It is critical for long-term investors not to be swayed by what other people think, what the rest of the world thinks, or anything like that. This is obviously easier said than done. I’d like to direct your attention to the cheap oil of the 1990s, and discuss three things: the headline risk that existed at the time, the investment returns that occurred during this time, and the changes in the price of oil’s fundamentals that occurred during this 1990-1998 time frame.
In September of 1990, the price of oil spiked to $60.57 per barrel (I’m giving figures that are adjusted for inflation using 2014 statistics). This was a significant uptick from the $35-$40 range that was the world’s oil price habit during the last five years of the 1980s. Saddam Hussein had accused the Emirate of Kuwait of using slant drilling techniques to steal Iraqi oil, and this price … Read the rest of this article!
In an old letter to clients, Tweedy Browne’s managers once stated that investors should be prepared to hold on to an undervalued stock for at least five years in expectation of the stock reaching fair value. Certainly, you can make the case that stocks can remain cheap for ten years or longer—Abbott Labs, Altria, and even Johnson & Johnson have proven that at different points in the past fifteen years. The only additional counsel given by Tweedy Browne is that the longer a stock remains undervalued after the five-year mark, the more likely it is that an investor is wrong about the valuation.
I don’t share the Tweedy Browne view, even though I think it contains some truth. I would modify their guidance to this rule as follows: Unless you can clearly articulate a reason based on facts and probable inferences that explain why a stock continues to be undervalued, … Read the rest of this article!
It is historically unusual for Royal Dutch Shell to yield over 6%. This is a company with a very long history of having a fair value that also corresponds to a dividend yield between 5% and 6%. Given how well the American stock market has performed over the past six years, it can be wise to take a look at any large company that appears to be offering a discount.
Royal Dutch Shell does $360 billion in sales per year. Hershey, which I covered yesterday, is worth $15 billion in its entirety. To get a feel for how large Royal Dutch Shell is, you could convert the amount of crude oil and natural gas that Royal Dutch Shell sells annually to the ability to buy the entire Hershey business 24x over. It is, without a doubt, massive.
Now, when people talk about being value investors, they often express a desire … Read the rest of this article!