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Blast from the Past: Walmart Dividend Letter from 1985

I was digging through an old file cabinet that had belonged to my grandfather, and I found this little blast from the past: a Walmart (WMT) letter to shareholders from 1985, signed by Chairman and company founder Sam Walton.

As a child in the 1980s, I actually remember my grandfather proudly showing me a paper certificate for his shares of Walmart stock, and I remember the day he went electronic by handing the paper certificates to the trust department at the bank.  He wasn’t sure he trusted the system and made sure to photocopy his certificates before handing them over…just in case.

Paper stock certificates seem so anachronistic today in this age of online trading and instant liquidity. It makes me wonder how different the world of trading and investment will be when my future grandchildren are going through a drawer of my personal effects.

1985 Walmart Dividend Letter

The truth is, I’m not sure how beneficial instant liquidity is in building long-term wealth.  In fact, it’s probably downright detrimental.  When my grandfather bought his shares of Walmart, the high cost of trading discouraged him from short-term trading.  As a result, he was a de facto long-term investor, which ended up working out to his benefit as Walmart grew into one of the largest and most successful companies in history.   Long after my grandfather passed away, the cash dividends from the Walmart stock he accumulated in his lifetime continued to pay for the retirement expenses of my grandmother–and for my college tuition!  Had my grandfather had access to the instant liquidity of today, he might have been tempted to sell far too early.

My grandfather also practiced his own version of Peter Lynch’s advice to invest in what you know long before Peter Lynch became a household name.  He was an Arkansas boy–born and raised not far from Fort Smith–and he liked to invest in local companies that he could observe firsthand.  Walmart was one of those local companies; its headquarters in Bentonville is less than an hour and a half from Fort Smith by car.

I remember fondly my grandfather taking me to Fort Smith’s Walmart and buying me an Icee at the snack bar.  He liked to walk the aisles personally to see what Mr. Walton was doing with his money.  That might seem a little old fashioned today, but then, it’s still the approach taken by Warren Buffett and by plenty of long-term value investors.  If done right, it works.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Worthless: Thoughts on Investing in Collectibles

My favorite historical anecdote—and one that every investor should be forced to acknowledge reading before opening a brokerage account—dates to the era of the South Sea Bubble. A charlatan whose name is lost to history, published a prospectus forA company for carrying on an undertaking of great advantage, but nobody to know what it is.” 

Yes, some 18th-century two-bit hustler launched an IPO for a company with a “top secret” business plan, and British investors actually gave him money.  If contemporary accounts are true, he took the money and fled to Europe, never to be seen or heard from again.

As a student of market history, I’ve come away with one enduring observation: investors can be phenomenally stupid.  Whether it is profitless social media stocks, Miami condos, or, if you want to go old school, decorative tulip bulbs, there seems to be no limit to the force with which otherwise sane people will suppress rational thought in order to throw away their hard-earned money.

But as crazy as stock market bubbles can be, they really don’t compare to collectibles crazes. A share of stock represents a claim of ownership in a business that, however implausibly, could someday generate real profits.  A collectible’s value, on the other hand, rest entirely on your ability to someday sell it to a greater fool.

In some cases—think Renaissance paintings—collectibles have maintained their value over time and proven to be fantastic investments.  Others…well, let’s just say that Star Wars Happy Meal toys might not be as good of investments as Old Masters.

Let’s take a look at two high-profile collectible bombs of recent decades, and then I’ll offer a little guidance on how not to fall victim to the next collectible fad.

Baseball Cards

I’ll start with one that I myself fell victim to in my late childhood: baseball cards.

I loved baseball as a boy and would subject my poor father to hours of inane player statistics. (He showed remarkably patience…a virtue I hope I can repeat when my own sons get old enough to badger me with meaningless statistics from the hobby of their choice.)

In the days before the internet, baseball cards were the perfect way to access years’ worth of player statistics, and I legitimately enjoyed organizing my cards into albums…and spending hours thumbing through the albums.

Then, somewhere around the late 1980s, it all got adulterated.  Baseball cards ceased to be a little boy’s objects of adoration and become “investments.” I stopped touching my “valuable” baseball cards for fear of degrading their mint condition, choosing instead to encase them in hard-shell plastic cases. I subscribed to Beckett Baseball Card Monthly, the authority on baseball card prices, and read it religiously.  I also stopped buying packets of cards as prices rose, choosing instead to buy individual cards of the most valuable players.  Not my favorite players, mind you, but rather the players whose cards were the most valuable at that time.

In Mint Condition, Dave Jamieson tells the story of the Great Baseball Card Bubble of the late 1980s and early 1990s, and The Slate published a fantastic excerpt here, which I quote below.

