Kissin' Don't Last Cookin' Do

There is way to much good material in The Future for Investors by Jeremy Siegel to cover in a single blog article. However, let me give you a taste of his thoughts on investing. The subtitle of the book is, “Why the tired and true triumph over the bold and the new.”

The core message is it isn’t what you buy that makes you rich. It is the price you pay for what you bought. Most people buy a story and then pay too much for growth. Just ask the people who bought Apple last year. That would include me. Last year my wife inherited a modest managed IRA from her father. It contains a pretty good balanced mix of bond funds and individual stocks. I saw a small amount Apple sitting in there and asked the broker, “Why?” He gave me an explanation I didn’t buy, but my wife and I decided to go ahead and this account ride for now. Professor Siegel tracks many examples over the course of the last century where boring sectors beat the latest hot growth stocks of the era. One of the chapters in the book is titled, “Growth is not Return.” How true. China has grown at a faster rate than Brazil, but an investor with a Brazil fund beat the investor with a China fund. The Chinese market has been consistently overvalued, by too much money chasing too few profitable corporations.

The author has discovered the best investments for the long run are not found in the latest sexy trend. They are often found in boring reliable companies producing boring reliable products and paying boring reliable dividends. As we say in West Virginia, “Kissin’ don’t last cookin’ do.” Consider this list of the best investments found in the companies that were a part of the S&P 500 in 1957. Check out those rates of return for the years 1957 to 2003. A paltry $1,000 investment in Phillip Morris at 19.75% would yield a return of $4,626.402!

1)Philip Morris (now Altria) 2)Abbot Labs 3)Bristol-Myers Squibb 4)Tootsie Roll Industries 5)Pfizer 6)Coca Cola 7)Merck 8)PepsiCo 9)Colgate Palmolive 10)Crane 11) H.J. Heinz 12)Wrigley 13)Fortune Brands 14)Kroger 15)Schering Plough 16)Proctor Gamble 17)Hersey Foods 18)Wyeth 19)Royal Dutch Petroleum 20)General Mills

19.75% 16.51% 16.36% 16.11% 16.03% 16.02% 15.90% 16.54% 15.32% 15.14% 14.78% 14.65% 14.55% 14.41% 14.36% 14.26% 14.22% 13.99% 13.64% 13.58%

If you are interested in how to find these undervalued companies, Siegel recommends a simple test first proposed by Peter Lynch, “Find the long term growth rate….add the dividend yield….and divide by the p/e ration. Less than 1.0 is poor; and 1.5 is OK, but what you are really looking for is a 2 or better.” This is essential the inverse of the PEG ratio. Using this measure you would look for PEG ratios less than 0.5. In today’s overheated market, those kinds of bargains are hard to find. In early 2009 during the dark days of the last crash, undervalued quality companies producing good products, good profits, and a steady cash flow were much more common.

Just remember, “Kissin’ don’t last cookin’ do.”

And for heaven's sake, let’s be careful out there today.