There's certainly no shortage of pundits, prognosticators and
even self-proclaimed prophets ready and willing to bombard us with
dire forecasts about our future. We get a day in the market like
Monday, August 8 and "Chicken Little" shows up everywhere: Radio,
television, newspapers, magazines and the Internet. Yet somehow, we
survive it all. But no matter how often our so-called experts get
it wrong, they remain steadfast in their desire to forecast our
doom with their gloom.
It's been more than 40 years ago when I first entered the
investment business that many friends and family admonished me to
reconsider my career path. Their reasoning was simple. There is
simply no possible way that the US economy could survive and
prosper under the weight of our enormous national debt. In 1970,
the year I entered the business, our national debt sat somewhere
between $370 and $380 billion. Of course, today our national debt
hovers somewhere around $13 trillion and growing.
Before I go further, I want to clarify one important matter.
Nothing I've already written or am about to write is meant to
trivialize our serious national debt issue. The amount of debt that
our government has piled up in the last 40-plus years is egregious
and needs to be addressed. On the other hand, a great motivating
factor for writing this is to attempt to separate government and
the economy. From my perspective, I clearly see government as a
major expense item on our economic profit and loss statement.
However, I reject the notion that the government either runs the
economy or is responsible for its health. Would it not be true,
that if our government ran our economy, that we would be at best a
socialistic state, or at worst a communistic state. But in truth,
we are a democracy, and our economy is one built on free enterprise
and consequently is market-driven.
Therefore, our free-market based economy is run and driven by
the economic forces of supply and demand. On this basis what
matters most is the attitude of the businesses, consumers and other
important components of our economic decision-making processes.
In other words
, how we feel about our economy has a great deal to do with how we
behave, which has a large impact on our economic growth and health.
In other words
, if we all believe our economy is weak it can easily turn into a
self-fulfilling prophecy. On the other hand, when our confidence is
high our economy tends to be healthier.
Therefore, it's really important to understand what drives our
economy and what doesn't. I believe that the overall level of
productivity is a major contributing factor to the continuation of
economic growth. Essential in this regard would be the primary
factors of production, which are land labor and capital. Additional
important factors would include research and development and other
paths to innovation that promise to increase productivity. But most
importantly, government is not a factor of production, as
previously stated - it's an expense.
Warren Buffett's Sage Advice in 1994
In the Berkshire Hathaway ([[BRK.A]],[[BRK.B]]) 1994 annual
report, Warren Buffett wrote something that had a major impact on
me at the time and has continued to contribute to my general
thinking about investing to this day. Consequently, I consider it
one of my favorite Buffett quotes, as well as one of the most
important lessons he ever offered the general investing public. I'm
going to present the entire quote; however, I am going to break it
down into shorter snippets in order to elaborate its important
message. But before I do that, I offer this lament: How can people
ignore the following aphorism to the point of not even considering
its important lesson?
The first sentence of this important Warren Buffett quote
establishes its message: "We will continue to ignore political and
economic forecasts which are an expensive distraction for many
investors and businessmen." With his first sentence, Buffett is
telling us that he considers politics and economic forecasts an
In other words
, he is in effect imploring us, as will become more evident later,
to focus precisely on what we own, rather than generalities that
may or may not impact us in the long run.
The point I am attempting to make here is a simple one.
Routinely, I talk to many people who can tell me in precise detail
not only what the politicians in the United States are arguing
about, but also what's going on in politics in other nations all
over the world. They get this information from the daily bombarding
of negative and scary headlines offered by the mass media. Yet
ironically, if I asked them questions about their precise holdings
they cannot answer them. For example, if I asked them whether the
companies they own had a good quarterly earnings report, or how
many of their companies raised their dividends or announced stock
buybacks et cetera, they usually have no clue.
In other words, I believe investors obsess about things that
although scary, do not have a direct long-term impact on their
specific portfolios, but only their short-term attitudes about
them. The next line in the Buffett quote speaks to my point:
Thirty years ago, no one could have foreseen the huge
expansion of the Vietnam War, wage and price controls, two oil
shocks, the resignation of a president, the dissolution of the
Soviet Union, a one-day drop in the Dow of 508 points, or
treasury bill yields fluctuating between 2.8% and 17.4%.
What these important words tell us is that with investing, there
is always something to worry about, keep in mind these words were
written in 1994.
