At the end of 2013, Grinnell College had an endowment of $1.5 billion. Not bad for a student body of 1,700 situated on a 120-acre campus in Iowa. The endowment has reached such a blessed size because the Trustees of the school had done two things intelligently in the 1960s: they bought shares of Berkshire Hathaway, and they made a very large investment in (what was then) the very small tech startup Intel [Grinnell College was the principal capital source for Intel in its formative years].

What I find interesting about the story is this: Even though the Grinnell Trustees were around the most successful compounders of the 20^th century, they couldn’t resist the urge to sell once the investment had grown to be a very large component of the portfolio. If you visit a library and dig up old Grinnell University magazines on the microfilm, you will see them talk about how much they were thankful for Buffett’s leadership (he became a trustee of the school in 1968) for recommending Multimedia stock to the Board and purchasing AVCO’s television station (WDTN) in Dayton for $13 and then helping the school sell the station five years later for $50 million. Buffett’s association with the school led to a quadrupling of the endowment over the course of eight years, if you tally up the effects of the Berkshire stock and Buffett’s recommendations. The Board was also thankful for Bob Noyce, the son of an Iowa minister that founded Intel with Gordon Moore. Grinnell’s magazines and public releases about both Buffett and Noyce spoke glowingly about the two men.

And yet, despite this esteem, the Grinnell Trustees couldn’t resist relinquishing some of the stock in Berkshire and Intel that had appreciated significantly. A third of the Berkshire stock got sold, and the entirety of the Intel stock got sold during the 1970s. To their credit, though, they did put a good chunk of their endowment into the Sequoia Fund, which grew at 14% annually (I hope all of you reading this end up with “mistakes” that compound at 14% per year). Had they held on to their Intel stock alone, they would have had an additional $18 billion in their endowment. Quite a difference between that and the $1.5 billion that they have now. Figuring out the worth of the Berkshire stock is above my pay grade, as they bought and sold Berkshire throughout the years and the Sequoia Fund also had about 30% of its assets in Berkshire over the years, so it would be difficult to measure the accurate effect of Berkshire Hathaway upon Grinnell other than to say that it has been substantial, and would have been even more substantial had Berkshire been purchased and held rather than traded throughout the years.

I bring this up for more than mere storytelling—instead, I mention this to highlight the fact that creating wealth looks very different than preserving wealth. When you preserve wealth, you can funnel assets equally into 100 different sources comprising 1% of your portfolio because slogging forward at a 4-7% rate is perfectly fine because your goals with the money are to: (1) maintain a lifestyle, and (2) modestly increase it at a rate above inflation. When preservation is your goal, you purchase every capital allocation decision in the spirit of “How much can this investment possibly hurt me?” rather than “How much money can this possibly make me?”

When I study people who have made very significant wealth, there is a recurring theme that does show up but gets rarely discussed in the financial media: Concentrated bets are involved at some point, either because someone deliberately made a large bet or because some particular investment kept growing, growing, and growing. My guess as to why this rarely gets discussed is due to: (1) ignorance of the importance of that principal cash-generating machine in one’s wealth story or (2) well-intentioned paternalism that seeks to prevent people from putting years of their labor into one stock that they do not thoroughly understand and then losing it all. Look at people who invested significant sums of their money into GTAT Technologies, only to encounter an eventual bankruptcy: the misery is real and substantial.

I write this because even if you diversify across 20 or 25 stocks initially, there is a good chance that over a stretch of 15+ years something like Nike, Disney, or Visa could come to represent a disproportionate amount of your net worth. If you do decide to sell, it’s important for you to run the numbers ahead of time and figure out what you’re giving up if they continue to grow at 12-15% per year. The Pareto Principle talks about how 80% of the success comes from 20% of the participants in a group. If you have a twenty-stock portfolio that is held for a couple decades, it is likely that around four of them will be responsible for an outsized influence on your personal compounding.

That’s why I often prefer diversification through cash rather than selling—if Becton Dickinson becomes 20% of your portfolio, you can divert your BDX dividends elsewhere and pool your other dividends + surplus cash generated from your labor to water down the effects of Becton Dickinson by investing new money elsewhere. Although there does come a point at which you shift from wealth creation to wealth preservation, the conventional wisdom about diversification, diversification, diversification should incorporate some kind of cautionary word that advises against discarding those excellent compounders.

About this time last year, I talked about Fayez Sarofim for the first time when I referenced his extensive art collection and some of the very interesting personal life that has marked his eight decades in the United States. I was recently reviewing his ten largest holdings registered to Fayez Sarofim & Co., and I am very impressed by the quality and growth characteristics of the portfolio that he has put together.

When I study how he has made his money, it’s one of the best things I’ve ever seen, and that is not praise I give out lightly. This is how he allocates his fund money: 5.9% to Philip Morris International, 5.3% to Apple, 4.6% to ExxonMobil, 4.3% to Coca-Cola, 3.7% to Chevron, 2.9% to Nestle, 2.8% to Johnson & Johnson, 2.8% to McDonald’s, 2.6% to ConocoPhillips, and 2.6% to IBM.

That’s it. That’s the magic formula. If you don’t ever visit my site or read any of my writing here again, the construction of a portfolio that looks like that should be the takeaway. I imagine over long periods of time, Mr. Sarofim’s portfolio will trounce the S&P 500 (remember, beating the S&P 500 by two percentage points or three over very long periods of time leads to significant wealth differentials) and better yet, these are the kinds of companies that will keep pumping out significant cash profits in the event that the global economy experiences a prolonged decline.

I was thinking about the difference between ExxonMobil and something like Seadrill after Seadrill announced that it was suspending its dividend payments in response to tough operating conditions caused by lower oil prices. From an operational standpoint, it’s amazing what a difference exists between how the two companies respond to stressful situations.

With oil prices coming down, Seadrill has developed excess rig capacity that have hurt profits such that Seadrill found itself paying $4 per share in dividends while only generating $3 per share in profits. To make matters worse, it has one of the ugliest debt-laden balance sheets I’ve ever seen. It carries $13 billion in debt, and $11.3 billion of it is due within the next five years (that is why the dividend has been suspended–the $1.5 billion in profit can be used to pay down debt obligations without issuing a bunch of new shares at this depressed valuation).

And now, you shouldn’t read this as a criticism of Seadrill as an investment right now. It is entirely possible that the price decline to $15 per share has overshot the poor business performance, and a modest recovery in oil prices could send the price up quite significantly. I’m not saying that lightly—this could be a $40 stock if the price of oil shot up to $110 and stayed there for a couple of years. But the problem? This is not the kind of company that could withstand a prolonged 2009 type of operating environment. If the last recession were to strike again, and last for three years, Seadrill would not survive absent a significant share offering.

The worst-case scenario with Exxon looks much more attractive. Right now, with lower oil prices, Exxon makes $8 per share in profits and pays out $2.76 in dividends. The dividend has been growing 8.5% annually over the past decade, and the present coverage is excellent despite lower oil prices. This is a slightly less than normal operating environment, and Exxon is still retaining almost 70% of every dollar it makes in profit. The year 2009 was probably the worst year in the company’s past three decades, and it still made $3.98 in profits while only paying out $1.66 in dividends. That’s why I consider Exxon to be a bedrock of estate planning—it’s unlike most other commodity companies because it still does so well in terrible conditions. And it also performs well when prices rise because it makes capital investments to grow production by 4%, uses free cash flow to retire 5% of the stock each year, and you also get a dividend payment plus any benefit caused by oil prices that increase over the long-term.

From 2010 through 2013, Seadrill had a dividend yield between 6% and 11%. It caught people’s attention. The problem was that the dividend took up so much of the company’s profits that the only way to grow consisted of: (1) borrowing, (2) issuing new stock, and/or (3) hoping oil prices rise. People look and see how well Exxon’s dividend is covered—and everyone knows it is an excellent business—but it gets ignored practically every day because the starting yield is usually in that 2.5% to 3.0% range.

You can get over this easy dismissal of something like Exxon if you look a few years out to see what your invested capital will be producing once it racks up a few years of dividend growth coupled with reinvestment. If you bought Exxon stock in 2006, you would be receiving around 5.5% to 6.0% annually on the amount you invested simply because you chose to reinvest the dividends and received the higher payouts (and the figure approaches 30% annually once you hold on to the stock for twenty years).

The best thing of all is that something like Exxon can be your endgame. If you own Seadrill, your attitude is not going to be “I’m going to hold on to these shares for 25 years, and use the dividend payments to support me for retirement.” The business model doesn’t invite that kind of reliance. If you own something like Exxon, your life is much easier—you are using the oil giant as the vehicle to build wealth, and then you can rely on it for income support during retirements because its reserves are so vast with only Royal Dutch Shell and Chevron being in the same conversation.

