Monday, November 30, 2009

Y H& C December Newsletter

Y H & C Monthly Newsletter- December 2009 Edition #19

US Economic & Financial Markets Outlook: The End of 2009 Approaches, All
Kinds of Extremes Are Noticeable, and What to Look for In 2010.
First, I hope everybody had a great Thanksgiving and had a nice time with their friends
and family. November of 2009 was a good month for the U.S. equity markets as the Dow Jones
Industrial Average gained 3.09%, the S & P 500 added 5.74%, and the NASDAQ market
increased 4.86%. In my opinion, the most interesting development in the financial markets has
been the continued weakness of the U.S. dollar against any major currency, and in conjunction
with dollar developments, the sustained rise of the price of gold to almost $1200 per ounce.
Over the last two weeks of November, at one point gold was up 8 days in a row. The dollar hit
an all time low against the yen (85 yen/dollar), and has weakened against both the Euro and the
Pound.
The end of the year can always be relied upon to bring extreme situations as some
underperforming money managers can be counted on to pile into anything that has worked for
the rest of the year, including specific trades, stocks, indexes, or currencies (or any
combination) that have outperformed a benchmark or the broader markets in general.
Depending on the specific situation, asset managers who have good performance will tend to be
very conservative as the year ends as the year has been good and it makes no sense to take large
chances now. Still, the developments of the dollar and gold show that extreme situations often
take place at the end of the year. A couple of other “noticeable” asset prices include the current
low 30 year mortgage rate of 4.97%, the extremely low U.S. Treasury bond yields of .68% for
the 2 year, 3.20% for the 10 year, and 4.20% for the 30 year. There are certainly a few stocks I
believe are extremely overbought, one in particular would be Amazon.com (forward P/E ratio of
53, trailing P/E ratio of 78, Price/Book value of 16). The most applicable word for this kind of
behavior is “lemmings” as the imitators can be counted on to join the bandwagon, no matter
what the price.
Now that we have looked at a few extremes to end 2009, I think the most pertinent
question investors should ask themselves is “What is going to transpire for the U.S. economy
and financial markets in 2010? With respect to the economy, I think at some point one has to
believe all the stimulus money the government has allocated towards reviving the economy
($700 billion) has to have some positive affect (many would argue that point). There are a few
statistics that may seem to indicate the economy is slowly healing. First, the most recent quarter
of GDP came in at a revised positive 2.8%. Second, weekly initial unemployment claims fell
below 500 thousand for the first time in many months. Many corporations have reported decent
quarterly financial profits, due mainly to cost cutting. I believe 2010 should see the economy
slowly continue to gradually improve, with the caveat that no large financial institution can
have a “Lehman” type situation. Naturally, low and behold, as I speak one has possibly taken
place.
As I write this newsletter, many financial analysts are worried about the Dubai debt
situation and its ripple effects on the global economic climate. If the economy continues to
slowly improve, one market you can count on to change will be the bond market. As
confidence improves, bond yields will go up, my guess in around June or July of 2010. Just as
significant will be to look at the unemployment numbers to get a good reading on whether or
not the economy is creating or losing jobs. I think if the country in general do not see the
employment picture starting to improve by the summer of 2010, there will be a huge change in
Congress during the mid term elections. Just a caveat, forecasting the economy or stock prices
is, in my opinion, a waste of time. I refer to the following quote by Warren Buffett, “We
believe that short term forecasts of stock or bond prices are useless. The forecasts may tell you
a great deal about the forecaster; they tell you nothing about the future.” (Warren Buffett,
Berkshire Hathaway Annual Report, 1980)
So, what does all of this mean for the future, especially in the stock market? One thing I
know is the only constant is change, and with changing circumstances comes opportunity. The
change may take very slowly or with remarkable speed, but as in 2009, 2010 will present many
investment opportunities for investors who do their homework and focus on situations that most
investors would not even consider.
Global Economic & Financial Markets Outlook: With One Month Left in
the Year, Global Stock Markets Rebound Strongly
With one month left in 2009, Global stock markets have rebounded impressively from
the disaster of 2008. Let’s look at the global indexes to get some indication of how strong the
bounce has been. The World Index including the United States is up an impressive 33.34%.
Interestingly enough, the same index which does not include the U.S is up 41.25%, which
shows the U.S. market underperformed relative to the rest of the world.
The continent where the most outperformance took place is in Asia. Take a look at
some of these results: Hong Kong +56.2%, Indonesia +116.9%, South Korea +48.7%, Taiwan
+65.2%, Thailand +58%, Australia +61.5%, Philippines +66.45%, and Singapore +66.06%.
