Happy Friday!
I have a few things I’ve been sitting on, but rather than develop each idea more fully, I’ve decided to publish them all at once. In today’s post you will find:
Living with change -- reflections on a book I'm reading about change.
Blessed are the forgetful -- why you have to be careful about "learning from your mistakes."
Domino's Pizza -- why we own it; not the US franchiser, but the UK version
Happiness -- some things about "happy" people
Hope you enjoy today's blog.
1. “We do not know anything for sure... We just keep trying to find out…”
I’ve been reading a good book -- an older, out-of-print book (it’s what I do) -- called Living with Change: The Semantics of Coping by Wendell Johnson, published in 1972. Born in 1906 on a Kansas farm, Johnson writes eloquently of the change he’s seen in society. Excerpts follow:
“I can remember horses vividly. My father was an old western cowboy. That is how young this country is. He rode horseback all the way from Seattle down to Los Angeles, all over the Rocky Mountains. There were no highways as there are now. I can remember, also, how he said ‘Giddap’ and ‘Whoa’ to our first car there in our valley in Kansas -- in a new world but out of old expectations, an older orientation, you see...
“I find it hard to empathize with people I meet on planes who complain of the service while we are going 500 to 600 miles an hour and who talk about the plane they should have taken that would have brought them to New York thirty minutes sooner...
“As I read the story of the development of our country I get the feeling that most people seemed to have almost no sense of what the railroad meant as it was being built or what it was going to mean. A train was a nuisance. Most people resented it. It was noisy and smokey and it scared the horses...
“One way I have found helpful in trying to visualize these difficulties is to think in terms of a diagram on which there are two curves, one almost flat, the other ascending sharply. I see the flat curve representing social change, that is, change inside our skins, and the sharply rising curve representing technological change, that is, change outside our skins. To me the increasing divergence of the curves suggests the tensions and stress within the individual and within the society as our inner and outer worlds become increasingly inharmonious. It is as if we were literally being torn apart by that divergence.”
I’ve been thinking about change a lot in recent days, in part because of Johnson. I love his idea of those two curves as a way to visualize change. Technology brings lots of changes, but it's still mostly the same old people, thinking in same old ways. The divergence brings stresses.
And I wonder if something similar to what Johnson describes is going on now. I wonder if we really understand the impact of social media, for example, on markets, politics and on “culture” generally. I don’t think we do, yet…
We’re like that old cowboy saying “whoa” to his first car. We’re still using old language to describe a new environment. We’re still trying to understand social media as if it were somehow like other media -- like cable TV or newspapers. And so Twitter doesn’t really know what to do with itself yet. Something I think people ten years in the future will have some clear ideas about.
There are always exceptions; people who see the future before it arrives. But by a large, I don’t put much stock in prophecy. One of Johnson’s ways of coping with change is to accept that change is always going on. If things are always changing, there are always new things to learn and understand. To Johnson, there was nothing more exciting than learning something new or gaining a new understanding.
He thought a lot of our problems stem from a quest for certainty, “a preoccupation with unanswerable questions, questions asked in absolute terms about a world of relative ‘facts’ -- a concern for neat and last-word statements about a reality of continuous process.”
He goes on to say:
"I think it is not good for us or anyone to read writers or hear speakers who pretend they know things. For then we end up with the notion that there are final answers and that it is desirable to know them. Well, this is a disease. This is delusional. We do not know anything for sure. We don't know anything completely. We just keep trying to find out. And we try to do a little better every day. But it is the difference between thinking we are done and knowing that we never will be that is important.” [Underline added.]
Wise words for anyone to follow, but investors especially so. The market is no place to let your views ossify. Always be learning, as Alec Baldwin might’ve said in Glengarry Glen Ross.
Johnson, by the way, was a student of Alfred Korzybski’s and one of my favorite writers on general semantics. His People in Quandaries is a classic in the field. (Read the first three parts, ignore the last two, which have dated badly).
