Don't Invest in Anything That Eats
I haven't been this popular since I lived slope-side at a ski resort in Colorado. Despite the fact that I was a ski bum living in a studio apartment, Navy, high school, and college buddies traveled great distances to stay with me.
Back then, I had dreams of making a living with Warren Miller. Today, my popularity has to do with puppies. I’m at that age where my offspring are seeking fulfillment in higher education. Between my wife and I, we will soon have four of them asking for great sums of money.
In an effort to defer some of the costs, the idea was to breed our champion Silken Windhound bitch. For those who don’t know — and few do — a Silken Windhound is a miniature Borzoi. A Borzoi is a Russian Wolfhound — they looks regal but are huge, can be vicious, and definitely will eat your cat.
In the early 1970s, Borzois were bred with Whippets and Shetland Sheepdogs to get a smaller, kinder regal-looking beast. They also sell for a pretty penny. So, when we learned that our dog's sister, a grand champion, had 10 puppies, the idea was hatched that we could make $15,000 to $20,000 breeding this dog.
Well, it turns out that Mimi — that’s the dog — had six pups, and one died with a vet bill. That left five. One went to the stud, one to my brother-in-law, and we were keeping one. That left two for sale, with a good deal spent on dog requirements such as whelping boxes and cages, shots, and expensive specialty food.
In the end, maybe we will clear $1,000 to make up for the work. That said, it's not the goal but the journey. Our house has been full of well-wishers and small children looking at puppies. In that dimension, it's been a nice distraction from a bleak winter, but as a moneymaker, the venture has fallen flat.
Was it Will Rogers who said never invest in anything that eats or needs repainting? So it goes.
Buy Dividend Stocks
The most consistent way to make a lot of money is to buy quality stocks on the cheap. And forget about diversity. Vanguard has eight of the top 10 mutual funds, has $5 trillion under management, and is the most crowded trade in history. If everyone owns it, it can’t be undervalued.
You should own six stocks at the most and know everything there is to know about each one. For example, my personal biggest holding is Microsoft (NASDAQ: MSFT):
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The story of MSFT is that it was extremely overvalued in the year 2000. It had a P/E over 100. Then the dot-com crash happened. Bill Gates retired and gave the CEO job to Paul Allen, who was a horrible leader. PCs were overtaken by tablets and phones, and MSFT came out with poor operating systems like Vista.
Then things changed. The company has a new CEO named Satya Nadella, who was in charge of its rapidly growing cloud business. He changed the Office suite to a subscriptions model, continued to grow cloud, consolidated the Xbox business into the dominant platform, monetized LinkedIn, etc.
Its Azule cloud business grew 76% in the third quarter, which was faster than Amazon's Web Services and now represents 29% of the company's revenue.
There is room to grow as well, as latecomer MSFT has 13% market share compared to 52% for Amazon. Most retailers would rather not use their biggest competitor, AMZN, given a choice.
Nadella is the most underrated CEO of our time, perhaps because he is never on MSNBC.
When I bought MSFT, it traded at $29.50 and paid a dividend of $0.23 a quarter. Now it pays $0.46 a quarter. My dividend yield has climbed from around 2.5% to 6.33%.
Though it must be said that its P/E ratio has more than doubled to 44. Obviously, half of the stock gain is due to value expansion. MSFT is no longer super cheap and coming off a 10-year consolidation pattern/coiled spring that ended in 2013.
Still, I fully expect that in five years, MSFT will trade north of $250 a share and pay out somewhere around $4.00 a year in dividends.
I’m not sure you can say that for Apple, Amazon, Facebook, and Google. Apple is now an iPhone company with poor leadership and little innovation. Amazon’s Jeff Bezos is going through a divorce, which could be devastating on the share price depending on his focus and the way the ownership is split. Facebook is falling apart before our eyes, and Google is set up for trust busting.
Microsoft reports earning on January 30th. (If you are thinking of buying, you should wait two weeks after earnings. There is usually some profit taking.)
The upshot is that you shouldn’t invest in anything that eats, but rather buy undervalued companies with high dividends and solid growth. Like this one.
All my best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.
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