When asked why he stuffs his portfolio with the bluest of the blue-chip stocks, Sarofim said: “They have the flexibility and critical mass to invest in developing countries.” For instance, on Thanksgiving, Coca-Cola teamed with SABMiller and the Gutsche Family to create a giant African bottling operation that will immediately generate $3 billion in sales and be owned 31% by the Gutsche Family, 11% by Coca-Cola, and the rest by SABMiller. When people ask me whether they should invest in third-world countries, and how to do so, this is my vision of what it looks like. You do it through large multinationals that can absorb failure if it happens but augment existing profits if the mission is successful. When you hop on the computer and buy shares of KO, you now have an ownership interest in an African bottling plant.

Someone who signed a contract with the Los Angeles Kings a while back wrote in and asked me how he should invest long-term given his lack of general interest in finance. The answer? I would want to find someone like Fayez Sarofim to invest my assets, given his ability to find excellent companies that make profits in all conditions and couple that with excellent growth profiles as well. Index funds work, too. The point is this: the probabilities of success shoot up sharply when you stop worrying about the latest fads and instead figure out the way to get your hands on big blocks of Exxon, Chevron, Coca-Cola, and Nestle stock. I prefer to do it directly because there are no ongoing fees once you make your initial purchase, but there are other ways to do it. The portfolio Fayez Sarofim built is one of the best I’ve ever seen for someone interested in risk-adjusted total returns that are excellent.

Interesting question came my way from reader Scott:

….But Tim, wouldn’t most investors be better off simply owning index funds instead of trying to pick successful companies themselves?

Scott, I like that question because it cuts to the premise of the site—I write articles for everyday investors, and it is fair to wonder whether it’s all a waste of time and whether low-cost index funds should be pursued.

First of all, I’d like to start by observing the great overlap that exists between the two strategies. If you look at an S&P 500 Index Fund, what are going to be some of the large holdings? ExxonMobil, General Electric, Procter & Gamble, and Johnson & Johnson.

What are the stocks I talk about buying individually? ExxonMobil, General Electric, Procter & Gamble, and Johnson & Johnson. There is a huge overlap between the companies I mention approvingly here, and the companies that pay a critical role in an index such as the S&P 500. That part of the argument is pedantic—okay, I might think that a portfolio should have 3-4% General Electric in it, whereas an investor in an index fund that tracks the S&P 500 Index will end up having $2 out of every $100 invested going into General Electric. That hardly calls for the neener-neener “This strategy is better than that strategy” when we are in agreement on the ingredients but in disagreement on the dosage.

Really, the problem I am trying to solve is this: History has shown that holding a basket of stocks for the long term is the greatest way to get rich in a passive way. If you don’t believe me, google the detailed and well-documented Ibottson & Associates studies that point out how holding stocks absolutely trounce the results you could get from holding bonds, gold, or real estate over the long term.

But it is a strategy that does come with significant strings attached if you are not prepared. Every generation, you will statistically face a drop in the 40-60% range. Every three or four years, you will be looking at a price drop in the 15-25% range. Really, the problem I am trying to help you solve is this: We can see this vehicle (stocks) that deliver returns in the range of 10% annually over long periods of time, but we have to deal with periodic drops of 25-60% or so over the course of a lifetime, and what is the best way to avoid being one of those guys that sets aside $100,000 to invest and then ends up selling a few years later at $65,000?

My answer is this: Understand that the business that exists is something altogether separate from the stock price. If you could gather 100 intelligent people in the financial industry together, and you asked them the question, “Will Coca-Cola, Colgate-Palmolive, Nestle, Johnson & Johnson, and Procter & Gamble still be profitable ten years from now?”—they would all answer that question with an emphatic yes. That’s what I’m trying to get you to do here—focus emphatically on the businesses that will still be profitable over the long-term, and then don’t overpay for the stock (although, if I had to choose, I’d rather overpay for an excellent company that get a “great deal” on a company that could be flirting with bankruptcy five years down the road).

That’s why I often talk about starting a portfolio with beverage and food stocks. Companies like Kraft, Pepsi, Coca-Cola, General Mills, and Dr. Pepper operate with very understandable business models. You can see the dividends marching upward over the decades, sometimes exceptionally so. When the price of the stock of one of those businesses fall by 30% or whatever, it’s easy to walk into Wal-Mart and take a look at the soda aisle. You can see all those different products—Coca-Cola, Diet Coke, Fanta, Sprite, Dasani, VitaminWater, Powerade—that all go towards Coca-Cola’s coffers. The tangibility of that experience, plus the cash you receive, makes it easier to hold than something like an index fund, which for someone like me is more of an abstraction.

The other reason, which I was just touching upon, is this—cash flow. There’s a reason why people tell their kids things like, “Whatever you do, don’t sell that Altria or Philip Morris stock. There’s a reason why companies like AT&T and Conoco Philips are the last stocks to go during lean times.” What does lean times necessarily indicate? Lack of cash. People tend to sell stocks when they have (hopefully temporary) cash flow problems. If Google falls 40%, it’s understandable why someone might get bothered and let the stock go. But if you got 800 shares of Conoco Phillips sending you $584 every ninety days, you’re going to be hesitant to let something sending you $2,300+ per year escape from your life.

From 1928 until 2003, guess which stock that existed over the full course of that time frame had the lowest turnover? It was the old Philip Morris, which now exists in the form of Altria, Philip Morris International, Kraft, and Mondelez. People are reluctant to part with an asset that keeps dispensing cash quarter after quarter, year after year. I usually write about income investing from the point of view that it makes reaching your goals easier to pursue because you don’t have to relinquish owner in order to have money come your way to do something, but there’s a flip side of the coin as well: you are deterred from ever wanting to sell.

Do you think people that own Altria, Reynolds, GlaxoSmithKline, AT&T, Conoco, Royal Dutch Shell, or Total SA rapidly trade in and out of the stock because it goes up 10%, down 15%, or whatever? No, because it’s a lot easier to think like a business owner when you are regularly receiving cash profits that the business makes. It makes the whole experience more tangible. Suddenly, everything becomes real. Index funds have a hard time of doing that.

One of the blessings that comes with the territory of investing in individual companies rather than a widespread basket of stocks like the S&P 500 is that you get to allocate your money to specific companies that are either growing faster than the S&P 500 or selling at a substantial discount to the typical stock in the S&P 500. It’s a style of investing that lets you personally find intelligent places to put your money even when “the average stock” in corporate America does not offer you an attractive entry price.

In the ‘50s and ‘60s, you had IBM outperforming the S&P 500. In the ‘60s and ‘70s, you had the tobacco giants and conglomerate-type businesses of General Electric, United Technologies, ITT, and Procter & Gamble roaring to life. Someone who bought Coca-Cola in the early 1980s has been compounding at 15.5% ever since. Buying Disney and Nike in the 1990s was incredibly intelligent. There is always something intelligent to do.

For someone looking to figure what the intelligent thing to do in November 2014 might be, you can look no further than the oil sector. Did you see what happened to commodity stocks on November 28^th? There is one of those rare times where you can throw darts and buy just about any large-cap in the commodities field, and you’ll be setting yourself up for great long-term returns.

Want an oil company with a high earnings per share growth rate over time? Look at something like Phillips 66. Want a big honkin’ dividend yield? Look at BP and Royal Dutch Shell. Want something that will be raising its dividend for decades, something quite unusual in the extra-cyclical commodities industry? Look to Chevron and Exxon. Want to capture the declines in other commodities beyond just oil? Look to BHP Billiton. This is a very attractive time for long-term investors that don’t mind working their way through the inevitable swings in prices—I mean, Chevron is on the verge of yielding 4%, for heaven’s sake. Where else can you get a 4% yield that will grow in the 8-11% for the lifetime of your holding?

This is one of those amazing opportunities, and I would credit Dr. Jeremy Siegel at Wharton for having the state of mind/framework for recognizing this as an opportunity rather than looking at the price declines as something to lament. Page 7-9 of his book The Future for Investors is one of the most persuasive bits of investment wisdom I’ve ever encountered. Siegel mentions these facts by way of a comparison between Exxon and IBM: From 1950 through 2003, Exxon grew its revenues by 8% annually, grew its dividends by 7% annually, and grew its earnings by 7.5% annually. IBM, meanwhile, delivered much better operational metrics over that period of time: it grew its revenues by 12% annually over that fifty-three year stretch, grew its dividends by 9% annually over that stretch, and grew its annual earnings per share by 11%.

By each of those measures, IBM would appear to be the far superior investment. Yet Exxon delivered 14% annual returns to investors over that time frame while IBM delivered 13.8% annual returns. Why is it that Exxon, which grew its profits and dividends slower than IBM, was able to outperform it over the course of 53 years? The valuation. Oil stocks like Exxon, Chevron, BP, Shell, and Conoco are prone to extended periods of cheapness, and this is where the oil stocks get their ability to outperform.

