Certainty vs upside

There are some companies that have enormous upside, yet are highly uncertain. There are others that are very certain, yet have limited upside.

If you are a reasonable golfer, you can bet heavily on a 1 foot putt. A 5 foot putt has a lower probability and you might land a 20 foot put 1 in 20 times.

The secret sauce of our investing style is to concentrate on our our 1 foot putts, limit capital allocation in our 5 foot putts and generally avoid the 20 foot putts.

Disclosure: I am a terrible golfer and I should not bet anything on my golfing abilities.

1 Foot Putts

Usually, it is the certain established businesses that have less upside.

They have already captured their market and are entrenched. There is little left for them to do other than remain dominant.

These companies can still make wonderful investments if they use their excess profits wisely with share repurchases. Sadly, many overpay for their repurchases and either destroy capital or add little in earnings per share growth from their efforts.

H&R Block borrowed and bought back shares at $37 a share 5 years ago. It now trades at $18.80. The revenues are little changed in the last 5 years. This is a very steady business. It had a high return on capital. If they had simply bought back shares at lower prices, the share price would be materially higher today.