In the 1990s, no stock contributed more to the earnings per share growth rate of the S&P 500 than Wal-Mart stock. It had been an elevator upward delivering 16% annual earnings per share growth throughout the decade, fresh on the heels of delivering 31.5% annual growth between 1972 and 1990. From 2000 through 2012, the party continued, as Wal-Mart grew earnings per share from $1.40 per share in 2000 to $5.02 in 2012. Although the best gains came to Wal-Mart’s early investors, participating in the growth of the business between 1972 and 2012 had been a blessing for any investor that chose to buy Wal-Mart outright instead of investing in something like an index fund.
The past three years have not been as kind to Wal-Mart shareholders. Between 2012 and 2015, earnings per share have exactly come down a bit. Wal-Mart made $5.02 in 2012, and is only expected to … Read the rest of this article!
Visa and Mastercard are distinctly different from other credit card companies like American Express and Discover Card. When you swipe something on your Visa or Mastercard, you are not actually using cards issued by Visa or Mastercard. The card itself is issued by a bank or financial institution somewhere, and the Visa and Mastercard brands represent networks that the issuing card joins. Anytime you make a purchase, the merchant has to pay a fee to the issuing bank by the end of the day, and the financial institutions have to share this fee with Visa and Mastercard.
Visa was created by Bank of America back in the 1966 to act as a way for banks to collect more from non-check purchases than the rising Mastercard which was an open-loop system created to electronically transfer funds. The important takeaway is that the Visa and Mastercard networks were created to make transactions … Read the rest of this article!
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!
When people buy shares in an Index Fund, they assume that they are buying shares in the largest companies available in the United States. You look at Apple, see its $700 billion market capitalization, compare it to the 4% allocation in the S&P 500, and figure it sounds about right. And for much of the 1950s, 1960s, 1970s, 1980s, 1990s, and 2000s, this was true. But in 2005, the S&P 500 shifted from selecting stocks based on market capitalization to selecting stocks based on a market capitalization with a formula that takes into account the free float of the stock.
The consequence is this: Those precious businesses with high insider ownership do not become nearly as represented in the S&P 500 as the market cap of the stocks should suggest. There are 38 stocks that are underweighted in the S&P 500 compared to what the weighting would be if the … Read the rest of this article!
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!