Tesla and Amazon have always been on my “too hard” pile to figure out as an investment. I commend what they are doing to innovate their industries, but I could never quite figure out how to reconcile their low net profits with their sky-high revenues. When you’re selling billions of dollars worth of goods, I expect you to make profits. Even Ford, a deep cyclical, is able to earn 5% net returns on each car it sells. If you spend $45,825 on a 2017 Ford F-150, I can appreciate that $2,291 will work its way to Dearborn, Michigan in the form of net earnings that the Board of Directors and management team can allocate as they wish.
But the only thing I know is that Tesla will have to raise prices in order to earn profit rates that approach Ford.
Check out the nine and a half minute mark of this charmingly clunky video from Peter Lynch. It contains the following quote:
“McDonald’s earnings have gone up, I think, more than 80 fold over the last thirty years. The stock has gone up 100 fold. What made McDonald’s earnings continue to grow? If they had just stuck with a cheap cheeseburger and a cheap hamburger at lunch, they probably would have run into earnings problems ten, fifteen years ago. But they expanded their menu, they kept their costs low, they added breakfast, they went overseas. Every day, they add two or three more restaurants. People thought there was no room for more McDonalds’ five, ten, fifteen years ago. They were wrong. If they had done the research that said, well, there’s a couple hundred countries out there. There’s lots of places to grow.”
I don’t think I have ever written about closed-end funds. It’s not because there is anything inherently wrong with the structure. They’re like traditional mutual funds except they don’t trade according to a daily tally of the net asset value of the investments. Instead, they are traded like shares of stock which have a sale price that exists independent of the net asset value.
There is nothing wrong with this.
However, as you might guess, closed-end funds naturally struggle to attract a client base. If you are going to stuff a commodities-based closed-end fund with shares of Exxon, Conoco, Chevron, Shell, and BHP Billiton, why wouldn’t an investor just avoid the 1.5% annual expenses and buy the shares of the companies outright in their own names?
An advantage that I have coming of age in the 2000s is that I have no reference or anchoring point to the “good old days” when savers could get real returns just by holding money in a savings account at their local bank or agreeing to store some funds in a certificate of deposit. I think I once stumbled across an old Kiplinger’s magazine from the early 1990s that talked about how $100,000 in a savings account paying 5% could be reliably counted upon to generate over $400 per month in retirement income.
If you saved a chunk of capital during the 1960s, 1970s, 1980s, or 1990s, socking it away in a certificate of deposit was often a credible alternative to stock-market investing. What you gave up in gains you made up for with the risk-free nature of your returns.
When Friedrich Hayek published “The Use of Knowledge in Society” in a 1945 edition of American Economic Review, he argued that an often neglected reason why capitalist economies create more wealth than centrally planned regimes is because of an information advantage. If you’re trying to sell coffee in Santa Cruz, California, you are going to know about the flavor demands, peak traffic hours, and seemingly idiosyncratic preferences of your customers better than a committee in Washington, D.C.
With stock market investing, we accept that information can be such an advantage that we attach criminal penalties to executives that purchase stock after receiving material information that is not disclosed to the public. Heck, for advocates of the semi-strong efficient market hypothesis, the underpinning is that the current price reflects all publicly known information about the stock.