These numbers are staggering in the extent of the gains, and it shows the volatility that is
inherent in emerging markets. Volatility in an index or stock is your friend if you are sharp
eyed and focus on what you want. Indeed, if you were concentrating on an opportunity to buy
into Asia, the end of 2008 and the beginning of 2009 would have been a great entry point.
The region where many investors have kind of neglected because they don’t have a
BRIC country included (Brazil, Russia, India, China) is Western Europe. Interestingly enough,
the performance there has been pretty strong. Spain, a country with almost 20%
unemployment, has an equity market +37%, which might say something about how much
unemployment and stock market performance is correlated. Norway is +90.00%, and
Switzerland is +67%, again showing great returns were possible almost anywhere in the world.
Another interesting fact is France was +26.78%, and Germany +23%, and compared to the U.S
still outperformed our major indexes.
My observation to sum it all up is that 2009 started out with most investors scared to
death about investing anywhere. Those that risked their capital in the first three months of 2009
have been rewarded, in general, with great returns, showing once again a great time to invest is
when the world is screaming to put your money under a mattress. You could make the case that
the world is awash in liquidity and ultimately the world will pay for this with inflationary
pressure down the road. At this point, however, compared to the end of 2008, investors can live
with the current situation far better.
The Psychology of Investing: John Paulson: A Great Example of Conviction and
Trying to Make 82X on Your Money.
I want to share with you a bit of information I gleaned from reading about John Paulson.
John Paulson is a hedge fund manager who shorted anything housing related from early 2005-
2008.
‘The two Paulson credit hedge funds invested a total of $1.2 billion of cash and racked
up nearly $10 billion of gains all in two remarkable years. Paulson’s other funds enjoyed about
$10 billion of their own gains, all from obscure protection on mortgages most experts said
would never get into trouble.’ (The Greatest Trade Ever, Pg 262, Greg Zuckerman, Broadway
Books.)
One of the key takeaways from the book is that if an investor is trying to build a big
position, there are going to be people on the opposite side of those trades, and many times each
side believes they have the correct position. In Mr. Paulson’s case, he built huge positions that
many investment banks on Wall Street sold him. In fact they could have easily discouraged him
when the positions did not initially go his way.
‘When the ABX index tracking subprime mortgages were introduced in July 2006,
Paulson’s team immediately bought CDS protection on that too…. At first, traders were happy
to sell CDS insurance to Paulson, thrilled at the mounting commissions. By selling Paulson
mortgage protection, they also could create product for bullish investment vehicles to buy. At
Morgan Stanley, a trader hung up the phone after yet another Paulson order and turned to a
colleague in disbelief.
‘“This guy is nuts, he said with a chuckle, amazed that Paulson was agreeing to make so
many annual insurance payments.’ “He’s just going to pay it all out?” Soon, however the
traders began to wonder when all the buying would stop. The more CDS insurance they sold
Paulson, the more they were on the hook to find bullish investors willing to take the other side
of the transactions. Some worried that they might be stuck with Paulson’s trades if they
couldn’t find enough investors to take the contracts off their hands, a dangerous position if
housing crumbled.’ (The Greatest Trade Ever, Pg 154, Greg Zuckerman, Broadway Books.)
The traders ultimately had very good reason to be concerned, it turns out. In fact, the
top CDS trader from Goldman Sachs (Josh Birnbaum) stopped by Paulson’s office to ask how
much protection Paulson ultimately wanted to buy.
‘If you want to keep selling, I’ll keep buying,’ he said. ‘We have a few clients
who will take the other side of your trades. And I’ll join them.’ Birnbaum was trying to tell
Paulson he was making a big mistake. Not only were Birnbaum’s clients eager to wager against
him, but Birnbaum was too. Paulson seemed unmoved. “Keep buying, Brad (his head trader).”
(The Greatest Trade Ever, Pg 154-155, Greg Zuckerman, Broadway Books.)
I also wanted to quickly include a personal experience. A long time ago I used to own
the stock of Diedrich Coffee (DDRX- I sold it about 7 or 8 years ago so don’t think I made a
killing on this one, I tried to though). It is a small company located in Irvine, CA that used to
own coffee shops in Orange County, CA, but moved into the wholesale coffee business.
Anyway, I owned the stock for about 5 years and in that time the company was never profitable,
and the stock sold for anywhere from 1 buck to 3 bucks. Earlier this year, during the huge
downturn, the stock sold for 39 cents. Last week, the company entertained buyout offers from
Peete’s Coffee and Green Mountain Coffee Roasters for, you will not believe, 32 dollars a
share. If you would have bought at the bottom, and no one ever does, that would be 82X your
money. The next time people discount the stock market, try and remember that. Ok, thanks for
reading this month and as always, if you have any comments, questions, or concerns, or you
would like to discuss your personal investment situation, please email me at info@y-hc.com.

