ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Thursday, January 2, 1997 TAG: 9701020033
SECTION: EDITORIAL PAGE: A11 EDITION: METRO
COLUMN: RAY L. GARLAND
SOURCE: RAY L. GARLAND
THE DAYS of new resolution having arrived, let us make our annual visit to the one subject in which most people are interested, the making and keeping of money. By way of disclaimer, which might seem more like a disqualifier, let me confess I am no stock-picker. But in retrospect it does seem absurdly simple.
As the third child of a small-town druggist, I absorbed the awesome power of Coca-Cola with my ABCs. Several years back, legendary investor Warren Buffett gave his reason for buying lots of Coke stock. They make a simple product, he said, and know how to market it superbly well through a worldwide franchise. In other words, it would cost you far more than the total value of Coca-Cola stock to create what the company already owns; ergo, Coke must be a great buy.
Even though a share of Coke now sells for almost 40 times its annual earnings at $54 and pays a dividend of less than 1 percent, the price has risen almost 50 percent in 1996 alone. Even more amazing, every dollar invested in Coke the day it was brought back into the Dow-Jones Average on March 12, 1987, is worth more than $3,000 today!
Had my family never done anything more complicated in the past 50 years than take whatever it could save to buy and hold Coke shares, it would now be rich beyond the dreams of avarice. Alas, it never owned a share and has no plans to buy any. Why? Because it doesn't like a dividend of 1 percent, which is a stupid way to look at value.
If you think an empire built on carbonated water is too fizzy, what about stodgy General Electric? With GE you get an astonishing diversity in a single stock: basic industry, high-tech, aviation, consumer appliances, banking and popular entertainment - a veritable one-company mutual fund. One of the original Dow stocks May 26, 1896, though twice dropped for brief periods early on, GE has gained 22,000 percent since being finally and firmly added in 1907. Well, not many of us were around in 1907, so what about 1987?
With a 2-for-1 stock split already approved for 1997, 100 shares bought for less than $10,000 Jan. 1, 1987, will shortly represent 800 shares likely to be worth more than $40,000. Unlike Coke and some other high-flyers, GE has seldom paid a dividend of less than 2.5 percent, which means the 1997 dividend on your 800 shares amounts to a 16 percent return on your original investment, plus a 300 percent capital gain! Sad to say, I've never owned a share.
Still, for one so prone to ignore his own advice, that conveyed to readers in this annual column holds up pretty well. While not pretending to have predicted a 30 percent rise in the Dow during 1996, I did say this a year ago: "Stock prices will continue to be sustained by two elemental facts. First, the United States is still the world's largest and most dynamic economy. Also, by far the safest and most hospitable to capital. Second, there is a river of gold flowing from personal savings, pension funds, corporate reserves and foreign flight capital that must find a home." That seems as true now as it was then.
So, can the Dow break 7,000 or 8,000 as easily as it did 5,000 or 6,000? I don't know. But I do know that if it does, I won't be along for the ride. I'll still be waiting for the "buying opportunity" passed up in every downdraft since that lulu in '87 when the Dow lost a quarter of its value in a few hours.
Everybody who has bought on "dips" in the past 12 years has been a winner. Assuming, of course, they bought the "right" stocks. Those holding the "wrong" stocks - and these are a majority - didn't fare so well. At the end of November, a respected source said that only 103 stocks out of more than 10,000 listed accounted for the bulk of this year's gains.
So, how do the unrich get rich? Most will say through mutual funds. The problem is, there are so many and so few that consistently outperform the broad market indices. There is, fortunately, a good alternative and that is to buy an index fund like Vanguard's 500 Portfolio. It doesn't pretend to know which stock is going up or down and simply buys all 500 stocks in the S&P 500 in proportion to their share of the total index, which covers almost 70 percent of U.S. market capitalization. Because there is no management as such, Vanguard charges a fee of only one-fifth of 1 percent. Here you have as close to a fair shake as you are likely to find this side of paradise.
Those needing current income may have a problem. With shares in the 500 Portfolio now selling around $70 each, the dividend isn't much above 2 percent. But look on the bright side. Shares bought 30 months ago have advanced 55 percent in value and holders never had to worry about Coke vs. Pepsi - they owned both.
If that portion of Social Security taxes not required to cover current benefits is ever credited to the individual benefit of those now making the payments - for which younger people should be clamoring - an S&P 500 fund would be the perfect place to repose them. In the 15 or so years that a "surplus" will accrue, the total sum invested would exceed $1 trillion. An average, annual growth of only 10 percent, with dividends reinvested, would create trillions in real wealth to be tapped when we really need it.
You must be asking at this point why someone who missed all the good bets should be dishing out advice. Well, there is the other side of the market, missing most of the bad bets by concentrating on more secure bonds and bond funds, taxable and tax-exempt. Returns greater than 10 percent a year are very possible in bonds, but you must learn to anticipate movements in interest rates, buying depressed older bonds when rates on new bonds are high and selling them when rates have fallen.
While current bond rates seem unattractive, I believe we will see still lower rates in 1997. With the federal deficit down, the dollar strong and aging baby boomers having got religion on saving, there seems an ample supply of capital for U.S. markets.
Ray L. Garland is a Roanoke Times columnist.
LENGTH: Long : 101 linesby CNB