My Big Investing Mistake of Omission

One of my favorite speeches of Charlie Munger, which Warren Buffett co-opted when he spoke at Florida University, was the story of how to turn $40 into $5 million. It was a story about Coca-Cola stock, and the conditions that can lead to super large financial rewards based on modest financial investments. The premise is this—you need a product that is super cheap to make and possesses enough brand equity that people will buy it deliberately on a regular basis.

Even before I encountered this story, I knew that the beverage industry has been a very lucrative place to make money if you want to make an initial investment and then grow richer in the coming years without having to do anything. Diageo, Anheuser Busch, and Brown Forman all have long records of growing profits per share and dividend payouts that are significantly higher each decade than the previous.

Pepsi … Read the rest of this article!

The Kraft-Heinz Deal Through The Lens Of Anheuser Busch

From an owner’s perspective, the advantage of having 3G operate your business is that a higher percentage of revenues become net profits that can be paid out to shareholders as dividends free and clear. The downside is that you cannot cut your way to prosperity, and eventually, you have to come up with growth initiatives.

Let’s look at what 3G did to Anheuser Busch since taking over. Even though the ADR of Anheuser-Busch began trading on July 1st, 2009, I am going to compare 2010 to 2015 because the 2009 recession distorts the picture of what 3G management does because the demand was unusually low for Anheuser-Busch products that year.

In 2010, Anheuser-Busch sold $36 billion in beer. It made $4.0 billion in profits. About 11% of revenues went to the bottom line as net profits. This is essentially a snapshot of what Anheuser-Busch looked like when it … Read the rest of this article!

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 will take 25 years to burn off, but you can test what happens when you pay 25x earnings for a high-quality stock instead of 20x earnings.)

My testing gave me renewed appreciation for the likes of Hershey, … 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 a stock simply because the price of the company went down or they assume that the recent bad economic conditions will continue perpetually into the future. Take something like BHP Billiton, one of the jewel companies with … 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 time comes when you need the cash.

But, over super long periods of time, companies like Hershey will have the best dividend growth rates of all because people eat chocolate in bad times, ordinary times, and good … Read the rest of this article!