As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.

Yale Bock, CFA
President, Y H & C Investments

Sunday, November 8, 2009

Like Em, or Hate Em, Starbucks is Going to Be a Bigger Company 3, 5, and 10 years from Now

Like Em, or Hate Em, Starbucks is Going to Be a Bigger Company 3, 5, and 10 years from Now

(Full Disclosure: Yale Bock, YH & C Investments, and its clients own positions in Starbucks. You should not buy SBUX stock based on this article and you should do your own research on the fundamentals of SBUX business, read its annual report and 10-Q, and assess your own portfolios objectives, constraints, time horizon, tax situation and any other pertinent facts before adding SBUX to the equity position in the context of a reasonably diversified portfolio).

Starbucks is going to be a larger company 3, 5, and 10 years from now. The main reason Starbucks will grow is because coffee and tea are both enormous markets, domestically and globally. Second, Starbucks has low penetration rates in terms of the number of locations it has, especially in the BRIC countries. Finally, Starbucks has nice potential for growth in packaged coffee, ready to make beverages, and the instant coffee markets, especially internationally.

Coffee is an incredibly large market, domestically and globally. According to coffee-statistics.com, in the United States 400 million cups of coffee are consumed daily, or 146 billion cups per year, making the United States the leading consumer of coffee in the world. According to the Buck County Coffee Company, there are 1.4 billion cups of coffee sipped per day, making it one of the most consumed beverages in the world. You may prefer McDonald’s, Dunkin Donuts, Peet’s Coffee & Tea, Panera Bread, or an independent house’s coffee, but I believe the coffee market is so large that there is more than a reasonable chance that Starbucks will be able to continue to grow it’s revenues and profits in the coffee segment.

Tea is also a huge market and one that SBUX participates in through its Tazo line and a partnership to sell a ready to drink tea beverage with Unilever. According to the Tea Association of the United States, wholesale tea sales grew from $1.84 billion in 1990 to $6.85 billion in 2007. Global tea production will rise to close to 4 billion kg by 2010, according to Kaison Chang, senior economist for commodities at the Food and Agricultural Organization at the 2nd Global Dubai Tea Forum in 2008 (Pg 2, India E-News). With the enormous brand recognition Starbucks has built all over the world, it is reasonable to expect Starbucks to grow and even increase its share of the surging tea market.

Working in tandem with the huge markets of coffee and tea, Starbucks has a low penetration of stores relative to the global market for coffee. Consider the fact that Italy, a country with a population of 58 million people, has over 200,000 coffee bars (Admittedly, Italy a very high ratio of number of people to coffee bars-1 for every 290 people.). Take a look at the following table and you can easily understand how much potential Starbucks has to grow its store base.



(From Starbucks Web Site) Starbucks: Huge Markets (Factbook 2008)

# of Starbucks Locations
(As of Sep 27, 2009) Country Population
Licensed-505
Owned-191
Total- 696 China 1.3 billion
None
(Regulatory Issues) India 1.15 billion
Owned-6,764
Licensed-4364
Total- 11,128 United States 300 million
Licensed- 74 Indonesia 240 million
Licensed- 23 Brazil 200 million
Licensed-19 Russia 140 million
Licensed-261 Mexico 110 million
Owned-144 Germany 82 million
Licensed-123 Turkey 72 million

If you consider that SBUX has stores in countries like Switzerland, France, Egypt, Saudi Arabia, and the Netherlands that are not included in the table (Starbucks has stores in over 50 countries), you can very easily grasp my point that the store base could easily double or triple from the current number of 16,535. The company has said over the next few years it will grow its store count more internationally than domestically. By doing so, more revenue will come from equity investees. In each of the last two years, income from equity investees has represented approximately 21-22% of operating income (2009-(121.9 million/562 million), 2008- (113.6 million/503 million)). Obviously, Starbucks and its partners will try to open locations in countries where the returns on invested capital are the highest.

