Guys, It’s a Grocery Store
A long time ago when I was a young public equities portfolio manager I sat through weekly analyst pitches of stocks the analysts thought we should buy. That firm embraced a number of investing styles and prized generalism, so the pitches were usually quite wide ranging in terms of subject matter and approach.
One stock that got pitched from time to time in that setting and that we did own at certain points was Whole Foods, the higher-end organic grocer that IPO’d in 1992 and was acquired by Amazon in 2017. As with most any stock, you could have made or lost a lot of money owning Whole Foods. That’s because your outcome would have depended on when you bought and when you sold.
If, for example, you owned it continuously from the 1992 IPO to the 2017 Amazon sale, you would have earned about 12% per year, which is pretty good. If, however, you had owned it from peak organic buzz in 2005 to the 2017 Amazon sale, you would have lost about 5% per year, which is less so. This despite the fact that Whole Foods as a business, at least measured by revenue, was up and to the right the whole time.
This is relevant because it goes to show that investing is really about two and only two things: expectations and reality. The relationship between those things, to paraphrase an idea from Michael Mauboussin, is that then when expectations exceed reality, you earn bad returns. But when reality exceeds expectations, you get good ones.
In the case of Whole Foods, I feel fairly confident saying that over its life as a public company it was a fairly well-run grocery store. But even the best-run grocery stores, because of all the dynamics that go into running a grocery store, will never ever earn an operating profit sustainably north of 6% or 7%. And that was Whole Foods. Over its life as a public company, it averaged 5% or 6% profits.
So when it was priced at its peak with people predicting it would become a lifestyle brand with a visionary CEO and many potential futures, I remember vividly sitting in that meeting and thinking, “Guys, it’s a grocery store.”
Does this mean I’m unimaginative? Yeah, probably. But I also think everything is more range bound than we think it will be. Which is actually an interesting idea in the context of expectations and reality.
– Tim
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