Everyday millions of people go on Amazon and buy things, this is changing the retail world and some ways it is good, it other ways it has challenges. Shira Ovide wrote a column in Bloomberg called Amazon’s domination is blocked by a delivery truck. Amazon digital world dominance is meeting the physical reality of packing, sorting and delivering those orders.

Those distribution orders cost Amazon $18.5 billion or 12.3% of its revenues are spent on sorting packages, transporting them and handling the shipping costs. In 2012 the number was 8%. This is a company which has an operating margin of 2.4%.

Part of the costs is Amazon has a program where independent merchants including Nike  sell through Amazon. The program allows the merchants to store their inventory in Amazon’s warehouses. The good news is half the orders of Amazon are coming from independent sellers. The downsize is not all independent sellers have the ability of Nike’s just in time production and sales ability.

It is expected Amazon will continue to rely on FedEx, UPS and US Postal Service but no is discounting Amazon may want to do more in house with its own fleet of trucks, planes and warehouses. In theory those companies could become subsidiaries of Amazon or lose volume shipments. (change is everywhere).

Amazon’s zeal to win the war to customer’s doors is also a reminder that success in the technology industry often depends on mastering the rather dull things (operations). Technology is often seen as the imagination of the human, but success has more to do with the nuts and bolts.

Linking to dividend paying stocks, as an investor you expect the company you own is really good at the execution of its products and services. The execution or delivery aspect allows for continuing repeat customers and as long as they are not looking for alternatives, profits should be made and dividends paid.

There are more questions than answers, till the next time – to raising questions.

South Africa is a beautiful country but it is governed horribly. Unfortunately the President, similar to other President’s for life, seem to think the government’s money is their money. In South Africa, the President is Jacob Zuma and for whatever reasons he allowed the Gupta family as business partners, often inserting the Gupta family company in between the government to collect fees. The companies do not add any value, they are meant to collect fees, take a percentage from the collection and pass the rest to the government – the term is state capture. To do this, while individuals can do it and in some countries (in one countries in South east Asia, the family was called 10% – whatever your revenues in the country are 10% go to the governing family), but more often the consulting companies are involved. The consulting companies are the blue chip names such as KPMG, McKinsey and others who should have known better or refused the business.

In South Africa, which has many scandals, McKinsey inserted the Gupta family company in the state owned electricity company Eskom and without making the electricity company better (by any sense of the word) it was designed to take fees from electricity bills and send it to the Gupta brothers company and the consulting company. McKinsey will payback about $100 million, no word on whether the Gupta’s pay anything back or keep collecting. However when one partners of the company is the President’s son, perhaps the President is very slow to react.

Linking to dividend paying stocks, while every company would love to be involved in these types of deals, collecting fees for doing nothing particularly utility companies, they are illegal. In business, companies are offered deals and sometimes what is more important is what do your turn down, rather that accept? As a profitable company does it go after the short term fees or the long term? As an small investor you are hoping the long term fees, but companies are run by people who sometimes do stupid things.

There are more questions than answers, till the next time – to raising questions.

In the northeast and north of Washington, DC one of the expectations in the next couple of months is to see ice. While few of us wish to see it on the road or power lines, have you ever thought about ice? A number of years while walking through an art exhibition pictures of ice were seen in their beauty and glory. Later, while walking through a field after a snow storm, the beauty of the wind and sun and colors of the ice were more appreciated. It was with those thoughts the book Ice by Pauline Couture published by McArthur & Company, Toronto, 2004 was read. One of nature’s abiding mysteries is when the disordered molecules that make up liquid water are exposed to a certain temperature, some kind of signal whips them into shape. The molecules form millions and billions and trillions of pristine hexagonal crystals gripping each other. Despite our vast knowledge we still do not know why this happens.

