At the end of 2013, Grinnell College had an endowment of $1.5 billion. Not bad for a student body of 1,700 situated on a 120-acre campus in Iowa. The endowment has reached such a blessed size because the Trustees of the school had done two things intelligently in the 1960s: they bought shares of Berkshire Hathaway, and they made a very large investment in (what was then) the very small tech startup Intel [Grinnell College was the principal capital source for Intel in its formative years].
What I find interesting about the story is this: Even though the Grinnell Trustees were around the most successful compounders of the 20th century, they couldn’t resist the urge to sell once the investment had grown to be a very large component of the portfolio. If you visit a library and dig up old Grinnell University magazines on the microfilm, you will see … Read the rest of this article!
Some of you have written in to me asking why certain blue-chip stocks don’t get mentioned, or only get mentioned in passing, here on the site. I can’t speak for everything, but often it has to do with valuation or my own estimates of future growth.
For instance, I would love to talk about Nike, Brown Forman, Hershey, and Colgate-Palmolive all the time. They are absolutely extraordinary businesses, as they possess both durable earnings quality that can make profits in all conditions AND they also have very strong earnings growth supported by sales figures that increase year in and year out.
My problem? Valuation. It is highly likely that anyone making a lump-sum investment in any of these companies right now will achieve long-term returns that trail the growth of the businesses themselves by an amount that you will find frustrating.
Take Nike, for example. This is a company that … Read the rest of this article!
One of the reasons why I have chosen blue-chip investing as the medium of choice to advocate is because there is so much downside protection—absent falling demand due to technology change or a lack of liquidity and a super-leveraged balance sheet like you saw at Wachovia, it’s almost impossible to take down a $100 billion company.
Anyway, I was checking the numbers on what has happened to General Electric stockholders over the past decade, and they’re officially in the black: if they dutifully reinvested and let their GE shares run on autopilot, they would have grown their position from 322 shares outstanding to 460 shares, and giving them total annual returns in the 1.5-2% range.
No, those aren’t returns to aim for at the moment of contemplation, but think about the conditions that existed and surrounded a GE investment over the past decade: the company was … Read the rest of this article!
I recently heard from a reader who mentioned that his wife had over 2,700 shares of AT&T stock sitting in an individual retirement account (IRA), and was seeking my input on whether such a heavy concentration in one stock was wise (this constituted almost the entirety of the IRA assets, in addition to a plain old bond index fund).
I posed the same question to him to rely on to his spouse that I pose to everyone wondering about proper portfolio risk management, “If something super weird happened and this stock went bankrupt, could you deal with it? Would it wreck your life? Would it set back your standard of living substantially?” If your answer is, “Yeah, it would cause me a whole lot of harm”, then there is no reason why you should stay super concentrated. You can reduce the risk substantially by dividing that money into Coca-Cola, Procter … Read the rest of this article!
If you are a close follower of IBM’s stock, you know what has been the general story for the company over the past several years: IBM has been having trouble transitioning to the cloud and growing revenues because operations are so immense, but because the dividend only accounts for a little more than a fifth of profits, IBM is able to retire significant blocks of stock and increase earnings per share due to buybacks with only a soft reliance on what we would consider old-fashioned growth, at this point in time.
Because IBM is getting 9% annual growth due to lowering costs and buying back stock rather than increasing revenues at the top line, a lot of analysts have been poking fun at the stock and touting it as a bad investment.
What I find bemusing is that, over this time period, Warren Buffett has nicely benefitting from his ownership … Read the rest of this article!