Other areas for continued growth are the packaged coffee segment, the ready to drink beverage segment, and in the 21 billion dollar instant coffee market, where Starbucks recently introduced its new VIA product line. In all of the countries where Starbucks has a presence, it does not necessarily sell packaged coffee, ready to drink beverages (through its partnership with Pepsi), or instant coffee. A country like Brazil, Russia, or China could conceivably have a tremendous market in any one or all three of these categories. Tying into these areas is the continued growth of the Starbuck’s card, a way for Starbucks to communicate with customers through social networking, texting, email (coupons for instant coffee, special promotions, nearest location, etc) and on line video. The potential to use the card in any of the 50 or so countries where Starbucks has a presence is a huge asset and certainly will be invested in.

Lastly, a couple of other factors should help improve Starbucks ability to grow their revenues and profits. First, with the overcapacity in real estate, as the percentage of retailers that default increases, a large tenant like SBUX gains leverage with commercial developers in their ability to find great locations. Great locations are a long term competitive advantage for SBUX, especially if they can get them at attractive lease rates. Second, Starbucks has taken restructuring charges of 269 million dollars in 2008 and 332 million dollars in 2009 as they had to close down underperforming locations. Assuming there are no more charges, just not having these charges will help the bottom line. All in all, you may like Starbucks, or you may hate Starbucks, but it is hard to argue that 3 years, 5 years, or 10 years from now, Starbucks will be a larger and more profitable company.

As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.

Yale Bock, CFA
President, Y H & C Investments

Sunday, November 1, 2009

Y H& C November Investment Newsletter

WWW.Y-HC.com

Y H & C Monthly Newsletter- November 2009 Edition #18
Index Yearly Return
Dow Jones +10.67%
S&P 500 +14.72%
Nasdaq +25.30%
Russell 2000 +12.68%
October 2009 Picks +0.68%
September 2009 Picks +2.95%
August 2009 Picks +9.13%
July 2009 Picks +23.33%
June 2009 Picks +24.86%
May 2009 Picks +30.75%
April 2009 Picks +61.28%
March 2009 Picks +94.12%
February 2009 Picks +118.2%
January 2009 Picks +63.78%
Y H & C December 08 Picks +142.58%
Y H & C November 08 Picks +42.32%
Y H & C October 08 Picks +9.85%
Y H & C September 08 Picks +0.78%
Y H & C August 08 Picks +7.44%
Y H & C July 08 Picks -2.13%
Y H & C June 08 Picks -31.36%
Y H & C May 08 Picks -31.06%

US Economic & Financial Markets Outlook: “The Great Recession,” The Unanswered Question, and All Asset Classes Have Issues.

During the month of October, the Dow Jones Industrial average gained .45%, the S&P 500 lost 2%, the Nasdaq lost 3.6%, and the Russell 2000 lost 6.9% (according to the October 31,2009 issue of Barron’s). The U.S. economy continues to try to rebound from the “The Great Recession,” or the worst economic period since the Great Depression. Many economic statistics indicate the country has serious problems that have not yet been solved. For example, the unemployment rate stands close to 10%, and in many states it is over 13% (here in Nevada, the official number is 13.9, but unofficially it may be closer to 20%). Over the last year, approximately 7 million jobs have been lost. The U.S. Government is running an annualized deficit of approximately 1.5 Trillion dollars (that is with a T, not a B, or an M). Most state government are still running large budget deficits and will have to eventually cut jobs, salaries, and benefits (probably all three) in order to become close to break even.

Over the last year, GDP growth has been negative. Corporate profits are typically running on average down about 10% for the last year. In many industries, there is significant overcapacity and probably will continue to be so in the foreseeable future (gaming, retail, anything housing related, oil and gas exploration, engineering, state and local governments, commercial real estate- as a personal anecdote, the owner of the Venetian in Las Vegas recently said he does not think a large gaming project will be built in Las Vegas for the next 10 years).
The country also faces issues with its lack of a pipeline for high value, intellectual property based employees. The United States has a great many incredibly profitable corporations that are market leaders in high value industries like engineering, consulting, computer science, software, biotechnology, pharmaceuticals, nanotechnology, etc. In order to maintain the country’s competitive position, our educational system has to improve the quantity and quality of the students who can possibly enter into these areas.