By the ’80s, baseball card values were rising beyond the average hobbyist’s means. As prices continued to climb, baseball cards were touted as a legitimate investment alternative to stocks, with the Wall Street Journal referring to them as sound “inflation hedges” and “nostalgia futures.” Newspapers started running feature stories with headlines such as “Turning Cardboard Into Cash” (the Washington Post)…

Precious few collectors seemed to ponder the possibility that baseball cards could depreciate. As the number of card shops in the United States ballooned to 10,000, dealers filled their storage rooms with unopened cases of 1988 Donruss as if they were Treasury bills or bearer bonds. Shops were regularly burglarized, their stocks of cards taken as loot. In early 1990, a card dealer was found bludgeoned to death behind the display case in his shop in San Luis Obispo, Calif., with $10,000 worth of cards missing.

It was a full-blown speculative mania.  And like all speculative manias, it didn’t end well.  High prices encouraged a massive increase in supply of the “investment,” no different than in the internet mania of the 1990s or the South Sea Bubble I mentioned at the beginning of this article, when companies couldn’t dilute their stock fast enough to meet investor demand .  As Jamieson continues,

Unfortunately for investors, each one of those cards was being printed in astronomical numbers. The card companies were shrewd enough never to disclose how many cards they were actually producing, but even conservative estimates put the number well into the billions. One trade magazine estimated the tally at 81 billion trading cards per year in the late ’80s and early ’90s, or more than 300 cards for every American annually.

At some point, something just clicked in my mind and collecting baseball cards lost its appeal. There was nothing enjoyable about having to elbow my way past sweaty, bearded, middle-aged men to bid for a piece of cardboard encased in glass.  The massive influx of new “premium” card series were hard to keep track of and, in any event, out of my price range.  And frankly, as I entered my teenage years, I discovered girls and pretty well lost interest in anything related to baseball statistics. The baseball card bubble crashed soon thereafter, and my “valuable” investments became all but worthless.

New baseball card sales were a $1.5 billion industry in 1992.  Today, the number is closer to $200 million, a drop of nearly 90%, and that does not include the effects of inflation.  The number of baseball card shops has shrunk from over 10,000 to less than 200.  And the value of all of those premium Upper Deck baseball cards?  You’d be lucky to get a couple cents for them.

Beanie Babies

I was thankfully too old to have ever played with a Beanie Baby and too young to have ever purchased one for my kids.  But I remember the Beanie Baby Bubble well, and it is as baffling to me today as it was in its mid-1990s heyday.

Beanie Babies were adorably cute bean-bag toys for babies and small children, and I understand their appeal—as toys for children.  How this became an investment fad for otherwise sane adults is something sociologists are no doubt still studying, but one family famously lost $100,000 when the bubble burst about 25 years ago.  And that’s $100,000 in late 1990s dollars.  Tack on another 30%-40% to get an estimate in today’s dollars.

John Aziz gives a nice telling of the Beanie Baby Bubble story here.  Beanie Babies were originally marketed as affordable toys for children, usually priced around $5.  But because they were originally sold at smaller stores and had a certain aura of exclusivity about them, they quickly became an object of speculation.  And the enabling tools of speculation soon followed: baseball cards had Beckett Baseball Card Monthly; Beanie Babies had Mary Beth’s Bean Bag World, which at one point had a circulation of 650,000 readers.

What made people believe that Beanie Babies had value?  Part of it was artificially constrained supply.  The manufacturer intentionally kept production down to create an air of exclusivity (yes…in a beanbag toy). Beyond this, it was a case of rising prices begetting rising prices.  The high prices attracted new speculator, who in turn sent prices even higher.

At some point, there were not enough new buyers to keep prices rising, and the bottom fell out.  Today, “investment grade” Beanie Babies that once sold for hundreds or thousands of dollars can be had for less than $10.  Which, after all, is a fair price for a cute toy made to be played with by young children.

So, how can you know ahead of time if a collectible is an enduring masterpiece or a ridiculous fad that will make you an object of ridicule among your closest friends and family?

There are no hard and fast rules here, but I would give two broad guidelines to consider:

  1. The rarity of the object in question, and
  2. What drives its perception of value.

I’ll start with rarity.  Rarity is not a guarantee of high prices, but it is definitely a precondition.  The mass-produced baseball cards from the late 1980s are all but worthless, but truly rare baseball cards have actually held their value surprisingly well.  A 1909 T206 Honus Wagner card can be expected to clear well over $1 million at auction.

This brings me to perception of value.  Rarity alone does not make the Wagner card valuable; there has to be something that makes the object special.  Among baseball aficionados, Wagner was considered to be one of the all-time greatest players.  And there is a mystique about the card itself because Wagner ordered its production stopped; he was uncomfortable with the fact that his image was being used to sell tobacco to children.

The same is true of paintings.  And Old Master is priceless because of its rarity but also for its beauty, the quality of the artwork, and legendary status that the painters have acquired with the passing of time.

So, before you consider investing in collectibles, ask yourself: Is the object sufficiently rare, and has its perception of value withstood the test of time?

But beyond this, I would offer one last piece of advice.  Don’t view a collectible as an investment at all or you lose that “special something” that make it valuable to begin with. Buy it because of the way it makes you feel, with the assumption that, even if its monetary value fell to zero, it’s still something you’d proudly display in your home.

