In an interview with Forbes on January 22nd, 1996, Charlie Munger said, “The objective is to buy a non-dividend paying stock that compounds for thirty years at 15% a year and pay only a single tax of 35% at the end of the period. After taxes this works out to a 13.4% annual rate of return.” The one advantage possessed by companies that pay no dividend, compared to those that do return cash to shareholders, is that they only have to pay one layer of taxation to their owners.
I’ll use as an example one of my favorite companies that pays no dividend at all: Autozone, the country’s largest retailer and distributor when it comes to car replacement parts. Entering 2015, Autozone had 4,836 stores. The company pays no dividend at all, and dedicates a large percentage of its annual profits to reducing its share count outstanding so … Read the rest of this article!
I received an e-mail from a reader who brought to my attention the fact that different sectors of the U.S. economy have very, very different records of building wealth for the shareowners, and he shared with me a story of how his father handed him a chart of each sector’s performance as an aid for him as he began making substantial investment decisions in his own life (he disclosed to me that he invested a bit here and there, and then upon seeing his salary go up big time, he was able to start investing $2,500 per month and began to take things more seriously).
The data he was referring to is this: The S&P 500 consists of ten different sector segments (Materials, Energy, Telecommunication Services, Utilities, Industrials, Financials, Consumer Discretionary, Information Technology, Consumer Staples, and Health Care). Over the past fifty years, the average returns by segment has been: … Read the rest of this article!
Many people who establish trust funds for their kids or some other beneficiaries tend to include restrictions on how the investment funds are to be allocated. A common clause is to state that all stocks and corporate debt in the trust must be classified as “investment grade.” On the surface, this provision sounds intelligent enough. Of course funds meant to last for long haul should be invested in durable companies. Very few durable companies have debt that is not classified as investment-grade during good and ordinary times.
However, it is also true that some durable companies tend to have their credit ratings slashed during recessions and other unanticipated deterioriations such as the spread of COVID-19.
To use a local example, I live in St. Louis and many trust funds contain a disproportionate amount of Anheuser-Busch Inbev (BUD) stock because Anheuser-Busch was originally found in the city and the decades and … Read the rest of this article!
When we talk about wild markets, we usually use the Great Depression and the WWII era as the benchmark for extreme market discussions. This is understandable, as the 1929-1932 was the most extreme market decline in the history of our country, with stocks falling 89% from peak to trough. Interestingly, perhaps because of the extraordinarily beaten down price that existed in 1932, stocks never moved more than 30% from any particular high or low between the start of WWII and the end.
My own view is that it is time to dust off the history books and use WWI as an example, particularly because it had the Spanish flu pandemic striking in waves during 1917 and 1918. When you look at the WWI-era stock market, there were 50% swings throughout the war. People who invested in shares of American business were called “stock cowboys” and Andrew Mellon was prompted to … Read the rest of this article!
In May 2007, the financial sector replaced the energy sector as the largest component of the U.S. economy. Banks, notably Wachovia, Citigroup, Lehman Brothers, Bear Stearns, Bank of America, JP Morgan, and a few others, began employing “high-grade structured credit strategies” in building the real estate portfolios on the bank’s balance sheets.
What that means is this: A bank like, like New Century Financial, would lend $150,000-$200,000 to borrowers with shaky credit histories in order to purchase a $200,000 home. But New Century Financial didn’t just sit on these mortgages and collect the high interest + principal on the payments from the families that had taken out mortgages. Instead, what they would do is bundle these mortgages together—with the thousands of other low-credit quality mortgages in their portfolio—and sell little slices of them to the banks mentioned above. During ordinary and good economic times, and when property values were rising, … Read the rest of this article!