Southern Company: No Dividend Cut Since 1948

A sub-theme that I occasionally stress is the difference between using the stock market as a vehicle to preserve wealth vs. using the stock market as a vehicle to build wealth.

When your goal is wealth preservation, you can keep your focus on companies that have very stable earnings no matter the economic conditions–your chief objective here is to protect what you’ve got.

If you’re trying to make investments that grow so fast they change your standard of living, you require earnings per share growth of at least 8% annually and probably in the neighborhood of 11% annually. Here, you are often taking on higher P/E ratios, more stock price volatility, and more variance in the earnings results during deep recessions. (Note: Another way to build significant wealth in the stock market is to practice a deep value strategy of purchasing stocks trading at $0.33 on the dollar and selling … Read the rest of this article!

Those Profitless High Flying Stocks

Mark Twain told us that history does not repeat but it often rhymes. I want to offer you another data point on the folly of paying high prices for “innovative” stocks. 

In 1999, there were 247 stocks trading on the New York Stock Exchange and the Nasdaq exchange with a price-to-sales ratio over 25. That is the sort of “we expect this company to take over the world” valuation. For comparison, the old-school benchmark was that a price-to-sales ratio under “2” signalled fair value and a P/S ratio under “1” was a strong sign of an undervalued stock. 

What happened to an investor that bought each of those stocks in 1999 and held through to today? You would have earned 3.5% on your money through today. And if you did not include Nvidia in your holdings, which was the crown jewel performer, you would have lost 7.0% annualized on your … Read the rest of this article!