More than 75% of the earth is water and 60% of humans is water and without water we cannot survive. The fact that 75% of the earth is water is good, the bad news is 98% of it is salt water. We live off 2% of the water in the earth and 75% of the 2% is found in the glaciers in the Antarctica and Greenland. Given we humans pollute our rivers and streams very few are clean and the rivers with the most runoff have the lowest populations, the areas with the fewest runoff from lakes and streams has the highest population.

In the grocery stores, many people read the makeup of the food, in the 1800’s when Frobisher was trying to find a passage above Canada to get to the Far East, his ships left with 84 tons of beer. People would complain about water, but beer would last and equally important it was a dark, heavy nutrient rich brew full of B vitamins and carbohydrates. The beer helped prevent scurvy (a little known fact about the Pilgrims to Plymouth Rock is one of the reasons they stopped there was they had run out of beer and need to grow grain to brew more. Think about the movies and beer stories – maybe there are not as outrageous as your might have thought about them).

If you drink Vodka, you likely have seen glacier water or ice for a better drink. People go to the glaciers coming down from Greenland, chip off the ice, bring it to shore to melt the ice and have clean tasting water.

Linking to dividend paying stocks, reading about ice and water it is hard not to be conscious of the matter we use water and how we have mistreated the waterways. Other most of us are not likely to change overnight, it does bring up issues of can we do better? and can out companies which we invest in do better? The answer is yes, but one can also see potential investment opportunities with clean water.

There are more questions than answers, till the next time – to raising questions.

A few weeks ago, the Chief National Economic Advisor to President Trump suggest the tax breaks would offer middle class Americans a tax cut of $1,000 which they could renovate their kitchen or buy a new car. The reality is $1,000 will not do that but $10,000 could. Ideally after your debts are paid, you have savings, it is still possible to do something with $10,000 and financial advisors can offer more opinions what to do with it than $1,000. For $1,000 if you are not offered an index fund, then you should say you need to consult with your spouse or delay the decision.

However for $10,000 there are options to choose and you will have a better understanding of the advise you are given. You will be able to determine how much fees you are being charged? what does the advisor think of you and your abilities to generate another $10,000? are you being steered towards short or long term situations?

Linking to dividend paying stocks, with these types of companies there is a long term consideration for the idea is to look to profitable stocks or companies with near monopoly like conditions to continually earn income and over time the stock prices go higher. The prices may not go drastically higher this year, but over time the stock price trades at a higher price earnings multiple which sends up the stock price. In this fashion you receive income, preserve and strengthen your capital which are good things.

There are more questions than answers, till the next time – to raising questions.

 

The company that changed vacuum cleaning, the British company Dyson has decided to produced an electric car. A column by Eric Reguly notes it is not as hard as it used to be. If you consider the average combustion engine vehicle it has 20,000 different parts which need to operate well, the electric car has 2,000 which on the surface makes it easier. Mr. Reguly compared the Tesla and Dyson.

To start with money or capital is needed, Mr. Dyson announced he and the company would invest $2 billion in the operation and 400 engineers are working on the project. Mr. Musk of Tesla has used the public offering, selling shares to raise over $10 billion and has spent most of it. With taxpayers, while most billionaires and regular taxpayers complain about high taxes, companies such as Tesla has used every tax incentive, subsidy, credits, rebates, and federal, state and local tax rebates it can to the tune of $4.9 billion. When the government offers rebates for people to put solar panels on their homes, Mr. Musk’s Solar City which is the US largest provider of panels has received the rebates and other tax credits. (They may have been brought in to encourage people to go green, but Mr. Musk’s companies capture a healthy share of those rebates). In addition, when Mr. Musk decided to locate his battery company production near Reno, Nevada the company received many state and local tax breaks. At the moment, Tesla has an edge although with Brexit coming to the UK, maybe the British government with throw tax credits to Dyson.

Electric cars conceptually are fairly simple affairs for they have 2,000 parts with the electric motor is basically an enlarged version of the one in the washing machine. The complicated stuff is the software for electric cars are rolling computers. The question for Dyson is the engineers he hired while they are good at vacuum cleaners, are they also great at vehicles? At the moment, Tesla has an edge.

