Growing Rich - Arabictrader.com

KIRK KAZANJIAN
railroads, utilities, steel manufacturers, and chemical companies. Does
that mean you can’t make any money in these businesses? Absolutely
not. They just don’t fit in with his criteria. “If you bought Chrysler at
$10, you made a lot of money; if you bought IBM below $50, you’re
happy as well. In both cases, I did not buy, not because I didn’t think
I could make money, but because I was concentrating on better
businesses. By staying focused, I can hit my goal of having the highest
returns with the least amount of risk. My overall strategy is first,
protect the capital of my investors, and second, grow it. I conceptually
refer to this strategy as buying beach balls that are being pushed
under the water as the water level is rising. Continued pressure can
keep the beach balls under water, but eventually the pressure comes
off, and the beach balls, or share prices, rise rather quickly.”
Roy Papp agrees that high leverage should usually be taken as a
warning sign. “I normally prefer to see less than 25 percent debt,” he
says. “When it gets up to 50 percent, I’m scared. Companies with a
lot of debt sometimes go bankrupt. Beyond that, suppose we get hit
with a recession, which we will. You don’t even need a full-fledged
recession, just a slowdown in business. Companies with a lot of debt
still have to pay interest on it, even though they’re bringing in less
money. If you’ve got a company whose earnings grow at 13 or 14
percent a year with 50 percent debt, it’s not worth as much as a similar
company growing by the same 13 or 14 percent but with no debt.
There are some exceptions. I’m happy to live with funeralhomeowner
Service Corporation even though half of its balance sheet
is made up of debt. What’s different is that this company’s business
is relatively stable. If we have a recession, I can guarantee you nobody
will postpone burying their loved ones, even if they have to borrow
money to do it.” Service Corporation, one of Papp’s major holdings,
has been plowing much of that borrowed money into acquisitions,
both in the United States and abroad, to strengthen its growing
dominant position in the industry.
Papp can also stomach 50 percent debt in utility companies as well,
since their business is little impacted by changes in the economy. “I
love to own monopolies in lead positions within their industry,” he
says. “I like to own franchises and patent companies, too. I’m very
keen on predictability. I can’t tell you what a steel or chemical company
is going to earn tomorrow. Neither can anyone else. But I think
I can come much closer predicting earnings for a couple of drug
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