What can corporate America do with the idea of listening to the fringe? In the late 1960s and early 1970s, Ron Castel, vice president of marketing at BankOne, spoke to national assemblies of bankers, recommending they attend protests (in jeans), listen to rock musicians, and visit campuses (where they would smell an aroma different from that of conventional tobacco products). It was controversial advice for the normally white shirted, blue suited bankers. Those who did break out of their suited environments and listened to the fringe went on to invent the automatic teller machine (ATM), point of sale processing of credit cards, electronic funds transfer, and a host of other innovations in banking products that eventually penetrated the majority culture.

Passion and Energy Create Brands People Want to Adopt Jagger struts; Madonna vogues; Tyler twirls; Diamond radiates; Simmons stomps; John pounds his keys. Attend a concert by any of these superstars and you’ll surmise that the commonality uniting them is the extraordinary degree of passion and energy they project. Night after night, city after city, these professionals take the stage and take charge of the tens of thousands of fans standing before them. They win their attention with the quality of the music they play; they captivate them, however, with the energy they emote. They never stop moving while on stage, leaving fans exhausted at the end of their two to three hour concerts. Leaving the venue, you’ll undoubtedly hear people talk about how energetic they are. Fans respect sweat.

Brands project energy and passion as well-some just project more than others. Victoria’s Secret emits an intimate form of passion, while Nike projects passion for exercise and life. Starbucks CEO Howard Schultz is passionate about coffee. Wal Mart is passionate about consumers and giving them the best possible value. When cost savings are achieved in most firms, the savings often flow to the bottom line as higher profit margins. When Wal Mart works with vendors to lower their costs-something it does with a passion-or works passionately to lower its own expenses, it returns those savings to consumers in the form of lower prices. In the long run, its passion for prices results in more consumers buying more items more of the time-one reason why Wal Mart’s revenues are now over onequarter trillion dollars. Some firms rely on high margins, but market dominance is often achieved with velocity or rapid asset turnover.

Wal Mart World Though some may not like to admit it, Wal Mart is part of contemporary American culture because it represents middle America’s desire for value in an environment that is nonthreatening and easy to navigate. Its strategies remain entrenched in the simple-it’s all about giving customers what they want to buy for the best prices possible and creating a shopping experience that keeps them coming back- but what it takes to execute that strategy continues to intensify. As Wal Mart fights for the lowest prices possible for consumers, its relationships with vendors become even more important. Wal Mart is now the biggest customer for many leading companies, including Kraft, Gillette, and Procter & Gamble. For these and 450 other suppliers, the relationship to Wal Mart is so vital that they have offices in or near Bentonville, with another 800 such branch offices planned to open in the next five years.

Wal Mart’s reach is still expanding. Even though it has already captured 8 percent of all U.S. retail sales (excluding auto dealers and restaurants), it has set its sights on banking, used car sales, travel, and Internet access, and there is no reason to believe its effect in these industries will be any less staggering than in those in which it already operates. In order to support its expected growth, Wal Mart plans to hire an additional 800,000 workers over the next five years, which in any economy, especially a stalled one, is a positive brand attribute in and of itself.

The Value of KISSing The successes of Wal Mart and KISS demonstrate that the most effective strategies are often simple, but involve brilliant approaches for relating to consumers. When implemented with excellence, winning strategies give advantages competitors cannot readily replicate, and often they succeed before the competitors even know they have been engaged. When a strategy is brilliantly conceived and executed with precision, an organization-whether a musical group or any other organization-dominates with a differential advantage that is difficult to duplicate.

Though Wal Mart might not have been the most sleek, sophisticated retailer in America, it was the hottest, biggest retail deal to roll into these small towns. And though Wal Mart didn’t set off fireworks and employees didn’t march around in strange makeup, Wal Mart did generate as much buzz and fervor among its fans with its everyday low prices (EDLP) strategy, offering consumers consistent, low prices every day, every time they shopped. Competitors usually employed high low pricing, in which a particular item acts as a loss leader one day (to entice customers into the store to pay full price for everything else) and is full price the following day. Customers began seeing WalMart as their friend in an environment where most other stores faced rising expenses and tried to pass them on to customers in the form of higher prices. Low prices and value remain an important brand proposition for Wal Mart, which today uses the phrase “Always Low Prices” in its tagline.

