USA Today's buy signal for stocks...
USA Today's buy signal for stocks... Coke or Pepsi? (Hint: Refreshing!)... Buy these stocks when you're scared... Why I came to Omaha... What's Buffet really up to?... A high school graduation gift idea...
A sign of an impending market rally was delivered to my door this morning.
This week, I've been staying at the Omaha (Nebraska) Hilton while attending the Berkshire Hathaway shareholder meeting and subsequent Value Investing Congress (more on this in a moment)… Like a lot of hotels, the Hilton delivers a complimentary copy of the USA Today to the guests' doors each morning. On the front page of today's edition reads the headline "Invest in stocks? Forget about it." The article says essentially that individual investors are still worn out by the 2008-2009 crisis. Last year's 20% market drop didn't help, either.
Ever since late 2008, I have been pounding the table extra hard on my World Dominating Dividend Grower (WDDG) stocks… repeatedly extolling the virtues of highly competitive, cash-rich businesses with growing dividends. Investing in these stocks allows you to compound your money at high rates over long periods of time.
Part of the message I'm trying to get across to investors is that these stocks are indeed different than all the speculative biotech and mining stocks (some of which are admittedly attractive today). WDDGs are cash-gushing businesses, and competing with them is insanely difficult.
Think of it this way. Add up Coca-Cola's debt and tangible equity, and you get about $36 billion. Do you really think if you had $36 billion, you could create a business that could dethrone Coca-Cola not only as the world's No. 1 beverage brand, but also (according to global brand consultants InterBrand) as the world's single most valuable brand of any kind for the last 10 years?
I doubt it. THAT is a stock you can buy, no matter what's happening in the world. THAT is a stock you buy when you're scared about what's going to happen over the next several years. If Coca-Cola's share price dips in the near term (as long as you haven't overpaid for the stock), you're still going to do really well over the long-term, thanks to that growing dividend.
I recently raised the maximum buy price on Coca-Cola, giving 12% Letter readers a chance to buy the stock if they'd missed it the first time the previous editor, Tom Dyson, recommended it. The stock rose about 10% above my maximum price relatively quickly.
Aside from the opportunity to make a lot of money over the next several years… think about the safety of a stock like Coca-Cola. It's got the biggest beverage distribution capability in the world. No matter what type of new nonalcoholic beverage comes into existence, the best way to get it to the maximum number of new customers as quickly as possible is for Coke to take it over and distribute it.
Every now and then, you might hear someone say he thinks Pepsi is a better business than Coke. I heard a decent presentation on Pepsi yesterday at the Value Investing Congress here in Omaha. And after all, Pepsi is always right on Coke's heels, isn't it? Well... not really... not from an investor's point of view.
Check this out... From 2009 to 2011, for every $1 of earnings it retained and reinvested in the business, Pepsi added $2 of market value. For every $1 Coke retained during the same period, Coke added $4 of market value.
There's a reason for that. Coke is a better business. It's No. 1. Being the biggest is much more valuable than most investors realize. By definition, it means this business is the most successful in its industry. Odds are excellent it'll continue being No. 1.
Coke isn't the only such business (though it's one of the best)... We recently added a brand new WDDG stock to The 12% Letter portfolio. This is a fairly rare event, so it's pretty exciting. It means we've found the "Coca-Cola" of another industry.
There are lots of No. 1 companies in the world. And lots of companies grow their dividends. But you can't count on a lot of companies to both crush their competition and grow their dividends for decades on end. That's what WDDGs do.
It's no accident Coca-Cola is the largest stock holding of the world's greatest investor, Warren Buffett. He knows the business isn't going to change much over the next several decades. It's just going to keep growing...
Think about it another way, too. Warren Buffett is 81 years old. He just bought a railroad. He owns a huge electric utility. His largest business is the sleepy, steady, inflation-beating business of insurance. He's building an endowment… an investment that will stay safe and continue to perform for decades after he's dead. That's why Coke is still his biggest stock holding at more than $15 billion.