As a response to the current economic conditions, the U.S. government has been trying to keep economic conditions as favorable as possible, especially for U.S. financial institutions. If you look at current U.S. Treasury bond yields, the 30 yr Treasury bond has a yield of 4.28%, the 2 year note has a yield of .92%, and the 3 month note has a yield of .03%. Consider this possibility if you are a large multicenter bank- you borrow for 3 months at .03%, and invest the proceeds into U.S. Treasury Bonds for 30 years at 4.28%. Your spread is 4.25%, which is greater than the dividend yield on an S&P 500 Index fund (approximately 2%). If one looks at the profits the large banks had in trading, I am not saying they used this strategy, but maybe something like this- (remember, they are investing multiple hundreds of millions of dollars).

So a real quandary economists and investors have is which market has it right, the bond market or the gold market? Gold currently trades at about $1035.00 per ounce, very close to an all time high. Bond yields for U.S. treasury bonds are historically very low, as stated earlier. High gold prices are typically an indication of large inflation rates, while low bond yields suggest no inflation pressures in the economy. If there were tremendous inflation in the system, bond yields should be closer to 10% or 15%. Maybe it is possible both markets have it a bit right and a bit wrong?

Lastly, consider the plight of an investment manager trying to pick where to put capital. Cash yields little to nothing, and so do money market accounts, so if inflation pops up, an investor gets a negative real return. Bond yields are minimal, and do you want to loan money at low rates where at the very least, potential defaults are increasing, and maybe even worse, you tie your money up for 30 years at 4% with the risk of interest rates or inflation rising? You think, maybe commodities because of emerging market demand? The issue here is possibly weakening demand in mature markets, which compose most of the demand in the first place. Real Estate you say, as in many markets prices are down almost 50%? Other investors believe real estate won’t see capital appreciation for another two years (or more) because of the overbuilding issues and the yet to come foreclosure wave. See where I am headed? My answer is to try and find the stocks of good companies at good prices and watch them grow.

Global Economic & Financial Markets Outlook: A Look All Over the World, and What to Bet On in The Global Economy.

A key point about investing money in the quest for higher return is the idea of relativity. Everything can be compared to something else to give you a better understanding of how you are doing. For example, if my portfolio dropped 10% last year, one might consider that a poor performance. However, if you compare a drop of 10% to the performance of most major indexes where the average loss is 35%, 10% does not look too bad. Hedge funds are called hedge funds because most of them are structured to make money in any kind of market, which is the idea of absolute performance. There are all kinds of hedge funds and an abundance of different strategies that are employed, but typically it involves “selling short” a percentage of stocks to offset the stocks that are held in long positions. Just because a fund is called hedge fund does not mean they will be successful. Many hedge funds had to liquidate assets and had negative returns last year because of the extensive use of leverage. My point is every asset class or investment style can use the idea of relativity to get a gage on performance.

For example, let’s look at how the Global Dow Jones Industrial Index is performing this year versus various country indexes across the world. The Global Dow is up about 20% during 2009. By itself, this looks like a very good result. However, if that number is compared to the China Shanghai index of +80%, or the Bombay Index (India) of +65%, or the Bovespa Index (Brazil) of +65%, or the DJ Russia Titans Index (Top10 companies in Russia) of +50%, and the Tel Aviv Index of Israel +40%, the Global Dow does not look so great.

However, if you compare DJ Global Index number(+20%) to the Nikkei Index of Japan +15%, or the Swiss Market Index (+3%), or the Euro 50 Index (+5%), the Global Index looks pretty good. Comparing the DJ global index to indexes in emerging markets, the JSE/FTSE all Africa index was +25%, and the Nigeria Index was -40% (interesting place to invest because of the oil factor, you would think) is a mixed bag. How about comparing the DJ Global Index to Iceland, where the currency was devalued? Iceland was down 60% during this year, which makes me wonder if Iceland is not worth investigating a bit more. Anyway, the point I am trying to make is comparing your performance to other indexes, a hedge fund, different parts of the world, or just large indexes in general give an investor a better understanding of how they are performing, and possibly where to look for investments in the future.

My take on global investing is the continuing growth of consumerism in large foreign countries will be a secular theme that will not change for many years. I want to invest in large U.S. based companies that are targeting countries like China, Russia, Brazil, India, Egypt, Indonesia, and Nigeria because I believe the consumers in those countries are going to benefit from their higher income levels and participate by wanting to increase their standards of living. In my opinion, global brands that are well known are only going to grow bigger and more profitable.