Professor Siegel puts it well: “A very important reason that valuation matters so much is the reinvestment of dividends. Dividends are a critical factor for driving investor returns. Because Standard Oil’s price was low and its dividend yield much higher, those who bought its stock and reinvested the oil company’s dividends accumulated almost fifteen times the number of shares they started with, while investors in IBM who reinvested their dividends accumulated only three times their original shares. Investors in Exxon had very modest expectations for earnings growth and this kept the price of its shares low, allowing investors to accumulate more shares through the reinvestment of dividends. These extra shares proved to be the margin of victory.”

It is fun getting to see a textbook case scenario unfold in real time, right before our very eyes all over again. Buffett often speaks of how when a stock is cheap, you just know it, and you don’t have to break out the calculator to study its pension assumptions and so on because the clarity of the value is there. I get that vibe from Chevron right now. This $108 price is getting 15-20% undervalued, which is extra-nice given its extraordinary safety (in terms of generating profits over the long term) and excellent growth profile given its planned volume growth in 2016 and 2017. It is paying out $4.28 per share in dividends which has been increasing annually for three decades and still only consumes about a third of the company’s profits in this depressed environment. Exxon tells a similar story, as it now yields over 3%. A lot of people are frustrated that they can’t buy things like Hershey, Nike, and Disney today because they are so pricey compared to current profits. The decline in the prices of oil stocks is welcome news for those with cash to invest and looking for something to do today.

Happy Belated Small Business Owner’s Day! Speaking of which, did any of you see that American Express commercial showing support for American small businesses by playing the Simon & Garfunkel “America” while showing the families of those operating mom-and-pop stores? If you are familiar with Simon & Garfunkel’s work, you might have noticed a little tweak in the lyrics. The commercial played: “Let us be lovers / We’ll marry our fortunes together. / I’ve got some real estate / Here in my bag. It took me four days to hitch-hike from Saginaw. / I’ve come to look for America.”

For those of you that have been fans of Simon & Garfunkel’s music, you probably noticed the fusion of the first verse with the third verse. If American Express had chosen to play the commercial with the original sequence and flow of the song, the commercial would have gone as follows: “Let us be lovers / We’ll marry our fortunes together. / I’ve got some real estate / Here in my bag. / So we bought a pack of cigarettes and Mrs. Wagner pies / And walked off to look for America.”

Isn’t that interesting—companies like PepsiCo do not hesitate to hire rappers like Lil’ Wayne to advertise their products (though they ultimately ended the relationship after Lil Wayne rapped about the slain African-American teenager Emmitt Till)—but American Express finds it necessary to censor out the mentioning of a cigarette purchase from an iconic American soft rock song.

Me, being me, started thinking about the cues moments like these provide for further reflection on tobacco investing. I remember Charlie Munger once saying something to the effect of, “The numbers are the easy part. Anyone can see that. It’s getting the story right that requires much more insight and confidence.” When I look back at pictures of the original Busch Stadium where the St. Louis Cardinals played baseball, there was a giant eagle hawking (ha ha ha) Anheuser Busch’s signature brand Budweiser  and the giant Marlboro Man in the outfield. That was it—those were the big baseball sponsors. Now, you have the ad agency that works for American Express distorting the lyrical flow to engineer a commercially acceptable version that scrubs Simon & Garfunkel’s originality to tug at the heartstrings of the American people in an unblemished way.

Trying to figure out the future for tobacco investments is tricky because success in spite of long-term doom and gloom (for investors) have proven to be a critical part of the investor’s returns. People expect the worst, and profits grow a bit more than expected, and then you have this situation where Altria has compounded at a rate of 19.33% over the past twenty years when you include the Philip Morris International, Kraft, and Mondelez spinoffs. Because the company buys back stock, and raises the prices of its tobacco products at a rate greater than the 3.5% annual volume loss, owners continue to make money. Usually, the dividend is also in the 5% or 6% range, and that amplifies returns for those that reinvest. When volume losses accelerate, and/or price increases of tobacco plus buybacks cannot offset these volume losses, you will encounter severe problems with any tobacco stock you own.

My solution to this dilemma? Buy a large block of Philip Morris International and take the dividends and reinvest them elsewhere each year. This would be especially wise right now, as Philip Morris International trades at 17x earnings while Altria trades at 22-23x earnings. Heck, Philip Morris International offers a 4.6% starting dividend yield while Altria offers a 4.1% dividend yield. This is one of those situations that should never happen—Philip Morris International is still growing its volumes in some countries internationally, and should have a higher earnings per share and dividend per share growth rate as the scope of the international tobacco business is much more vast and favorable than the climate that exists for Altria in the United States.

There is a significant downside that comes with what I recommend—taking Philip Morris International dividends and reinvesting them elsewhere will likely lower your compounding rate unless you take the dividends and do something like buy Visa, Ross Stores, Disney, Becton Dickinson, Nike, or Franklin Resources at fair value.

I read anecdotal accounts of investors reinvesting into more and more shares of Altria, quarter after quarter, reaching a point where 30-50% of their portfolio is in the tobacco giant. I would not be comfortable at all with that kind of reliance. When I wrote recently about how concentrated bets are often part of an investor’s story on the part to mega-wealth, there is no doubt that Altria, Reynolds American, and Philip Morris International have been companies appropriate for that task. The problem is that they come with a long-term wipeout risk—it might be only 5% or 15% depending on how you calculate it—but it’s always there, ready to emerge from the background. Someone who had 30-50% of their wealth in something like Exxon, Nestle, Coca-Cola, or Johnson & Johnson is in a much better situation because the downside risk is more favorable—at worst, you could face a prolonged period of weak growth with those companies.

Anyway, it’s funny where an American Express ad featuring Simon & Garfunkel lyrics can send my mind. The relationship between the enormous cash flows inherent to the tobacco business, and the offsetting political risk of higher taxes and limiting regulations, continues to fascinate me. I think the job of an intelligent portfolio manager is to make sure the price isn’t too steep if he gets the outcome wrong.

Daniel Solin wrote an article in October that has gotten a lot of attention, and you can read it here: “Investors: Researching Stocks Is A Total Waste Of Your Time.” While each peg is probably deserving of its own response, there is one thing in particular I want to discuss—Solin’s argument that “everything is priced into the stock.”

Solin writes: It’s not difficult to understand the reason for this underperformance. We live in a world where information is disseminated almost instantaneously. All the news that could possibly affect the price of publicly traded securities is already known to the millions of traders engaged in buying and selling stocks. And it is immediately incorporated into the price of stocks. The possibility of an individual uncovering something these traders have missed is infinitesimally small.

Even if you concluded, based on your research, that a stock is underpriced, there must be someone on the other side of the trade willing to sell that stock to you. That person or institution has reached the opposite conclusion. Why would you assume you are right and they are wrong?

Let’s work those arguments in reverse order. First, let’s talk about the person that is selling you a particular stock when you place a buy order. There are many reasons why someone may sell a stock. Oftentimes, people invest with a particular goal in mind—a house, a charitable fund, university donation, retirement funds to live off, an education to fund, and so on. Someone’s decision to sell a stock could merely be the arrival of a certain goal, the time to turn a dream into reality. After all, the point of investing isn’t to amass money aimlessly (though I agree there are people out there who get misguided and do become this way), but to turn accumulated capital into a particular purpose. Also, sometimes you just need the money. You lose your job, have an unexpected expense, or whatever, and you withdraw from your stock holdings to pay the bill. There’s all sorts of reasons investments get sold that have nothing to do with commentary on the investment itself.

Also, if someone is selling a stock deliberately for company specific reasons, it doesn’t mean that the investment is bad. What if someone sells Procter & Gamble to buy Visa, believing Visa will compound at 14% while Procter & Gamble will compound at 8%? It’s not that they think P&G is crap; they’ve merely found a better opportunity. If Procter & Gamble is the kind of company that is within your wheelhouse of skills to evaluate, and you are satisfied with a safe 8% long-term return, why would you be upset that someone is getting richer faster as long as you are still marching towards your goals?

I remember a few years ago when I was buying Johnson & Johnson in the $60s. It was literally at the time Warren Buffett was selling. Talk about a heck of a situation—being on the exact opposite side of a trade from my childhood investing hero while I was in the process of making Johnson & Johnson my largest personal investment. Since then, J&J has gone from $60 to over $100, and played a growing dividend along the way. Maybe Buffett used those proceeds to fund the Heinz purchase, and he’ll compound the money at a higher rate. Also, companies that Buffett has discarded through the years have gone along to do quite well—McDonald’s and Disney come to mind—so the fact that Buffett is selling something isn’t proof the company is going to hell. And if Warren Buffett selling a stock isn’t proof that it is bad, why the heck should I worry about Joe Smith hawking shares of Chevron to me at $110?

To address the first part of Solin’s—that information technology has reached a point where all stocks are appropriately priced—ignores the fact that we are all operating on different time horizons. It has reached the point where operating on Wall Street or running a mutual fund has become a twelve to twenty-four month game. Very few people are interested in 5-10 year time horizons anymore, because people read investment news every day and can’t stand the thought of underperforming for a year or more. BP and IBM have underperformed for the entire history of me owning the companies, and I don’t care one iota, because I know BP will experience significant capital appreciation when the lawsuit clears way and I can see IBM’s earnings per share growth rate increase before my very eyes. I care about where those shares will be in the 2020s, and as far as I’m concerned, lower prices in 2014 and 2015 only provide reinvestment opportunity to enhance my compounding rate.

