Investing On The Eve Of Crisis

Lately, I’ve been doing some back-testing to try and find good answers to the following: (1) What if someone invested a lump sum in 2007 right before the financial crisis, and (2) what if that investor paid an unusually high premium for the stock even during a period of high valuations? It’s been my way of challenging the Benjamin Graham thesis that investors should focus on getting the price above all else. I wanted to test scenarios to see what happens if treated quality as your primary concern, and regarded price as a secondary matter (you can never truly get past “price matters” because paying something like 50x earnings for Coca-Cola in 1998 … Read the rest of this article!

Fidelity’s Best Investors Are Dead

A news item that has gotten a lot of attention recently concerned an internal performance review of Fidelity accounts to determine which type of investors received the best returns between 2003 and 2013. The customer account audit revealed that the best investors were either dead or inactive—the people who switched jobs and “forgot” about an old 401(k) leaving the current options in place, or the people who died and the assets were frozen while the estate handled the assets. The next best performers were those with energy, healthcare, and small-cap value portfolios.

My speculation on why dead people beat everyone else is that there is no temptation to employ recency bias and sell … Read the rest of this article!

Blue-Chip Stocks With Low Dividend Yields

Hershey stock has come down 15% since the Christmastime period when I wrote about it being overvalued. The price currently sits at $93 per share (down from the January high of $111). I would classify the current price as high end of fair value. Many people will look to the 2.3% dividend yield and conclude that it is too low to meet their needs.

I certainly get that. If you have a plan to live off dividend income within the next ten years, you are going to receive much higher checks if you buy Chevron at $105 per share, lock in a starting yield of 4%, and reinvest those dividend payments until the … Read the rest of this article!

Some Stocks Are Ticking Time Bombs

There is a reason why debt matters. There is a reason why you have to dig in and study balance sheets instead of making investment decisions based on what you see pop up in a stock screener. For instance, imagine if you looked up Weight Watchers. You would see a stock generating $1.26 per share in profits and trading at a valuation of 5x earnings. That would look like a really good deal. You can reasonably think, “Hey, America has an obesity problem that is only going to get worse, and people are going to want to use services like Weight Watchers to get their BMI under control.”

This would likely lead to … Read the rest of this article!

My Recommendation: Look To Berkshire Hathaway

Berkshire Hathaway is sitting on an overwhelming amount of cash. It overshadows just about every other company I study in terms of raw, untapped earnings power. As of last quarter, Warren Buffett had $62 billion in cash sitting on Berkshire’s balance sheet. The market capitalization of the stock is $360 billion, meaning 17.2% of your purchase price is sitting in cash alone. If you buy a share of Berkshire for $145, your look-through portion of cash is $24.94 per share. The only other companies in similar situations are tech giants like Microsoft and Apple where the long-term business model is subject to rapid changes in technology in a way that Berkshire Hathaway is … Read the rest of this article!