Driving Around the Change Machine

Investors are driven by change. Passive investors steer around allocations to avoid instincts. Aggressive investors speed toward game-changers to chase upside. So much traffic and technology I had to pull over when I saw this machine that still takes old fashioned change.

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I was in the neighborhood I grew up in as a kid, and this machine has not been replaced inside that car-wash since. Looking around, it did not look like a penny had been reinvested into updating or even maintaining most of the property. Making sure the hoses are working - that felt like bazookas of water as a kid - is all that matters to these customers.

When you have a free cash flow machine you can mess a lot of things up around it, and still have uninterrupted mailbox money as a stakeholder. I like to ask my kids if they could name one business now that will still be IN business, doing the exact same business, when they are an adult. As a portfolio manager I am not sure that riddle isn’t harder these days than some CFA or MBA classes they could take. And, a correct answer can be worth a lot more.

Game un-changers are so beautifully boring they are hiding in plain sight.

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Right next door to the car-wash is the exact same auto parts store since I was a kid. I marveled at how unspectacular it is, compared to new developments. I wonder how many retail experts drove by over the past four decades, to negotiate new space from another store closing. Almost seven thousand retail stores closed last year, even more than during the 2008 recession.

I immediately started quizzing myself on the way home. I looked and looked and could not find a single retail space that has stood the test of time like that auto parts store. You can drive by popular intersections today, where the spaces have changed already this year.

Genuine Auto Parts Company was born in 1928. I do not know what Carlyle Fraser must have been projecting when he started that first shop with $40,000 and six employees. I bet I know what he was not thinking about - all that might change.

When investors think about any retail shop like his today, they immediately wonder when Amazon will put it out of business. But if you ask its founder Jeff Bezos about his warp speed of change, he offers a profound clue to investors if they dig in, that just might shock them.

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“I very frequently get the question: ‘What’s going to change in the next 10 years?’ That’s a very interesting question.

I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two.” – Jeff Bezos

I am not a car guy. Fancy cars for Houston potholes and crowded parking lots always seemed like a depreciatingly odd mix. I just care that ours work well, and fixing one is not a competitive shopping spree.

On my way home from the change machine, I drove past where giant dirt hills once stood in a construction site that I would go to with my sister, to drive our “big wheels” up and down, as little kids. Those hills on the western edge of town became Beltway 8 and now the center of Houston. The list of changes since then is staggering. The list of a few businesses that have not changed is short and sweet.

Genuine Auto Parts eventually went public in 1948. Plenty of free cash flow has allowed them to reward shareholders with an uninterrupted dividend ever since. Recently, they announced another increase in that dividend, a pay raise of 6.7%, the same as their average hike over the past decade. This was the 62nd consecutive year of dividend increases, the fourth longest streak of any stock according to my notes.

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Two huge risks prevent a potential shareholder from finding these rare businesses that last the test of time as game un-changers. Overall, the Stock Market will always provide plenty of fears. One stoked currently is the return of inflation. Yet, when I go see my good buddy down the road to get my car fixed, I have never seen Federal Reserve data in his shop. Just customers.

For all the re-allocations and speculation triggering portfolio changes to beat inflation, I humbly submit one simpler alternative. The most consistent answer is an unflinching discipline of finding dividend growth that far outpaces inflation.

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Genuine Auto Parts dividends starting at $0.03 are in blue, inflation of that same three pennies over the same time, is in orange if you can see it down there.

The second risk is more difficult for smart people conditioned to seize new solutions – opportunity risk. Beautifully boring business are easy to drive by, in search of game-changers with more upside. Currently, there is a different kind of car company that has captured the imagination of the high tech crowd like never before. Maybe their computerized cars will not need any parts replaced. Like all high flyers, a crowd of speculators is drawn to the hope of upside. The founder is so excited he is already working on space travel before they can figure out how to deliver cars, on the ground, already paid for. Fans of game-changers have the focus of moths in a light bulb factory on boring stuff like balance sheets and free cash flow.

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It takes uncommon discipline to move at more of a sloth's pace with those first few pennies of dividends. In this photo is the patriarch of a dear client's family that I am lucky to serve. He pumped gas for a living. Working at that gas station which he later would tirelessly earn the chance to run, was the only profession he ever knew.

He diligently purchased as many shares of the dividend paying parent company as he could. I smile and think about how many great new ideas must have rolled through that station while he humbly pumped their gas and stuck to his plan of more mailbox money down the road.

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No doubt some of his customers had flashy cars that others chased to afford with game-changing risk. He watched them all pass by while his dividends slowly compounded.

For car guys (I had to ask one) the Gullwing here is an incomparable treasure. The days of driverless cars is not the dream of many drivers. One of them paid seven figures for this old car.

He bought it from that gas pumper's family. Those dividends added up.

A secret of the merely wealthy we have learned, is they thoroughly enjoy what already is. That is my affectionate term for my favorite kind of investors.

When we chose to leave Wall Street right before their credit crisis, the big firms were interested in chasing risk and only attracting the ultra-wealthy. Our definition of wealth was always different, so it was an easy choice to leave. A final tip of our cap is the name of our blog, after writing there was disallowed. Another change that we did not care for.

When mailbox money coming in exceeds all expenses going out, with overflows into a contingency cash bucket, financial freedom is achieved. The resulting peace of mind from free cash flow instead of asset fluctuation is the ultimate dividend.

There will be all sorts of amazing changes to consider going forward. Here is an easy one with massive potential. What if, for every one we hear about, we dropped a few coins into the few un-changed machines?

Who needs virtual reality when reality is so good?!!