Thursday, December 09, 2004


Colgate Polmolive announced a major restructuring a couple of days ago and the stock has soared in value. The Colgate and Proctor and Gamble stock prices have followed virtually the same path until a couple of years ago when PG got ahead. Since 1970, PG is up 3000% and until recently CL was only up 2500%; it is now up about 2700%!

At first glance, these these returns are not especially good. PG is a thirty bagger (thirty times your investment) in 35 years. This works out to about 9.5% tax deferred return. However both companies have consistently paid an increasing dividend. My rough guess is that had one reinvested the dividends for all these years the compounded annual returns would have been better than 16%! If you make 16% on your money for thirty-five years, you will be surprised at how much money you have. One thousand dollars would have become $260,000.00 with the owner paying only the tax on the dividend.

For some time, I have been writing that a sector rotation is in the works. I have been saying that it is time to accumulate what I call the "big, dumb, and ugly" US stocks. In a very similar time back in 1995 to 1999, CL and PG out-performed the market. These big stocks are not glamorous. However, when interest rates start to rise and consumers think twice about borrowing money to buy a car or a house, they will continue to buy Colgate toothpaste and Polmolive dishwashing liquid. These stocks will do well in a difficult market. Even after the recent jump, I like CL. Buy this big relatively safe company with confidence. This is the kind of stock that you can put 5 to 7% of your money in and sleep at night.

I am frustrated that several readers have aggressively purchased SIRI without balancing these with other stronger recommendations. SIRI is a stock that I have suggested again and again as being over-priced. I have said the company has huge potential but that the price is so high that it is very risky. Yes, I have expressed my happiness at having purchased shares at $2.08 and that I intend to hold these shares long-term. However, after a 350% increase, I do not have a full position in this stock and it only represents about 2% of my portfolio.

Don't get me wrong, I am thankful to those who have followed any recommendation that I have made. Yesterday a reader reported he has quick gains of 7% or more in GE and CAL and profits of over $45,000 in GOOG. Another reader recently purchased PEP and another NSC. I am sure there are many others that I do not know about. However, there is an allure to a stock with a deceptively low nominal price like SIRI. It trades so many shares because there are so many shares. It is in the news; it is a"hot" stock. I hope you will re-read my blog on Gresham's Law and apply the logic about bad money driving out the good and equate it to stocks. The smart money hoards the good stocks and trades the weak stocks like crazy. If you have not studied portfolio theory and if you do not have a successful track record in the market, please allow me to help you.

I am reminded of a large position I built in Oakwood homes in the late 80's. After the news was very bad, over a period of time, the stock traded down to about $5 per share. It stayed there for about a year. I started buying shares as fast as I could. The stock was out of the news and so thinly traded that it was hard to buy. It took a long time but I eventually purchased about 30,000 shares. When the stock took off, it exploded to the upside. When it quickly hit $13, the company offered more shares to build a new factory. The company could not keep up with the demand for the product and the stock continued to soar for the next several years. I made several times my investment when I sold way too soon. Within a few more years the stock was up 25 times my original investment. The stock was constantly in the news. It was actively traded and then over the next several years it went spiraling down into bankruptcy. As I recall, the company was eventually taken over by Warren Buffet. Coincidentally, Winnebago (WGO) which is a similar company is currently selling at a long-term high.

One point is that buying stocks that are "hot" is risky. You can make a lot quickly or lose a lot quickly. I prefer to put most of my money in "cold" stocks and then hold on until they become "hot". The hardest thing in the world to guess is when is it the time to sell a "hot" stock. It is a nice problem to have if you bought the stock cold and it is now up 4 times or more than what you paid (a home run or 4 bagger). It is often very hard to hold on until you have 10 times or more.

Back when GOOG was coming public, the news stayed consistently bad. The stock was eventually offered at $85 which was well below the original expected price of $125. After the stock soared, the analyst have come on board and many recommend the stock. However, even now, the news is far more negative than SIRI. Google has an already proven product that is growing like wildfire. GOOG is already bringing in billions in revenue. For those of you who do not like my recommendation of buying the "big, dumb and uglies", buy GOOG before buying SIRI. I am confident in GOOG but I know I am a speculator in SIRI.

Speaking of News

NSC is in the news because the railroads do not have enough cars and engines to haul all the coal. Business should be strong for several years to come.

The Associated Press says that Europeans have discovered the weak dollar. They are traveling to the US and spending money. Good news for those who own property but bad news for those who rent. Rents are expected to rise in particular in resort areas. If you know of someone who would like to own 10% of a beach property, tell them to contact me now, the price is about to increase again.

IBM employees in Research Triangle will retain their jobs after the PC division is sold to Lenovo. Buy IBM with confidence.

Money management firms including TROW, AC, BEN, and JNS are being strongly recommended by firms such as Merrill Lynch.

One highly respected analyst has been pounding the table in regard to Apple Computer. He has been absolutely right so far. AAPL has made a big run but recently pulled back. The analyst says it is a buying opportunity. His key point is that those who have bought i-pods like them so much that they are now buying Macintosh PC's.


There are many who doubt that George Bush will be able to get SSN reform through the republican controlled congress. NOT ME! A major change is in the works. The plans are SSN to replace the funds it needs to pay new retires with borrowed funds. Younger retires will put some of their funds into investment accounts. These funds will not be available to pay the new retires but the participants in the investment accounts will not be owed SSN. The concept is a bit like a reverse mortgage on a house. The borrowed money will be paid back by a reduction in future liabilities.

This is an amazing story. I believe it is the Presidents top priority. The state of the union address will be made about the third week of January. Earlier in this blog, I mentioned that Merrill is pounding the table in regard to TROW, BEN, AC and JNS. These investment funds are expected to benefit from the SSN reform. All I know is that it appears that the government of the US is likely to facilitate the borrowing of funds from the SSN to be used to purchase stocks. Will this lead to higher interest rates and higher stock prices? Stay tuned and stay fully invested.