Two words to start the day: Grace Groner.
Three years ago, Grace Groner's death made headlines when it was revealed that she left behind a $7 million estate donation to Lake Forest College, despite displaying no outward signs of material wealth to her peers (she was a secretary at Abbott Labs for 30+ years, and lived in a small little cottage). The key to her fortune? In 1935, she bought three $60 shares of Abbott Laboratories (ABT) for a total of $180 (that would be the equivalent of investing about $3,000 in today's dollars). Groner reinvested the dividends for most of her seven decades owning the company, and began to use some of the dividends to fund vacations and small donations later in her life.
When this story first hit the news waves three years ago, the popular reaction was not as positive as you might guess. Most of the comments I read in reaction to news of Groner's fortune were some variation of "She had no husband! She had no kids! Of course it was easy for her to save!" or "She lived in a small house and never put that wealth to good use!" or "Who the heck can let something compound at 15% for 70 years?" The thing is, you do not have to read the investment story of someone's life and come to the conclusion that it is valueless if you cannot replicate it exactly for yourself. Rather, it can have value if there is just one element of someone else's strategy that you can co-opt as your own to fit your own personal values, opportunity costs, temperament, and objective.
And here is the part I love about Groner's story: she is an extreme example of the benefits associated with buying high-quality assets and then going about life. One of the bedrock assumptions of finance is this: a 9% return is automatically better than an 8% return. A 5% return is automatically better than a 3% return. And so on. As you can probably already tell, I do not subscribe to that view because almost all of the financial advice out there ignores the question of "how" you create the wealth.
A lot of times, I like to point out how advantageous it is to own an excellent company for a long period of time. Johnson & Johnson (JNJ) grew earnings by 11% annually over the past decade. McDonald's (MCD) grew earnings by 12.5% annually over the past 10 years. Royal Dutch Shell (RDS.B) grew earnings by 9.5% annually over the past decade. Coca-Cola (KO) grew earnings by 9.0% annually over the past 10 years. Procter & Gamble (PG) grew earnings by 9.0% annually over the past decade.
Usually, when I mention this, the conversation turns to whether or not this outperforms other strategies. But what this discussion misses is an often overlooked point: the ease with which those 8-12% returns are accomplished. When you acquire ownership shares of a company like Colgate-Palmolive (CL), the point is not that you are automatically going to get richer at a faster pace than your neighbor every year. Rather, the appeal is how easy the process is:
- You look around you and find a company you understand that makes a profit, and has been making a profit for most of your life. A company that has been selling dish soap profitably since the late 1800s is not a bad place to start (the company has been paying uninterrupted dividends since 1895).
- You determine an appropriate price to pay to acquire shares.
- Once you make that initial investment, the process becomes incredibly passive. You spend a couple hours each year reading the financial statement to make sure the business is in order, and with a company like Colgate-Palmolive that has been raising the dividend every year since 1964, you can be reasonably assured that your initial check to purchase shares will be giving you more and more annual dividend income, even though you do not have to do anything. It's a cool way to go about life because all the energy is upfront. You have to come up with the initial capital, you have to do proper research to find the excellent company, and if you do it right, the rewards pile up year after year without the need to provide much additional effort beyond basic monitoring of the company's underlying health.
Incidentally, this is why I have great respect for those who follow indexing strategies. They know themselves well enough to know that they do not want to worry about valuing specific companies, and they can accumulate long-term wealth by focusing on their savings rate rather than the trials and tribulations of the individual companies that exist in the stock market. The key is finding that blend between the returns you expect and the amount of effort you want to expend as it matches your general passion for investing.
That is why I cringe a little bit every time I hear someone say "McDonald's crossed $100. I think I'm going to take a little bit off the top" or "Johnson & Johnson has gone up 24% since its recent low-nobody ever went broke taking a profit, right?" The reason I do not embrace that attitude is because there are not that many companies out there that can offer near-guaranteed 8-12% annual returns over time without much effort. Charlie Munger is on to something when he says there is something special about the companies that you "just know" will increase their intrinsic value year after year.
There is nothing "wrong" with selling a company once its exceeds fair value. Heck, that is the bedrock foundation of Benjamin Graham's life work. But you are giving something up when you sell an overvalued blue-chip stock. I have written a couple articles on Seeking Alpha explaining why I would not buy Colgate-Palmolive right now. But if I already owned the stock (especially in a taxable account), you better believe I'd continue to hold it at these prices. There have only been two years since 1996 when Colgate-Palmolive did not increase its normalized earnings and cash flow per share. Dividends increased every year over that period (and every year dating back to 1964). The company has over two dozen products generating $100 million in annual sales. The company has been profitable through WWI, WWII, The Cold War, 9/11, you name it. Really, someone would give up ownership of that kind of business because its P/E is a bit above its historical average and the stock price might lag earnings growth for a couple years? Durable profits like that are hard to come by. That is why, when it comes to a lot of blue-chip stocks right now, I encourage investors to "respect" the hold.