As companies like Apple and Alphabet went from companies too small for an index fund to its top components, such that 6% of all S&P 500 index investing dollars go into these two companies alone, it has been an underappreciated benefit that these two companies have been immensely profitable, sitting on hundreds of billions of dollars in cash and earning tens of billions of dollars per year in cash profits, respectively. Even though the companies are “new” by historical standards regarding where they were twenty years ago, they have not introduced a systemic risk because the profits were there.
You know what can be an incredible competitive advantage? Not engaging in a particular expenditure that your peers do. Given how cheap and incredibly easy it is to make your own coffee, I do not understand those who go to Starbucks before work every morning, especially when they hit the drive-thru so they cannot even claim the ambience and lodging of going inside. For those who camp out at Starbucks with a book or laptop for three hours, I can at least understand it, as you’re really using the beverage as a proxy for $1.67 per hour rent for usage of a facility to tend to your business.
When you invest in a business, it can be overlooked that you need to draw a distinction between the per share results of a business and the results of the business itself. It is not enough to say that, say, Apple grew it profits by 10% to figure out what is going on with your wealth, because you do not own the entire business and the capital structure of any business is subject to stock repurchases (which can raise per share profits at a rate higher than the overall growth of the firm) or the issuance of new shares that results in stock dilution (which can cause your share to represent lower profits than the overall growth of the firm).
Recently, people are starting to re-awaken to the fact that Coca-Cola is a business that earns 28.2% net profit margins, controls 3.5% of the entire world’s liquid supply, has the most vast distribution network of any manufacturer in the entire world, and has probably the most valuable intellectual property ever invented on its Coca-Cola assortment of brands that have truly global recognition.
The stock, which had traded in the $40s per share more or less since 2012, is starting to show that smaller packaging with higher unit costs and a ruthless focus on automation (that is largely underreported in the financial media) is driving a return to 7-9% earnings per share growth. With a dividend yield still north of 3%, it is now positioned for 10% to 12% returns over a multi-decade period.
I just finished reading this thread on The Bogleheads Forum (a popular place where index investors hang out and philosophize about personal finance):
The topic at hand isn’t all that important—it was a bunch of guys debating the get-the-party-started question of international allocation within a portfolio—but I wanted to point out an example of the dumbest way to approach personal finance or any other topic: the constant appeal to authority.
Originally posted 2013-08-19 23:57:59.