The Psychology of Investing: How Serious Was Last Year, and Warren Buffett and Li’L Abner Show Us Why Holding On To Winners Could Make A Huge Difference in Your Portfolio.

In order to be a great investor, I believe you need to constantly keep learning. Typically, this involves reading about what has gone on in the market, what is going on in the market, how market participants see the market, and who is buying (and why) and who is selling (and why). In my opinion, and I keep going back to this, last year was a once in a lifetime kind of year where no matter who you were, or what you did, you were going to have terrible returns, unless you were short everything or had everything in cash. In reading a book by the NY Times Dealbook columnist Andrew Ross Sorkin, (“Too Big To Fail,” Page 3, The Viking Group, 2009), just look at this quote by Jamie Dimon, the CEO of JP Morgan Chase (This is the week before Lehman Brothers failed and he is talking to his top two dozen members of his management team, to give you some context:
“Here’s the drill,” he continued. “We need to prepare right now for Lehman Brothers filing (bankruptcy). Then he paused. “And for Merrill Lynch filing.” He paused again. “And for AIG filing.” Another pause. “And for Morgan Stanley filing.” And after a final, even longer pause he added: “And potentially for Goldman Sachs filing.”

When an investor thinks about those possibilities, it puts the current situation in a perspective that maybe the world was very fortunate. Markets have recovered from the Lehman bankruptcy and the world is dealing with (so far) the government takeover of AIG. The other large investment banks survive, in a different form for sure, but they have survived. All in all, as an investor continuing to learn about past events should help lend perspective to the current economic environment.

The current theme in the investment world is to always take profits when you can. I think much depends on the situation an investor is, but I am not a big believer of that philosophy, especially if you own stocks that have done very well for you. In many cases, stocks can generate wealth for many decades, not just a 20% or 50% return. Sometimes I have wondered would it have been better to sell and take large gains when I could. However, let me share with you a story Warren Buffett uses to explain how he thinks about taxes and selling versus selling after a long period of holding a stock.

“Through my favorite comic strip, Li’L Abner, I got a chance during my youth to see the benefits of delayed taxes, tough I missed the lesson at the time. Making his readers feel superior, Li’l Abner bungled happily, but moronically, through life in Dogpatch. At one point he became infatuated with a New York temptress, Appassionatta Van Climax, but despaired of marrying her because he had only a single silver dollar and she was interested solely in millionaires. Dejected, Abner took his problem to Old Man Mose, the font of all knowledge in Dogpatch. Said the sage: Double your money 20 times and Appassionatta will soon be yours (1,2, 4, 8, ….1,048,576).
My last memory of the strip is Abner entering a roadhouse, dropping his dollar into a slot machine, and hitting a jackpot that spilled money all over the floor. Meticulously following Mose’advice, Abner picked up two dollars and went off to find his next double. Whereupon I dumped Abner and began reading Ben Graham.
Mose clearly was overrated as a guru: Besides failing to anticipate Abner’s slavish obedience to instructions, he also forgot about taxes. Had Abner been subject, say, to the 35% federal tax rate that Berkshire pays, and had he managed one double annually, he would after 20 years only have accumulated $22,370. Indeed, had he kept on both getting his annual doubles and paying a 35% tax on each, he would have needed 7 and 1/2 years more to reach the $1 million required to win Appasssionatta.
But what if Abner had instead put his dollar in a single investment and held it until it doubled the same 27 and ½ times? In that case, he would have realized about $200 million pre-tax or, after paying a $70 million tax in the final year, abut $130 million after tax. For that, Appassionatta would have crawled to Dogpatch. Of course, with 27 ½ years having passed, how Appassionatta would have looked to a fellow sitting on $130 million is another question.”

The Essays of Warren Buffett: Lessons for Corporate America, Lawrence A. Cunningham, First Edition, Pages 230-231, Copyright Lawrence A. Cunningham, 1997 and 2001.
Notice nobody from the trading desk or the Fast Money Show on CNBC will mention something like this. Might be a reason Buffett is the wealthiest guy in the world? Maybe he thought about these things a bit and reckoned it was worth a person’s while to find a company that might double 27 times. Gee, maybe that is why so many people spend so much time on finding stocks. Finally, if you are interested in sharing with me your current investing situation or are a bit stumped with your portfolio, please send us an email, and as always, if you have any comments, questions, or concerns, certainly contact me at info@y-hc.com.

As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.

Yale Bock, CFA
President, Y H & C Investments

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