Almost every analyst I’ve ever talked to has agreed with me that BP is a great 5+ year investment. What they don’t know is how the stock will do in the next year or two, as low oil prices and adverse court rulings could make the stock a bad performer from a price perspective in the short-term (though, with the dividend this high, it provides the opportunity to “snack on the hors d’eouvres as John Neff would say, or add to my “bear protector” and “total return accelerator” as Professor Siegel would say). Being able to truly make decisions for the long term—not merely pay lip service to the term, but to actually make decisions with ten-year measuring periods in mind—is the individual investor’s greatest advantage which is rarely discussed. It flies in the face of everything being priced into the stock the heavy traders are usually reacting to short-term movements in the pursuit of making a buck. If you have confidence in your business judgment and the ability to make decisions in 2014 with 2024 in mind, you can move beyond all this pseudo-intellectual flummery and build a badass collection of ownership interests instead.

One of the consequences of truly understanding what it means to invest in common stocks is that you come to appreciate that you are a part owner in the business that you select. Sure, someone with 100 shares of 100 Exxon Mobil won’t be able to show up at headquarters in Irving, Texas and successfully demand changes to the company’s capital investments, but he is one the many captains to whom the Board and management team is ultimately held responsible.

When you realize you are the part owner, the question naturally arises: Is what am I doing here moral?

I’m using Coca-Cola here as an example because it’s frequently pointed out that high consumptions of soda can lead to obesity and diabetes among other problems. I could have easily used Pepsi or Dr. Pepper as an example, McDonald’s with its Big Macs and French fries, and so on.

But for today, we’ll tackle Coca-Cola.

Like many large American firms, and frequently all that we discuss here on the site, Coca-Cola has a diverse set of products. Over five-hundred different brands in fact. When you collect your Coca-Cola dividend check, some of that profit comes from Dasani, Coca-Cola’s signature water product.

Almost every grocery store that I’ve ever visited, I’ve seen both Coca-Cola and Dasani offered. Whichever selection I pick, it goes to Coca-Cola’s coffers just the same (in fact, since Dasani is slightly cheaper for the company to produce, they’d probably enjoy it if a Dasani wave swept the nation).

Ahhh, you see, but most people aren’t selecting Dasani—they are choosing to drink regular Coke (and all its permutations like Chery Coke, Diet Coke, Vanilla Coke, etc.) and Sprite and Fanta and so on.

From there, a few questions arise. The first one: Is everyone who drinks Coca-Cola doing so in an irresponsible manner?

Of course not. Many people are able to drink soda products around the holidays, birthday, big games, and what not, and it is an entirely enjoyable experience, they should be denied that opportunity because some individuals can’t handle soda consumption responsibly?

If someone is drinking ten Cokes per day, is it really Coke’s fault? Every liter or twelve-pack contains the calorie information on it, and a very quick Google search will inform you of the health consequences of every drink. And if Coca-Cola didn’t exist, do you really doubt that Dr. Pepper or Pepsi would serve as their replacement? In that regard, you are blaming Coke for making the superior product.

So really, when someone asks “Is investing in _______ unethical” when it involves food companies, what they are really saying is this: Do you find it morally sound to own something that some people can’t help themselves in using the product to destroy their health, even though the company has fully informed them of the health information regarding the product, many consumers can use these products moderately without ill effect, and the company offers healthier options like Dasani that are more profitable and unquestionably good for you?

In my case, companies like Coca-Cola and McDonald’s don’t bother me morally because I have a strong disdain for the whole “this is why we can’t have nice things” mindset. I’ve seen so many times in my own personal life where a broad freedom to do something existed, someone had an accident or engaged in bad behavior that produced undesirable effects, and then the right was taken away from everybody. I choose not to participate in that.

Additionally, when you look at the companies whose morals we are debating, it’s not isolated to the company in question. Blaming Coca-Cola for someone’s obesity seems somewhat disingenuous: if a magical diary produced the behavior of someone who was obese or diabetic and consumed Coca-Cola, or do you really think Coca-Cola is the only bad habit you’d find in the daily log? If you’re exercising two hours per day on a treadmill at a high intensity, you’re probably not going to be medically obese. And if you’re eating grilled chicken and broccoli as the meals along with your Coke, your life is probably not going to be cut too short. My point is this: Do you really think Coca-Cola exists in isolation as the sole problem for someone who develops severe health problems, or do you think there are other lifestyle choices that of a questionable nature being made as well?

By the way, none of this should be read as an attack on those who suffer from any kind of addiction or are dealing with severe temptation. I understand and fully empathize with the struggle. But at the same point in time, when you walk in McDonald’s, you can choose whether to get a salad or a Big Mac? The salad goes for $5 a pop and makes the company a whole lot more money than a dollar burger, so they’d much prefer that you eat healthy. Trips to McDonald’s and down the aisle of Coca-Cola aisle can be done responsibly because they sell products that are healthy, and if you choose the unhealthy products, you can do so in moderation without harm as long as you have the rest of your life in order. And if you do consume Big Macs and large sodas regularly, both of those companies put you on notice with calorie information of what the consequences of consumption will be. Given my respect for the free will of individuals, and the recognition that healthy options exist and the unhealthy options ought to be handled in moderation, I don’t find a portfolio stuffed with Coca-Cola and McDonald’s to be immoral.

I do not write about IPOs often. As far as I am concerned, there is only one privately traded company in the United States that would engender “must have” status if it became traded on the stock exchange, and that would be Mars Candy (the maker of M&M’s, Snickers, Twix, 3 Musketeers, and a handful of others). Out of all the IPOs in the only past generation or so, the only worthy of truly long-term holds that could not be bought through a similar proxy would be Google, Starbucks, and Visa. It’s not something that I think about all of that often, given the strong wisdom against IPO investing given by Jeremy Siegel and Benjamin Graham on the matter.

In the case of Siegel, the admonition against investing in IPOs is based on the numbers. Siegel argued on page 14 of his book The Future for Investors, “The long-run performance of initial public offerings is dreadful, even if you are lucky enough to get the stock at the initial offering price. From 1968 through 2001, there were only 4 years when the long-term returns on a portfolio of IPOs bought at their offer price beat a comparable small stock index. Returns for investors who bought IPOs once they actually start trading do even worse.”

This is called the growth trap. Siegel writes, “The growth trap seduces investors into overpaying for the very firms and industries that drive innovation and spearhead economic expansion. This relentless pursuit of growth—through buying hot stocks, seeking exciting new technologies, or investing in the fastest-growing countries—dooms investors to poor returns. Our fixation on growth is a snare, enticing us to place our assets in what we think will be the next big thing. But the most innovative companies are rarely the best place for investors. Technological innovation, which is blindly pursued by so many seeking to ‘beat the market’ turns out to be a double-edged sword that spurs economic growth while repeatedly disappointing investors.’”

You can look at something like Microsoft. From 2000 through 2014, the business grew at 12% annually (or more precisely, earnings per share grew at a rate of 12% annually because Microsoft regularly repurchases some of its own stock). And plus, the company paid out a dividend. That sounds like a good growth stock. And yet, investors have only received 4.5% annual returns since then because Microsoft traded at 50x profits back then when its terminal P/E ratio turned out to be something in the 15-20x earnings range. To put Siegel’s “growth trap” into numerical terms, the P/E compression from when a stock goes from 50x profits or 100x profits to 15-20x profits proves to significantly reduce your total returns even when the actual growth of the business is above average.

As an aside—although Microsoft from 2000 to 2014 illustrates the general principle that explains why IPOs do not perform as well as you would expect, the Microsoft IPO in 1986 was actually the most lucrative investments you could have made over the past three decades as the shares have compounded at almost 26% annually from 1986 through 2014 to turn a $20,000 investment into $13,660,000. Here is what Siegel has to say specifically, “Investing in IPOs is much akin to playing the lottery. There will be a few huge winners, such as Microsoft and Intel, but those who regularly invest in IPOs…generally lagged the market by two to three percentage points per year.” Siegel goes on to add that four out of every five IPOs go on to underperform against a small-cap index fund from their IPO date until the time he published The Future For Investors in 2003.

I’ve examined profit-challenged tech companies on this site before, pointing that Twitter doesn’t even have a P/E ratio right now because it is losing money. The current valuation of Facebook stock at $210 billion because Chevron is also valued at $210 billion. Chevron makes $21 billion in profits per year (even in light of lower oil prices) and returns a third of that to shareholders as dividends. Facebook makes $3 billion in profits per year.  Investors are currently paying 70x Facebook’s current profits. That is going to lead to underperformance at some point, when Facebook does what every other tech company (see Microsoft, Apple, Oracle, Intel for examples) does and sees its end-game P/E ratio fall into the 15-20x profit range. Put another way, if Facebook tripled its profits in the next ten years but simultaneously saw its P/E ratio come down to 20x profits, your returns with the stock from 2014 through 2024 would be 0%.

