Cashtoons

Choose a Cheetah

January 15, 2021

How do you know if you picked a good investment? Let’s say that the company you chose looked like this when you invested:

babyplant

Then after a few years the company looks like this:

plant

There was new growth! All that growth means your part of the company is worth more. If you sold your shares today, you would make money! So this looks like a good investment. But is it?

What if the opposite happens? You buy some stock when the plant looks like this:

babyplant

A few years later some of the plant has shriveled:

wilting

If you sell your stock now, you lost money. Looks like it was a bad investment, but was it? There is an important factor we can’t see here. Let’s take a trip to the savanna. We’ve got some Cheetahs waiting to help us figure this out.

Here, there are two different Cheetahs living in different places at different times. Choose the cheetah that you think can catch more gazelle:

cheetahs

Some info to help you choose: Meet Speedy.

speedylist

Now for Spotty:

spottylist

Who can catch more gazelle? Which did you choose? Probably Speedy. You would be right that Speedy could catch more gazelle, but, when we look at the number of gazelle they actually caught, Spotty won.

Spotty caught 3 gazelle for every 2 that Speedy caught.

spottygazelle

speedygazelle

How is this possible?

Let’s look at where our cheetahs live. Speedy lives in a part of the savanna with very few gazelle.

speedyhome

Meanwhile, Spotty has won the gazelle jackpot:

spottyhome

When comparing stocks or cheetahs, for that matter, it is helpful to see the environment. Where are they living? This helps us know if we are choosing a Speedy or a Spotty. Spotty is not a great predator, she’s just lucky.

There are some ways to see the place where companies live. We’ll check it out next time.

Sources

sources

Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor


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