Monday, August 24, 2015


   When I was an undergrad at Cornell, I used to walk up the hill past the Johnson Art Museum every day.  It was a giant building shaped like an old-fashioned school desk.  At the time, I thought the money for the building had come from one of the Seward Johnsons of Johnson and Johnson fame.  I learned later, that in fact, the money had come from the other Johnson family, SC Johnson. 

   Why am I writing about this?  Because SC Johnson is the largest privately held company in the world and the maker of such popular products as Windex and Pledge.  The family made its fortune on Saran Wrap and they never went public.  You cannot buy stock in SC Johnson no matter how much you might want to.
   The question I want you to ponder is this:  In all of this market turmoil has the value of the SC Johnson company changed?

   Stock prices go up and they go down, but the underlying value of the companies that those stocks represent does not change.   There is no question that companies like Apple, Coca-Cola, General Electric, and Next Era Energy (Florida Power & Light) have value.  There is also no question that most of these companies (and their peers) will have greater value in 5, 10, and 20 years.  They will have greater value because they will pay a larger dividend per share than they do today.

   I expect that the correction we have seen over the past few days to be short lived.   Today’s activity is very informative.  Panicked investors stewed over the weekend and lined up to get out this morning.  The market went down over 1000 points at the open and then rallied back.

   As I write this the market is down around 200 points and a number of stocks we hold have moved into positive territory.  My message is, DON’T PANIC.  People that gave into their fears over the weekend are already regretting that decision.

Wednesday, April 29, 2015

The Real Secret of Dividend Investing

In 1917,  the Dodge Brothers, John and Horace, sued the Ford Motor Company because they wanted a dividend.  Two years later, a final Judgment was entered in favor of the Plaintiff shareholders in the amount of $19.3 million.   The Michigan Supreme Court looked past Henry Ford's argument that he wanted to put "the greatest share of our profits back in the business" and held that "[a] business corporation is organized and carried on primarily for the profit of the stockholders."

There are essentially three ways to value a business.  All of those methods involve multiplying either the earnings, the revenues, or the dividends by a factor.   The factor varies based on the type of business and the prevailing interest rates.  

Frequently when valuing a private enterprise like a pizzeria or a parking lot, the multiplier is applied to revenues.  A dry cleaner, for instance, might sell for 70-100% of annual revenues; while a liquor store will only fetch 5% of annual sales plus inventory.

It is common when looking at stocks to value the stock based on a multiplier of earnings.   We call this multiplier the P/E or Price/Earnings Ratio.   A stock selling for $36 a share with $3.00 a share in earnings would have a P/E Ratio of 12 (12x3=36).   Arthur J Gallagher, one of the nations largest publically traded Insurance Agencies current trades at P/E multiple of 16 and 1.6 times sales based 2015 estimates; numbers that are not that far off of what you would expect to pay for a local accounting firm. 

When you think about it, the true value in owning a business or a portion of a business comes from the dividend and the expectation of future dividends.   If we lived in a world where the buying and selling of interests in a business wasn't facilitated by modern stock exchanges then the ONLY value a share of stock would have would be the dividend.   In other words, if you could not sell it then the only benefit you would get out of your stock would be the dividend.

It has been rightly said that the value of an asset is what it pays you.   Earnings and Sales are informative because they are indicative of what the business can pay in the form of a dividend and the dividend is what we want.   More importantly, we want the stream of dividends going forward.  

The real secret of investing in dividends is that we are not buying the dividend today; we are buying a rising stream of cash flow in the form of expected future dividends.   Ten years ago (in February of 2005)  we could have bought a share of Johnson and Johnson stock for around $64 a share.  The dividend at that time was $1.14 a share for a yield of 1.75%.  Over the next 10 years the price per share increased to around $105 per share (an increase of 64%).  Over that same time frame the dividend increased to $2.80 (an increase of 145%).  An investor putting $6400 into Johnson and Johnson stock in February 2005 would have received $4100 in capital appreciation and $2018.50 in total dividends. 

What is significant is that one third of the total return for this 10 year period came from dividends alone!  What is exciting is that based on her original purchase price, our hypothetical J and J investor is now earning a yearly dividend equal to 4.8% of her original investment.  (An investor purchasing the same stock 20 years ago would now be receiving an annual dividend equal to about 18% of their original purchase price.) 

And that brings us to the real value of a dividend portfolio.  When looking for dividend stocks do not become overly enamored by the current yield, instead look at the "future yield."  This years dividend has value, but the real value of our investment lies in  increasing income stream stretching off into the ever receding future. 

Friday, April 24, 2015

Why I am bullish!

Why I am (and remain) bullish!

I have been a professional investor for over 30 years and the first thing I want to say is that this is what a bull market feels like.  The market goes up regularly, almost every single day.  It goes up in small increments.  Then, it will move sharply lower for a short period of time, often just a day, before rebounding and begin the slow move upward.  If you think back to the last panic or correction in 2008 and 2009 we had exactly the opposite phenomenon.   The market went down with gut-wrenching regularity.  Sure we had an occasional rally, but each one was followed by a swift move to the downside erasing the one day gains as the market moved inexorably lower.

