Young Guns Capital Corp.
Teenage Mutant Ninja Turtles, kids investing and Domino’s pizza
"Imagination is more important than knowledge. For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution." - Albert Einstein
In 1983, struggling artists Kevin Eastman and Peter Laird were living outside Boston, Massachusetts. One night, as a joke, Eastman drew a turtle standing up, wearing a mask, with nunchucks strapped to its arms. Eastman wrote “Ninja Turtle” on the top of the page. Eastman drew four turtles, each armed with a ninja-style weapon. Laird added “Teenage Mutant” to the “Ninja Turtles” title. They didn’t think much about it at the time.
They felt they were on to something so in March 1984, Eastman and Laird created a new company, Mirage Studios (there was no actual studio, just Laird’s living room). With a tax refund and some savings they raised $2,000 and printed 3,000 copies of their first comic book, Teenage Mutant Ninja Turtles (TMNT). It was black and white as color would have been too expensive. They used the leftover cash to run an ad in an industry publication. It worked. Comic distributors across the country started calling, and Mirage sold all 3,000 copies within a few weeks. At the time no one could have imagined just how big this was going to be.
For those of you who didn’t grow up in the 1980s or 1990s, TMNT is about four superhero teenage mutant turtles named after Italian Renaissance Artists. They were trained by their mutant rat sensei in the Japanese martial art of ninjutsu. They lived in the sewers of New York City and battled petty criminals, evil overlords and mutated creatures while attempting to remain hidden from society.
During the late 1980s and early 1990s TMNT became an unstoppable global brand. Cartoon series, films, video games, toys, and other merchandise were hugely popular with kids. Teenage Mutant Ninja Turtles movie released March 30, 1990. With a budget of $14 million dollars it made over $200 million worldwide and became a box office hit. As a kid, my dad liked the TV show and watched the movie when it was released. This was the first of six films. Teenage Mutant Ninja Turtles (2014 film) earned $493 million, becoming the highest-grossing film of the series.
The franchise has generated a total revenue of approximately $15 billion in merchandise sales since 1984. Two struggling artists fooling around with drawings in their living room created a multi-billion dollar brand.
Peter Lynch is one of the most successful and well-known investors of all time. He ran the Fidelity Magellan Fund for 13 years. Between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than double the S&P 500 stock market index and making it the best-performing mutual fund in the world. He retired in 1990 at the age of 46. His books One Up on Wall Street and Beating the Street were National Best Sellers in the 1990’s.
Lynch gives a fairly detailed account of how he did his analysis in the book Beating the Street. He mentions that you never invest in any idea you can't illustrate with a crayon.
In 1990, in a suburb of Boston, Mass. a class of seventh graders at a primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. Ms. Morrissey, the teacher, explained the first lesson:
“Before my students can put any stock in the portfolio, they have to explain exactly what the company does. If they can't tell the class the service it provides or the products it makes, then they aren't allowed to buy."
They sent their picks to Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of:
The Walt Disney Co.
Topps (baseball cards)
The Gap Inc.
* In 1990, Pepsi owned Pizza Hut and Kentucky Fried Chicken
**Maker of coloured pens and markers
All companies made easy-to-understand products. There were no technology companies in the portfolio except for IBM. The kids went for solid stocks with less debt and increasing profits. Not all of their picks worked out but that’s how investing is.
The kids portfolio returned 70% gain over a two year period (1990/91) outperforming the S&P 500, which gained 26 percent in the same time frame.
Company 1990-91 Gains
The Gap Inc. 320%
Walt Disney 3.4%
The students' stock picks outperformed 99% of all equity mutual funds at the time, whose managers are paid considerable sums for their expert selections, where these kids were happy to get free pizza.
This example explains what Morgan Housel, popular personal finance writer and author of The Psychology of Money, often talks about:
“In what other field does someone with no education, no relevant experience, no resources, and no connections vastly outperform someone with the best education, the most relevant experiences, the best resources and the best connections? This happens in investing.
The first rule of compounding: Never interrupt it unnecessarily. The punchline of compounding is never that it’s just big. It’s always – no matter how many times you study it – so big that you can barely wrap your head around it. In 2004, Bill Gates criticized the new Gmail, wondering why anyone would need a gig of storage.”
If you look at the kids stock picks from 1990 they went on to deliver mind blowing returns over the past 30 years. Most companies on this list have generated double digit annualized returns for at least 40 years. Pepsi has delivered an annualized return of over 12% since 1926. Check out the increases in stock prices from December 23, 1990 to December 23, 2020:
Company 1990 2020
Gap $2 $20.43
Nike $1 $141.60
Walmart $8 $143.50
Pepsi $13 $145.06
Disney $8 $173.73
IBM $28 $124.69
These are just stock prices. Articles on our blog have detailed how these companies have paid and increased dividend payments over time. Two ways to make money off stocks: capital appreciation and dividends. Walt Disney paid an annual dividend of less than $.04 a share back in 1990 today the dividend is $1.76 a share. Those dividend checks really add up over the years. The total returns of these stocks over the past 30 years would be even higher if you reinvested the dividends and bought more stock. Compounding at work.
