When we track the price of goods or services over time to measure inflation, we often neglect to account for the improvement that represents more value being delivered to the customer. For instance, if someone trades in a Toyota Camry XSE for a Lexus ES, we don’t describe the this switch as inflation even though the Lexus ES costs more because we understand that the latter has more features.
Likewise, even though the we use the same name “Toyota Camry” to describe the vehicle each year, it can be easy to just look at the price changes in the vehicle each year from 2008 through 2018 to calculate the inflation without realizing, of course, than many of the features available in the 2018 version were not available in the 2008 version.
If we wanted to calculate the inflationary effect, we would have to compare a hypothetical 2018 version of the … Read the rest of this article!
For those of you who are students of stock market history or have been on the investing block for a while, you may know that there was a period of transition between when Warren Buffett ran his private partnership for select investors and when he began using Berkshire Hathaway as his wealth-building vehicle.
During this period of transition from a partnership to Berkshire, Warren Buffett became disillusioned with the high prices in the stock market at the time. During the late 1960s and early 1970s, the major firms in the stock market were going through their “Nifty Fifty” days. This was a wild time when Coca-Cola traded at 40x earnings, Johnson & Johnson traded at 30x earnings, Pfizer traded at 28x earnings, and even Procter & Gamble traded at 28x earnings.
Buffett had no desire to invest new money in such an environment, so he shut his partnership down with … Read the rest of this article!
Do you know what was the most prosperous food company during the Great Depression? White Castle.
And not for the reasons you’d think. The well-known fast food chain that sells hamburger sliders was one of the most incredibly conservative enterprises I have ever studied. In 1929, it was loaded with $32 million in cash. None of the restaurants have ever been franchised. It had an explicit policy of only opening a new restaurant location when it could do so from its cash on hand, and rarely rented any machines. Everything was paid for in cash.
The financial strength of White Castle during times of calamity explain why the business is still around almost a century later.
During ordinary and good times, everyone talks about the benefits of leveraging to accelerate growth. It is now common practice in business schools to teach that the lowest amount of … Read the rest of this article!
One of the most important insights that I have had over the past several years is that I have come to appreciate that the the scalability of “things” compared to “services” often serves as an important divining rod for identifying future investments that are the most compelling. The reasons is because the production of cheap widgets (or, more accurately, widgets with a low marginal cost) can lead to ramped-up production and high returns on capital because there is not an equally corresponding increase in expenses.
For instance, if someone launches a software firm like Adobe, which makes the famous PDFs, the costs of creating a distribution channel for the future of Adobe software is fixed. It does not matter whether there are 5,000 customers or 500,000 customers using the product–the costs are generally the same (except for the negligible data costs of tracking the subscriptions). Very real wealth gets created … Read the rest of this article!
For those of you who are aware of Warren Buffett’s long-time investment in Coca-Cola, you may know that he has turned a $1 billion investment in the late 1980s/early 1990s into 400,000,000 shares worth over $16 billion today, and that is not included a growing cash dividend that Buffett has received over the past 20+ years, which would make the returns on this investment substantially higher.
If you are a student of the dotcom stock market of the late 1990s, you may be aware of the absurd valuations placed on many companies, including large-cap blue chips that had moved well past their 20% annual growth days. In the case of Coca-Cola, the company traded at over 60x earnings for much of the 1998 calendar year. When a blue-chip stock that has a future earnings per share growth rate of around 10% gets investors willing to pay $60 for each dollar … Read the rest of this article!