Morris is at the top of the list. It was the top-performing S&P 500 stock from 1957 to 2003. It sold cigarettes, which contain addictive nicotine.
Coca-Cola and Pepsi Co. are on the list. They sold soda… which is a sugar delivery vehicle. Hershey Foods and Tootsie Roll are on the list. They sold chocolate and sugar. Wrigley is on the list. It sold sugary gum, like Big Red and Juicy Fruit. People love to get a little sugar rush. It’s habit forming… even addictive.
Many drug companies are on the list. These names include Abbott Labs, Bristol-Myers Squibb, Merck, Wyeth, Schering-Plough, and Pfizer. People get accustomed to taking certain drugs. Much of the time, those drugs are useful, although sometimes they are not. I’m not saying they are good or bad… I’m simply pointing out that people get extremely accustomed, even addicted, to taking them.
Fortune Brands, which was called American Brands for a while, is on the list. It sold cigarettes and alcohol.
You can make the case that certain fast foods are addictive as well. Food chemists load fast food with stuff that makes people want more. This is part of the reason McDonald’s has been such a corporate success. McDonald’s returned an average of 13% a year for three decades. Few businesses can achieve that kind of sustained performance.
The businesses I just mentioned produced more than 13% annual gains for decades. Those returns are extraordinarily rare in the stock market. You won’t find anything better. Most companies can’t sustain 13% annual returns for more than five years. The businesses I just mentioned sustained those returns for decades. And the reason why they did so well is simple.
When people form a habit around a product, it goes a long way toward ensuring repeat business. People get used to certain brands and they grow resistant to switching. Also, when people get used to a product and the brand surrounding it, they are more likely to continue buying the product even if the price increases a little. Both of these habits help companies sustain sales growth and healthy profit margins. That’s good for shareholders.
It’s also important to know that when these companies hit upon the right recipes or the right mix of whatever it takes to make good products, they don’t have to make large, ongoing investments in the business. They don’t have to spend tons of money on further research and development. Once Coca-Cola hit upon Coke, it didn’t have to change it. The same goes for Budweiser and Hershey and Tootsie Roll.
When you develop a product that people love and develop habits around, you don’t tinker with it. You don’t have to spend a lot of money on new research and development. You don’t have to buy expensive high-tech equipment. This means a larger percentage of revenues can be sent to shareholders. This leads to big dividends and share price gains. When a business get into that position, my friend Porter Stansberry says it is “capital efficient.”
These sellers of branded, habit-forming consumer goods, by the way, are the kinds Warren Buffett, the greatest investor in history, always looks to buy.
S&A: How about a few recent examples of this idea working?
Hunt: The coffee chain Starbucks is a great one. It’s one of the great success stories of American business.
Starbucks coffee was traditionally higher in caffeine than other brands. This helped it become more addictive. From 1995 to 2006, Starbucks advanced more than 2,000%. Starbucks was very good at selling a habit-forming product, and shareholders made a fortune.
Sam Adams is another good modern-day example. The makers of Sam Adams did a great job of producing quality beers associated with a strong brand. The name “Sam Adams” is associated with quality beer all over America.
From 2003 to 2013, shares in the maker of Sam Adams, Boston Beer, gained more than 1,000%. It’s been a tremendous stock market winner. And the driver of those gains is a habit-forming product.
S&A: What are some of the other benefits of this strategy?
Hunt: The idea of owning businesses that sell simple, habit-forming products is great for folks who don’t follow changing technologies.
It shows you don’t have to try to pick winners from the complicated world of high-tech. You can make a fortune in “low tech” companies. It’s very unlikely that enjoying a beer after work will become obsolete.
I like the predictability of owning robust, reliable businesses like McDonald’s and Coca-Cola. I know it’s very likely that folks will keep eating burgers and drinking soda.
I don’t like the idea of buying a stock only to see it fall 30% in a few days because its fad product is going out of style… or because the cancer drug it bet the company on got rejected by government regulators.
Owning quality businesses that sell habit-forming products is a safe, sleep-at-night way to build wealth in common stocks.
S&A: How about another benefit?
Hunt: This strategy is also ideal for investing in high-growth emerging markets like China and India.
Combined, China and India have about 10 times the population of the United States. Many of those people are at the level of economic development of 1950s America… and they are getting a little richer every year. It’s an incredible trend.
To invest in the trend, I don’t want to try and guess what websites will become popular… or what retailer will become fashionable. That’s a very difficult game. Those business landscapes will shift and change rapidly.
On the other hand, I’m very confident those folks in India and China who are getting a little richer every year will want to enjoy the same habit-forming products Americans have enjoyed for decades. They will want to consume more branded soda, cigarettes, beer, liquor, and processed foods. So, owning international businesses that serve those growing markets makes a lot of sense.
S&A: Can you provide some guidance on the right time to buy these companies?
Hunt: One way is to buy the biggest and best companies, like Coca-Cola or Hershey.
In order to buy them at a bargain price, it’s best to buy them after a bear market or a major market correction. For example, many good sellers of habit-forming products fell 25%-50% during the 2008 market crash. After the crash was a great time to buy them.
You can also get bargain prices when a good company gets hit by what Warren Buffett calls a “one-time huge, but solvable, problem.”
What Buffett means here is that even great companies make mistakes along their way to greatness. When these mistakes occur, investors often overreact and dump their shares. When you see a great company like Hershey or Coke suffer a major share-price selloff, I recommend viewing it as a potential buying opportunity.
Another option is to try and pick the next big success story. Who’s the next Boston Beer or Starbucks? If you can get in early, the gains can be extraordinary.
But remember, that’s a much riskier path. When Boston Beer began nationwide distribution, there was no guarantee enough Americans – accustomed to mass-produced lager like Miller Lite – would pay premium prices for a higher-quality “craft” brew.
And remember in 1997, a year after it went public at $30 a share, Boston Beer was trading for $9 a share. Probably not a lot of shareholders held on through the darkest days to enjoy the big gains.
If you want to try to profit from the next big success story, my advice is to keep your position sizes small so you can withstand the big swings in share price. Also, if your stock doesn’t become the next big success story, at least you won’t lose much.
S&A: Any final thoughts?
Hunt: It’s worth addressing something that always comes up when this idea is discussed. People like to talk about whether it’s right or wrong.
I’m not making a statement on whether owning these companies is right or wrong or socially responsible. Deciding to own businesses like these is up to the individual.
I’m just pointing out what works. I’m pointing out that selling habit-forming products often makes for a great business. It has been a proven strategy for decades… and it will continue to be for decades more. Human nature is what it is.
There are two basic keys to successful long-term investing in common stocks. One is to learn how to identify great businesses that you can own for years and years. The other is to make sure you pay good prices for your ownership stakes in those businesses. Knowing the powerful secret of “investing in habits” is a great help with the first part of the strategy.
If investors know this secret, they can make sure to monitor these types of stocks, look to buy them at good prices, and hold them for long periods of time. It’s a proven wealth-generating idea that’s rooted in common sense.
S&A: Thanks for your time.
Hunt: My pleasure.
“If you want to be successful in stocks, there’s one simple thing you have to do,” Brian writes. “Focus on the price you pay. Buy at bargain prices.” Learn how you can use this idea to make winning investments right here.
Steve Sjuggerud says there are nine rules the best investors live by. “Every investor – experienced or novice – should stick to these rules,” he writes. If you do, “you should be successful.” Get all the details here.