What drives investments returns?

What drives investment returns?

Here is a piece from another good communicator at Dimensional – one I have met (and he’s as thoroughly entertaining as he is decent). Weston Wellington (what a great name!) penned this piece for Dimensional and I have permission to share it with you, I think it provides some useful insights. I hope you agree. As ever, there are American references, but if we are looking after your portfolio, you will recall that we invest globally and that the US market makes up about half of the world stock market by valuations. Over to Weston…

A recent news item reported that Frederick Smith intended to step down as Chairman and Chief Executive Officer of FedEx Corp., the largest air freight firm in the world.

FedEx for a Mr Smith…

As a Yale undergraduate in 1965, Smith wrote a term paper for his economics course outlining an overnight air delivery service for urgently needed items such as medicines or computer parts. His professor was not much impressed with the paper, but after a stint in the Air Force, Smith sought to put his classroom idea into practice. He founded Federal Express (now FedEx) in 1971, and one evening in April 1973, 14 Dassault Falcon jets took off from Memphis airport with 186 packages destined for 25 cities.

In retrospect, it was not an auspicious time to launch a new venture requiring expensive aircraft consuming large quantities of jet fuel. Oil prices rose sharply later that year following the Arab states’ oil embargo, and the US economy fell into a deep recession. Most airlines struggled during the 1970s, and Federal Express was no exception.

But Smith’s idea found favour with customers, and 49 years after its initial deliveries, the firm is a global colossus with over 650 aircraft, including 42 Boeing 777s—each of which can fly more cargo than 100 Falcons. Although it took over two years to turn its first profit, FedEx became the first start-up in American history to generate over $1 billion in revenue in less than 10 years without relying on mergers or acquisitions. The journey has proved rewarding for investors as well—100 shares purchased at the initial offering price of $24 in 1978 has mushroomed to 3,200 shares worth over $718,000 as of May 31, 2022.*

Fred Smith’s idea is just one example of ingenuity that humans have exhibited for centuries. Sticks and stones led to hammers and spears, the wheel and axle, the steam engine, and eventually semiconductors and jet aircraft. The invention of writing made it possible to store and hand down information from one generation to the next, enabling ingenuity to compound into an ever-increasing body of knowledge. Although we often associate innovation with clever new technology, some remarkable developments have required little more than astute powers of observation. The curse of smallpox, for example, has afflicted humans with death or disfigurement for thousands of years. English doctor Edward Jenner noticed that milkmaids who had previously experienced cowpox did not catch smallpox, and in 1796, he took material from a milkmaid’s cowpox sore and inoculated James Phipps, the nine-year-old son of his gardener. Later exposed to the virus, Phipps never developed smallpox, and Jenner published a treatise on vaccination in 1801. Smallpox vaccines gradually eliminated the disease in countries around the world, and the last known case was reported in Somalia in 1977.

Where do returns come from?

ONE INNOVATION PAVES THE WAY FOR OTHERS

  • Charles Lindbergh took off from Long Island for his historic transatlantic flight to Paris on May 20, 1927. That same day, J. Willard Marriott opened a nine-stool lunch counter serving cold A&W root beer in Washington, D.C. Ten years later he began to supply box lunches to airlines flying from nearby Hoover airport and 20 years later opened the world’s first motor hotel in Arlington, Virginia. Today, Marriott is the world’s leading travel firm, with over 8,000 hotel properties in 139 countries.
  • The now-ubiquitous microwave oven can trace its roots to a happy accident. While working on radar equipment in 1945 for Massachusetts-based Raytheon, electronics engineer Percy Spencer noticed that the chocolate bar in his pocket had suddenly melted. His curiosity led to the introduction of commercial-grade water-cooled microwave ovens in 1947 costing thousands and ultimately to countertop units available today for $99.
  • Frustrated by lengthy delays associated with loading and unloading cargo ships, trucking firm owner Malcolm McLean launched a shipping service in 1956 using standardized steel containers of his own design. Met with great scepticism when first introduced, his idea for theftproof stackable cargo boxes eventually transformed the global shipping industry—and world trade—by slashing dockside loading costs over 90%.
  • On June 26, 1974, cashier Sharon Buchanan inaugurated the era of barcode inventory tracking when she scanned a pack of Juicy Fruit gum bearing a Universal Product Code at Marsh Supermarket in Troy, Ohio. Barcode scanners eliminated the drudgery and inevitable mistakes associated with manual entry by checkout clerks and provided store managers with powerful tools to track sales trends. As retailers such as Home Depot, Ross Stores, and Walmart expanded throughout the country in recent decades, barcode technology played a key role in matching inventory with local preferences at each location.
  • In March 2022, a 20-year-old woman born with a small and misshapen right ear received a 3D-printed ear implant made from her own cells and shaped to precisely match her other ear. Although experimental, the procedure represented a significant advance in tissue engineering and could eventually lead to artificial organs such as lungs or kidneys.