Beyond these academic considerations, Wall Street and the media’s obsession with IPO companies and the technology sector is what inspired me to regard investing as a do-it-yourself investor. When I was in college, and I saw some of my friends take internships with Goldman Sachs and JPMorgan (which heavily recruited at Washington & Lee), I would discuss what they learned from their summer work and all they talked about was the excitement over LinkedIn and Facebook IPOs (plus the speculation about when Twitter would go public) as well as guess whether Apple would beat its quarterly profit estimates. While I do not deny that good stock-market traders exist, I could not personally distinguish between someone who trades Alibaba stock on its IPO day and someone who takes $10,000 to the Casino Queen and puts it all on “red” at the Roulette Wheel.

Fortunately for me, I was able to visit a boutique investing firm that held Coca-Cola shares for decades and all sorts of trade executions that had been permanent holdings in investor’s portfolios dating back to the 1970s. This appealed to me in two days. First, it was understandable. I understand why someone thinks Nestle chocolate and ice cream and milk and cookies will be around and profitable twenty years from now, so they take a chunk of change and initiate an ownership position in the stock. This also appealed to my moral preference for making money—if you buy a stock for $10 and sell it three months later for $15, you are making a profit at the expense of someone else’s misjudgment. That’s not bad, but it’s not fulfilling either.

If, on the other hand, you own Johnson & Johnson stock for thirty years and see a $10,000 investment grow into $984,000, you can be satisfied that the wealth was made through profit growth and dividend payments that are byproducts of delivering products to people who value them (such as Tylenol and Band-Aids). There’s social value in giving people a product they want so bad they are willing to part with a very small part of their own wealth to obtain it. That style of wealth-creation appealed to me (and incidentally, it becomes easier to weather sharp declines in stock market prices because you are naturally geared towards looking at the underlying profit statements to see what the company is doing despite the price swings).

Benjamin Graham also had a nice quip on this shiny object syndrome. He said the following in the 1973 edition of The Intelligent Investor: “The speculative public is incorrigible. It will buy anything, at any price, if there seems to be some action in progress. It will fall for any company identified with “franchising”, computers, electronics, science, technology, or what have you when this particular fashion is raging. Our readers, sensible investors all, are of course above such foolishness.” In addition to this concern about the long-term durability of companies that have an initial public offering, Graham also made the practical argument that many hot IPOs drift lower in prices once the excitement wears off. Heck, even Coca-Cola stock, perhaps the most-hyped IPO in the first half of the 20^th century, saw its share price fall from $40 in 1920 to under $20 in 1921 once the Atlanta soda company lost the spotlight that comes with IPO’ing.

It’s a disconnect that is important to keep in mind. You will never turn on the TV and see analysts oohing and aaahing over Hershey, General Mills, and PepsiCo. Their businesses are highly predictable, and you are almost never going to see something like 25% year-over-year growth with firms like them. The initial hurdle, though, is recognizing that the companies most frequently discussed in the financial media usually aren’t the ones that are the most suitable for long-term investment. When is the last time you ever heard a financial analyst spend a long time talking about Kraft? And yet, buying Dart & Kraft in 1980, sticking around for its renaming to Kraft in 1986, and then holding through the Philip Morris purchase all the way until the Altria spinoff would have compounded your money at 16% annually. And you would have done it by selling cheese and snacks.

Susan Conrad, you get a gold star. When asked to comment on the new proposal to include annuity options in a 401(k) plan, Ms. Conrad said, “All annuities are not created equal, and that concerns me. Our industry is moving towards more transparency, and the introduction of annuities as a plan option could take us in the opposite direction.” Anthony Webb, you get a gold star, too. He added, “They’re not offering an inflation-indexed product, but if you are buying a product for 25-years into the future, you are going to be concerned about inflation.”

The argument in favor including annuities in a 401(k) plan, summarized by the St. Louis Post-Dispatch in this article titled “Regulators Seek to Make 401(k) A Bit More Like A Pension”, is this: “Buying a deferred annuity essentially converts a lump sum into a future stream if income. The Treasury rules envision that, beginning at age 55 or later, a target-date fund could start shifting its bond holdings into annuities. In theory, this would give you the best of both the 401(k) and pension worlds. Your target-date fund would still hold some stocks, so you would participate in the market’s future growth, but it would also promise you a steady income beginning at 65 or some later age.”

If you want to make 401(k)’s more like pensions, you should disable the ability of people to sell any of their assets before reaching a certain age. It still wouldn’t mimic pensions because there is nothing to stop you from selling everything after a 30% drop and putting it into a money market fund, but it would be a step in the right direction because it would force you to keep all of your assets inside the wrapper of a 401(k) so that assets could only be depleted by unwise investment choices rather than actual withdrawals.

The reason why I have a problem with adding annuity options to a 401(k) is that such an option is superficially enticing, but would actually result in a significant amount of lost wealth that would become very significant over long stretches of time. To understand why this would be the case, first think about how annuity companies generate a profit in the first place. They receive a lump sum payment from you—say, $100,000 or so—and they promise to perpetually pay you 3% or 4% of the amount that you invest.

What do they do in turn? They take your money, and invest it in large-cap American stocks, often through vehicles that resemble S&P 500 index funds. When they receive your $100,000, they immediately put it into work in Apple, Exxon, Microsoft, Johnson & Johnson, General Electric, Berkshire Hathaway, Wells Fargo, Procter & Gamble, JPMorgan Chase, Chevron, and so on. The 9-10% expected annual returns from that collection of assets creates a large spread between the 3-4% they have to pay you, and explains their core profit-making mechanism (they also frequently charge fees, but one would hope these would be negligible in a 401(k) offering as the bulk size of a retirement plan often enables the negotiated lower fee arrangements).

Over the course of twenty years, the difference in outcomes become substantial. Someone who hands over $100,000 and collects 4% income payouts each year would receive around $120,000 in future benefits on the investment. Someone who help a basket of large-cap American stocks that earned 9.5% would see $560,000 in wealth get created from his lump sum investment. When someone trades in a stock fund that comes close to resembling the S&P 500 for an annuity that yields 4%, they should keep in mind that the annuity’s profit mechanism is to invest the received funds in the same way that the 401(k) investor was doing before making the switch! The amount of wealth foregone over two or three decades from this single decision could prove mind-boggling; you are taking an axe to your and chopping up your future wealth potential by nearly 70%.

Would annuity investments in a 401(k) be 100% destructive? No, I can conceptualize of an investor that would benefit. If you are someone who simply can’t handle stock market fluctuations, then it would be dumb to invest in stocks, as you would certainly sell following a 20% or 30% decline. If bond options only yield 2% or 3%, and you can find an annuity investment that pays out 4%, I could see how an investor with such a temperament could benefit from the existence of such a product.

But for many others, it could be a disaster playing out, when pursuing stability leads to huge amounts of foregone wealth. This is especially bothersome when many 401(k) plans offer a company match of sorts, so your investments could fall 20% or 25% and you’d still breakeven on the amount of capital that you personally have to set aside. It’s crazy what people are sometimes willing to give up in the pursuit of stability. Only 57.2% of American households in the American 55-64 age group own stocks. The number one reason why the amount is so low isn’t because Americans lacked the money to invest (that was reason #2), but because they feared that they would lose money by making an investment.

This fear of loss is why earn mediocre returns by going through something like an annuity—in fact, mediocrity is almost guaranteed when you agree to surrender principal in exchange for a 4% payout. Even if stocks have a more disappointing 25 years ahead, it is incredibly likely that a collection of cash-generating assets featuring Dividend Aristocrats (like Colgate, Nestle, and Exxon) will significantly outperform someone opting for an annuity. And it’s incredibly unlikely they would underperform an annuity. If annuities become options in 401(k)s and become heavily advertised, I shudder at the amount of wealth foregone for the typical American investor that doesn’t know any better.

Other than people looking to get started investing, by far the most common correspondence I receive from readers is the profile of someone who received a significant amount of money either through selling a business or receiving some kind of inheritance, and is looking for help on what to do.

Most of the conventional wisdom that you can find on the topic just by doing a quick google search is quite good—take a few months to just chill out and *think* before rushing to do anything, don’t look to make any concentrated bets (which is a slightly different way of saying that you should diversify), and so on.

The one piece of advice that doesn’t show up nearly enough, and you kind of have to look for it online to find it, is this: time diversification. If I suddenly had $1 million to invest, I would not instantly convert it into a $40,000 income stream (although I can see how a savvy investor could make this work well and construct such a portfolio with ease). Instead, I would craft a four or five year plan to gradually deploy the $200,000 annually so that the process would be along the lines of “Oh, I bought 1,000 shares of AT&T in January 2015” and then I bought “1,000 shares of Coca-Cola in March 2015.” A couple months after that, General Electric was the next line.