One of the final aspects to making vehicles is selling them, if you are a Dyson vacuum cleaner fan will you buy a Dyson vehicle? Is the brand building the same or different? Tesla has Solar City panels and the vehicles, it would appear Tesla has an edge.

Linking to dividend paying stocks, in every industry there are barriers to entry, if Dyson can produce an vehicle to be sold then the barriers to entry into the auto companies falls drastically. This means the auto companies have to compete on price and prices should fall which is good for consumers, not so great for manufacturers. Ideally you are looking to invest in a win for the consumer and a win for the manufacturers who do not compete on price, thus maintaining profit margins.

There are more questions than answers, till the next time – to raising questions.

The running shoe and apparel company Nike has been the number one running shoe company for a long time, Sarah Halzack writing for Bloomberg News asks has Nike lost some of its magic? At the end of September, Nike announced its North American sales had lost 3% of sales because of gross margins declined as more people shop in off-price sales.

All companies have a gross margin and if the image or brand they are projecting appeals to the general public, the public is willing to pay the extra cost of the merchandise. For Nike, fewer people are willing to pay full price or they are looking for the specials which means gross margins fall. Recently market research firm NPD Group reported Adidas outsold the Nike Jordan line.

Nike sells 55% of its shoes outside the US and in China sales were up 12%. The Nike brand is considered to be very strong, Nike’s online sales from its website was up 19% and from the Nike stores were up 5%.

The consensus is Nike is still in control of its narrative and world-building in the shopping experience for it has a rare asset. Nike has everyman appeal but also seen as an aspirational, high-end halo. The comparison is Apple.

Nike’s plan is to speed up the innovation pipeline to bring more fresh styles.

Linking to dividend paying stocks, unless there is a monopoly or monopoly like conditions, companies will be doing well until they begin to hit a roadblock of the public’s change. Change is wonderful until it is not.

There are more questions than answers, till the next time – to raising questions.

Lately there has been a number of studies, led by Hendrik Bessembinder of Arizona State University which says 4% of the publicly traded stocks accounted for all of the net wealth of the stock market since 1926. A mere 30 stocks account for 30% of the net wealth generated by the stock market and 50 stocks account for 40% of the net wealth. The number one company on the list is Apple, Amazon is 14th, other companies are Exxon Mobil, Facebook, Visa, Alphabet (Google), Microsoft and Berkshire Hathaway. It stands to reason if your investments do not include these stocks, your portfolio has not done as well.

In a recent article by Barry Rithhotz writing for Bloomberg News asks what should you do? One solution is to buy the index, however you will own the big winners and you will own the mediocre companies to. Another approach is to be selective and try to buy the winners.

Each approach has its plus and minuses. If you own the stocks and they are doing very well, do you take profits or let it ride? Another issue is each of the successful stocks on their way up had large downward swings of 50% or more, would you have kept them? Owning GM stock was a star until it went 2009. The important takeaway is finding the very best companies is a difficult thing to do.

Linking to dividend paying stocks, eventually the best performers pay dividends because the first rule should be to invest in profitable stocks for the idea is not to lose money. One can always add to your portfolio either through dividend reinvestment into the company or using the dividends to buy the best companies you can. Another choice is to ensure you have a fund similar to the SPDR Technology Select Sector (this is from State Street). The fund invests in 73 of the largest tech companies which have multiple names among the wealth creators list.

There are more questions than answers, till the next time – to raising questions.

Warren Buffett through the Berkshire Hathaway Group has been consistently one of the best investors in the stock market for many years. With success comes opportunity to learn from him and duplicate the success for you. In the stock market there are multiple methods to come to decision to buy and sell stock and when you find the correct formula for you then it likely will be a combination of more than one investor. A number of years ago, Mary Buffett wrote a book called Buffettology published by Rawson Associates, NY, 1997 in which she outlines the process or techniques which Mr. Buffett uses.