However, perhaps the most important lesson that this, my
favorite Buffett quote, can teach us is found in the next phrase as
But surprise: None of these blockbuster events may even the
slightest dent in Ben Graham's investment principles. Nor did
they render unsound the negotiated purchases of fine businesses
at sensible prices.
Here Buffett is telling us that the prospects and rewards of
owning good businesses are often independent of the general
political and economic environment we find ourselves in. He is also
speaking to the importance of investing in good businesses at sound
valuations. Finally, we believe he is telling us that it's more
important for us to focus precisely on what we own, because this is
where our true long-term rewards or losses will come from.
The final three sentences in this profound Buffett advice are
most relevant to the purpose of this article:
Imagine the cost to us, if we had let a fear of unknowns cause
us to defer or alter the deployment of capital. Indeed, we have
usually made our best purchases when apprehensions about some
macro event were at a peak. Fear is the foe of the faddist, but
the friend of the fundamentalist.
Once again, I believe Buffett is advising us to focus on our
precise holdings and their unique fundamental strengths, and worry
less about what's going on in more general terms. An old Wall
Street adage summarizes my point: "Wall Street climbs a wall of
worry." Of course the most important lesson here is not to let fear
overcome reason. As promised, what follows is the Buffett quote in
We will continue to ignore political and economic forecasts
which are an expensive distraction for many investors and
businessmen. Thirty years ago, no one could have foreseen the
huge expansion of the Vietnam War, wage and price controls, two
oil shocks, the resignation of a president, the dissolution of
the Soviet Union, a one-day drop in the Dow of 508 points, or
treasury bill yields fluctuating between 2.8% and 17.4%. But
surprise: None of these blockbuster events made even the
slightest dent in Ben Graham's investment principles. Nor did
they render unsound the negotiated purchases of fine businesses
at sensible prices. Imagine the cost to us, if we had let a fear
of unknowns cause us to defer or alter the deployment of capital.
Indeed, we have usually made our best purchases when
apprehensions about some macro event were at a peak. Fear is the
foe of the faddist, but the friend of the fundamentalist."
A Few Real-World Examples of Buffett's Wisdom
What comes next are four real-life examples looked at through
the lens of our
research tool. Admittedly these four selections are hand-picked,
because the theme of this article relates to focusing on precisely
what you own and carefully researching them before you buy them.
Our first two examples will look at what we consider to be pure
unadulterated growth stocks. Our third and fourth example will look
at two blue-chip dividend growth stocks.
Two Powerful Growth Stocks Unaffected by the Great
Our first example is Cognizant Technology Solutions (
). "Headquartered in Teaneck, New Jersey, Cognizant is a leading
provider of information technology, consulting, and business
process outsourcing services, dedicated to helping the world's
leading companies build stronger businesses ..."
The focal point of the following graph is the plotting of each
year's earnings since calendar year 2004 as represented by the
orange line with white triangles. Notice how during the great
recession this well-managed company, with no debt on the balance
sheet, generated powerful earnings advances in spite of the
economic crisis. Furthermore, also consider that the significant
drop in stock price from 2007 to 2008 of approximately $48 per
share to a low of approximately $14 a share was unjustified based
on operating results. Perhaps even more importantly, notice how the
stock price had recovered to a high of over $80 a share by spring
of 2011. Finally, we need to ask ourselves if the current price
drop based on the recent level of panic in the marketplace is also
Cognizant Technologies Inc.
Powerful Performance Right Through the Recession
The performance results associated with the above graph
illustrate how powerful the rewards can be when the focus is on the
specific business results of the company instead of on general
economic conditions. The total annualized rate of return for this
non-dividend paying growth stock was in excess of 25% per annum at
a time when the general market produced very weak results.
Apple Inc. (
Our second example looks at one of today's most highly
recognized growth stocks, Apple Inc. Thanks to the significant
innovations that this company has developed in recent years, its
earnings growth has been nothing short of spectacular.
Nevertheless, even with this outstanding operating performance,
Apple's stock price was more than cut in half during the great
recession. Of course, the subsequent recovery in the stock price
has also been nothing short of outstanding.
Strong Recession Resistant Performance Results
The associated performance results for AAPL since calendar year
2004 are truly remarkable. And, as this article is designed to
point out, the more than 59% compounded rate of return that Apple
generated for shareholders was achieved independent of the economic
or political environment that prevailed during this time.