2. “Blessed are the forgetful: for they get over their stupidities…”
The line is Nietzsche’s. I’ve been thinking about it because a friend of mine likes to track stocks he’s sold. He says it's good to follow them so he can learn from his mistakes.
I’m not sure that’s a good idea. I know investors love to talk about how they "learn from their mistakes." But what if you learn the wrong lessons? If the stock goes up after you sold it, did you make a mistake? Not necessarily. How much time do you need before you can make such a call?
My friend likes to point out, wisely, that you can’t know anything about a money manager’s ability after 3-5 years. There is simply too much noise in the short-term results. You need at least a decade, he says.
If so, then why not give your buy/sell decisions the same kind of timeframe? If that’s right, then you can’t know anything about the stocks you’ve sold until a decade passes. Then let’s see.
Food for thought: Being too focused on “learning from your mistakes” by evaluating recent buy/sell decisions can be bad for you. You can learn the wrong lessons.
Sometimes I think successful investing is a lot like putting in golf. Bob Rotella, author of Golf is Not a Game Perfect, writes about how the best putters believe every putt is going in. They’re decisive and confident, even when they miss. Great putting is about attitude.
Is investing kind of like this? How can you hold on to something for five years, ten years, or longer... if you don’t have a great deal of confidence in your own work that says “this is a business I want to own for the long haul.” All that work is not worth much if a couple of bad quarters makes you sell. It takes a certain kind of attitude.
And you also have to accept you’re going to get poor results sometimes, despite your best efforts. Here is Rotella:
“Remember, too, golf is not a game of justice. A player can practice properly, think properly, and still hit a bad shot. Or he can hit a good shot and watch a bad hop or a gust of wind deposit the ball in the sand trap.
A golfer can’t force results to happen. He can only do everything possible to give those results a chance to happen. As Tom Watson once put it, to become a really good golfer, you have to learn how to wait. But you have to learn to wait with confidence.”
Golf is not a game of perfect… neither is investing.
The best golfers also tend to forget their poor shot after they hit it. They hit it. It’s over. Accept it. Stay focused on the next shot. In this, Nietzsche was right. Sometimes it’s best to forget.
3. “Freshly made pizza from order to door in less than 25 minutes…”
I think something special might be in the early stages at Domino’s Pizza, which released earnings this week. Not the US-listed one, but Domino’s Pizza Group Plc (DOM) listed in the UK. (DPUKY in the US). (Disclosure: We own it at Woodlock House, at an average cost of about 300 pence.)
A little about the business: DOM has the exclusive franchise rights for the UK and Ireland (it’s main markets). It also has the rights to Iceland, Germany, Sweden and Switzerland.
DOM is a franchisor and franchisee, in a sense. DOM pays the mothership a royalty fee (less discounts for meeting store growth goals). And in turn, it has about 1,200 franchisees that pay it royalties and other fees. Altogether, DOM did about £1.3 billion in system-wide sales last year, an increase of 10.3% from 2019. Underlying EBIT was about £101 million. And that’s after £9 million in COVID-related costs. About £5 million of these won’t recur. Returns on capital employed have averaged about 30% in recent years. We’re getting close to a 5% free cash flow yield to start. Overall, a good package.
The stock hasn't been a winner because the company has been badly mis-managed. But a newly refreshed board started the process of rebuilding in 2019 and a new management team took the reins in 2020.
The new board owns quite a bit of stock, buying it in the open market, starting with Usnam Nabi of Browning West at ~9%. He was a key figure in helping turnaround Six Flags and Temper Sealy. The board includes other interesting people as well. For example, Elias Diaz, a 3G executive, who “most recently led the Kraft Heinz turnaround in UK, Ireland & Nordics as President for Northern Europe” and was CEO of Tim Hortons, among other roles. These are just two members of what I think make up a strong board.
