Kenneth Orr Explains How Boring Businesses Make Great Investments
Investors often spend a lot of time conducting research to find the next big business.
They search for the next Apple, Twitter, or Craigslist. But in reality, you could end up with the next Myspace, MSN, or Vine — initially successful in the short-term, but a disappointment in the long-term. Inevitably, this will weaken your portfolio.
So, how do you avoid this financial land mine? Kenneth Orr, a professional investor, recommends investing in companies and sectors that may be considered “boring.”
What is a “boring” investment?
Rather than focusing on unique start-up companies, consider investing in something less “sexy.” This could be a domestic product, utility, consumer healthcare product, or even a franchise company. Boring business models also have slow, steady, and predictable growth, offering dividend yields that may be above average.
Investors usually focus on the newest technology trend that everyone seems to be talking about. This can be risky, since trends tend to lose popularity as time goes on. It is also quite difficult to predict the future of the technology industry.
Kenneth Orr chooses to listen to the advice of one of his role models, Warren Buffet, who said “We see change as the enemy of investments…so we look for the absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everybody needs.”
Investing in goods and services
You should consider investing in a “boring” company because business involves purchasing a service. For many start-ups, the business involves investing in a concept or an idea. A commodity or utility business is a tangible investment, a service or good that consumers would pay for, thus increasing earning potential.
Take Google and Apple for example. On first glance, one may think that Google is the most profitable company in the world as the preferred search engine that hosts a plethora of additional services such as Gmail, Google Drive, Google Alerts, and Google Hangouts. Alphabet, Google’s parent company, was valued at around $845 billion as of August 2018. Apple, on the other hand, recently became the world’s first $1 trillion company. The reason for this difference is that most of Google’s services are entirely free of charge to users, while consumers actively pay for products from Apple.
Google and Apple are by no means “boring” companies, but for early investors, this was a gamble, since, as noted, it is difficult to predict the next tech giant. In this case, for instance, the investor could have chosen Research In Motion (RIM), now known as BlackBerry Limited as an opportunity, and that would have been a large blip in any portfolio.
The bottom line, however, is that it is always better to invest in a company where business is based on an exchange of payment for a particular service, specifically, one that most people use, says Kenneth Orr.
Invest in what you know
Investing in the tech sector is risky, especially if you aren’t particularly “tech-savvy.” Even if you are, you can’t predict the future. Just watch older films and television shows that incorrectly predicted that we would be driving flying cars by now. The point is, we don’t know the future.
Bearing this in mind, it is better to invest in a company that has shown slow, steady growth, as its stock performance is therefore more predictable than a start-up. In that sense, you are investing in what you know rather than trying to predict the future of an app that potentially no one will download.
By investing in boring businesses, you could increase the strength and value of your portfolio.