So if you're like those folks in the USA Today's front-page article and you're still scared of the stock market, please consider putting some money into the World Dominating Dividend Growers. That way, you'll beat inflation, compound your money at high rates for many years, and sleep well at night. If the market drops, you'll have little to worry about. And you'll keep making more money – in cash dividends – year after year.
WDDGs ought to be the core of your stock holdings. They're great long-term investments… You can always count on them to pay you higher cash dividends every year. And they keep your money safe no matter what happens in the stock market.
WDDGs beat the heck out of inflation, too. Last year, WDDGs in The 12% Letter portfolio raised their dividends by an average of 11.6%! A few additional years of that will be more than enough to convince you that holding shares of these companies is the wisest stock market investment you can make for the long term.
Only S&A's The 12% Letter has the WDDG list. I'm really grateful, too, to S&A for selling The 12% Letter at a low price. I truly believe every individual investor ought to own WDDG stocks. Selling the letter at a low price can help it reach as many people as possible.
Right now, The 12% Letter only costs $39 for a year. Anyone can afford it, even a high school student. Come to think of it, it wouldn't make a bad graduation present for a child or grandchild... So if you want to get past the fear of stocks that's so widespread today and set you, your children, or your grandchildren up for decades of safe compounding, click here to sign up for The 12% Letter (without watching a long promotional video). If you don't like it after four months, you can always get your money back, no questions asked.
As I said earlier, I came to Omaha to attend the Berkshire Hathaway annual shareholders meeting on Saturday, followed by the two-day Value Investing Congress on Sunday and Monday, and the one-day Value Investing Congress workshop today.
It's been an intense few days, including six hours of question-and-answer with Berkshire Chairman Warren Buffett and Vice Chairman Charlie Munger.
It's a lot to process, but I've already learned much that's useful...
For example, I was shocked and pleased to hear Warren Buffett say he'll be able to invest $100 billion in one of his 70-plus operating subsidiaries over the next 10 years. That's half of Berkshire Hathaway's current market cap. That's huge growth potential for an already huge company.
I learned that another of Berkshire's largest subsidiaries has quintupled its market share in a highly competitive industry since its current CEO took over in 1993.
And I learned that Berkshire's five biggest insurance subsidiaries made $9 billion in pretax profit last year... and are expected to make $10 billion this year.
I learned that one of Berkshire's subsidiaries operates not one… not two… but three World Dominator businesses. (They dominate their industries in North America, not worldwide. But that's good enough for me.)
And finally, I learned Berkshire Hathaway has about $36 billion in cash right now. I know Buffett likes to keep a minimum of $20 billion on hand, so that's a potential $16 billion of new investments right there… Plus, the cash just keeps pouring in from Berkshire's 70-plus subsidiaries.
Put that all together, and you have a huge company with multiple growth engines… all in very different industries. (I'll update Extreme Value readers on the details in the May issue.)
At the Congress and workshop, speakers profiled more than 50 different stock picks. I'll be sifting through my notes and considering new picks and pans for Extreme Value and The 12% Letter in the coming weeks.
One final bit of advice I want to share came from Glenn Tongue, the successful hedge-fund manager at T2 Partners…
T2 takes a research-intensive, value-oriented approach to investing. Given the work its analysts do to assess a company's inherent value and identify the optimum price to buy… you expect once it opens a position… it would hold that stock with great conviction.
But Tongue – though he's great at analyzing companies – told Congress attendees, "Sometimes, taking a position clarifies your thinking."
Tongue was showing us the value of intuition in investing. Investing is an art that involves numbers, not a mechanical exercise based solely on math. Tongue also reminded us of a similar idea expressed by well-known hedge-fund manager David Einhorn of Greenlight Capital. Einhorn says if he thinks he wants to sell, he sells a small amount of stock then sleeps on it. If he wakes up missing the shares, maybe he sticks. If he wakes up feeling like it was a good decision, perhaps he'll be inclined to continue selling.
