Financial surfers

They're not really investors at all, are they? They're financial surfers. They sit on their boards, waiting for the next big wave (which is harder than it looks, I can tell you), convinced they'll catch it and ride it to the shore.

Of course, my surfer friends (Steve Sjuggerud among them) tell me hidden dangers often accompany the best surfing conditions. For example, you'll find coral reefs in many good surfing locales. They can kill you, if you hit them. The occasional shark shows up, too. They don't know the difference between surfboards, surfers, and lunch. They eat it all and let their cast-iron stomachs sort it out later.

So the average guy with an Ameritrade account sits fully invested, loaded to the gills with highly speculative stocks. Those positions have just enjoyed the mother of all bull runs, with the Russell 2000 up more than 120% since March 2009. Now he's wondering when the market will turn. Some of his friends are starting to sell. The American Association of Individual Investors (AAII) Sentiment Survey shows bullish sentiment falling from 50% last week to 42% this week. Bearish sentiment rose from 29% to 34%. If the market surges higher, he'll fear being left out... and the survey will hit 55% or 60% bullish.

A lone voice of sanity, the folks at Wedbush Morgan are still bearish (as we are), though they raised their target price from $78 to $80 a share, about 62% below today's levels.

Plus, digital content can be hard to nail down. For example, couldn't movie studios cut out Netflix and start their own websites for streaming video? The technology is cheap and abundant. Why pay Netflix? Perhaps one day we'll look back on Netflix as a cross between Blockbuster and AOL... In the meantime, the market herd stampedes toward Netflix.

Ferris comment: A World Dominator is a big company that is No. 1 in its industry. Examples are:

• Wal-Mart, the No. 1 retailer in the world.
   
• UPS, the largest package delivery company in the world.
   
• Microsoft, the top PC software company in the world.
   
• Intel, the No. 1 microprocessor company in the world.
   
• Johnson & Johnson, the No. 1 medical-device company in the world.
   
• McDonald's, the No. 1 restaurant company in the world.
   
• ExxonMobil, the No. 1 oil company (not including state-owned companies) in the world.
   
• Procter & Gamble, the No. 1 consumer products company in the world.
   
• Coca-Cola, the No. 1 beverage company in the world in the world.
   
• Amazon.com, the No. 1 online retailer in the world in the world.
   
• Visa, the No. 1 payment card company in the world.

They dominate their markets, obliterate competition, gush cash, pay rising dividends year after year, and are generally underappreciated by the average investor, since they probably aren't going to rise 300% in a week.

World Dominators ought to be the core of your stock portfolio, the anchor that performs for you over the long term, providing safe, steady returns (mostly via relentless dividend growth), and providing you with an income that will beat inflation better over a lifetime of investing than all the gold stocks in the world.

World Dominators are so hard to compete with, they sometimes get sued for it, like when the Justice Department sued Microsoft and the European Union sued Intel. Of course, it didn't matter to either company. Microsoft still has 90% of the PC operating system market. It's got $40 billion in cash and securities and less than $12 billion in debt.

It still has 80% gross profit margins.

Intel lost its $1.25 billion suit. The result: It is one of the financially strongest companies on the planet, stronger than most U.S. banks. It has $21 billion in cash and less than $3 billion in debt, and makes 44 times its interest expense in pretax profits. It has 50%-plus gross profit margins.

World Dominators are so good at what they do, regulatory bodies often try to prevent them from putting other, higher cost providers out of business, like when Wal-Mart was denied a license to start a bank, because all the big Wall Street bankers knew it would put them out of business by not charging super high fees. 

Thing is, it doesn't matter what you do to them. Every so often, Johnson & Johnson has some scare or recall around one of its drugs. But it doesn't matter. It is well-known for handling The Tylenol Killer – who laced Tylenol bottles with poison, killing several people many years ago – in a swift and professional fashion.

These are the safest companies in the world. 

When they get cheap, they are the only "sure thing" in the stock market. They're not frauds. They're not financially weak. They're not losing money. Their businesses aren't shrinking. They might have laid a few people off and had lower sales in 2008 or 2009... But generally speaking, the crisis left them untouched compared with almost every other business in the world. 

You want to know what the greatest investor in history owns? His name is Warren Buffett and he owns World Dominators. His company, Berkshire Hathaway, is Coke's biggest shareholder. He also owns Procter & Gamble, Johnson & Johnson, Wal-Mart, UPS, and ExxonMobil. Warren Buffett buys World Dominators because he knows they'll continue to beat the competition for many years to come.

These companies ought never to trade for less than about 15 or 16 times earnings. They're just too valuable. But right now, at least three of the ones I've listed above are trading at or below 11 times trailing free cash flows. They are the bargains of the century.

I started writing about World Dominators a couple years ago, in my high-end value-investing service, Extreme Value. Now that I've taken over The 12% Letter, I've decided it's the perfect vehicle in which to tell the whole world about World Dominators.