If you watch the news, the first headline tends to be fear or something – natural disaster, political, health, family concern. It is there because we all have fears, for we are human, but can we understand them? In the book Risk – The Science and Politics of Fear by Dan Gardner published by M&S Toronto, 2008 the answer is yes we can understand them.

Mr. Gardner points out Fear has two minds – natural selection and mutation Natural selection favors traits that help an organism survive and reproduce, while slowly weeding out those traits that hinder our survival and reproduction.

Mutation is genetic mutation which institutionalizes the natural selection. The line between what is positive and negative is never clear, with the classic example of sickle cell anemia . The positive is it boosts the child’s resistance to malaria. The negative is if the child has the DNA from both parents, they are likely to die before adolescence.

Our brain develops over the years based on the survival aspect is the Law of Similarity. Appearance equals reality or you may have the saying it is walks like a duck and quacks like a duck, it is a duck. This evolves into 2 systems of thought: System One is the intuitive, quick, and emotional. System 2 is the calculating, slow and rational. Mr. Gardner uses the terms Gut and Head. You like said or heard someone say I have a Gut Feeling which means I have a vague sense that something is true but it is hard to explain. The second expression you have likely heard is Use your Head – stop and think about it before acting.

The interesting and complex aspect is the two systems work semi-independently of each other. The two systems overlap which can be a great thing. We do something such as the 10,000 hours theory and we become good at it. We use both systems. The negative side is to move the public to an action or inaction, advertisers focus on one system or another.

Linking to dividend paying stocks, one of the offerings of a mutual fund is called a Balanced Fund and similar to balance we need in our lives. In general, the world most of us live in has never been better to live in despite of ongoing concerns. Think about the good things in life – receiving a dividend and it growing on a regular basis. Investing is about managing risk and lowering the risk is focus of buying profitable companies.

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

Although as investors we all want more, there are different methods to arrive or strive for more – the classic examples are growth and value investing. Growth are those stocks which have a great product or service and the world keeps discovering it, for these companies most of the money the company makes is reinvested in attaining more growth. If the company is growing, then the stock price typically trades at a premium or higher multiples than other companies because of the basic supply and demand curve. Many technology stocks are considered growth stocks. In the industrial category, where there are higher barriers to entry, markets are steady and it is still possible to raise prices to keep a good margin these companies would be considered value companies. Given there is plenty of choice on the markets, there are lots of other choices.

John Reese wrote about value investing and noted investors tend to exaggerate the attractiveness of some stocks, often at their expense. And it is only a matter of time until the shift occurs.

Columbia University professor Kent Daniel recently published a study of the analysis of stock prices as they relate to book value. He found the average large-cap value stock’s price to book ratio is half the average large-cap growth stock. The difference is even higher for small-cap stocks. Since 1959, the average value stock’s price to book ratio has been a third less than the average growth stock. The research was published for MarketWatch.

What to do with the information?

Ben Graham believed a stock selling at or below its book value was a bargain. (if the company went bankrupt sold off its assets, the investor still makes money).

Joseph Piotroski, professor of accounting at Stanford looks at the book value as it relates to the share price, keying on stocks that end up in the top 20%.

John Neff a former Vangard Windsor fund manager for 30 years used low Price/Earnings or PE Ratios to look for undervalued stocks. Mr. Neff would start with stocks with low P/E Ratios that were half what the market average was at any given time. Next he would look for companies that had steady growth in earnings per share and solid dividends. Mr. Neff would measure total return – the EPS growth plus the dividend yield divided by the P/E ratio.  The next aspect was compared the total return to the market average or industry average and pick the best ones.

Mr. Reese of Validea Capital believes 3 stocks are worth looking at Penske Auto, B Riley Financial and CVS Health.

Linking to dividend paying stocks, the great thing about dividend stocks if the price goes higher you can receive capital gains, if it stays flat you receive an dividend or income or yield for holding the stock. If the market goes down, because the companies are profitable, they bounce back before the growth stocks. In the stock market, there are many choices for dividend companies and as you do your homework you narrow the field to pick the companies that you can easily follow.

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

 

 

 

 

The best performing stock of the past decade has been Netflix, since 2008 the stock is up 5,384%, it closed in early October at near $200. To stay at is growth rate the stock would have to move to $10,660, will it? Well no one knows, however the gains it saw will likely not be repeated because it the US, 50% of the people who have internet have Netflix. Will the other 50% sign up, not likely, will some yes. Shira Ovide of Bloomberg recently examined Netflix and noted Netflix has been available for $9.99 a month and recently raised its price to $10.99 a month. If the subscriber base stays stable, the extra dollar will mean an extra $600 million in revenue or about 5% of the company’s expected revenue in 2017.

The company is expected to continue to spend billions to license or purchase entertainment programming or there is an expectation many will continue to subscribe. If the number shrinks, then Netflix has to increase its non US subscriber base in Brazil, India and China. At the moment, outside the US the company is not making money.

Linking to dividend paying stocks, while Netflix is not a dividend payer it is one of the FAANG stocks which is likely in most portfolios – either index or mutual funds because it has been such a good performing stock. Will it continue to be an excellent stock to own, likely if the shows which people love and watch are easily found on Netflix.

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

 

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.