The Cockroach Theory: Investing in Companies That Withstand Economic Recession

During their recent episode, Tobias Carlisle and Mike Meixler discussed The Cockroach Theory: Investing in Companies That Withstand Economic Recession. Here’s an excerpt from the episode:

Tobias: What is your solution for that? How have you been dealing with that?

Mike: Well, clients laugh. I tell them about the Meixlery and cockroach theory. You’ve probably heard that before, but I can’t– [crosstalk]

Tobias: I haven’t, but I like it.

Mike: Huh?

Tobias: I haven’t, but I like it.

Mike: You want to own things that are so tough and resilient that when the nuclear blast detonates, only the cockroach survives, and then the cockroach actually reproduces and multiplies. So, maybe you have a company with such a strong balance sheet that when the recession hits where competitors are failing and going out of business, that real strong war horse type of company picks up the remains and coming out of the cycle does even better.

I would say I spend as much time looking at balance sheets, and resilience and survivability as I do the income statement.

Tobias: What are you looking for on the balance sheet? Cash? Holding cash?

Mike: Not much leverage, or leverage that could easily be paid off. And then, I like tangible. I being a part time hobby farmer, I like lots of tangible assets that I think are valuable. So, yeah, survivability. Will this business be around in 20 years? Will it be paying dividends to your great grandkids?

Things like that, you put a lot of thought into the company. Obviously, if you had invested in newspapers the last 20 years, it was a terrible long-term investment, because Craigslist and eBay and other things just ate their lunch. But had you owned something like a Lamar that owns 220,000 billboards–

The internet hasn’t disrupted that business. The billboard business was a pretty good business. If you can put up a billboard for 100,000 and rent it for $2,000 a month, that’s a pretty sustainable, durable type of asset. So, I think a lot about sustainability. How can you farm a farm for 100 years without losing all your topsoil and have to put more and more chemicals on it, right?

Tobias: How do you distinguish between something like a newspaper or even the Yellow Pages, which was a great business at one point, and so I guess you would call them value traps-

Mike: Right.

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