Every now and then, I come across a company that has made real, sustainable profits and has served as the perfect intergenerational holding, making any investor that holds onto it for the long haul much richer than those who would have gone the traditional route exclusively with index investing.
Typically, these types of investments have some type of “moat”, that is, a characteristic that allows the business to charge a premium rate that a low-cost competitor cannot touch. This results in the business earning high returns on capital while retaining its competitive advantage over the long haul. The company that I have recently identified earns 20% operational returns while retaining its competitive advantage … Read the rest of this article!
From 1981 through 2017, McDonald’s (MCD) stock returned approximately 14% annually. Someone who witnessed Ray Kroc’s visionary leadership in rolling locations across the country and chose to reinvest $100,000 in the enterprise that was already by that time the largest fast food empire in the United States would have ended up with a present day value of over $20,000,000 generating in the neighborhood of $500,000 in annual dividends.
There are no other fast food businesses that generated returns anywhere within hailing distance of that. Heck, there are only three or four publicly traded fast food businesses that have a record of making profits that stretches back more than thirty years.
This raises an … Read the rest of this article!
Usually, when we observe how technological changes alter the value of other businesses, we pay attention to the changes that are absolutely fatal. The rise of cell phones with the ability to take pictures has demolished both the camera and film development industries. The iPhone bankrupted Eastman Kodak.
In giving so much attention to the changes in technology that are fatal to business models, we tend to pay less attention to the changes that are less than fatal but yet significant enough to alter the intrinsic valuation calculations for certain businesses.
Gas stations come to mind as a fair example.
In the 1950s through the early 1970s, being a gas station was a … Read the rest of this article!
Since literally biblical times, the possibility that a parent would favor one child over the other has been a cause for resentment for the less loved children. Consider this passage from the Book of Genesis Chapter 37, verses 3 through 5:
“Now Israel loved Joseph more than any of his other sons, because he had been born to him in his old age; and he made an ornate robe for him. When his brothers saw that their father loved him more than nay of them, they hated him and could not speak a kind word to him. Joseph had a dream, and when he told it to his brothers, they hated him all … Read the rest of this article!
If you are a long-term investor, it usually provides opportunity than hardship when an investment you own is undervalued—i.e. selling for less than it is properly worth. If a business is worth $70 per share and yet it trades for $50 per share, there are two levels that can be pulled on behalf of shareholders to create value.
First, the management team could repurchase some of the company’s stock, which assuming the estimates of the business’ value are accurate, results in the creation of a 28% return as long as that status quo differential persists. And secondly, the management team can declare a dividend, which the shareholder can then choose to reinvest into … Read the rest of this article!