It’s a Market of Socks!

photo shows a rainbow of socks clothes-pinned to a line with a sunny sky behind it

Imagine buying a value pack of socks. Unlike your everyday value pack, this one contains 500 pairs of socks, and every single pair is different. Some are ankle-height, some crew. Some black, some brown. Some striped, some filled with pictures of cheese. Some will become your favorite socks ever, and some of them you’ll become embarrassed to own.

All in all, the pack could still turn out to be a good deal, right? But one more thing: you can’t break up the set. If you really wanted to return one pair of the value pack, you’d have to toss all 500 pairs back. Even those favorites!

Things could get hairy. If you ever needed to pull back, and no longer had room for 500 pairs of socks, you’d have to clear house and start from scratch. Discover that one sock had a hole? Live with it, unless you’re ready to pitch the other 999 socks too.

Doesn’t it sound like more fun to only buy the socks that you like best? Socks that you can actually imagine owning? Or socks that may have untapped potential (think of those warm, fuzzy ones you’re glad you got for the depths of winter). And—when you need to get rid of a sock—you’re not losing your whole collection.

Some people do buy stocks that way in effect: indirectly, 500 at a time. But what a tremendous privilege and exciting challenge to pick only those stocks, I mean, socks that you find most worthwhile.

Clients, if you have any sock tips, email or call.

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A Share of What?

© Can Stock Photo / tvirbickis

Some people invest in common stock without even knowing what the company does. To them, a stock is price on a screen that can be bought and sold minute by minute—day-trading, they call it. Those people study price charts, not financial statements.

At the other end of the spectrum, investor Warren Buffett understands that a share of stock is a piece of a business—a share in an enterprise. He once said it would not bother him if they closed the stock market for ten years: he is happy to own percentages of businesses.

We suspect that many of you have an understanding that is somewhere in between these two views. We would like to offer you a little more perspective on what ownership is, and what it means.

Recently, in analyzing a company many of you own, we broke it down to what $1 invested represents. We’ll call it Company X, the leader in its industry, a blue chip company.

$1 invested today, whether you just bought in or paid half that amount some years ago, represents a certain amount of revenues—sales of goods by the company. It also represents a share of income and dividends (cash paid to shareholders).

Each dollar of ownership value in Company X represents 32 cents worth of revenues this year. After expenses, the company’s net income for the year will be between seven and eight cents per dollar of today’s stock value. If the Board of Directors continues to approve quarterly dividends at the recent rate, each dollar of stock value will get close to 3 cents in cash dividends.

For long term owners, this year’s results are of interest but the outlook for the future has a large impact on how the stock price will change. For this reason, we seek to understand the relative value today, but also the potential for the company to reap its share of future growth in the American or global economy—to increase its revenues, income, and dividends.

This work is totally captivating, if you are us. Clients, many of you have told us this is why you hire us—your interests lie elsewhere. They say it takes all kinds to make a world; we’re glad to know your kind. If you’d like to talk about this or anything else, please call or email us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

Renting the Oil Company

© Can Stock Photo Inc. / fredgoldstein

We all seem to know intuitively that rent on a residence covers all the expenses of ownership, plus a profit for the landlord. Hence most people prefer to own their homes rather than pad the landlord’s wealth.

And yet when we buy a gallon of gasoline, we are paying all of the oil company’s expenses plus a profit for their owners. We pay the cost of refining crude oil into gasoline, transporting it to retail locations, or running the store at which we purchase the gasoline. Not to mention the cost of exploring for and pumping the crude oil and shipping it to refineries.

But if we own a piece of the action (in the form of shares of common stock) in an oil company, we indirectly own a share in the oil wells and refineries and transportation and everything else needed to put a gallon of gasoline within our reach. Own or rent? We prefer to own—and by the way, if you prefer to rent, thank you for doing business with our oil company!

We and our clients own phone companies and clothing manufacturers and car makers and raw material producers and major retailers and airlines and nearly every other segment of the economy. From the time we wake up and brush our teeth, put on clothes, go to factories and shops and offices, use energy through the day… we are doing business with ourselves. We are owners, not renters.

It is our opinion that a person who owns no common stock or other business rents everything: the refineries, auto manufacturers, food distributors, trains and planes, communications networks. They are paying rent for everything that goes into their life, without receiving any benefits of ownership.

Rent or Own? You might want to own shares of companies for the very same reason you prefer to own your home. We are available to discuss whether this philosophy fits into your plans and planning—call or write.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.