One of the underpinnings of Benjamin Graham’s financial advice to investors is that, at a certain price, ninety-nine out of one hundred companies in existence become attractive at a certain price. This is true even for the companies that you identify as mediocre, simply because they could theoretically reach a price so low that you can’t help but do all right.
Take a company I would never want to own over the long-term: Best Buy. Under a Graham analysis, there is a point where the company gets so cheap that it would necessarily become a successful investment over the intervening years. Let’s stipulate that the investors in the marketplace somehow decide to value the shares at $10 each. That would knock the valuation down from the current $14 billion down to $3.5 billion. Meanwhile, the company is still pumping out $850 million in annual profits. It’s hard not to get … Read the rest of this article!
In 1989, Peter Lynch referred to Colgate-Palmolive as a stalwart stock, and quipped: “How much can you expect to squeeze out of Colgate-Palmolive? You aren’t going to become a millionaire off it. . .unless there is some startling new development you would have heard about by now. With the stalwarts you have to consider taking profits more readily.”
Incidentally, the beginning of January 2014 marked the moment when a $20,000 investment in Colgate-Palmolive would have become worth over $1,000,000 had it been purchased at the moment when Lynch said that in the summer of 1989.
With blue-chip stocks, there is this constant underestimation that the glory days are over because there is simply nowhere else to go. This kind of logic ignores the potential for acquisitions, technology gains/productivity gains, price increases at rates greater than inflation, and enduring buyback programs with the excess free cash flow.
With the Coca-Colas, Johnson … Read the rest of this article!
Even though I spend a lot of my time thinking about and writing about dividend-focused strategies, I’m definitely not opposed to strategies that involve focusing on profit growth in general without much consideration of the dividend. How can I criticize people who have been holding Berkshire stock for 30+ years? They are more financially successful now than I will ever be. I don’t want to throw stones at people who are better than I am at investing.
But I do think there is an appeal in having cash come your way on a regular basis, organically through the profit sharing structure of dividends at the high-grade American companies. If you accumulate 25,000 shares of Philip Morris International, you are going to collect $94,000 in dividends (plus you pay taxes). That creates options for you–without working, you get to live on the salary of the average American household (low $50k’s) and … Read the rest of this article!
The funny thing about GE’s dividend cut during the financial crisis is that it actually freed up capital to allow General Electric to recover faster and stronger than it would have if the $0.30 quarterly payout had to be maintained. Additionally, it is the presence of a high-quality executive base (that happens to get paid very well) that is largely responsible for being able to grow profits 8-12% annually despite being a monolith that brings in $146 billion in revenues. We’re talking about lightbulbs, water processing, and engine construction here. This isn’t like Coca-Cola where you can just twiddle your thumb and the annual growth happens automatically due to the ubiquity and brand equity of the product.
Managerial excellence is an important ingredient in GE’s long-term success, and paying people well is important to keep talent. Although it’s currently fashionable to trash GE’s credit division (and with the destruction it … Read the rest of this article!
Now that I’ve given you an example (here) of what I consider to be a bad commercial for mental model associative purposes, I want to shine a light on the positive and discuss with you a commercial I find to be brilliant and try to explain why I think that.
First, I should define my terms. I define a “good commercial” for the purposes of our conversation as something that makes you more inclined to actually buy the product being sold. This is the obvious, basic truth of advertising. Just as some operational companies go adrift by focusing on sales and total revenues for an extended period of time to the detriment of bottom-line profits, some companies likewise go adrift with their advertising campaigns by trying to be funny, evocative, or “create buzz” even if it does not actually make people more likely to buy the products being … Read the rest of this article!