The above chart is incredibly sexy and makes me very excited for the near and mid term future for stocks.  To explain it, let me start with a basic principle: the intrinsic value of stocks and the underlying companies always goes up.   (This is not true for every individual corporation on the S&P 500 or even the Dow, but it is certainly true for those corporations as a whole.)  The price of the stocks fluctuates around that intrinsic value sometimes wildly.   As a result, we have these powerful bull markets that always end in an excess of exuberance.   When the bubble of irrational exuberance bursts, stocks plummet and we end up with a "lost decade."  We had two of these "lost decades" in the 20th Century; 1929-1942 and again from 1967-1982.   After each "lost decade" the market rose precipitously for a long period of time eventually increasing the value of a basket of stocks exponentially. 

Looking at the chart, we see that we seem to have completed another "lost decade."   If history repeats itself, the next 15-20 years should take the market to dizzying levels.   I would suggest it is a ride you cannot afford to miss.

Scott A. Grant

Why I held onto my GE stock. (and why I am glad I did)

Why I held onto my GE stock. (and why I am glad I did)
Originally published on Facebook 4/10/2015

We have owned GE since at least 2009 in most of our accounts. The stock has been stuck around $25 for almost 2 years now and there have been many occasions where a client or friend has tried to talk me into selling because "the stock isn't going anywhere."
I resisted the temptation to dump the company and here is why. I like the business. The world needs more and more electricity and most methods of generating electricity involve using a turbine. GE makes turbines for electricity and jet planes and anything else that uses a turbine engine. I also liked the dividend. I was happy to get paid 3.5% while I waited for the stock to go up.
But the biggest reason was the "Al Slotnick Rule". Al was an early client of mine at EF Hutton and one of the smartest investors I have ever met and he had a rule: "never sell anything." When you think about it, it is not a bad rule. Most investors hurt themselves by trading too frequently. They give up the huge compounded returns that can only be earned over years if not decades.
I will be honest, I break the Al Slotnick Rule from time to time. Last year I took a fairly large profit in Merck and the year before I did the same with Verizon. And, this year I took a loss on IBM. In each case I thought the money could be better invested and I DID NOT make the decision to sell lightly.
If you start out with a default rule that you will never sell you tend to be more selective when you buy something (a good thing) and you tend to think long and hard before you sell (another good thing).
Today, General Electric jumped over 11%. We think the stock will go higher. Patience is a virtue!

Thursday, February 5, 2009

Six degrees of Bernie Madoff

Today, the US Bankruptcy Court in Manahattan released a 162 page list of Bernie Madoff's clients.

The list included actor Kevin Bacon. This will make the old 6 degrees of Kevin Bacon game so much easier to play, since you will be able to go through the Madoff Client list and get to just about anyone.

Other notables on the list include John Malkovich, Larry King, Senator Frank Lautenberg, Steven Spielberg, Madoff's attorney Ira Sorkin and hall of fame pitcher Sandy Koufax.
It was sad to see Koufax's name on the list. I have no idea how much money he invested or how much he has left. Sports heros often lose most of their money. I hope that didn't happen to this iconic figure.
So let's play the game. Kevin Bacon to Adolf Hitler. Sound impossible? It isn't.
Kevin Bacon invested with Madoff. So did Koufax who was a team mate of Jackie Robinson, the younger brother of Mack Robinson. Mack Robinson finished second in the 1936 Berlin Olympic 200 meter dash finals to Jesse Owens who famously refused to dip the US flag to Adolf Hitler.

Tuesday, December 16, 2008

The Great Recession

They call economics the “dismal science.” The term was coined by the 18th Century Scottish Philosopher Thomas Carlyle in response to the economic theories of the Reverend Thomas Malthus. Malthus was an early economist who predicted that mankind would starve to death because population growth would far exceed the growth of food production. According to the “Malthusian Theory,” population would grow geometrically while food production would only grow arithmetically eventually leading to the “Malthusian Catastrophe” of worldwide starvation.

Arithmetic Progression 1, 2, 3, 4, 5, 6, 7, 8

Geometric Progression 1, 2, 4, 8, 16, 32,

Malthus’ theory was wildly popular in its day. It was embraced as an obvious and inescapable truth. It was also, as we now know, wrong. It turns out that civilization learned how to increase food production at a rate that far exceeded population growth. Innovation won out over pessimism.

The Holy Roman Empire was neither holy, nor Roman, nor an Empire.

In most instances economics is neither dismal, nor a science. It is at best an inexact science and at worst a collection of flawed competing theories. These flawed theories get trotted out before an eager public anxious to embrace again the most dismal predictions during times of economic turmoil. Currently, one of the prophets of disaster making headlines is Peter Schiff. Known as “Dr. Doom,” Schiff is the son of the well-known tax-anarchist Irwin Schiff. “Dr. Doom” predicts that the US economy will collapse because of the lack of a manufacturing base coupled with rampant consumption. Schiff, who served as economic advisor to Presidential candidate Ron Paul, has been predicting this disaster for the last 20-25 years and his fans argue that he is now finally being proven right. Most serious academics dismiss Schiff’s theories as “Malthusian.”

