The Big Oil Crash of the 1990s

It is critical for long-term investors not to be swayed by what other people think, what the rest of the world thinks, or anything like that. This is obviously easier said than done. I’d like to direct your attention to the cheap oil of the 1990s, and discuss three things: the headline risk that existed at the time, the investment returns that occurred during this time, and the changes in the price of oil’s fundamentals that occurred during this 1990-1998 time frame.

In September of 1990, the price of oil spiked to $60.57 per barrel (I’m giving figures that are adjusted for inflation using 2014 statistics). This was a significant uptick from the $35-$40 range that was the world’s oil price habit during the last five years of the 1980s. Saddam Hussein had accused the Emirate of Kuwait of using slant drilling techniques to steal Iraqi oil, and this price … Read the rest of this article!

Annuities and the Cost of Guaranteed Income for Life

Over the past few months, the largest annuity provider in the United States has been training its advisers to take advantage of the current global health crisis to sell their clients annuities. Apparently, various consumer market studies have indicated that retirees right now are particularly receptive to the promise of “guaranteed income for life.” One study found that 33% of scared retirees bought an annuity upon hearing the words guaranteed income. 

This is predatory as it exploits one’s fear of economic insecurity to make a financial decision that is to the detriment of your household. And given the large sums of money often involved in annuities, the costs of the poor decision are particularly high.

Going into this year, the typical annuity provides $0.78 in cumulative lifetime value for every $1 purchased, provides $0.05 in commissions to brokers/sellers, and lasts 7.82 years. In other words, if you buy an annuity … Read the rest of this article!

Buying Stocks: Looking at Revenue Growth

The rise of Apple, Amazon, Alphabet, Facebook, and Microsoft over the most recent investment generation has led to perhaps an uneven view of American growth. From 2010 through 2020, the S&P 500 appeared to achieve top-line revenue growth of 6.7%. That was actually better than the post-WWII average of 6.2%. 

But almost all of the revenue gains across the index came from these top five stocks. If you subtract the big five from the S&P 500, and only measured the top-line growth of the S&P 500 of the other 495 companies, you would only see top-line growth of 3.8%. From an investment perspective, it is quite difficult to get double-digit returns from a particular investment with revenue growth that barely exceeds inflation. Cost cuts, productivity gains, and share repurchases can only get you so far. The real wealth gets made by selling a meaningful amount of more stuff each year … Read the rest of this article!

Buying Microsoft Stock: From 2000 Through Today

There is almost no business in the world that is as great as Microsoft. If presented with a scenario where I could make ten investments at fair value to hold for a lifetime, Microsoft would be one of the slots. Its software products for individuals and businesses as well as cloud data storage segments has given it 30% profit margins on business lines that grow increasingly entrenched over time while achieving double-digit sales growth. 

In addition, it has one of the strongest balance sheets in the world with a net cash surplus of almost $70 billion. Monster repurchases, one-time dividends, or large acquisitions certainly await its future. The R&D budget is one of the five largest in the world, and internal product growth is almost certain to contribute new products meaningfully over time. It is exactly the kind of business you would love to own over the next couple decades. … Read the rest of this article!

Anheuser-Busch Inbev: Beer Industry Consolidator

Anheuser-Busch Inbev (BUD) has announced the terms of financing for its $104 billion acquisition of SABMiller for $68 per share (it works out to 44 pounds per share on the London Stock Exchange.) Verizon Communications, which currently holds for the record for one-time corporate borrowing as a result of needing $49 billion to buy out a joint venture with Vodafone in 2013, is about to be surpassed by 3G’s current strategy to take on $70 billion in debt to complete the SABMiller transaction. About $55 billion of debt will come from bond offerings.

This debt binging is entirely predictable for those that have studied the history between the partners at 3G Capital. The origins trace back to 1989, when Jorge Paulo Lemann, Carlos Alberto, Sicupira, Marcel Hermann Telles, and Roberto Thompson Motta got their hands on Brahma, a declining Brazilian brewer that had the highest costs of any company doing … Read the rest of this article!