This article first appeared on InvestorPlace.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Forget Yield; Dividend Growth is the Metric that Matters

Income investors had a little scare in May and June.  Bond prices took a tumble and dragged down assets that have come to be viewed as bond substitutes—including popular dividend-paying stocks, MLPs and REITs.

Now that the dust has settled and the income markets have regained some semblance of normalcy, let’s take a step back and review the case for income stocks.  With the Fed’s quantitative easing eventually coming to an end and with bond yields likely to rise in the years ahead, does it still make sense to look to the stock market for income?  Or might investors be better off buying and rolling over a bond ladder to meet their income needs?

Let’s take a look at the numbers.  Consider the options you had as an investor ten years ago.  In 2003, the 10-year Treasury yielded 3.97%.  We’ll be generous and say 4% to keep the math simple.  A million-dollar portfolio invested in Treasuries would have paid out an income of $40,000 in the year you bought it…and ten years later, it still would have paid you $40,000 per year on your original purchase price. (Math purists will point out that the yield to maturity calculation is a little more complicated than that, but it’s close enough for our purposes here.  We’ll assume you bought the bonds at par and that capital gains are a moot point.)

Over the ten year life of the investment, you would have received $40,000 per year.  Of course, $40,000 went a lot further in 2003 than it does in 2013, but we’ll get to that a little later.

Now, let’s do the same math on one of my favorite REITs—Realty Income ($O).

I chose Realty Income for a very specific set of reasons.  First, in 2003, its dividend yield—at 3.5%—was close enough to the 10-year Treasury yield to make these two viable competitors for the would-be income investor’s portfolio.  Secondly, as a low-risk, triple-net retail REIT, Realty Income is a prime example of a stock that has come to be viewed as a “bond substitute” by income investors.

So, how did Realty Income stack up?

The math here is a little more detailed, but I’ll do my best to keep it simple.  A million-dollar portfolio invested in Realty Income at the beginning of 2003 would have bought you 29,516 shares paying $1.17 per share in annualized dividends.  That works out to $34,534 in income in the first year—or about $5,500 less than the 10-year Treasury.

But this is where it gets fun.  Unlike the bond, Realty Income actually raised its payout every year.  By 2013, those 29,516 shares were paying out $2.18 per share in annual dividends.  That works out to $64,345 in annual income—or $24,345 more than the interest from the bond.

In 2013, Realty Income sported a dividend yield of 4.8%, which isn’t shabby.  But your yield based on your purchase price would have been a much more impressive 6.45%.  And remember, we haven’t said a word about capital gains; we’re focusing purely on the cash payout, which is ultimately what pays your bills in retirement.

Stepping away from REITs, let’s take a look at two widely-held blue chips that have more or less tracked the market over the past ten years—Johnson & Johnson ($JNJ) and Wal-Mart ($WMT).  I included both of these names for one critical reason—both paid comparably low dividends back in 2003.  Yet despite paying a modest yield at the time, both had been serial dividend raisers for a long time—and still are.  Their stock prices have had wild swings over the years, but their dividends have been a source of rock-solid stability.

In 2003, Johnson & Johnson and Wal-Mart yielded 1.5% and 0.65% in dividends, respectively.  A million dollars invested in each would have paid out $15,296 and $6,538.  That stacks up pretty poorly in comparison to the $40,000 you could have received in bond interest by investing in Treasuries.

But let’s fast forward ten years.  Those original million-dollar investments in Johnson & Johnson and Wal-Mart would be paying you $49,244 and $34,144, respectively.  Wal-Mart’s total cash payout is still a little lower than the payout from the Treasury note, though it rose by more than a factor of 5—and will likely keep rising at a blistering pace for the foreseeable future.   And again, this says nothing about capital gains—or about the reinvestment of dividends, which would have boosted the number of shares you owned and thus your ultimate payout.

Income on $1 million invested in 2003 Income in 2013 on original 2003 investment
10-Year Treasury  $40,000  $40,000
Realty Income  $34,534  $64,345
Johnson & Johnson  $15,296  $49,244
Wal-Mart  $6,538  $34,144

 

What lessons can we learn from this?

Dividend growth matters far more than current yield.  When building an income portfolio, accept a lower payout today in the interest of generating a far bigger payout tomorrow.  As in so many other areas of investing, delayed gratification has its rewards.

I’ll leave you with one final point on inflation and taxes.  The first is obvious.  Prices rise over time, and the only way you can avoid getting progressively poorer in retirement is to have an income stream that at least keeps pace with inflation.

Finally, depending on how you are invested (IRA vs. taxable account), taxes will play a role in your “take home” income.  If investing in a taxable account, you will pay 15-20% on your dividend income, depending on your income bracket and whether the dividends are “qualified.”  Bond interest is taxed as ordinary income, meaning you could be paying a substantially higher rate, depending on your tax bracket.

Disclosures: Sizemore Capital is long O, WMT, and JNJ.

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Sizemore on CNBC Asia: “Japanese Equity Market at Extreme Risk”

Watch Charles Sizemore chat with CNBC’s Oriel Morrison about the Japanese markets and the potential for a full-blown capital markets meltdown.

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