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Why Stocks Are Your Best Bet... and more
I came across a sobering statistic the other day: 38% of American households believe that owning stocks is too risky.
I sometimes forget that other people aren’t as obsessed with stocks and investing as I am. They don’t enjoy diving into financial statements to calculate free cash flows or poring over earnings reports and conference call transcripts.
In other words, they have a life.
So, while FinTwit argues over the relative merits of ETFs and SPACs, a lot of people still need to be convinced to invest their money at all. To them, stocks are risky.
Understandable. But untrue.
In fact, doing the conventionally “safe” thing — leaving money to collect dust in the bank — jeopardizes long-term wealth. You can’t save your way to riches.
Investing in excellent companies, especially ones growing profits and paying dividends, is the surest route to a better financial future.
Don’t take my word for it. Listen to Mando:
Simply put, nothing creates wealth like the stock market.
Just don’t expect an entirely smooth ride.
Historically, the American stock market delivers about 10% annual returns. That’s way better than bonds, high-interest savings accounts, or stuffing cash under mattresses.
But, along the way, there will be plenty of ups and downs. I promise.
Some years feature giddy results straight out of the stratosphere, while others are a dispiriting slog through corrections, recessions, and bear markets. Average it all together, though, and you’re left with those sweet 10% returns.
Tom Lewis, former CEO of Realty Income, described it best:
“The American stock market is similar to watching a person walk up the stairs with a yo-yo. People focus on the yo-yo going up and down, while the real story is the consistent movement of the person up the stairs.”
Or, for the visual thinkers:
As long as you do your research and buy good companies at a fair (or better) valuation, stocks are not lottery tickets. They’re little pieces of an actual business that allow you to share in the profits for as long as you continue to hold them.
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Buffett & Berkshire
[Ed: I didn’t intend for this newsletter to become The Warren Buffett Show, so I will do my best to confine my embarrassing fandom to this once-weekly section.]
It didn’t take Warren Buffett long to find an investment opportunity that excited him.
After Buffett lamented the lack of value in today’s market in his annual letter, Berkshire Hathaway revealed a new $5 billion stake in Occidental Petroleum on Friday evening.
Berkshire bought 91 million shares of the Texas-based oil giant last week, at prices ranging from $43 to $56.
So, why Occidental Petroleum and why now?
Buffett told CNBC: “I read every word [of the company’s February 25 earnings call] and said this is exactly what I would be doing.”
“We started buying on Monday and we bought all we could.”
Two more big reasons for this purchase:
(1) The price of oil has soared due to inflation and the Russian invasion of Ukraine. Crude oil touched $130 per barrel on Sunday night and some analysts think it could rise as high as $180-200 during the summer travel season.
Any oil company, even one that has been on the rocks like Occidental, can get right in a hurry under these market conditions. Case in point: $OXY shares were up 45% last week, even before news broke of Berkshire’s investment.
(2) Buffett has a history with Occidental Petroleum. One of the Oracle’s trademark moves is to “loan” money to a company in need via the purchase of preferred stock that comes attached with additional perks.
So, when Oxy needed $10 billion to buy Anadarko in 2019, Berkshire rode to the rescue. Buffett brokered a deal to buy 100,000 preferred shares of $OXY that yield 8% annually and give Berkshire the future option to acquire 83 million common shares at $59.62 a piece.
At the time, activist investor Carl Icahn said that Berkshire “took [Occidental] to the cleaners” and “the Buffett deal was like taking candy from a baby”.
But, as the price of oil crashed in 2020, the outlook was decidedly more negative.
At the 2020 Berkshire Hathaway shareholder meeting, Buffett struck a downbeat note about his Occidental Petroleum investment. “If you’re an Oxy shareholder, or any shareholder in any oil-producing company, you’ll join me in having made a mistake so far in terms of where oil prices went. Who knows where they go in the future?”
So far, at least, they’ve gone up. Way up.
This has allowed Occidental Petroleum to pay down debt, raise its dividend, and authorize $3 billion for share repurchases. 2022 also looks to be a big year for Oxy’s free cash flow.
After a busy week of buying, Berkshire now owns approximately 9% of Occidental Petroleum. If Buffett chooses to exercise those common stock warrants in the years ahead, Berkshire’s ownership of the oil giant could balloon to 17%.
And, with shares of $OXY dropping 1.3% on Monday, he might not be done yet…
Meme of the Week
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.