In one of Peter Lynch’s old interviews, he remarked that he
loved volatility but he estimated that volatile markets were probably a
disservice to the average investor. Specifically, he purchased shares of YUM
Brands (then just Taco Bell stock) at a price of $7 after it had fallen from
$14. The stock then fell to $1 per share before going on a multi-year tear that
ultimately resulted in PepsiCo acquiring it for $42 per share.
Lynch remarked that he enjoyed the volatility from $7 to $1
per share because he knew the company was in great shape (no debt, no store
closings, and in fact, same-store earnings growth) and he was able to enhance his
compounding by purchasing shares as the price declined. In the same breath, he
pointed out that the average investor would not be well-served by seeing his
investment suffer a similar decline because the possibility of … Read the rest of this article!
It has often been said that seeing your net worth fall by 30-60% on several instances over the course of an investing lifetime and that is the price that must be paid in order to receive the benefit of long-term wealth compounding at 8-12% (rather than the 1-2% that you will otherwise find in U.S. bonds and high-yield savings accounts).
Another cost that is rarely discussed is this: What happens if you sell your stocks amid a crisis and buy in several at a later point? It is an imprecise inquiry because the mileage can vary with each possible date–i.e. If you sell on April 2nd, you’ll get different results than someone selling on April 3rd, and if you buy on May 4th, you’ll get different results than someone who buys stocks on May 5th.
With the understanding that there is the possibility of large variance, I wanted to examine … Read the rest of this article!
Clorox stock has a distinguished history. Since 1920, it has
compounded at a rate of 14.5% annualized (including the period when it was acquired
and spun-off from Procter & Gamble). It is one of the all-time great investments
in the history of Western Civilization. And yet, I don’t own any Clorox stock.
The reason? The ten-year rate of volume gains, pre-coronavirus,
is only 1% annualized. The 5.5% earnings per share growth over the past ten
years has been the result of Clorox buying back 10 million shares and raising
prices across all categories at a rate of 4% annualized.
Of course, Clorox is up from $152 at the start of the year
to $184 at the time of this writing (April 10, 2020). The mistake that
investors make is that they assume the current rise in product demand will
cause long-term incremental effect.
Since Clorox was … Read the rest of this article!
When people buy shares in an Index Fund, they assume that they are buying shares in the largest companies available in the United States. You look at Apple, see its $700 billion market capitalization, compare it to the 4% allocation in the S&P 500, and figure it sounds about right. And for much of the 1950s, 1960s, 1970s, 1980s, 1990s, and 2000s, this was true. But in 2005, the S&P 500 shifted from selecting stocks based on market capitalization to selecting stocks based on a market capitalization with a formula that takes into account the free float of the stock.
The consequence is this: Those precious businesses with high insider ownership do not become nearly as represented in the S&P 500 as the market cap of the stocks should suggest. There are 38 stocks that are underweighted in the S&P 500 compared to what the weighting would be if the … Read the rest of this article!
I just finished reading a post, linked here,
about an individual that entered the coronavirus pandemic with 50% of his
wealth invested in stocks and 50% in bonds, sold a large chunk of it during the
late March lows, witnessed the recent 20-30% gain in stocks, and now regrets
his decision and wishes to invest again.
I share this information with you because I don’t want you
to make the same mistake with your investments. Study after study of market
performance has shown that stock market wealth is created in short bursts of
gains—it’s not a trickle of 0.1% gains and penny per share rises.
For those of you who are data-minded, check out this
study from Fidelity about the growth of $10,000 invested in the stock market on
January 1, 1980. If you invested continuously in the S&P 500 during
this time, your $10,000 would have grown … Read the rest of this article!