My dad was a huge Boston Celtics fan. It's probably not too surprising, since he was an Irish-American who loved playing, talking and watching basketball. He had all kinds of memorabilia scattered around our several homes, from framed pictures and action figures of his favorite players (Larry Bird and Kevin McHale) to refrigerator magnets featuring the go-lucky leprechaun logo. If the Celtics had been a publicly owned team, my dad would have been long, long, long.
And of course that would've been a huge mistake, because in the 90s and earlier this decade, the Celtics sucked. They went from winning eight division titles, five conference titles and three NBA championships just in the 80s, to winning a mere total of three division titles over the next 21 years – with a dry spell of 12 years (from 1993-2004, inclusive) in the middle. Since their 2005 division title win, they hit purt'near bottom finishing with one of the worst-ever records in the history of professional basketball. It would be hard to find a team that had performed worse in a given 20-year period.
This year, though, the Celtics are back. According to Wikipedia, the 2007-08 season is the biggest single-season turnaround in NBA history, and they're about to square up against the Lakers – another dynastic team – in this seasons championship series. How did they do it? It began when Executive Director Danny Ainge (a former player himself who was instrumental in at least two of the Celtics' NBA championships during the 80s) shook things up, made some daring trades and put together a team that has really gelled together well.
So what does this all have to do with investing?
It's all about cycles, baby. Twenty years ago, the Celtics were at the top of their game; then they fell apart and nothing they did seemed to produce any decent results. Now, merely a year after performing like a pack of whinos lured from a dumpster behind the nearest pub, things are looking drastically better.
Likewise, companies go through cycles. Look at Coca-Cola (KO) for example. In the late 1980s, they had strong growth and earnings, which prompted Warren Buffett to buy up more than $1 billion worth of shares near $10 per share. This is heralded as one of the greatest investment moves by one of the greatest investors of the modern age. For ten years, KO performed superbly, coming to a peak in 1998 at around $87. Add in dividends, and smart people like Buffett made out very well during this period.
But starting in 1998 and continuing over the next several years, KO's stock plummeted by close to 50%. If you had bought KO near $85 in 1998 and held until today, you'd be grasping onto a 23% loss (not accounting for dividends). Like the Celtics, Coca-Cola's dynasty broke down.
And also like the Celtics, it may be that Coca-Cola is on the rise again. Since it's 2006 low near $37, KO is up almost 50% – even with the 8% drop in January after 2007 annual earnings failed to meet expectations. I won't make any predictions about the future, but it could be it's making a comeback. (As an aside, I wouldn't buy right now, even if it is working on a comeback, because it recently dipped below it's 200-day moving average, but the long term trend is fairly positive.)
Parting thoughts
Some people claim that big companies like Coca-Cola return less than stellar growth, and as a general rule that is true. Large companies simply can't match the growth potential of their small- and mid-cap counterparts.
But it's also clear that the idea of large companies producing only single-digit percentage returns is false as well. Companies like Coca-Cola that have multi-year spans of decent growth and earnings can see their share prices increase many-fold. And because they are large and generally stable, dividend reinvestment maximizes those earnings with much less risk and volatility than smaller companies.
Disclosure
I have owned shares in KO since Aug. 2006.
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