9. Where to look for Excellent Businesses

There are essentially 3 types of toll companies that produce excellent results:

1. Businesses that make products that wear out fast or are used up quickly, that have brand name appeal or if a merchant does not carry it, sales suffer
2. businesses that provide a repetitive service manufacturers must use to persuade the public to buy their products
3. businesses that provide repetitive consumer services that people and business are consistently in need of.

As you begin to look at what companies really do and how price sensitive they are, you will see many options for companies making money every year and you task is to break them down to what ones work for you.

10.  Management

In as much as the people are very important, if the business is really good as long as management does not screw up, then you have a stock worth investing in. The trick is to find honest hardworking people whose job is to profitability allocate capital, keep the return on investment as high as possible, and to think of shareholders when they have no investment opportunity at the moment.

Linking to dividend paying stocks, the book is full of details of how to do but the idea is to build the discipline in the decision making process to look at expected return on investments, what are the alternatives and use the power of compounding. Then your decisions are good decisions.

There are more questions than answers, till the next time – to raising questions.

 

Warren Buffett through the Berkshire Hathaway Group has been consistently one of the best investors in the stock market for many years. With success comes opportunity to learn from him and duplicate the success for you. In the stock market there are multiple methods to come to decision to buy and sell stock and when you find the correct formula for you then it likely will be a combination of more than one investor. A number of years ago, Mary Buffett wrote a book called Buffettology published by Rawson Associates, NY, 1997 in which she outlines the process or techniques which Mr. Buffett uses.

6. Determining What Kind of Business You Want to Earn

What are the characteristics of the businesses that you would want to own? Everyone has a different idea and that is what makes the economy, this is good. If you go into a store for a bargain, is everything on sale or is  a bargain to you? Hopefully you said no, maybe many things but not everything. The next decision is when do you sell? How do you know you bought a company that will not work on for you, even though the price is good for? Warren’s answer is the theory of an expanding intrinsic value. The theory is over the long term, if a company has an expanding value – higher earnings every year, profitable, can reinvest in the company, the price of the stock will go higher and you will get the return you are expecting. Time is the friend of a great business and a curse to the mediocre. A mediocre business rarely will be anything besides a mediocre business. A great business only gets better over time.

7. How to determine what is mediocre and what is a great business.

In Warren’s investing, there are two types of businesses – commodity type or consumer monopoly. A commodity business is a business where price is the single most important motivation factor for the consumer’s buy decision. In a commodity type business, the low cost provider win. The lower the costs to produce, the higher the profit margins, but profit margins will fall when someone can produce for less.

Identifying a Commodity type business

low profit margins – competition will mean prices are set lower.

low returns on equity – in 1997 the average return of equity was 12%, if it is less, then it is a

absence of any brand name loyalty

presence of multiple producers

existence of substantial excess production capacity in the industry  – think base metals

erratic profits

profitability almost entirely dependent upon management’s abilities to efficiently utilize tangible assets

8. How to Identify the Excellent Business

1. Does the business have an identifiable consumer monopoly?
2. Are the earnings of the company strong and showing an upward trend?
3. Is the company conservatively financed?
4. Does the business consistently earn a high rate of return on shareholders’ equity?
5. Does the business get to retain its earnings?
6. How much does the business have to spend on maintaining current operations?
7. Is the company free to reinvest retained earnings in new business opportunities, expansion of operations, or share repurchases?
8. Is the company fee to adjust prices to inflation
9. Will the value added by retained earnings increase the market value of the company?

Linking to dividend paying stocks, one of the keys to excellent businesses is the moat and the ability to raise prices for inflation. The classic example is electric utilities and the regulatory body, 99% of the time they allow for increases. After identifying the industry the challenge is to pick the best alternative in the industry.

There are more questions than answers, till the next time – to raising questions.