What Doesn't Change

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In 1956, Lay’s potato chips overtook the Utz brand to become the top selling chip in the world. 1956 – the year Dwight Eisenhower was reelected President, the first ever enclosed shopping mall was opened in Minnesota, and when a bottle of Coke cost a nickel. Compare that to today, when shopping malls are struggling against online retailers, “artificial intelligence” is a part of everyday life, and a Coke now costs $1.29. Yet, in every year since 1956, 67 consecutive years, Lay’s has continued to be the top selling chip in the world.

Source: 1000logos.net

Much of Wall Street is built on selling you what will change. There’s something exciting (and profitable for the big Wall Street firms) about chasing the new wave. Yet, many of those waves break. 

Take the auto industry. In the early 1900s, it was the newest technology taking the country by storm, with numerous investing opportunities. Over 2,000 companies entered the U.S. auto industry in the early decades of the 20th century. Over time, though, almost all of those companies went away as the industry was whittled down to just the big 3 manufacturers (2 of which went bankrupt in 2009). Predicting the future is hard

That is why we focus on what doesn’t change. We don’t try to predict what’s going to be different, since frankly we don’t know (and neither do the Wall Street pundits). Rather, we seek to own quality companies, ones with strong brands and durable competitive advantages. Companies like PepsiCo (PEP), whose Frito-Lay division owns not just Lay’s potato chips, but 7 of the top 10 chip brands in the world. Or Procter & Gamble (PG), where Tide has been the dominant laundry detergent for nearly 75 years (ahead of #2, Gain, which is also owned by PG). Or Caterpillar (CAT), which has carved out a dominant position in construction equipment for much of the last century.

This isn’t to say investing in these companies is easy. Investing can be simple, but never easy. Like any company, quality companies go through out of favor periods. Management makes mistakes, there is the occasional scandal, and economic downturns hit them like everyone else. When you are an owner of a company and watch it and its share price suffer through a crisis, it’s no fun, but a big part of setting your portfolio up for long-term compounding. [If you’re not an owner, those same crises can be great opportunities since they can allow you to buy a quality company at a discount.]

PepsiCo’s drawdown chart – periods when it was below its most recent high – shows what long-term investing can be like, even in a blue-chip stock. Since 1968, there have been numerous significant drawdowns for PEP. In 1974, as part of the 1973-1974 bear market, Pepsi suffered a -65% drawdown. $100 put into PEP in late 1973 was worth just $45 by October 1974. Yet, within two years, it was back at all-time highs. You can see other gut-wrenching drawdowns: 1998 as part of the Asian Crisis, the Great Financial Crisis in 2007-09, and even Covid.

Since 1968, even with all those drawdowns, PEP has compounded at 13.1% per year. $100 invested in your favorite potato chip manufacturer in 1968 is now worth $95,826. This has outpaced the broad S&P 500, which was up +10.2% per year over the same period. It didn’t take constantly predicting the future to earn this return with PepsiCo. It took patience, discipline, and seeing what doesn’t change – in this example, Frito-Lay’s dominance in the salty snack aisle of the grocery store.

Right now, the market is going through an out of favor period. Over the last two years, the S&P 500 has gone nowhere – we’re still below the all-time-high of January 2022. This can be a frustrating time to invest as you see your investment doing nothing (or going backwards if we factor in inflation). With cash yielding 5%, it can be tempting to move your portfolio in that direction. People probably had similar thoughts in late 1974 when PEP was down -65% and cash was yielding 7.8%. Over time, though, finding those investments where things don’t change can provide amazing returns. We would be happy to sit down with you and discuss the risks and rewards of different asset classes and how they can help you reach your investing goals.

If you have any questions about your account(s), or if there has been a change in your financial situation or investment objectives, please feel free to contact any member of our team at (406) 839-2037 to schedule a meeting.

Data Sources: @dataplayer; Hobby Lark, Company Filings, Yahoo!Finance, Koyfin, Allied Calculations
The views expressed in this newsletter represent the opinion of Allied Investment Advisors, a Registered Investment Adviser. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment or services. The information provided herein is obtained from sources believed to be reliable, but no representation or warranty is made as to its accuracy or completeness. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results. Investments are not a deposit of or guaranteed by a bank or any bank affiliate. Please notify Allied Investment Advisors if there have been any changes to your financial situation or investment objectives or if you wish to impose or modify any reasonable restrictions on the management of your accounts through Allied Investment Advisors.