What’s the appeal of taking it slow? A couple of things. It recognizes the psychological importance of the need to get it right; this isn’t where you’re having a couple hundred bucks taken out of a paycheck and put into a 401(k). No, this is the focal point where you can either erase decades of hard work and having nothing materially to show for a lifetime of hard work or, if you choose prudently, can ensure a high quality of life where you don’t have to spend your time in typical American fashion waiting for the Friday paycheck so you can go out and get food, pay the rent/mortgage, get the electric bill paid, and so on.

The psychological temperament of almost everyone you ever meet is such that they would enter something resembling a depression if they set aside $1,000,000 in a 2007 type of situation and then saw it turn into $700,000 within twelve months. Most people would get miserable because they would think that has money has been permanently lost. I suspect that typical readers of this site would take it more in stride, in a just-stubbed-my-toe type of manner, frustrated by all of the permanent dividend income that could have been purchased at the later date.

Time diversification ensures that this never becomes your story; if you buy 1,000 shares of Coca-Cola in 2015 and the company falls 30% as part of a broad market selloff the next year, then you still have a lot of remaining funds to deploy. If there is no recession or broad decline immediately coming, then you get a couple years of dividend growth and profit growth to cushion you before the next market decline. In the case of Coca-Cola, you’d be collecting $1,220 this year, $1,220+ in the following year, and $1,220+ in the year after that to absorb some of the shock, and furthermore, Coca-Cola’s profits will be higher in 2017 so that the decline becomes more manageable.

After all, if a broad selloff took Coca-Cola down to 15x earnings in 2014 when its profits were around $2.20, that is a price of $33 per share. If the next steep decline came in 2017, when Coca-Cola was making $2.60 in profits, not only did you collect all of those dividends, but the 15x earnings sale price would imply a price of $39. With each year of profit growth, the floor on the stock grows higher. Combine that with the dividends collected, and you are creating your own style of capital preservation.

Time diversification does have some drawbacks. If you’re sitting on money in cash instead of putting them into productive assets, you are by definition not collecting the dividends, rents, and interest income that the money could be throwing off.

The great quote from Benjamin Graham on this topic is the following:

“It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.”

The other drawback is that, two years out of three, stock prices in the United States end the year higher than where they were at the beginning (using the 20^th century American stock market as a guide). Imagine how much it would stink if you came into a large sum of cash at the start of 2010, and then set a five-year plan of investment instead of making a lump-sum investment at the start of 2010. Obviously, you would have missed out on a lot of dividend income and wealth over the past five years. So I don’t pretend to think that pursuing time diversification rather than lump-sum investing is a strategy without risks of its own, particularly in the form of foregone wealth that could have been created by immediately putting the money into productive assets.

Like everything else, it comes down to what style of investor you are. For someone coming in to significant money due to a one-time event, I would think the priority of wealth preservation would override wealth creation. It’s easy to do something stupid all at once. It’s easy to buy a whole lot of stock in the year right before the stock market takes a significant dip. But if you draw up a three, four, or five year plan and commit to gradually building positions in high-quality stocks, bonds, and even real estate, you are adopting a strategy that says, “I’m too old for heartache and going back to the drawing board. Avoiding cardiac arrest is more important than doubling my net worth or potential income.” For conservative investors looking to invest one-time income well, time diversification is an element that deserves serious consideration.

In order to persuade someone of something, there are two things you have to do right: you have to have the right message, and you have to deliver the message in a persuasive way such that the person on the receiving end of what you are saying inevitably thinks, “Why yes, you are like me, and people like us do end up doing things like that.”

I’ve been spending part of my day watching Youtube videos of financial managers and planners talk about the advice that they give prospective clients, and while I don’t want to single any of them out, I will share with you my general impression: even though a lot of them get the abstract advice right about avoiding fads and mentioning the inherent advantage of low-cost index funds, their method of delivering the message is terrible.

Why do I say that? Because they talk to the lay investor as if we are mentally incompetent and unable to understand the adult notion that decisions involve trade-offs. They say things like “retail investors only pick faddish stocks” and “individual investors panic sell as soon as their stock declines 10%” and they present this information in a tone that suggests they are the mature overseers with Buddha-like discipline while the rest of us are the great unwashed masses that somehow got our hands on $1,000 and can’t be trusted with it for another moment longer lest we buy some shiny object, and so we better hurry up and give it to them.

It would be much more refreshing if someone came along and said things like, “Low cost index funds are inherently hard to beat because indices like the S&P 500 consist of many of the superior businesses that you might select if you did your own investing, and the negligible fee amounts protect index investors from ever losing big due to one big, ill-timed bet.” Or “Typical large-cap American stocks tend to deliver returns in the 10% range. There is a catch, however, to receiving those 10% annual returns: about once every three years, you will see the total amount of money to your name decline, and about once per generation, it will decline by a significant amount and quite quickly. You get to decide if you find those terms acceptable.”

Even at the individual level, it would nice if there were some conversations had on the trade-offs between growth and income, something along the lines of: “Let’s say you have $10,000 available to invest. If you invest in AT&T or Royal Dutch Shell, you will get high current income that really does amount to something nice if you reinvest, but unless you get those stocks at a discount, the odds are unlikely that you will underperform the S&P 500. Likewise, if you choose to reinvest in Disney or Visa, there are very good chances you will beat the S&P 500 Index funds over the coming fifteen years, but that growth will manifest itself in a high net worth rather than high current dividend amount.” And then, after laying out both sides, the customer would decide which is more appropriate.

Who knows? Maybe these guys are more charming and personable when you visit them at their business offices than when they are speaking broadly to an interviewer about retail investing in general. But my impression is that the investment industry needs a lot more people who truly “get” their clients and can break down the complexity of investing into a series of questions yielding to different outcomes based on asking you about your personal preferences.

Instead, it seems that all financial managers just assume that every investor want to hear a clichéd bromide about how he will make them money in a “safe” way, without any particular conversation about the style in which the money gets made.

I do realize, of course, the inherent contradiction in what I just said: The kind of people who don’t want to think about the nuts and bolts of investing aren’t going to care about the process of creating wealth, and the kind of people who care about the process aren’t going to outsource all of their money to a third party.

But when people talk about “Main Street investors panic selling” or “always buying at the top”, my guess is that a lack of communication and proper empathy between the financial advisor and the client is a part of the process. Like I’ve mentioned before, if I were in the business, I’d make the client take a walk with me through Wal-Mart before deciding to sell.

Want to get rid of that Procter & Gamble stock because the price fell to $50? Okay, but first, you are going to have to walk with me through Wal-Mart and observe all the Procter & Gamble products sitting on the shelves. Then, you would have to go through a dividend reinvestment history through Procter & Gamble during the 2008 & 2009 financial crisis in which you see that those reinvested dividends created more wealth and higher income than when P&G’s share price came out of the recession. If that didn’t prove persuasive, well, you can only do so much.

I would be a lot more impressed with the financial industry if they didn’t assume their clients were stupid/emotional, and if someone is either stupid or emotional, they would take the time to explain why a client’s emotions might be getting the best of him without sounding patronizing.

/Rant over./

Royal Dutch Shell pays out a dividend of $0.94 per quarter, or $3.76 per year. The price of the stock currently sits at $69.83 per share, an inch above the company’s fifty-two week low price of $68.29 that was reached during Friday’s trading. I find it to be a chronically underrated company, with annual returns of over 14% from 1914 through 2014 and over 11% annual returns since having globally scaled operations in 1986.

It is also a company that has served an important purpose in helping me develop and improve my overall understanding of investing, as Royal Dutch Shell had cut its dividends six times over the course of delivering 14% annual returns during the past century—the story of long-term oil investing success is one of peaks and valleys, with each decade’s peak being larger than the one reached during the previous business cycle. Because commodity prices fluctuate, often abruptly and with little discernible warning in advance. Where companies like Coca-Cola, General Mills, Colgate-Palmolive, and Hershey reliably grow profits annually for every nine years out of ten, oil stocks have a business model guaranteed not to do this.

This tendency comes with both an advantage and a disadvantage. As a matter of behavioral investing, there is usually an overreaction—the price of oil stocks falls more than is warranted by the decline in oil prices as investors use recency bias and project recent news far out into the indefinite future (it was a mere six years ago, a blink of time in the scheme of things, that we were debating the constitutionality of excess profit tax legislation on the supermajor oil companies for making too much money!).

And when the price of oil, natural gas, and other commodities stays depressed for an extended period of time, dividend cuts become a possibility (heck, Royal Dutch Shell is probably the third most conservative energy investment someone could make, behind only ExxonMobil and Chevron, and it has averaged a dividend cut every sixteen years from the dawn of the First World War until the present time). This often induces massive selling, particularly among income investors, at precisely the time when the stock is cheapest and the paper losses become cemented into permanent losses. Other times, investors initiate a position in an oil company with a long-term time horizon in mind, and somewhere during a significant fluctuation—be it, 40%, 50%, or 60%, find themselves unable to handle the momentary loss of significant capital and decide to sell.

