When A License To Print Money Doesn’t Make You Rich

Imagine you lived in St. Louis, Missouri, had a $100 in your pocket, and wanted to go spend $100 at a casino one weekend. Where should you go? As far as payouts, your worst bet is the Harrah’s in Maryland Heights. There, the slot machines only pay out $0.89 for every dollar that is spent gambling. Your best bet is the Casino Queen in East St. Louis if you want the higher payouts, as you stand to collect $0.93 on every dollar.

If you look at the structure of casino payouts, and use that as a proxy for the business model as a whole, you would think that casino stocks would be a goldmine. And yet, it is the most disastrously performing sector of the sin stock category, with only 5.8% annual returns since 1992. What gives?

Sometimes, the casino itself does not even own the slot machine software. They … Read the rest of this article!

Big Oil Dividends

I am intrigued by the risk management technique of dividend extraction–buying high yielders with slow dividend growth or medium yielders with medium dividend growth–in which you receive a large percentage of your purchase price back in the form of dividends as a reward for sticking around for awhile.

I have made no secret of the fact that I think quite highly of Royal Dutch Shell, despite the fact that it is frequently maligned in the popular media. I think it is because Wall Street will never truly get behind supporting something with a middling growth rate. People are attuned to desire growth, growth, growth.

If you’re well off, and you ever find yourself buying thousands and thousands of shares of Royal Dutch Shell, you really need to get your hands on the four-volume set “The History of Royal Dutch Shell” by Stephen Howarth, Joost Jonker, Keetie Sluyterman, and Jan Luiten … Read the rest of this article!

The Businesses That Run Themselves

Due to neglect, I’ve built up a few hundred mailbag questions that I have not been able to address. I hope to be more ambitious in tackling them, and this is the first.

What surprises you the most about the financial commentary you see from other writers?

I am surprised at how often pundits and retail investors fail to separate the inherent nature of the enterprise itself from the people running it. For instance, almost every finance writer concludes that Michael Eisner was an extraordinary Disney CEO between 1984 and 2005. Such an opinion is informed by the 18% annual returns of Disney stock during his tenure–you needed to invest $36,000 on the day he became CEO to become a millionaire by the time he resigned.

This assumes that Eisner did great things, rather than operated a business that was doing great things on autopilot. When … Read the rest of this article!

The Morality of For-Profit Prison Investments

When Seth Klarman was asked about the ethics of his investments into companies that gave high-interest loans to customers with poor credit histories, he defended his investment on the grounds of personal responsibility and mentioned that no one puts a gun to the head of someone taking out a loan–it is an act of consent between an adult and a financial institution. Klarman also reiterated that people do not enter into commercial transactions unless they believe it is in their interest to do so–if you have never paid off an obligation to creditors in your life, and you need $500 in car repairs to keep your job, then agreeing to 18% interest is an improvement over your status quo otherwise you wouldn’t take out the loan in the first place.

When Charlie Munger was asked about his investments in Wells Fargo and U.S. Bancorp, an interviewer asked him whether his … Read the rest of this article!

The Sin Stock Never Mentioned

Professor William Dukes, a WWII soldier that survived combat and later became a distinguished tenured professor at Texas Tech, passed away in June 2015. One of his special side projects at Texas Tech involved studying “sin stocks” and examining (1) whether they generated superior returns; (2) why they generated superior returns; and (3) what type of investors owned these stocks.

Professor Dukes concluded that yes, sin stocks generated 2.8% extra annual returns per year since 1973. And these stocks tended to be owned by private investors that remained outside the limelight and institutional funds that are run by small committees. According to Professor Dukes’ survey of money managers that declined to make investments in tobacco, gaming, and alcohol, the most cited reason was “It wouldn’t look good to clients and the media.”

Dukes speculated that small committees of institutional money would feel comfortable putting money in Altria or Philip Morris … Read the rest of this article!