British Stocks After Brexit

As the day goes on, I hope to publish some more posts specifically in response to the day’s trading events triggered by the British vote in favor of Brexit.

But I’d like to offer you two thoughts before you participate in any activity related to a British stock selloff:

First of all, the British stocks that fell over 20% immediately upon the Brexit news are unusually low-quality names for large caps. Things like Barclays bank? Yes, the fall from $11 to $8 is interesting, but the bank’s internal controls and stability of deposit base are unimpressive. Remember this: Barclays also traded at $8 in 1996.

As in, if you’ve been a buy-and-holder for that time period, you would have only compounded wealth at a 3.5% over the full course of multiple business cycles. This is a company that is frequently cheap for a reason. You’d be sitting on an 85% … Read the rest of this article!

Take-Home Investing Lessons From The Collapse Of Coal

From the end of World War II through 2007, coal industry stocks returned an average of 6.8% per year. Peabody, Patriot, Arch Coal, Alpha Natural Resources, and Walter Energy returned 8.7% over the same time period. It sounds almost crazy to express now, but for the second half of the 20th century, you could meet your investing goals by owning coal stocks.

Had a kid born in 1989 that started college in 2007? Someone that purchased $150 of coal stocks each month would have earned 8.9% returns and built up a college fund of $79,500 by the kid’s first year at the university. This information doesn’t seem to compute. Coal stocks + $150 per month = Financial Goal Realized is not an equation that improves our intuitive confidence in the rationality of math. It just doesn’t seem to add up.

Although coal stocks never outperformed for the Dow Jones Index … Read the rest of this article!

Apple Stock: Modern Investing Philosophy

Although I’m going to use the specifics of Apple to discuss some investing specifics, my intent is that you’ll see the broad contours of how I evaluate investor psychology and the growth potential of mega-caps that operate in nearly every country and have cumulative revenues in the billions of dollars.

Number One: The margin of safety principle really works. Does BHP Billiton have business results that merit it beating the S&P 500 from 20% to 2% since April 7, 2016? No. It’s just that the expectations got so low that reversion to the mean was inevitable. Does Conoco’s business performance suggest that it ought to be up 40% compared to the S&P 500’s 13% gain since February 10th, 2016? No. But while the dividend was being cut, the expectations for Conoco got so low that reversion to the mean was bound to propel it upward.

You should be very hesitant … Read the rest of this article!

Warren Buffett on Donald Trump in 1991

Fascinating comment by Warren Buffett in a Q&A session with Notre Dame business school students about why Donald Trump’s Taj Mahal filed for Chapter 11 bankruptcy in 1991:

“The big problem with Donald Trump was he never went right. He basically overpaid for properties, but he got people to lend him the money. He was terrific at borrowing money. If you look at his assets, and what he paid for them, and what he borrowed to get them, there was never any real equity there. He owes, perhaps, $3.5 billion now, and, if you had to pick a figure as to the value of the assets, it might be more like $2.5 billion. He’s a billion in the hole, which is a lot better than being $100 in the hole because if you’re $100 in the hole, they come and take the TV set. If you’re a billion in the … Read the rest of this article!

Be Wary of Minimum Volatility Funds

I think it is a very, very dangerous game to make a stock market investment with the intention that it will experience minimum volatility in price. This line of thinking suggests that people aren’t really treating a stock investment as a fractional ownership position in a business but instead treat it as a cash-like number on a household balance sheet that ought to rise and rise at every snapshot in time.

To protect myself from this delusion, I keep a log of the story behind Starbuck’s historically amazing performance and the terms of volatility that needed to be endured in order to achieve those performance results. Since its 1992 IPO, Starbucks has grown its earning by 28.8%. Over the past ten years, the earnings growth at Starbucks has been 19.5%. If it has been tucked somewhere in a diversified portfolio, you would be fortunate to own anything else that has … Read the rest of this article!