Two Blue-Chip Dividend Growth Stocks Unaffected by the
McDonald's Corp. (
When looking at dividend growth stocks like our first example,
McDonald's Corp., the focus on the orange earnings line is still
very important. However, the light blue shaded area on the
following graph depicts dividends paid out of earnings. What is
clear from the graph is how McDonald's stock price tracked its
consistent earnings growth record of over 17% per annum. The
dividend growth investor can still face day-to-day stock price
volatility, but the advantage of carefully selected dividend growth
stocks is the consistent reward from the increasing dividend.
At the bottom of the McDonald's chart, we can see that the
dividend increased from $0.55 per share to an estimated $2.49 per
share for calendar year 2011. Since dividend growth investors tend
to be long-term owners focused on dividends, they were rewarded
even during the great recession of 2008 by the growing dividend
representing an annual increase in pay.
With the performance results associated with the above graph, we
find that McDonald's was an exceptional investment prior to and
during the great recession of 2008. As stated above, the most
important attribute to focus on here is the rapidly growing
dividend record of this recession resistant company.
A Growing Dividend Every Year
Our fourth and final example looks at Johnson & Johnson (
), a company whose AAA credit rating is currently even higher than
the US government's, at least according to one rating agency. Once
again we see an example of a very consistent earnings growth rate
through the recession. However, the recession did cause its
earnings growth rate to slow, but not fall. This graph also shows
that JNJ has typically commanded a premium price earnings ratio
relative to its earnings growth. However, since the great recession
of 2008 this extremely high-quality company now trades at a
discount to its earnings justified valuation (the orange line).
Shareholders Get a Dividend Increase Every Year
As was the case with McDonald's, when looking at the associated
performance results with the above
, we once again see an example in JNJ where it was able to raise
the dividend every year since calendar year 2004. Although the
growth rate was not as fast as we saw with McDonald's, the current
yield approaching 4%, thanks to its current low valuation,
represents an intriguing purchase opportunity. Possibly for the
first time ever, Johnson & Johnson offers investors a starting
dividend yield that is more than they can earn on a 30-year
treasury bond. It's also important to mention that a high starting
valuation was the major contributing factor to Johnson &
Johnson's modest returns.
This article is about casting a light of reason on the
longer-term perspective in contrast to what is typically an
emotionally charged attitude about short-term volatility. It is
understandably human nature to judge the performance of our
portfolios based primarily on their closing stock price for any
given day, week, month, or even quarter. The point we're trying to
make here is that it is not the most important factor, unless you
were actually planning to sell on the day you measure it.
Otherwise, the intrinsic value derived from the operating results
that your companies generate is, beyond a shadow of a doubt, more
important than price volatility.
Part of the problem lies in the complexity that most investors
face when attempting to evaluate their specific portfolios beyond
price alone. The media only speaks to generalities about the stock
market, the economy or politics. Therefore, the everyday investor
can only judge their holdings, outside of stock price, against the
backdrop of what is generally happening. On the other hand, there
are ways that investors could organize the information they receive
to focus more on their actual specific holdings. By doing this,
they could keep track of their earnings and dividend records, as
well as other important news relating specifically to their
Buffett's timeless quote, along with the four examples cited in
this article, provide prima facie evidence that supports our
thesis. Leave the broader economic issues to all the pundits who
relish the opportunity to predict the unpredictable. Regarding your
own financial futures, place your attention on what you actually
own and focus specifically on the performances of the businesses
behind your investments. There is no place in investing for
allowing emotions to interfere with sound judgments. If others are
selling because they're afraid, you can ignore that on the basis of
the confidence you have in what you actually own. I will summarize
and conclude this article with another related Buffett quote:
If we find a company we like, the level of the market will not
really impact our decisions. We will decide company by company.
We spend essentially no time thinking about macroeconomic
factors. In other words, if someone handed us a prediction by the
most revered intellectual on the planet, with figures for
unemployment or interest rates, or whatever it might be for the
next two years, we would not pay any attention to it. We simply
try to focus on businesses that we think we understand and where
we like the price and management.
Long CTSH, AAPL, MCD and JNJ.
The opinions in this document are for informational and
educational purposes only and should not be construed as a
recommendation to buy or sell the stocks mentioned or to solicit
transactions or clients. Past performance of the companies
discussed may not continue and the companies may not achieve the
earnings growth as predicted. The information in this document is
believed to be accurate, but under no circumstances should a
person act upon the information contained within. We do not
recommend that anyone act upon any investment information without
first consulting an investment advisor as to the suitability of
such investments for his specific situation.
The Different Between Single Sector And Country