Intuition plays a part in investing. You generally can't trust your gut without having acquired plenty of experience and done tons of homework on a particular investment. But with experience and knowledge, your intuition can help you make buy and sell decisions.
Several subscribers have let us know the link we provided yesterday to the "S&A Common Sense Guide to Technical Analysis" was not accessible to all Digest readers. We apologize for the inconvenience. We've corrected the error. To read the guide – which provides a plain-language explanation of basic "common sense" analysis terms – click here.
New 52-week highs (as of 5/7/2012): Berkshire Hathaway (NYSE: BRKA), W. R. Berkley (WRB), AB InBev (BUD), and Texas Pacific Land Trust (TPL).
When you see a bearish article on the cover of one of the biggest newspaper in the country, does it color your thinking one way or the other? Let us know how you gauge sentiment at feedback@stansberryresearch.com.
"If you are in it to make money for yourself, you are doing just great. If you are attempting to help ordinary investors, you should get out of business!" – Paid-up subscriber B.T.
Ferris comment: The marketplace for investment advice isn't telling us we should get out of business. It's telling us it wants more of our advice. And I think the market is right. I don't see how telling folks to buy safe companies that boast inflation-beating dividend growth year after year for decades on end is a bad business.
"Porter, I definitely don't hate you, but I do think your advice is wrong when you paint with such a broad brush and declare, 'If you see lots of newsletters touting the same idea, avoid it.'
"I tend to maintain a certain level of inertia when it comes to investing, not willing to pull the trigger so quickly unless I am convinced that an investment has a much higher reward than risk potential. So I may not always get in on the bottom rung at the very lowest price. Take, for example, your recommendation to invest in Chineire and LNG exporting, I believe about nine months to a year ago. While I did not track the stock from the point of your original recommendation (I believe it had an initial hefty rise and then fell a good bit), you may or may not have been right on target.
"But I was not convinced by your own recommendation in which you admitted that you might be wrong, the CEO had experienced catastrophic failure in previous ventures, and the stock could very well go to zero. After reading more about the future of LNG and companies such as Cheniere, in particular, from numerous sources, I felt that the positive recommendations reached critical mass, and I made the investment, and have done quite well.
"The same thing goes for the concept of long term investing in WDDGs, in general, and which ones in particular are the most stable, capital efficient businesses worthy of such long-term investment. When numerous sources are touting the concept of WDDGs and certain specific names are mentioned over and over, these tend to be the ideas that I follow. In short, my theory is that if enough financial pundits whom I respect are talking about something, than there is a good chance that they are correct and are on to something. So, in conclusion I think you need to either qualify your statement or remove it from the 'how to lose money' column. – Paid-up subscriber M.K.
"I would be more than happy to provide a testimonial. Since I became an Alliance member in December of last year, my return on my investments has greatly increased. I buy bonds, I buy WDDGs and I sell puts and calls. I am truly thankful for all of the knowledge I have learned. If S&A were to go completely out of business, God forbid, I would have all the tools necessary to continue making money for the rest of my life. And for that I thank you." – Paid-up subscriber W.P.
"How do you get better financial data on corporations?"– Paid-up subscriber LP
Ferris comment: Start with the financial reports the companies file with the Securities and Exchange Commission. You can find them for any public company by entering the company's ticker symbol on this page. The main documents you want to read are the annual 10-K and quarterly 10-Q forms. Also, read through the many 8-K forms you'll find there. They often contain interesting and pertinent information. And look for forms with the letters DEF. These are proxy statements. They'll tell you about things like management and board of director compensation. Go to the company's website and scour its investor relations page. Read the annual report, which is usually quite different than the 10-K.
Start with these, and I bet you'll find more ways to get good information as you become more familiar with these starting points. Good luck. You're doing the right thing by seeking out better financial information.
Regards,
Dan Ferris
Omaha, Nebraska
May 8, 2012