The ultimate goal, however, was to enter larger suburban markets. First circling cities with a ring of stores in surrounding small towns, Wal Mart would then gradually build newer locations closer and closer to the target city. Incrementally, Wal Mart grew both in size and in operating efficiency, and by the early 1990s, its total sales were greater than those of the Goliaths who had previously ignored the little David from Bentonville and the markets they deemed too small.

Wal Mart continues to penetrate further into target markets, marching from conquered suburbs into larger cities. This type of expansion is forcing a new twist-going from stores so large that some customers have requested benches so they can rest during shopping sprees to a smaller, neighborhood market concept with less space and stock keeping units (SKUs) than in rural and urban locations.

2. The rate earned on the Standard & Poor’s index of 425 industrial stocks was about ?2% on asset value-due in part to the inclusion of the large and highly profitable IBM, which is not one of the DJIA 30 issues.

5793. Achart issued by American Telephone & Telegraph in 1971 indicates that the rates charged for residential telephone services were somewhat less in 1970 than in 1960.

4. Reported in the Wall Street Journal, October, 1970.

Chapter 3. A Century of Stock Market History: The Level of Stock Prices in Early 1. Both Standard & Poor’s and Dow Jones have separate averages for public utilities and transportation (chiefly railroad) companies. Since 1965 the New York Stock Exchange has computed an index representing the movement of all its listed common shares.

2. Made by the Center for Research in Security Prices of the University of Chicago, under a grant from the Charles E. Merrill Foundation.

3. This was first written in early 1971 with the DJIA at 940. The contrary view held generally on Wall Street was exemplified in a detailed study which reached a median valuation of 1520 for the DJIA in 1975.

This would correspond to a discounted value of, say, 1200 in mid1971. In March 1972 the DJIA was again at 940 after an intervening decline to 798. Again, Graham was right. The “detailed study” he mentions was too optimistic by an entire decade: The Dow Jones Industrial Average did not close above 1520 until December 13, 1985! Chapter 4. General Portfolio Policy: The Defensive Investor 1. A higher tax free yield, with sufficient safety, can be obtained from certain Industrial Revenue Bonds, a relative newcomer among financial inventions. They would be of interest particularly to the enterprising investor.

What lessons-again using the pretentious title of my 1920 pamphlet-can the analyst of 1958 learn from this linking of past with current attitudes? Not much of value, one is inclined to say. We can look back nostalgically to the good old days when we paid only for the present and could get the future for nothing-an “all this and Heaven too” combination. Shaking our heads sadly we mutter, “Those days are gone forever.” Have not investors and security analysts eaten of the tree of knowledge of good and evil prospects? By so doing have they not permanently expelled themselves from that Eden where promising common stocks at reasonable prices could be plucked off the bushes? Are we doomed always to run the risk either of paying unreasonably high prices for good quality and prospects, or of getting poor quality and prospects when we pay what seems a reasonable price? It certainly looks that way. Yet one cannot be sure even of that pessimistic dilemma. Recently, I did a little research in the longterm history of that towering enterprise, General Electric-stimulated by the arresting chart of fifty nine years of earnings and dividends appearing in their recently published 1957 Report. These figures are not without their surprises for the knowledgeable analyst. For one thing they show that prior to 1947 the growth of G. E.

So these are nine records of “coin flippers” from Graham andDoddsville. I haven’t selected them with hindsight from among thousands. It’s not like I am reciting to you the names of a bunch of lottery winners-people I had never heard of before they won the lottery. I selected these men years ago based upon their framework for investment decision making. I knew what they had been taught and additionally I had some personal knowledge of their intellect, character, and temperament. It’s very important to understand that this group has assumed far less risk than average; note their record in years when the general market was weak. While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock. A few of them sometimes buy whole businesses. Far more often they simply buy small pieces of businesses. Their attitude, whether buying all or a tiny piece of a business, is the same. Some of them hold portfolios with dozens of stocks; others concentrate on a handful. But all exploit the difference between the market price of a business and its intrinsic value.

I’m convinced that there is much inefficiency in the market.

These Graham and Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a “herd” on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.

The purchasers view the current good earnings as equivalent to “earning power” and assume that prosperity is synonymous with safety. It is in those years that bonds and preferred stocks of inferior grade can be sold to the public at a price around par, because they carry a little higher income return or a deceptively attractive conversion privilege. It is then, also, that common stocks of obscure companies can be floated at prices far above the tangible investment, on the strength of two or three years of excellent growth.

These securities do not offer an adequate margin of safety in any admissible sense of the term. Coverage of interest charges and preferred dividends must be tested over a number of years, including preferably a period of subnormal business such as in 1970