I have taken an interest in studying the operation of family farms and the difficulties that have arisen due to falling crop prices in recent years. Many farmers, who are distrustful of attorneys—can ya blame them?—refuse to meet with one and form an LLC or some other type of business entity that not only could provide some measure of protection against liability arising from a tractor accident or illness-causing crop sale, but also provide immediate tax benefits that are unique to business entities which a person acting in an individual capacity does not enjoy.
Seventy years ago, a lawyer in Chicago named Russ Gremel invested $1,000 (the economic equivalent of $13,000 in 2017 purchasing power) to buy shares in Illinois’ pharmaceutical giant The Walgreens Co. Over that time, he collected substantial dividend checks and watched that position balloon into over $2 million in value through 11% compounding from the capital gains exclusive of the dividends.
A few thoughts:
Gremel was able to turn $1,000 into $2,000,000 over seventy years without needing to reinvest the dividends. Had he reinvested into Walgreens stock, his compounding rate would have soured to 14% annualized. That would have turned his $1,000 investment into $14 million.
If you are familiar with the e-commerce giant Alibaba (BABA), you might wonder how you are able to purchase shares in the stock given that the government for the People’s Republic of China has substantial bans on foreign direct investment that aims to keep ownership of Chinese-originated businesses in the hands of the Chinese.
To receive capital from American investors—or investors anywhere outside China for that matter—Chinese business executives have begun to create variable interest entities (VIEs) that are designed to mimic the effects of foreign stock ownership.
When you review the history of the American stock market from 1926 through the present day, you will find that nearly all of the gains came from just 4% of the publicly traded businesses in existence. For most of the 20th century onward, someone who held shares in Exxon, AT&T, General Motors, IBM, and Apple could claim to represent a meaningful chunk of the stock market.
This data point has been profiled in the working paper of Professor Hendrik Bessembinder at Arizona State University whose work has the non-ironic title “Do Stocks Outperform Treasury Bills?”
About a year ago, Apple stock (AAPL) traded at $92 per share. Right now, it is trading at $155 per share. This significant June-to-June swing of 68%–a little over 70% when you include dividend payouts—gives students of the market much to analyze and reflect upon.
The theory that the stock market is a near-perfect calculator of the intrinsic value of a business is once again debunked. Apple is the largest business in America. Its profits have vacillated between $45 billion and $48 billion the past three years. The new project announcements and cash build-ups have proceeded as expected. There haven’t been any crazy events, such as annexing Google, that would justify a massive reorientation due to unpredictable circumstances.