Financial Strength Before An Economic Downturn

Do you know what was the most prosperous food company during the Great Depression? White Castle.

And not for the reasons you’d think. The well-known fast food chain that sells hamburger sliders was one of the most incredibly conservative enterprises I have ever studied. In 1929, it was loaded with $32 million in cash. None of the restaurants have ever been franchised. It had an explicit policy of only opening a new restaurant location when it could do so from its cash on hand, and rarely rented any machines. Everything was paid for in cash.

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The Rocket-Ship Investments Of The Future

One of the most important insights that I have had over the past several years is that I have come to appreciate that the the scalability of “things” compared to “services” often serves as an important divining rod for identifying future investments that are the most compelling. The reasons is because the production of cheap widgets (or, more accurately, widgets with a low marginal cost) can lead to ramped-up production and high returns on capital because there is not an equally corresponding increase in expenses.

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A Subtle Investing Tip From Warren Buffett

For those of you who are aware of Warren Buffett’s long-time investment in Coca-Cola, you may know that he has turned a $1 billion investment in the late 1980s/early 1990s into 400,000,000 shares worth over $16 billion today, and that is not included a growing cash dividend that Buffett has received over the past 20+ years, which would make the returns on this investment substantially higher.

If you are a student of the dotcom stock market of the late 1990s, you may be aware of the absurd valuations placed on many companies, including large-cap blue chips that had moved well past their 20% annual growth days. In the case of Coca-Cola, the company traded at over 60x earnings for much of the 1998 calendar year. When a blue-chip stock that has a future earnings per share growth rate of around 10% gets investors willing to pay $60 for each dollar of profit instead of $20, you know you are heading towards trouble (because even if profits grow, you will get whacked by a justified drop in valuation as investors regain their sanity to pay about a third as much for Coca-Cola’s profits after the dotcom bubble as they were willing to pay during it).

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Originally posted 2013-07-25 08:38:01.