The new CEO is Dominic Paul, previously the CEO of Costa Coffee. And the Chairman of the Board is Matthew Shattock, previously non-executive chairman of spirits maker Beam Suntory since April 2019, after having joined the company in 2009 as CEO. I like this team and a company of DOM’s size is fortunate to have attracted such talent -- either could have landed at a much bigger company.
COVID certainly presented challenges last year and probably slowed down the team’s ability to make changes. But this week, they announced their new strategic plan.
First, when looking at any franchisor, you want to make sure the franchisees are doing well. In Domino’s case, they’re doing quite well:
Store-level economics of a Domino’s box are strong. And the brand is healthy, with a seemingly happy and growing customer base. Out of laziness, I’ll just clip this slide in from Domino’s presentation on Tuesday:
So, this is not a turnaround story. Yes, past management botched a bunch of things. But the core brand is in great shape. And despite all those mistakes, the business still put up strong returns on capital. What did Buffett say about investing in a business an idiot can run, because someday one will? Domino’s went through that… and survived.
If the new team does nothing but improve capital allocation, the stock should do well. And capital allocation is an obvious priority. Again, out of laziness, here’s a relevant slide from the deck:
I like the buyback. I’m not that fond of the dividend, but nobody is perfect. Seems to me, over time, the firm will have plenty of reinvestment opportunities. At some point down the road, I don’t see why they can’t try to expand again outside of the UK and Ireland. Just because the previous team botched the previous effort to expand, doesn’t mean it can’t get done.
Even if the overseas expansion doesn’t happen, there is room to grow in the UK and Ireland. Paul says his “medium term” ambition is to add 200 stores and boost sales to £1.6 billion to £1.9 billion, a 23%-46% increase in sales.
What is “medium term”? Sometime before the next ice age? Management did not make this clear, but they said 25-30 this year. The pace will probably quicken after this year.
There are plenty of things to do -- increase the carry-out business (or collections, as they say), where the economics are better than delivery. There is potential for a loyalty program. There are other efficiencies they can achieve. The UK business is behind the US business technology-wise and there is much they can do here.
One example Paul mentioned on the call: The average delivery time across the entire network was 24.9 minutes. “Freshly made pizza from order to door in less than 25 minutes despite the peaks we have seen in our business,” he said. Their goal is to bring it below 20 minutes.
It plans to exit under-performing overseas businesses with the exception of Germany. (Although, they have a put option on the German business that could realize £80 to £110 million in cash proceeds -- a substantial sum, as DOM’s entire pre-tax profit was ~£100 million last year).
I like it. And, as I say, I think we’re in the early stages of something special happening here. Earnings power is way higher, in my view. Rising margins, rising sales, better capital allocation and a better valuation could all make for a very good stock over the next few years... The market doesn’t believe it and so you can get a pretty good package for ~17x earnings and ~5% free cash flow yield. Give it a look.
4. “Happier people live longer and are more successful…”
So says an article in today’s Wall Street Journal. It goes on to say:
“Happier people live longer and are more successful. A 2015 study found the risk of death was 14% higher among those who were not happy compared with those who were very happy. Happier people have greater earnings potential—earning 3% more—and are 12% more productive than less happy people, according to two studies.”
So, what does happy mean? Happy all the time? Unhappy all the time? Happiness here is treated like a label people stick to their forehead. And anyway, even accepting the implicit idea that “happiness” is a thing, perhaps the causation goes the other way. Maybe people are “happy” who earn more. Maybe healthy people are “happier” than unhealthy people.
Articles like this make me appreciate evermore the benefits of knowing a little general semantics, as taught by Alfred Korzybski and his intellectual heirs. Nobody who has would ever give much credence to such a silly article as this one.
And that gives me a segue to mention my own little book on the subject, titled How Do You Know? recently re-published by the Institute of General Semantics. Check it out and let me know what you think. All proceeds go to the Institute. [Link].
Thanks for reading and have a great weekend!
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Published: March 12, 2021
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