Lying Companies And Faulty Stock Analysis

There are two important reasons why an investor should take asset diversification seriously: One, in the event that something out of the range of normal probabilities occurs. This is something like BP, General Electric, or Wells Fargo. Two, to act as a safeguard against yourself in the event that your analysis might be wrong. Two companies that, even with the benefit of hindsight, would have succeeded in fooling me? Worldcom and Wachovia.

The difficulty in catching Worldcom is that…the company lied. If you curled up and read the annual report, you would have seen numbers reported as assets that were, in fact, liabilities. When the providers of the data lie to you, it’s difficult to mount a successful defense. How perilous is this stuff? When Benjamin Graham was asked in an interview if there were value investing opportunities that he would never pursue, he only came up with one example: Insinuations of bad numbers. If a company was involved in some type of accounting scandal, or if there was a meaningful accusation of an accounting scandal, Graham would stay away altogether because investments can only be justified based on the numbers, and if you have no numbers you can trust, you lose the sound basis for making the investment.

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Why Visa Seemed So Much More Attractive At $60 Than $70

Given my excitement about Visa’s fall in stock price yesterday, I wanted to walk through my viewpoint of why I considered $60 to be a fair value for the stock but consider a $70 price based on current earnings estimates to be somewhat outside the zone of reasonableness that I would prefer to pay for the stock.

First, I should mention that I use the most recent quarterly earnings figure as my threshold point when valuing this stock. This is different from how I value most non-cyclicals like Johnson & Johnson, Coca-Cola, and Colgate-Palmolive. With the latter three companies, and many of the other companies that comprise the Dividend Aristocrat universe, I prefer to use the trailing twelve-month earnings figures because this is what Benjamin Graham preferred as it naturally carries a certain conservatism with it. You’re not going to go wrong buying Hershey, Brown Forman, and Nike at 19x trailing twelve months earnings, unless Treasury rates were over 9% or something truly outside the bounds of normal economic activity was going on.

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I Can’t Believe BHP Billiton Now Yields Over 8%

BBL, the British-traded shares of the world’s largest miner BHP Billiton, is trading at $30.50 per share. It pays out a $2.48 annual dividend. Based on current market prices, this amounts to a 8.13% dividend payout. Once a large-cap starts yielding in that range, we are talking about investments that can entirely self-fund mini-blue chip portfolios in their own rights if you make a heavy initial investment.

If someone invested $100,000 into BHP at $30.50 per share, I would imagine that such an investor would receive at least $100,000 in dividends cumulatively over the coming seven or eight years. You could build an entire mini-portfolio filled with $10,000 positions in Chevron, Nestle, Johnson & Johnson, AT&T, Exxon, Pepsi, Johnson & Johnson, Procter & Gamble, Hershey, and General Electric from the BHP Billiton dividends alone. And, of course, ten years hence, you would be collecting dividend payments from the BHP Billiton shares as well as the new positions that you were able to create out of thin air from the BHP Billiton dividends.

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