What If You Don’t Invest In The Best Stocks?

When you review the history of the American stock market from 1926 through the present day, you will find that nearly all of the gains came from just 4% of the publicly traded businesses in existence. For most of the 20th century onward, someone who held shares in Exxon, AT&T, General Motors, IBM, and Apple could claim to represent a meaningful chunk of the stock market.

This data point has been profiled in the working paper of Professor Hendrik Bessembinder at Arizona State University whose work has the non-ironic title “Do Stocks Outperform Treasury Bills?”

The abstract for the paper contains the following the highlight:

“When stated in terms of lifetime dollar wealth creation, the entire net gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks, as the other ninety six percent collectively matched one-month Treasury bills. These

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Apple Stock’s Slice of America

About a year ago, Apple stock (AAPL) traded at $92 per share. Right now, it is trading at $155 per share. This significant June-to-June swing of 68%–a little over 70% when you include dividend payouts—gives students of the market much to analyze and reflect upon.

My takeaways:

The theory that the stock market is a near-perfect calculator of the intrinsic value of a business is once again debunked. Apple is the largest business in America. Its profits have vacillated between $45 billion and $48 billion the past three years. The new project announcements and cash build-ups have proceeded as expected. There haven’t been any crazy events, such as annexing Google, that would justify a massive reorientation due to unpredictable circumstances.

And yet, the value of the stock changed 70% in a year. Does anyone out there truly believe that Apple is worth 70% more now compared to last June? Of … Read the rest of this article!

Corporate Insiders Have Forgotten The Warren Buffett Feud With Seabury Stanton

Many of you reading this are familiar with the backstory of how Berkshire Hathaway came to be the chosen investment vehicle that built Warren Buffett’s vast fortune. Buffett noticed that the price of Berkshire tended to bump in price every time there was an announcement of a mill closing, and he thought there was a gap in value between the $7-$8 prevailing price and the $20-$21 stated book value of the stock.

Because Berkshire’s stock price was so low compared to the book value, patrician CEO and Chairman Seabury Stanton would use the liquidated proceeds from the mill closings to buy back its stock. Although this may be obvious, it is useful to keep in mind the premise—anytime a smallish company wants to repurchase a meaningful percentage of its stock, it needs to locate shareholders willing to part with the stock lest the business end up bidding against itself or—even … Read the rest of this article!

The Secret to Investing in Bonds

If you read an intermediate level finance textbook, you will encounter advice that discusses the relative safety of bonds. Usually, you will encounter information that says something to the effect of—national governments have the safest debt obligations, then state and/or local governments, then large businesses, and then small businesses. Those notions may be useful as vague generalities, but provide little insight when you are actually trying to determine how to invest your money: What are the exceptions? How can you tell when, say, a high-quality large business is giving you a “safer” bond offering than a government entity?

No matter what type of bond investment you are contemplating, the analysis of bond safety will always require two steps.

First, you determine the quality and scope of the cash flows that are the source of underlying support for the bond payments. In the case of governments, you examine the … Read the rest of this article!

American Credit Scores Hit Top Of Range

Between now and 2020, you will likely encounter statistics and headlines pointing out that the top range of the average American credit score has recently risen. There is a reason for this. It is because the poor credit events of the Great Depression are starting to roll off the credit reports of American consumers.

For the first time since 2005, the average credit score of an individual in the United States has hit the 700 mark. As a general FICO reference point, credit scores are viewed as follows: 580 or below and you’re considered high risk, 580-670 and you’re in that range where you’ll get a mix of approvals and rejections and likely carry a moderately higher than average interest rate, 670-740 and you have good credit such that you’ll only get rejected if you attempt to borrow a very high number relative to your income, 740-800 and you’re going … Read the rest of this article!