THE BENEFITS OF INNOVATION ARE WIDELY DISPERSED

The benefits of innovation are widely dispersed throughout the economy, often in unpredictable ways. Apple Inc. became one of the world’s most valuable companies based on its clever marriage of the computer and the telephone; both iPhone users and Apple shareholders reaped substantial rewards.

On the other hand, suppose your fairy godmother had told you in 1935, at the dawn of commercial air travel, that this tiny sector of the economy would eventually become a gigantic industry with millions of passengers flying every year—including some flying from breakfast in New York to Los Angeles for dinner. What would your prediction be for industry pioneers such as TWA or Pan American? Most likely, bountiful prosperity and rewarding stock market performance. The millions of passengers materialized. The profits did not. Both firms went bankrupt. So innovation itself does not ensure prosperity in every case.

That’s why it makes sense to diversify. Investors are often tempted to focus their attention on firms that appear poised to benefit from innovation. But it’s difficult to predict which ideas will prove successful, and even if we could, it’s unclear which firms will benefit and to what extent. Software giant Microsoft has been a big winner for investors, with the share value soaring more than 100-fold over the 30-year period ending May 31, 2022. Discount retailer Ross Stores proved even more rewarding, as the stock price multiplied over 189 times during the same period. One firm developed powerful computer technology and the other applied it.

Civilization is a history of innovation—curious minds seeking to improve upon existing ways of meeting mankind’s wants and needs. Public securities markets are just one example of such creativity, and they have a history of rewarding investors for the capital they supply to fund such innovation. But a significant fraction of the wealth created in public equity markets typically comes from only a small number of firms; therefore, we believe owning a broad universe of stocks is the most effective way to participate in the rewards of ingenuity and innovation, wherever and whenever it takes place.

Footnotes

*Stock split information sourced from FedEx investor relations website. Stock price information provided by Bloomberg. This is not taking into account cash dividends or any reinvestment.

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

What drives investments returns?2023-12-01T12:12:44+00:00

You’ve Been Trumped

You’ve Been Trumped

When I ask most people when they wish to retire, they tend to say “65” some say earlier than that, but certainly most say 65. So whatever one thinks of the recent election in the United States, it is worth remembering that clearly the a new top job posed no obvious concerns for either Hilary Clinton (69) and Donald Trump (70) the latter will now replace Ronald Reagan as the oldest US President elected (who was 69 in 1981 at the time). Mr Obama, for the record turned 55 in August and so would only just have qualified for the new pension freedoms here in the UK.

The unease about Mr Trump is largely due to the rather reckless and aggressive things he said as a candidate. Naturally many of these have been taken at face value and it is hard to see how he would make a worthy world leader given his apparent lack of self-control and overly inflated ego. Indeed his understanding of “hate” and “harassment” must surely be out of whack. His own words before and since the election delivered in a tone precisely the opposite to that of the actors at a New York theatre, who respectfully offered their legitimate concerns to Mr Pence, yet he took this as an affront and has repeatedly demanded an apology, something that he has not offered himself to anyone for any of his rants. However, sadly, he will be the 45th President, assuming the 70-year-old can live with the stress and legal challenges until January. He is arguably one of the least suitable people to be President, but of course history reveals a lengthy list of similar psychopathic leaders.

The Great Con Trick

Mr Trump has estimated wealth of over $3bn yet seems to have persuaded the majority of key voters that he is anti-establishment. Yet this is a man who has only once elected finally settled a fraud case about his “University” – essentially proving that justice in America is for those with cash and who can make problems disappear. If ever there was an example of the 1% “elite” getting their way and deluding the masses, this must surely be it. Perhaps the Hamilton thing was simply his way of trying to distract people from yet another example of his utter hypocrisy.

Swallowing Camels

Talking of delusional, many of his voters were conservative evangelical Christians (some not all), who by any measure must fall foul of straining a gnat to swallow a camel, turning considerably more cheek and “blind eye”, perhaps due to some sense that he represents “family values” (ironic given his background) but by which is meant… there’s one way to do this thing called life.

