Over the course of the 20th century, the valuation for a “typical” S&P 500 stock shifted upward from a P/E ratio of about 10 to a P/E ratio of about 17. Unless you happen to have a nice taste and appreciation for history, this might fall into the category of things that you do not think about a whole lot. But still, it can be a question worth examining: Why are investors, on average, willing to pay $17 for each dollar of a company’s profits when a century ago they were only willing to pay $10 for each dollar of profits. Is this an example of permanent irrationality in the marketplace?
Thanks to technological advances and productivity gains, most S&P 500 companies are able to take more profit out of the company than ever before (as opposed to the days of railroads, telephone companies, and steel mills … Read the rest of this article!
One of the oldest Wall Street aphorisms is this: “A stock does not know you own it.” Usually, this quote crops up during a conversation between someone who got burned by an investment in a particular company and another person that is looking to initiate a position in that company.
I’ve always shied away from using the phrase “A stock does not know you own it” because, in my experience, its connotation has always been negative, involving some investor lecturing someone else for making a bad investment.
The classic case study example of this is General Electric. Over the past five or so years, it has really burned investors. That is because the company’s P/E ratio has fallen from above 20 to 16 while simultaneously experiencing a horrific liquidity crisis in 2008 when the GE Capital arm of the company almost brought the industrial side to its knees as a … Read the rest of this article!
If some people choose not to invest in a particular master limited partnership because the underlying energy holding contains too much debt, I don’t blame them. That is sound investment analysis! If others don’t invest in an MLP because they invest through IRA accounts and they do not want to deal with the specialty rules that exist for IRAs that generate more than $1,000 in unrelated business tax income (UBTI), I understand and agree. And if some people just plain don’t understand this class of investments, that’s a fantastic reason to avoid MLP investments (sticking to your circle of competence and not straying is a properly well-regarded Warren Buffett quip, so long as it isn’t a crutch to stop learning).
But the dumbest reason I have heard for avoiding the MLP sector is the fear of dealing with the K-1 statement, usually described in hush hush terms as though it … Read the rest of this article!
When I read the biographies of America’s most famous self-made men and titans of industry, there is one character trait that seems to always be a common denominator that they all share: an unrelenting focus to make something great, and from there, an ability to monetize that passion into obscene wealth. John Rockefeller was no exception. When asked by a journalist to articulate the purpose of his life, Rockefeller answered, “God put me here to make money.”
When he created the Standard Oil trust at just thirty-one years of age, he had one mission regarding the fragmented oil industry in the United States: combine everything under the Standard Oil umbrella. To accomplish this goal, Rockefeller did one of two things: he either gobbled up his competitors in exchange for some freshly issued Standard Oil stock, or he would be willing to sustain a temporary loss to himself to drive his … Read the rest of this article!
Quick. Take a look at your portfolio. Pretend that someone just told you that the stock market was going to close until January 1st, 2023. If you knew that you could not sell any of your current holdings for the next ten years, how many of them would you keep?
I was recently reading an old Wall Street Journal article that examined the fact that the fluctuations in net worth among the most affluent 1% of Americans has increased substantially over the past generation. The conventional wisdom on the matter is that we have experienced an unprecedented era of rapid technological innovation, and these changes in technology have threatened the stability of most business sources. That’s part of the story.
Another part of the equation is the fact that access to the capital markets are easier today than they have ever been. Let’s explore the implications of this.… Read the rest of this article!