I get e-mails from people all the time looking for good reading material. Most of you have already red the basics like The Intelligent Investor, One Up On Wall Street, or all of Warren Buffett’s letters to Berkshire Hathaway shareholders. Beyond that, most recommendations hinge upon the specifics of the person asking. Some people think they want investment advice, but really what they need is a good estate planning book. Others need to read Dividends Don’t Lie to understand why some industries with high dividend payout ratios can have safer dividends than those with lower payout ratios. Other people are too focused on numbers and probably need to find something like The Speed of Trust.
It is not terribly unusual for some companies to create a dual class structure for the stock. Hershey, Google, and Ford immediately come to mind. In every example of this I have ever studied, the purpose is to keep ownership control in the hands of a select few that want to maintain control over the company by scaling back their investment in it. It’s a controversial practice—people think that investors with $500 million worth of stock should wield 10x as much influence as someone with $50 million in the firm. Others find the practice tolerable because investors have notice of the arrangement at the time they make their investment, and plus, the original founding families that own the firm through the decades may have more of a long-term orientation than some random guy that gets his hands on a large block of stock.
I do not believe that I have ever written a finance article advocating the purchase of gaming stocks like Activision or Electronic Arts. It’s not that video games aren’t profitable—far from it, intellectual property that costs a few bucks to manufacture per disk and can be sold for $50 is a great way to make money while putting down a small amount of initial capital.
Instead, the challenge is sustainability. When Nestle sells a cookie, I can make intelligent guesses about how many cookies are going to be sold several years into the future. For the past century, the world consumes about 4.5% more cookies each year, and the Nestle Tollhouse usually sells 4% more cookies than the year previous. If someone is in the habit of buying 6-8 cookie rolls per year, that behavior is likely going to continue indefinitely. Through technological advances, boom and bust cycles, and the changing dietary preferences of Americans, it’s still pretty easy to figure out that people will be eating cookies ten years from now.
Just as it is easy for me to talk about dividend investing because real-life companies like Coca-Cola and Colgate-Palmolive exist, it is easy to advocate index fund investing because Vanguard exists. You can write a check or establish an electronic debit for $3,000 of VFINX, and instantly own shares in the 502 different companies that currently represent the S&P 500. And you only have to pay 0.17% in annual fees. Between 2015 and 2025, you will only pay an estimated $119 in total fees in exchange for using Vanguard’s consolidated purchasing power to buy ownership stakes in a wild diversity of companies.
One of the regular search terms that brings people to this site is: “Should I buy REITs” followed closely by “Are REITs conservative investments.” Sometimes, people think about REIT investments as identical blocks of real estate that have few differences between them. That, of course, is not the right perception. Just as there is a difference between buying and holding Coca-Cola and ExxonMobil for thirty years compared to holdings salesforce.com and Iron Mountain instead, there is a wild divergence in the quality of REIT investments that a person can make. Let’s walk through a couple examples.