I was struggling for a long time. For years and years I always thought I had to be a true expert on an industry to successfully invest in it. Specifically, I thought I had to understand the why of consumer behavior in an industry. And by “consumer behavior,” I mean both people buying products and services from B2C companies and also businesses buying products and services from B2B companies. For example, If I was going to invest in the soft drink industry, not only did I need to know what soft drinks consumers were buying, but I also thought I had to know why they were buying those soft drinks.
But after hearing Warren Buffett talk about consumer behavior and the marketplace, I have loosened my approach and no longer put much as much weight into figuring out the why of consumer behavior. I can’t remember what Buffett said specifically, and I can’t remember where he said it, but I think it was during an annual shareholder meeting. I think someone asked him his opinion on a business they had bought or invested in, and he made some comment like, “well, we like what we see with sales, it’s clear the marketplace has a demand for what they’re selling.” And this comment made the light bulb light up above my head.
I instantly realized I was putting too much time and effort and worry into figuring why consumers were doing what they’re doing, and not giving enough credit to just seeing them do what they’re doing. Don’t get me wrong, I still study and work hard at figuring out why consumers buy products and services or stop buying them. But I no longer feel a pressure to be a world class level expert on every product or service companies that I invest in offer to their customers. It’s good to think about the why, but you don’t have to obsess over it. When I heard Buffett’s comments, I thought to myself, the behavior itself is much more important than understanding the “why” at an expert level. It’s okay to only know a little bit about the “why.” What’s important is the behavior itself. Listen to the data.
Let me give you an example. I’ve bought large amounts of Fiat Chrysler stock recently. And good news, in the last year Jeep and Ram sales are up big. The old me would think to myself I can’t be a good investor in Fiat Chrysler unless I’m an expert on their products. I need to know why Jeep and Ram sales are up. I need to teach myself about every little Jeep and Ram feature that came out with the latest models, and I need to know if competitor companies offer those features too. People study FCAU full time and people in the industry know way more than me about why these sales are going up. I can’t compete with them and get good results unless I’m an expert like them.
But after thinking about Buffett’s comments on consumer behavior and the sales history data, now I think to myself about the Jeep and Ram situation something like Jeep and Ram sales are up big. I don’t know every little last reason why they’re up, but that’s okay. They’re cool brands, Jeep has a unique brand that people like, Ram trucks look awesome, I get it, they’re cool brands and cool cars. It makes sense that they’re selling more of them. Management has a great plan in place, the company is selling for “a PE of 2 in a few years” and looks really cheap, and they’re basically at net cash. Besides things I can’t predict like recessions, wars, etc, there’s no reason these brands under current management should not continue to perform well over the next few years. And I no longer overthink things and try to cram being an expert in an industry in two weeks when it’s never going to happen anyway. I just let the data do the talking, and I think through it at a high level and, see if it makes sense, and think a little about if things can continue. I’m now listening to the marketplace and letting the data do all the talking.
I’m doing this now in my day job as well. I recently rolled out a new product at my marketing agency. I put a few weeks of upfront work into the product, with the hope that it would sell well based on knowing what I know about my customers, but there was no way to be 100% sure. But I took a small time risk, created a new offering, and decided I would let the marketplace do the talking and tell me if I was onto something. And it turns about my customers love the product and are buying more and more of it.
Listen to the marketplace. The data is all there for us. Don’t overthink it.