Why Wall Street Ignores Perfectly Good Blue-Chip Stocks

On CNBC last week, a financial analyst/TV pundit went on air and said, “We are bearish on AT&T—it hasn’t grown its profits at a rate above inflation in a very long time. We don’t have it in any of our client portfolios.” Now, the statement by itself isn’t necessarily indicative of poor investment thought—I would imagine an investment portfolio consisting of Franklin Resources, Nike, Visa, Disney, and Becton Dickinson would create more aggregate wealth than AT&T stock.

Discussing the telecom giant’s 2% growth rate in isolation does paint a picture that would blend in with what the analyst said. But there is a catch: it’s not the whole picture. It’s like only talking a supermodel marrying an overweight old person without disclosing the fact that the person is also sitting on a million-dollar fortune. The totality of the facts affect your judgment of an action. In the case of AT&T, the important fact that often gets ignored is this: the starting dividend yield is often above 5%, and it grows (albeit slowly) each year. High dividends, perpetually reinvested upon themselves, can overcompensate for slow growth.

Continue Reading!

Rich Families, Poor Families, And Chapter 13 Bankruptcy

When someone contemplates filing for bankruptcy, one of the first choices that an individual or a family must make is this: “Do we want to file for a Chapter 7 or Chapter 13 bankruptcy?” In a nutshell, the difference is this: If you file for a Chapter 7, you are going to lose almost all of your possessions and personal property, but the principal advantage is that you get almost all of your debts wiped clean (with the exception of things like student loans, costs related to a DWI, child support payments, and things like that) so that you can start your life mostly anew a few months after filing you file for Chapter 7 bankruptcy.

Continue Reading!

The Tax Man And Your Compounding Machine

In an interview with Forbes on January 22nd, 1996, Charlie Munger said, “The objective is to buy a non-dividend paying stock that compounds for thirty years at 15% a year and pay only a single tax of 35% at the end of the period. After taxes this works out to a 13.4% annual rate of return.” The one advantage possessed by companies that pay no dividend, compared to those that do return cash to shareholders, is that they only have to pay one layer of taxation to their owners.

I’ll use as an example one of my favorite companies that pays no dividend at all: Autozone, the country’s largest retailer and distributor when it comes to car replacement parts. Entering 2015, Autozone had 4,836 stores. The company pays no dividend at all, and dedicates a large percentage of its annual profits to reducing its share count outstanding so that the remaining profits only go towards a smaller ownership pool.

Continue Reading!

An Investing Chart Placed In The Home Of A Wealthy Family

I received an e-mail from a reader who brought to my attention the fact that different sectors of the U.S. economy have very, very different records of building wealth for the shareowners, and he shared with me a story of how his father handed him a chart of each sector’s performance as an aid for him as he began making substantial investment decisions in his own life (he disclosed to me that he invested a bit here and there, and then upon seeing his salary go up big time, he was able to start investing $2,500 per month and began to take things more seriously).

Continue Reading!

Why Lehman Brothers And Bear Stearns Collapsed

In May 2007, the financial sector replaced the energy sector as the largest component of the U.S. economy. Banks, notably Wachovia, Citigroup, Lehman Brothers, Bear Stearns, Bank of America, JP Morgan, and a few others, began employing “high-grade structured credit strategies” in building the real estate portfolios on the bank’s balance sheets.

What that means is this: A bank like, like New Century Financial, would lend $150,000-$200,000 to borrowers with shaky credit histories in order to purchase a $200,000 home. But New Century Financial didn’t just sit on these mortgages and collect the high interest + principal on the payments from the families that had taken out mortgages. Instead, what they would do is bundle these mortgages together—with the thousands of other low-credit quality mortgages in their portfolio—and sell little slices of them to the banks mentioned above. During ordinary and good economic times, and when property values were rising, these loans proved extremely lucrative as these bundled loans would earn returns of 11%, 12%, or 15% per year.

Continue Reading!