We are enjoying sluggish times and not enjoying them very much.”

- George H. W. Bush -

Are we in a recession? As with all things economic, it turns out there are two competing theories. According to the traditional view, we won’t know until late February or early March of next year when we find out for sure that we experienced an economic contraction in the fourth quarter of this year. According to a second theory, we have been in a recession since December of 2007. The National Board of Economic Research made this announcement two weeks ago. Since most of us have known intuitively that this is a recession, I like the second theory. The different standards demonstrate a truth about economics: economists tend to tell us about economic cycles after-the-fact and not before.

How long will this recession last and how bad will it get? Since the end of World War II, the average recession has lasted a little over 10 months. The two longest recessions have both been about 16 months. The greatest economic contraction occurred in the first of these two long recessions beginning in 1973. The largest unemployment rate, 10.8% occurred during the second of these beginning in 1980.

Most experts are telling us this will be the worst recession since World War II. While almost undoubtedly true, this dire warning ignores the fact that post-WWII recessions have generally been mild compared to pre-WWII recessions. Pre-World War II, the average recession lasted 21.2 months. Post WWII recessions have lasted only half as long on average. Since the worst recession of the last 60 years lasted only 16 months, this recession only needs to last another 4 months to become the longest.
Average Length of US Recessions

Post-World War II 10.4 months

Pre-World War II 21.2 months

How will we know this recession is over?

Because of the way these things are reported, the economists will not notify us that the recession has ended until way after the fact. Not surprisingly, the best indicator that the economy is entering or exiting a recession is the stock market. About half the time, when the market declines 10% or more, we are entering a recession. 100% of the time, the stock market heralds the end of a recession with an advance that begins typically 6-9 months before the recession ends. Another signal to look for is a decline in the monthly increase in unemployment filings.

Slaying the Dragon

Economists disagree on how to fight a recession. Keynesian economists suggest that deficit government spending will re-inflate the economy. Supply-side economists suggest that lower taxes will spur corporate investment. These two competing theories go a long way towards explaining the political rhetoric dominating the American landscape today. I am a Keynesian. I like deficit spending. I also like lower taxes. One thing is certain, the Hoover administration created the Great Depression by raising taxes, tightening credit, and slashing government spending.

Different Approaches to Fighting a Recession

Keynesian economists deficit spending

Supply side economists lower taxes, especially corporate tax rates

Laissez-faire economists no government action

Populist economists direct payments to consumers

The Reagan Revolution

Supply-side economists point to Ronald Reagan’s success in ending what “was” the worst recession of the post-WWII era as a victory for tax cuts and the “trickle-down theory.” That argument misses the mark. The real credit should go to Reagan’s substantial deficit spending on defense. Reagan spent billions on defense; star wars, stealth bombers, Abrams tanks, and my personal favorite; refurbishing World War II battle ships to serve as platforms for the new cruise missiles. Reagan increased the federal deficit and defense spending at a record rate. He also created 2.8 million new jobs, the greatest bull market in history, and nearly two-decades of unprecedented prosperity. Take it from the “Great Communicator,” deficit spending works!

Friday, December 12, 2008

Filibusters and the Greatest Heist in History

Just a couple of comments. The short-term rally we were looking for got derailed temporarily this week by concerns about GM and the other Auto Makers.

It looks like President Bush is going to provide the bailout in the short-term out of the Tarp.

The Auto Bailout failed in the Senate last night by a vote of 52 in favor and 35 against. This was a strange result. A majority of the Senate was in favor of the bailout. They had the votes to pass the bill. BUT, they didn't have the votes to stop the Filibuster by the minority.

That minority was led by Richard Shelby of Alabama. Congress, the President, the President-elect, and a majority of the Senate were in favor of the bill, but one lone Senator was able to stop the whole thing with the help of 34 colleagues.

In some ways that is just crazy.

But even crazier was the news the that Bernard Madoff was arrested for perpetrating the largest theft in history. It turns out his $50 billion hedge fund was a giant Ponzi scheme. Madoff used to be chairman of the NASDAQ. He virtually invented it. He ran a number of large investment houses on Wall Street since 1960.

Adding a surreal quality to the story, Karen Finerman on CNBC's Fast Money said; "why admit it was a Ponzi scheme now. this market gave him the perfect cover. Just say you made some bad trades and lost all the money."

It is no wonder people are losing faith in the system, both Wall Street and the Government.

Here's some added irony from Madoff's website:

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

I think we will see increased regulation of Hedge funds going forward. That's a good thing.

I think we will see increased regulation of derivative products going forward. Not just the debt swaps that got us into this mess, but the double and triple down ETFs that exaggerated the decline. Also a good thing.

I think we are back on track for a near-term rally. I remain optimistic in the short run.