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Making Money the Old-Fashioned Way

© Can Stock Photo / stokkete

Years ago, the Wall Street firm of E.F. Hutton advertised “We make money the old-fashioned way. We earn it.” This tag line evoked a world of indepth research into securities and markets, and investment analysis by experienced professionals.

E.F. Hutton disappeared into a series of mergers, and making money the old-fashioned way is increasingly scarce. One popular theory now is that security selection does not matter, only the allocation of money across the different sectors of the market.

Combined with the idea that past patterns of volatility and past returns by sector should dictate what one should own for the future, many modern ‘investment advisors’ pay no attention to individual company stocks or bonds.

It seems to us that owning stock in a failing chain of department stores is a lot different than owning the world’s largest online retailer. A few automakers survived, hundreds did not. Buying a corporate bond for 50 cents on the dollar is a totally different proposition than selling it for 50 cents on the dollar. Owning some of everything is different than being selective.

Our experience says security selection DOES matter.

One of our strategies is to try to find ownership in great companies at decent prices, to buy and hold. Looking for cyclical companies at low points in the cycle is another strategy. And simply seeking bargains anywhere in the investment universe is a third.

This is not easy. Conditions are always uncertain. There are no guarantees. It takes a lot of effort and energy. There is no assurance that the old-fashioned way will make money, as E.F. Hutton claimed.

But we are trying.

Clients, if you would like to talk about this or anything else, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Cars and Trucks, Philosophy and Money: A Research Case Study

© www.canstockphoto.com / Apriori

How do YOU get where you want to go? Transportation. We are invested rather fully in automakers and related companies, so we pay a lot of attention to this vital sector of the economy.

Many companies in the sector are reaping handsome revenues and profits, paying generous dividends, and yet the valuations in the marketplace do not reflect the good results. Some say this is because vehicle sales are at a peak, 17 million units a year, so stock prices reflect a future decline in revenues and profits. Others forecast new sales records ahead for the industry, with rosier outlooks. Who is right?

With 260 million light vehicles in the US fleet, it seemed to us that 17 million, or one-fifteenth of the fleet, was clearly a sustainable annual sales pace. After all, replacing 1/15th of the fleet does not seem excessive.

But we know the story is a little more complicated than that. We wanted to see how annual sales compared to fleet size through recent history. We looked back at annual sales data from Wards Auto and annual fleet size from the U.S. Bureau of Transportation. It turns out that the current rate of about 6% annual-sales-to-fleet ratio is in the middle of the 4 to 8% range that has prevailed over the last 25 years.

Annual sales are made up of two things: changes to the size of the fleet, and replacement for existing vehicles in the fleet. Annual sales equal the change in the fleet plus a replacement factor of 5.5% of the fleet, on average, over the past twenty five years. This means that we are replacing 1/18th of the fleet every year.

We immediately wondered if replacing 1/18th of the fleet makes sense—eighteen years is a long time to replace the whole fleet! But if that replacement rate held steady for many years, the average age of the fleet would not be eighteen years, but only half that—nine years. With the current actual average age at eleven years (Ward’s data), this makes sense.

What does it all mean? When you figure a replacement rate of 5.5% plus a fleet growth rate equal to population growth, or use the average fleet growth rate of 1.2% over the last twenty-five years, you find that annual average sales might be in the 16.5 million to 17.5 million range going forward.

The upshot is that the current sales rate may be near the actual equilibrium pace, with future years coming in higher or lower depending on economic and other factors. We reject the notion that current sales are at an unsustainable peak, while acknowledging they will go up and down.

We know the future rarely follows a straight line from the present, though. Think of the dramatic evolution that the automobile has undergone in our lifetimes: fuel injection, catalytic converters, four wheel drive, air bags, onboard computers… what’s next? The work of understanding the world is never done, and we will always be researching and studying to further our knowledge.


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