Take a simple idea and take it seriously

Interesting column today on the Motley Fool.

Take a Simple Idea and Take it Seriously

The article points out how companies that seem to do one or two things but do them really well have outperformed big name (read:  "sexy") stocks over time.

McCormick makes garlic powder. Its stock is up 1,423% since 1995. Oracle has a near-monopoly database management software. Its stock is up 1,419% since 1995.

V.F. Corp makes jeans and flip-flops. Its stock is up 1,444% since 1995. Cisco Systems connects the entire world together in one place. Its stock is up 1,018% since 1995.

Valspar makes industrial coatings, and has returned 1,521% since 1995. Adobe makes some of the most popular software in the world, and has returned 1,230%.

Google is one of the most exciting companies of all time. Its stock is up 345% since 2008. Altria makes cigarettes in the rapidly declining U.S. market. Its stock is up 494% since 2008.

I cherry-picked these examples, but the idea holds up with broad indexes. The best-performing industry over the last 50 years, by far, is consumer staples – things like food, toothpaste, and toilet paper. The worst-performing industry, by far, is technology.

The article summarizes with a few key points. Here is the one that resonated most to me:

Value isn't necessarily created by innovation or complexity. It's created by solving people's everyday problems for the longest period of time. This is why toilet paper and garlic powder have been better investments than some of the most innovative technology companies. Lots of technology has solved people's problems, but few to the degree toothpaste and deodorant have, and will continue to do for the indefinite future.

I couldn't agree more!

Something for nothing

Original post:  Jul 2, 2013

Five Guys is a fast-food restaurant famous for their artery-clogging menu. They have delicious hamburgers and fresh french fries. They also deploy a sophisticated psychological ploy that helps make their food even more irresistable.

When you order french fries, the person filling your order will take out the paper cup. They will fill the cup with fries. They will then open the paper bag and place the cup in the bag. They will then take another small scoop of fries and throw that in over the top of the cup so that they spill over into the bag.

That extra flourish at the end gives you the illusion of getting something for nothing. Who doesn't like free? While they have likely priced the serving to include the additional fries, they still leave the customer with the impression that they are receiving more value for their money.

Over the weekend, I read an article that discussed two ways of describing the same quarter-pound hamburger. One version sold the burger as a standard menu item. The other called it an "extra large." It turns out that people felt like they were getting more of a bargain when the burger was described as greater than normal (even though the serving was exactly the same size).

It's interesting to note how much our perception of value drives our purchasing decisions.

Can't see the value

Original post:  October 4, 2011

Value has a very amorphous description. It can mean very different things to different people.

Much of value is tied to perception. There can be two items of very different objective quality. However, if the consumer does not perceive any meaningful difference in the value of that product, they will be unwilling to pay more.

One example might be in diamonds. It takes a jeweler's loupe to be able to determine the difference between the finest grades of diamonds. A flawless diamond may cost ten or a hundred times one with a few tiny occlusions. If the customer doesn't perceive the difference, they won't pay extra.

A well-tailored suit may cost ten times as much as one off the rack. It may feature lots of special attention in unseen areas (stronger seams, higher quality fabrics, better overall construction). It might mean something to someone who wears a suit every day or appreciates the subtle differences between worsted wool and a polyester blend. It may mean nothing to someone who wears khakis every dat to work.

Sometimes what we don't see really can hurt us. It's nearly impossible for the lay person to be able to look at a structure and determine whether or not it meets building codes. When a disaster strikes, the extra money spent for little changes like hurricane-proof hangers for beams and joists might actually return their cost many times over!

I know that I often struggle in understanding the value in areas outside my own circle of knowledge. It's important to keep in mind as we work with other departments across the company.