Another company any seventh grader understands is Domino's Pizza. In 1960, while still in university, two brothers named Tom and James Monaghan borrowed $900 and bought a small Michigan Pizzeria named Dominick’s. The pizzeria was initially run by the both of them until James decided to sell his share for an old beat up Volkswagen Beetle that the brothers used to deliver pizzas. James wanted to keep his full-time job at the U.S Post Office. The pizza business was too risky for him. James would later go on to work as a security guard. Tom purchased two more pizzerias and changed its name to Domino’s Pizza. The Domino’s logo has three dots which represent the three original stores in 1965.
Tom realized early that his restaurant would have to focus solely on delivery as he had limited dine-in capacity. This led to several innovations. Domino’s pizza is credited for creating the first insulated pizza bags in order to keep pizzas warm during delivery. Their biggest invention was the corrugated pizza box, which is cheap, stackable, insulated and remains sturdy despite the moisture and cheese from the pizza. This was a major advancement in pizza technology. In addition, the pizza boxes provided space for advertising. The invention was so simple yet brilliant. It’s been almost 60 years since it was introduced and still used around the world today.
There was no industry standard back then for pizza delivery times, Domino’s had usually been making their deliveries in less than 30 minutes, so guaranteeing it seemed doable. Domino's created the 30-minute guarantee in 1984 and to say that “30 minutes or less” was a success would be a huge understatement. Not only did it vastly increase Domino’s sales, it ended up setting the industry standard for delivery times, which still holds today. It was referenced in most tv shows and movies at the time including Teenage Mutant Ninja Turtles (1990 film). In one scene, the Domino's delivery guy drops off the pizza, Michelangelo shorts him three dollars: "You're two minutes late, dude!"
Tom later sold Domino’s to an investment firm for a billion dollars. Domino’s expanded for decades then the quality of the pizzas became poor. Back in 2010, Domino’s Pizza was known for making terrible pizza. Sharing comments from customers about what they thought about their pizza: “Worst pizza I ever had”; “The crust tastes like cardboard.” Patrick Doyle, CEO appeared in TV ads and promised to “work days, nights, and weekends'' to get better. Domino's Pizza stock was trading at $9 a share at the time.
Doyle’s dedication to improving the quality of their pizzas and remapping the company’s delivery systems with new tech solutions led to increased customer satisfaction which then led to increased sales and profits. You could check on the Domino’s app if your pizza was still in the oven or on its way. Also you could even place an order by texting an emoji.
Just like back in 1965, Domino’s stores are optimized for delivery instead of dining in. Their store locations are selected based on the best delivery routes, not the most foot traffic. This is a huge savings on real estate costs. And because people typically order more than one pizza, the delivery expense tends to be a small percentage of the average order value. When was the last time you only ordered one pizza?
Domino’s profit per restaurant is significantly higher than the average restaurant in markets dominated by third-party delivery players. Companies like SkipTheDishes, DoorDash and UberEats charge restaurants up to 30% in commission. The entire profits go to paying these companies for deliveries. As a result, most restaurants are just keeping the lights on. Because of their strong digital brand most customers prefer to deal with Domino’s Pizza directly. No middleman to take all their profits.
The savings get passed down to customers. Domino’s is roughly 30% cheaper in terms of feeding a family of four than fast-food or getting a meal delivered from a casual dining chain. For a hungry family, you can’t beat the value Domino’s Pizza provides. We order pizza at least twice a week. It’s cheap, easy and convenient.
All this has led to sales and profits growing at double digits. 21.3% sales growth in the U.S. in 2020. Domino's stock price today is over $400. It was under $10 a decade ago. The stock has risen by more than 4,600% since 2004. Better than tech stocks such as Apple, Google, Facebook and Amazon. Domino's has also built a brief track record of dividend hikes. It has raised its dividend every year since 2014.
Today Domino's is the largest pizza chain in the world. According to their website, Domino's operates 17,200 stores in more than 90 countries around the world. Domino’s had global retail sales of more than $14.3 billion in 2019, with over $7 billion in the U.S. and nearly $7.3 billion internationally.
Domino’s sells an average of 3 million pizzas a day.
The Teenage Mutant Ninja Turtles loved pizza. In the 1990 movie version, the Turtles would order pizza from Domino's and get it delivered around New York City close to the sewers. The delivery driver would never see them. They were ninjas after all. I pictured my dad as a 13 year old watching the movie in a theatre with his Air Jordans, Gap hoodie sipping on a Pepsi.
Imagination is a necessity for building future success in business. One of the most powerful forces in investing is compound interest, the mathematical engine that makes gains grow on top of gains, is what makes your investment grow exponentially. As Einstein said, knowledge puts limits on an individual. Imagination sets you free.