Value Investing Meets 1999, 2015

On January 10, 2000, Merrill Lynch’s Henry Blodget made the following statement: “Valuation is often not a helpful tool in determining when to sell hypergrowth stocks.” Shortly thereafter, the valuation of tech stocks trading on the NASDAQ exchange crumbled. On July 13, 2015, Paul Sweeney, an analyst at Bloomberg, offered this: “When you see stocks with these high multiples, it shows you the market’s comfort in the longer-term growth story.” Every generation, a rationalization for paying prices disconnected from business fundamentals seems to arrive. People can’t help themselves; it plays out over and over again.

The likelihood of falling for this kind of stuff does seem to be more nature than nurture. When Warren Buffett explained value investing to students at Columbia University in 1981, he mentioned that people instinctively are attracted to the concept of buying “dollar bills for fifty cents” or they immediately have no interest in it. … Read the rest of this article!

A Tale of Two Cities

Earlier this month, Facebook (FB) gained a lot of attention for being the fastest company to reach a $250 billion valuation in the history of the NASDAQ stock exchange. It’s not really a measuring stick that comes with an equal playing field, as Facebook was valued at over $100 billion at the time it went public. Is Facebook going from $100 billion in 2012 to $250 billion in 2015 better than Starbucks going from $400 million in 1992 to $83 billion in 2015?

Of course, what makes life interesting for investors is that we get to spend our time figuring out whether the rise in Facebook’s share price is deserved, as the company’s market cap goes barrelling past legendary investment titans like Wal-Mart Stores and Procter & Gamble.

There are less than a dozen companies in the United States that Facebook is yet to eclipse, and one of them is … Read the rest of this article!

Integenerational Wealth: A Case Study of the Rockefellers

The late Dr. Thomas Stanley’s research in The Millionaire Next Door offered the statistics that 92% of millionaire households in the United States were first-generation wealthy. There are three primary factors that explain why wealth is not stagnant in America: an extensive spirit of philanthropy (American millionaires are more likely to donate half their estates to charitable causes than the wealthy in any other country); general mismanagement by the heirs (there seems to be something in human nature that suggests people who do not directly earn wealth from their own labor cannot maintain it as well as those who did); and an increasing divisor of heirs makes it difficult for idle wealth to perpetuate.

Few very investment articles discuss the mechanics of this third element. To conduct a case study into how this plays out in real life, let’s take a look at what we know from the trust of … Read the rest of this article!

If Your Net Worth Is Invested In Your Employer’s Stock

Imagine you spent the past thirty-five years of your life working for Colgate-Palmolive. During your time there, you recognized the greatness of the company. You soaked up the history, knowing that the original William Colgate & Company founded on Dutch Street in 1806 to sell soaps and candles had resulted in a business that had been profitable for 87% of the time that the United States America existed. You know that the private owners collected their dividend checks through the War of 1812, the Civil War, and the 1896 introduction of toothpaste in a tube marked the point from which it would never again cut its dividend.

If this Colgate-Palmolive employee started investing $500 per month 35 years ago, and increased his contribution by 6% each year, the net result would be a $33,900,000 portfolio. When you find an excellent company, give it a long time, and constantly supply fresh … Read the rest of this article!

Warren Buffett’s Quiet Strategy

In 1998, Warren Buffett found himself in a predicament. He knew that many stocks had become overpriced, including many owned through Berkshire Hathaway. He also knew that selling those stocks would require a substantial tax payment to the U.S. government, and it would be difficult to find other things to purchase that would create more wealth in the long run once you adjusted for the lower pot of money available after taking the tax hit.

Instead, Buffett pulled off one of the most excellently structured deals of his career. Seeing that Berkshire Hathaway was trading at 2x book value, he issued 18% of Berkshire’s stock to purchase the reinsurer General Re. The brilliance of this move is that: (1) Warren Buffett created value out of thin air by transacting away some of his stock during one of the rare times under his helm when it was expensive; and (2) he … Read the rest of this article!