Of course, these destructive impulses can be fought. If you study the company balance sheets of the six oil majors, you will see vast resources to the tune of billions of barrels of oil in reserve and trillions of cubic feet in natural gas that will almost assuredly make these companies solvent and highly profitable enterprises for many decades to come. Furthermore, because the long-term demand for oil and natural gas among industrializing nations and nation-states is growing at a rate in excess of the rate at which the supply of these resources is being produced, I find it intelligent to expect the long-term price of commodities to rise by one to three percentage points above inflation over the coming decades, even if the yearly movements do not smoothly indicate this larger trend that is at work.

Now, for the advantage that accompanies volatile energy prices: the reinvestment of large dividends at lower prices. When you buy something like Colgate-Palmolive, the reason why you outperform is due to a high internal rate of compounding and reinvestment at a tolerable price that allows you to lock into more shares that can also lay claim to Colgate’s high internal rate of compounding. It is the business performance of the company that is propelling your returns. With oil companies, the earnings per share growth tends to be lower, but you receive a very significant benefit from high payments that get reinvested into discounted shares. Someone will look back on BP dividends reinvested at $39, Shell dividends reinvested at $69, Chevron dividends reinvested at $108, Exxon dividends reinvested at $93, and Conoco dividends reinvested at $67, and smile. The lagniappe provided to investors by the reinvestment of high dividends at lower-than-fair-value prices does not become apparent until years after the fact, such as when a private investor reviews old brokerage statements of reinvested oil share dividends in 2008 and 2009 and compares them to the current value today.

Speaking of which, I think part of the reason why you are seeing fear among oil investors today is caused by investors that neglect to take a moment and contemplate the almost incomprehensible vastness of the oil majors. Even with oil prices down, BP still makes $14 billion in annual profits. Even with oil profits down, Royal Dutch Shell still makes $18 billion in annual profits. Coca-Cola, the ubiquitous symbol of a truly global brand, meanwhile earns $9 billion per year. Keeping mind such vastness makes easier to recognize the price declines as a pricing opportunity. To get an idea of how much money flows through the business, I offer this fact: Royal Dutch Shell generates more than $400 billion in revenues per year, even with the current low prices of oil.

During the worst of the financial crisis, Royal Dutch Shell’s yield reached 6.5%. Right now, it is at 5.4%. During eight out of the past ten years, the starting yield for Shell investor was somewhere in the 4% range. We are now at a point where someone buying Royal Dutch Shell today is likely to achieve 10% annual returns from here, with over half of that total return coming from the dividend. Production growth of 3% or so annually, plus (dare I say it?) a long-term rise in oil and natural gas prices should make that the case. The only difficulty presenting itself to investors is that owners of the Royal Dutch Shell B shares cannot automatically reinvest into more B shares—they would have to make an independent purchase order to buy more shares of the oil giant. This is not the end of the world, as Royal Dutch Shell rarely becomes overvalued, and you can combine B share dividends with fresh cash to treat the company as something on your permanent buy list.

I imagine that buying and holding five of the six oil majors now (I exclude Total SA because the French dividend tax takes a significant bite out of total returns and holding the stock is not necessary when you have a portfolio already stuffed with Exxon, Chevron, Conoco, BP, and Shell), holding the shares through thick and thin, and reinvesting the dividends when possible, will lead to very significant amounts of annual income ten to twenty years from now. Of course, if the volatility bothers you, there are other things you can do—Nestle, Unilever, and GlaxoSmithKline appear like good deals, for instance—but for those who like good discounts on stock purchases and recognize the value of reinvesting dividends at depressed at depressed prices, the next few years should likely be focused on building out the energy component of your family’s portfolio.

When you build an ownership collection of the best companies in earth—I have in mind firms like Visa, Coca-Cola, Johnson & Johnson, and Chevron—there is a pleasant occurrence you can come to expect: These companies will regularly grow their profits, causing your calculations of the firm to constantly be subject to upward revision.

It came to my attention when I was in dialogue with a reader that had an average cost basis in Chevron stock somewhere around $63 or $64 per share, and couldn’t bring himself to pay $115 per share even though he thought the stock seemed like a good deal at the price. That’s a behavioral force worth examining—previous experience with a stock at a cheaper price can color your current perception of the company’s value now. It can have the effect of preventing you from making a good investment (into a company you already own) and lower your overall returns if you choose an otherwise inferior investment instead simply because it is something new and you don’t have previous mental baggage with that company.

Here’s how I would go about smashing through this particular mental hurdle: Study the company’s finances, and realize that the company you are studying today is not the same one with which you had previous experience. Sure, the executives are mostly the same. The products produced are the same. It has the same ticker symbol “CVX” and all outward appearances look similar. But what the business represents is something new entirely.

I didn’t ask the reader when his position of $63-$64 Chevron stock was established, but I want to follow through with this point, so let’s make the assumption that it was 2005. At that time, when Chevron was trading at $64 per share, it was making $13 billion in cash profits and divided into 2.2 billion pieces. It worked out to earnings per share of $6.54 and dividends of $1.75. The Chevron that exists today in the $115-$120 range is not the same Chevron that existed in 2005. The Chevron of today makes $21 billion in annual profits, and earns $10.80 per share while paying out $4.28 per share in dividends.

Yeah, a price of $115 per share is 80% higher than a price of $64 per share. But, earnings per share of $10.80 are 65% higher than they were in 2005, and dividends are 244%. Also, keep in mind that oil prices regularly fluctuate so you will see a snapback in earnings—after all, the reason why Chevron is affordable again is because commodities and profits are temporarily down. Just two years ago, Chevron was making $13.44 per share in profits, which was 205% higher than 2005’s profits. You will see a snap forward to earnings per share of around $15-$16 when oil prices sustain an average price of $110 per barrel of oil or more for 12 months straight, reflecting Chevron’s growing daily production.

Chevron generates $21 billion in profits this year. About $8 billion gets shipped to shareholders as dividends, and the other $13 billion gets poured into new investments, and to a lesser extent, share repurchases that eliminates some of the other owners from having a claim on Chevron’s profits. When you’re retaining $13 billion for further investment or buyback, you’re going to increase the enterprise value of the firm by launching new projects that grow production.

In a few years, Chevron might be in the $170s, and you’ll be wishing you could have bought it in 2014 at $115. I understand that anchoring can be an insidious force—I remembered reading forums about General Electric during the financial crisis where investors were refusing to pay $12 per share for GE because it had doubled from the low of $6. That $6 low had an anchoring effect that prevented someone out there from making a once-in-a-lifetime investment. Those GE shares at $12 would currently be yielding 7.33% annually, without assuming reinvestment of any kind. Maybe if GE only fell to a low of $11 rather than $6 during the financial crisis, some of those investors would have loaded up on $12. It’s better form, and you will get better results, if you define ahead of time what constitutes an attractive investment, and then compare a company’s current price against your future projections to see if it meets your requirements. It seems far more rational than latching onto prices in the past, and developing discomfort for the price of today because the price of the stock is not what it once was.

Hi Tim. I have seen Warren Buffett mention that the threat of nuclear weapons is what scares him the most about the future of America. I understand that this is a personal question, but I hoped you would share what you consider the greatest threat to the American economy, and how to prepare for it if possible. Okay thanks… -John

Interesting question, John. I like it because not only do you want to know what I consider to be the biggest problem, but what I consider to be the solution as well. I like receiving questions where I can already tell that the person asking the question has a fighting spirit.

As we get ready to close up 2014, our economy is in a pretty good spot. At the very least, it’s nothing like the Great Depression years, the 1973-1974 bear market, the 2008-2009 financial crisis, or any of the other crisis that have left their mark on American workers.

Despite the fact that the large corporations that dominate the American economy are making record profits, we still get news like this: Cisco is cutting 4,500 jobs. Merck is cutting 8,500 jobs. Siemens is cutting 15,000 jobs. Microsoft is cutting 18,000 jobs. I think Hewlett-Packard is getting rid of something like 30,000 people, the kind of number that sounds so miserably high you end up triple checking the figure to make sure it is right.

Those are the signposts indicating that companies are able to grow without making a capital investment in people. What scares me is that the old saw that companies add jobs in good times and cut them in bad times has been replaced with “companies cut employees in good times, and cut even more in bad times.”

The whole premise of this site—using excess cash from your labor to build reliable sources of income—becomes undone when the notion of having a job can no longer be taken for granted. I think the best advice remains to get a degree in something practical—I’ve written here about how my skill set would have been made me more employable had I pursued a geology degree instead of English writing (although, heck, The Conservative Income Investor would never exist if I had become a petroleum engineer, so there’s a little bit of a redemption story).

More specifically, I would wish that I had developed a skill set than involves my hands—if I could have developed the skill set to change some electric wires, I’d always have a job. If I had developed the skill set to fix toilets, I’d always have a job. If I had developed the skill set to fix cars, I’d always have a job. Electricians, plumbers, and mechanics aren’t going to see their jobs get outsourced (and, in fact, they can often go into business themselves and directly reap the rewards of their own labor).

