This is the Humility Curve made by Tim Hanson, it shows the normal path of an investor. Normally investors start at stocks they understand like Whole Foods (WFM), Mattel (MAT), etc. Then, investors think that they’ll make more money with complicated stocks like Cresud. People believe that they can make more money with complicated stocks because when it comes to jobs, the more complicated the more money you make, this doesn’t apply to stocks and I’ll show you why.
Cresud is an Argentinian farming company, they own farmland in Brazil and sell it at very low prices, around $3.00 an acre. I know that sounds like a great deal and maybe once they sell some of their lands they’ll make a profit, the second you glance at the numbers you’ll find that Cresud is not the way to go.
Metric
|
Hurdle
|
Cresud (CRESY)
|
Gross margin
|
25% or higher
|
28.9%
|
Return on Equity
|
15% or higher
|
-109.9%
|
Dividend yield
|
Between 2-5%
|
---
|
Dividend Payout Ratio
|
50% or lower
|
---
|
Debt/Equity
|
0.7 or lower
|
129.6
|
Price to Earnings Ratio
|
20 or lower
|
---
|
You may notice that Cresud has no Price to Earnings Ratio, that is because they have no earnings. If you refer to the table above you can also see that Cresud is missing all the hurdles. Once, investors learn that Cresud is not the way they are going to make their money they work their back down to understandable stocks. I think the table shows enough.
The reason I included the table was to show you another way to figure out if a company is too complicated. Missing one or two hurdles is okay, but this many of them definitely should show you something not so positive.
If you haven’t started investing please remember complicated is not the way to go. In the end, you want to draw a line straight across from Whole Foods (WFM) to Disney (DIS).
"Some luck lies in not getting what you thought you wanted but getting what you have, which once you have got it you may be smart enough to see is what you would have wanted had you known." - Garrison Keillor.
The name of my blog is Compounding Snowballs that represents long run returns, which is the point I’m trying to make especially in this post.
Understandable companies can be more predictable and less risky making them a safer hold. Using Long Run Data I found that with a simple company like Sherwin Williams with an original investment of $1,000 over 20 years your total with compound interest makes over $29,448. Now looking at Cresud with that same 20 years and that same original investment of $1,000 your total compound interest is $400. Make sure the snowball compounds and it can’t compound if it melts.
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