BP shareholders learned a hard lesson in 2010 about the risks that do not show up on balance sheets. If you had to choose between Chevron, Exxon, Royal Dutch Shell, and BP on January 1st, 2010, it would not be clear which of those companies carried the highest risk of earnings impairment.
Even if BP disclosed the specifics regarding the Deepwater Horizon oil rig to investors, it would not be clear that the machinery carried a high risk of explosion–over $30 million was spent on safety equipment that conformed to the industry’s safety standards. In fact, BP’s behavior was so consistent with the rest of the oil industry that I disagreed with Judge Barbier’s ruling that BP committed gross negligence rather than negligence.
Regular negligence refers to when you should have done something but messed up; gross negligence was born out of Alfred the Great’s “Doom Book” put together in … Read the rest of this article!
Over the past five years, Coca-Cola has been gaining an
enormous competitive advantage of its peers. And it does not involve the sale
and manufacture of the syrup concentrates for which it is famous. Instead,
Coca-Cola has been getting stronger over the past five or so years by entering
into distribution arrangements around the world with Dr. Pepper Group, Anheuser-Busch
Inbev, Mondelez, and over 300+ regional producers of soda.
It is a story that involves everyone’s favorite topic: asset-intensive
business models and the earnings that are reported to investors. Over the past
few years, perhaps fueled by the rise of companies like Microsoft and Visa that
can grow earnings very quickly due to a fixed-up cost business model that has
very little cost for each additional consumer, it seems that every business has
been trying to become less asset-intensive than it used to be.
As a consequence, most beverage companies … Read the rest of this article!
Dividend Aristocrats is the trademarked name that Standard
& Poors uses for its list of companies that have raised dividends annually
for 25 years or more. Needless to say, being able to not only part with cash, but
a growing amount of cash, every year for the past quarter-century is an incredible
accomplishment and is often a hallmark of the best businesses that have also
outperformed the S&P 500 Index.
As a bit of a research project, I reviewed the histories of
over 20 companies that are considered Dividend Aristocrats to determine both
their long-term total returns and the number of years in which these stocks
underperformed the S&P 500.
As you can see, even the best of companies spend a fair
amount of time underperforming the index. If you were a holder of Colgate-Palmolive,
which is one of the twenty best stocks you could have purchased in the entire
… Read the rest of this article!
Get this: 73% of people who currently use Tide laundry detergent report that it was the detergent of choice in their household growing up. This is an important part of a business model–when you own a business that seeks to maintain the same customers for life, it is important to understand the source that creates the habit. When it comes to laundry, you buy Tide because your mom bought Tide. Most importantly, it suggests that the purchasing habits formed during youth are critical to business success because it becomes part of the invisible script that sticks with a person throughout life.
Take a look at smoking rates once the old guard tobacco companies were legally barred from advertising to high schoolers in September 1970. The smoking rates were 48% among “adult students” in 1970, and 42% among the American population at large. Fast forward to the end of 2014, and … Read the rest of this article!
It is common to hear people say that they do not have enough
money to start investing. I hate hearing people say this because it is not
true. One of my favorite investment stories involves the life of Grace Groener.
She worked at an entity that merged into Abbott Labs, and in 1935, she purchased
three shares of Abbott Labs for $65 each (this would be roughly $3,000 in today’s
money). As a result, the investment grew into $3 million by the 1990s and she
ended up dying with an estate valued at over $7 million.
Now, I am not trying to tell you that you only need to
invest a couple hundred bucks to end up with millions a couple decades from now.
But what I am saying is that, when you work for a paycheck, you are engaging in
an act that has very fixed terms as it … Read the rest of this article!