A Deep Sense of Inadequacy

His credentials in business are somewhat questionable, having made a fortune and lost one, with six of his businesses declared bankrupt (Chapter 11) between 1991 and 2009, all of which came about from over-borrowing. He invariably claims that business isn’t personal, though excels at telling anyone how personally talented he is. In essence Mr Trump already had a fortune and then borrowed money as a landlord to make a larger one. His high-rise Trump Tower buildings presumably provide any psychotherapist with ample material.

Pandora’s Box?

Naturally, I do not know Mr Trump personally, so I am not in a strong position to assess the information we have about him any differently from anyone else. He does not appear to be a man able to remain calm in a crisis, indeed he merely stirs and promotes phobias of those who seem to need little prompting, perhaps due to ignorance or genuinely miserable lives that need to blame anyone and anything that’s different… and I am, like others, concerned that his election “normalizes” extreme views of a very unpleasant nature.

It’s possible that he might be a decisive President and able to get things through both Congress and the Senate, now that they are “rigged” in his favour, much as they have clearly been working against the interests of Mr Obama.  His stated aims are alarming, he has surrounded himself with people who appear to also struggle with inflated egos and at this stage it is hard to see who will provide the wise counsel that he will certainly need.

Of course, quite why people voted as they did, for something different or just someone they thought was tough on TV I shall leave to the pundits to decipher. We will calmly review investments in light of information as it materializes.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

You’ve Been Trumped2023-12-01T12:18:59+00:00

Money and Power

Solomons-financial-advisor-wimbledon-blogger

Money and Power

Perhaps my age is showing, but it is only day 6 of the new year and I am already fed up with the election campaign. I ought to be celebrating our democracy and the opportunity to hear reasoned arguments, however inevitably we seem stuck in a cycle of who will tax or cut most, the prospect of genuine change and improvement for all seems rather unlikely with the inevitable tension around money and power. Here Lies Love NT

In a more reflective moment, I remind myself that this is not a dictatorship and we at least get to vote and I don’t really think we are at the mercy of a despot who has anger issues and a twitching finger poised over an end-all button. This isn’t the case for millions of “voters” around the world who are marched off to vote for egomaniacs. This in mind, a relatively new musical to arrive via New York at the National Theatre “Here Lies Love” is based on a 2010 concept album of the same name, which gives musicals a nightclub injection. If you think that a nightclub is exclusively for the “young” perhaps think agains as, the creators Fatboy Slim (Norman Cook) is 51 and David Byrne is 62. The production has the flavour of community theatre, with the execution of high-end night club. A moving stage and audience, all combine to great effect and an entertaining, immersive experience.

Imelda Marcos

This is the story of Imelda Marcos, her rise and fall from power. Byrne and Cook wanted to explore what makes powerful people behave the way they do. I’m not so sure that this was explored terribly well, whilst displaying a delusional, drugged up Imelda, she isn’t portrayed that badly – a little bit too vanilla in Manilla – little about her excessive flamboyancy and penchant for hundreds of shoes. The story is chronological, revealing the fragility of her marriage, her inability to cope with her rags to riches story and a familar narcissism of Heads of State that seem to believe that they “give their all to their people”.

The Price of Democracy

There was little in the musical that gave me reason to believe such behaviour was understood or how to spot it in others and take precautionary action…so no tips for our elections. The world seems to have done little during the period of martial law and  assassination of the opposition including the shooting of Benigno Aquino on the steps of his ill-advised return flight to Manilla on 21 August 1983 (age 50) which you may remember. In the Philippines, the Marcos regime was eventually cast out by a peaceful protest, following a corrupt election (February 1986) against Aquino’s widow following which the public simply decided enough was enough. Marcos and his family took US advice and support then fled to Hawaii along with 24 suitcases of gold bullion and jewellery. Sadly for Imelda this took precedent over her 2,700 pairs of shoes. It is estimated that Marcos stole over $10billion from the country, much was invested into various family related businesses and Swiss accounts. The Swiss have so far returned about $684 million. So for me, this musical, whilst being entertaining does little to understand how and why power corrupts so absolutely. Indeed one might argue that the catchy tunes, flashing lights distract from the real story… but then, perhaps that’s the point.

Dominic Thomas

Money and Power2023-12-01T12:39:50+00:00
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