No. of Recommendations: 28
While this is about RTX, I think you might see some similarities with Berkshire ;-)
Today, Raytheon Technologies (RTX) reported strong earnings, sending its stock soaring to a record high. But this isn't about today's headlines; it's about the conviction required on the worst possible day 24 years ago.
Our initial investment was in United Technologies (UTC), the predecessor company that eventually merged to form RTX. We executed the purchase on September 10, 2001. In hindsight, it may have been the most perfectly disastrous timing imaginable.
Less than twenty-four hours after the trade settled, the world changed. Following the terrorist strikes on September 11th, the U.S. stock market shut down for four trading days—the longest closure since 1933. When trading finally resumed, the panic was palpable, especially in the aerospace sector.
Due to UTC’s substantial exposure through its Pratt & Whitney engine division, the stock immediately plummeted by more than 30%.
Air travel demand evaporated overnight, paralyzed by safety fears and new, stringent security procedures. U.S. airlines scrambled to ground significant portions of their fleets, sending aircraft into specialized desert "boneyards." Consequently, airlines canceled and deferred vital orders for new aircraft and maintenance, effectively eviscerating UTC’s commercial aerospace volume and orders.
With the initial investment seemingly wiped out in a moment of national crisis and economic chaos, the impulse was to sell. But that's when the quality of the investment truly mattered.
We held our position, not out of stubbornness, but because we trusted the fundamentals: UTC was a diversified, high-quality business with best-in-class management and a rock-solid financial position. Its other segments—Otis elevators, Carrier HVAC, and its growing defense work—provided a crucial ballast against the collapsing commercial aviation market.
Holding the line through that uncertainty was the hardest part of the investment.
Fast forward 24 years, and that conviction has been handsomely rewarded. That initial investment has grown from a split-adjusted $18.25 per share to more than $170 per share today.
This demonstrates an important lesson in long-term investing: You don't have to get the timing right on a high-quality stock. If the business is fundamentally strong, patient conviction and a long-term horizon will ultimately conquer even the worst possible start.
No. of Recommendations: 5
This demonstrates an important lesson in long-term investing: You don't have to get the timing right on a high-quality stock. If the business is fundamentally strong, patient conviction and a long-term horizon will ultimately conquer even the worst possible start.
Your point is well taken, and part of being a high-quality stock could be understood to include a reasonable valuation, but that's an important qualifier.
I remember at the time, as a relatively young inexperienced investor, after realizing that some of my investments were actually bad speculations (i.e. Ballard), for a short time falling for the relative valuation viewpoint and thinking that some of the tech titans would be good investments because they were such great businesses, not realizing just how long it would take to overcome PE 50 even if the business continued to be great for the coming decades.
Valuation matters. I know I'm preaching to the choir. :) Cisco still hasn't passed it's year 2000 high. They do pay a dividend these days, so there has been some cash flow from it, but adjusted for inflation it's been a monstrously bad investment even while being a good-great company the whole time.
No. of Recommendations: 2
<<< Cisco still hasn't passed its year 2000 high. They do pay a dividend these days, so there has been some cash flow from it, but adjusted for inflation it's been a monstrously bad investment even while being a good-great company the whole time.>>>
Good observation. CSCO’s biz obviously had legs, 25 years strong. Just how many others didn’t? Looking back from 2050, it’s rather likely that a few CSCOesques would have shown legs from today. AI-legs or whatever the buzzword today.
“How much” was the forgotten question then and now. The question was/will be answered with inflicted pain.
No. of Recommendations: 28
"Valuation matters.... Cisco still hasn't passed it's year 2000 high... a monstrously bad investment even while being a good-great company the whole time." This comment reminds me of a famous quote:
‘At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?’ -
Scott McNealy, Business Week, 2002Here is a diagram showing price/revenue ratios for every Nasdaq 100 stock, at the close of market today.
https://finviz.com/map.ashx?t=sec_ndx&st=psPalantir at 121x price/revenue is priced almost as if you're actually buying fractional ownership of the US government.
Applovin at 36x, Tesla at 16x, Microstrategy at 172x (!), ARM at 43x, Crowdstrike at 29x, NVIDIA at 26x...
The market as it stands today makes dotcom mania anecdotes seem rather tame.
It is very important to get the pricing right on a high-quality stock - not 'to the penny', but certainly 'to the correct order of magnitude'.
TRS
