Spoiled Rotten Investors

Middle-aged Midwestern farmers did their part during WWI by dropping significant chunks of their food off with local U.S. government food officials that transported the food to the Allied Cause in exchange for Liberty bonds. A liberty bond was exactly what you think it is–a low-interest bond that was created by the United States government to facilitate borrowing to fund the war effort.

It was heavily marketed as a patriotic duty, with movie stars like Douglas Fairbanks and Mary Pickford rallying the public to delay gratification and accept as any bonds in lieu of cash as was possible to survive, and Liberty bond posters decked the local churches and government halls.

By the time the Allies had secured armistices from Austria-Hungary and Germany in November 1918, many Nebraska farmers were looking to unload their Liberty bonds. It wasn’t just for the liquidity purpose of getting their hands on cash that … Read the rest of this article!

Someone Out There Bought Royal Dutch Shell At $37

I have made no secret of the fact that I am a big fan of the U.K.-Netherlands energy giant Royal Dutch Shell (RDS.B). The company was the subject of my first blog post ever at The Conservative Income Investor, and I came to like it even more after reading parts of the four-volume set “The History of Royal Dutch Shell.” Since 1911, the returns have been over 14% annualized, with about two thirds of the total returns come from collecting dividends and reinvesting them.

During the 1957 through 2006 period, Royal Dutch Shell delivered 12.5% annual returns (suggesting that the law of large numbers only had the effect of diminishing Royal Dutch Shell’s long-term returns by a percentage point and a half as it transitioned from large-cap to mega-cap status).

With most investment decisions, there is a trade-off between income and market-beating returns. If you want high income now, you … Read the rest of this article!

A Terrible Argument By The American Express Board of Directors In 1976

In 1959, William Donaldson, Dan Lufkin, and Richard Jenrette started an investment bank that they named after themselves–Donaldson, Lufkin, and Jenrette, Inc. (usually called “DLJ”). It immediately went public, and employed thousands of people in its budding trading, underwriting, and research divisions. The odds seemed fair that it would emerge to occupy a dominant place on Wall Street, and it drew the attention of the American Express Board of Directors as a fast-growing firm worthy of acquiring.

The American Express Board of Directors couldn’t agree with the DLJ Board on the right price for an acquisition, so American Express just began acquiring shares of DLJ on the open market in 1972. If even a 70% premium wasn’t enough to convince the DLJ Board to sell, American Express was happy to flood the market with buy orders for 1,954,418 shares of DLJ stock. By the end of 1972, American Express had … Read the rest of this article!

Those Small But Fast-Growing Dividends

When I first started writing finance articles, I noticed that my author peers would often include income investing rules like “I only consider a security if it is yielding at least 3%.” That is a rule that has some rationality if you are near retirement or have some plans to collect the cash produced by your investments and do something with it in the near term. But still, I had some type of intuition that this rule was suboptimal, as I noticed that many of the firms with the highest earnings and dividend growth rates tended to have market prices that would only give you an initial yield of 1% or 2%.

The question I seek to answer through case studies is this: What happens if you actively choose to forego current income today, and instead opt to own something that doesn’t give you much income now, but has a … Read the rest of this article!

Mastercard Stock Price Will Remain Stagnant For Five Years

Mastercard is one of the best stocks you could have in your portfolio. As you know, it rules the credit card world along with Visa. The fees come with every single transaction, and the costs are generally fixed and the business model is asset light so 43.5% net profit margins are maintained. As a result, profits have sextupled over the past decade. Even if your expectations for business performance are unreasonably high, Mastercard still finds a way to exceed them.

But Mastercard is now a $200+ billion entity trading at 33x earnings. Since its IPO in 2006, this is by far the highest valuation, excluding the wildly fluctuating price immediately after the IPO. In four out of the past ten years, the stock maintained a P/E ratio below 20.

My expectation is that Mastercard shareholders will experience something analogous to what Microsoft investors endured from 2003 through 2012–a period of … Read the rest of this article!