That’s the first, and important line of defense: Get a practical degree or develop a skill set that involves your hands.

From there, and this seems counterintuitive maybe, the next step is to invest in these same companies that are doing all the layoffs. I have contemplated the morality of this, and I realized that my abstention from ownership does not improve the lot of someone who has lost a job. If you got laid off from Bank of America, whether or not I own 500 shares is not going to improve, worsen, or affect the quality of your life thereafter. Worrying about that is an ultimately misguided emotion, even though it comes from a good place in your heart. If anything, you should feel a strong desire to own a whole bunch of the stock so you can convey to management that you’d rather make a nickel less per share than see your fellow man treated like cattle.

One company that has gotten very good at minimizing costs is Colgate-Palmolive. A couple generations ago, they used to have commercials showing men and women screwing in the caps to toothpaste. This is just the latest permutation of that fact—every year, it is going to take fewer and fewer people to transit toothpastes and cleaning oils, even as the business grows. The only time you will really see spikes in their hiring count is through acquisitions and unique departments like perhaps the tech division. This means that if you become the owner, more and more money will flow directly to you because there the input costs of producing the profits will be trending downward as the number of humans involved continue to decrease.

Not that long ago, it seemed weird to have self-checkout at a grocery store. Most people have now grown accustomed to it, so much so that we now have baseball stadiums beginning to have self-dispensers for beer with only one monitor guiding the line. I was reading an article about how the St. Louis Cardinals price their tickets, and they used to have an entire department dedicated to informing the owner Bill DeWitt of the areas sell well and those that don’t. Now, he gets zapped an electronic current from Stubhub that gives him all the details he could want, so he can modify the pricing however he wants. This outsourcing happens a bit here and there, all over the place.

The best defense I got this: (1) Be a workhorse. (2) Get educated in something that will give you a specialized skill that cannot easily be outsourced, and/or develop a strong skill involving your hands. (3) Spend much less than you make, for as long as you can while still enjoying the ride. (4) Build a diversified collection of blue-chip stocks that sell products you intuitively understand which don’t seem to run the risk of becoming obsolescent, and have been raising their dividends for at least 25 years and have grown profits by at least 5% over the past decade. That’s the best advice I got for the economic side of life.

All of my articles, summed up into one:

#1. If you want to own companies that you can hold for three decades without thinking about hardly at all, then you have to avoid banks and the tech sectors entirely. Things like Wells Fargo and IBM will probably do very well over that time frame, but they require the steady guidance of montoring—the amount of debt a bad management team could put on a bank’s balance sheet quietly or the quickness of technological change over a short period of time make these stocks ineligible for permanent capital categories. If you want to think about “forever” investing, you need to focus on food, beverages, and the diversified energy and healthcare companies.

#2. When tempted to make a concentrated bet, remember why you entered investing in the first place. Although there are many reasons why people don’t like relying solely on the income they receive from their job to live off, one of them is this: they don’t like the fact that at the word of their employer, all of their income could dry up instantly.

When you invest, the same logic should apply: you don’t want a substantial chunk of your income to dry up simply because one Board of Directors said so. What’s the old John David Rockefeller line? Something like “I’d rather have 100 people owe me $1 than have 1 person owe me $100.” There are 15,000 companies out there in which you can purchase ownership stakes. There is no reason to limit it to one or two. You ought to be able to pick a few dozen that get the job done.

Someone who had 20% of their portfolio in BP because they (correctly) thought it was an awesome company would have had a rough go of it in 2010 after the oil spill in which the $0.84 dividend cut was suspended, then cut in half, and is still recovering to its pre-oil spill highs. On the other hand, an investor that said, “I want 20% of my wealth in energy assets” is going to have a pretty sweet life by dividing that 20% portfolio into six chunks consisting of ExxonMobil, Chevron, ConocoPhillips, BP, Royal Dutch Shell, and Total SA. The growth profile of BP alone isn’t better than this six-stock combined entity, and yet the benefits of spreading your bets across those six iconic oil firms is significant compared to a concentration in just one of them. Plus, it’s just more fun to collect $10,000 in total dividend income that is split into twenty-four pieces of roughly $416 rather than four checks of $2,500. But maybe that is just me.

#3. Apply my favorite filter to stocks, which is this: Look for companies that have been raising their dividends for 25 years, and have been growing profits by an average rate of above 5% over the past decade. It’s the best formulaic way to screen for stocks that I know, because it does two things very well. First, the twenty-year dividend streak ensures that the company has a durable business model that will be around for a while, which makes the inevitable 25% and 50% drops much easier to handle when you know the company is going to survive.

The insistence on a 5% growth rate helps to make sure that you are increasing your wealth at a rate greater than inflation, and you’re not dealing with a moribund dividend growth company (there are a few dividend growth companies that limp along with 1% and 2% dividend increases, but do not actually make you richer). When you combine lengthy histories with satisfactory business performance over the most recent full business cycle, you are treading on fertile soil for super long-term investments. A portfolio consisting entirely of these types of securities (a la Emerson Electric, 3M, Procter & Gamble, Colgate-Palmolive, and Coca-Cola) is the closest you will come to long-term guarantees in the financial world.

#4. Never pay more than 30x earnings for a large non-cyclical company. The only time I’ve ever seen paying exorbitantly for a big company work out is Starbucks, in which case investors that paid 50x earnings a generation ago still reaped 20% annual returns. But those situations are very, very rare. Since 1998, Coca-Cola investors have only received annual returns of 2.78%, even though the business grew by almost 9% over that time frame. People were doing crazy things like paying 50x earnings for the company, almost ensuring mediocrity.

When companies like Coca-Cola and Colgate-Palmolive start to drift from 20x earnings to 30x earnings in their valuations, you start sacrificing your future turns a bit. Paying 25x earnings for Coca-Cola won’t be the end of the world; you might get 7.5% annual returns instead of 8.75% annual returns. In other words, you receive less returns than would be fully justified by the growth of the company, but the wealth creation process still continues undisturbed (it is when you cross the 30x earnings mark for a mature American companies that you actually begin impeding the wealth creation process).

#5. Reinvested dividends are a great way to build a wealth torrent that marches forward. I write about this stuff all the time, and it still amazes me what compounding can do when you give it over ten years or so. In the past generation, AT&T has paid out over $32 in total dividends, with an average reinvestment price of nearly $16 per share. Loosely speaking, AT&T has turned every 1 share owned into 3 shares owned over the past twenty years, due to the power of dividend reinvestment.

That’s huge. When you evaluate the 1998-2014 period for AT&T, you might see a dividend that has grown from $0.94 per share to $1.84 per share. Someone just looking at that might think, “Okay, your dividend doubled, that’s nice.” But that is only a partial story. Someone with 1,000 shares didn’t just go from collecting $940 annual dividends to $1,840 annual dividends. No, they also saw their share count in the telecommunications bellwether increase from 1,000 shares to 3,000 shares. Really, the $940 income grew into 3,000 shares paying out $1.84 so that you’d actually be collecting $5,520 annual checks from AT&T rather than the $1,840 you might think. This is life-changing stuff if you recognize it and harness it.

If you follow these five rules, there is a very, very high probability that you will create a portfolio that can last for the long-term, and be able to weather things like 2008-2009 financial crisis, the 1973-1974 bear market, and even something that comes within hailing distance of another Depression.

Jeremy Siegel’s advice that buying large energy companies when they are out of favor, and holding through thick and thin, seems to have been going through an animadversion of sorts lately. I’ve been reading online about several oil investors that have said they are abandoning their oil stock investments after seeing the sharp declines in price since this summer. It seems they’ve taken Siegel’s advice to be—if the price declines 10%, buy more. If the price declines 20%, buy more. But any more than that, sell!

As you can already guess, I find such a strategy terrible because it guarantees that you will be a terrible investor. When oil companies have conservative balance sheets, extensive reserves, and a wide range of production sources, you should buy more with confidence as prices decline because you are incorporating a margin of safety in your purchase price so that your future returns will be a result of: stock buybacks + production growth + price of commodity growth + dividends paid out + P/E multiple expansion. That’s why buying out-of-favor oil stocks is often associated with long-term wealth—the dividends are high, get reinvested at favorable prices, and surplus cash gets used to grow production so that profits will be higher as the price of oil, natural gas, other chemicals rise over time.

The oil giant that has especially caught my eye of late is Chevron. It strikes me as the best current combination of value plus future growth among the oil giants today. You get the three decade record of consecutive dividend increases (and something absurd with over 600,000% dividend growth since the Supreme Court ordered the breakup of Standard Oil in 1911) that is backed up by $76 billion in reserves and $14.5 billion in cash on hand. It’s grown profits by 21% annually over the past ten years (and even with the downtick in prices, it has still grown profits by 6% annually from the summer of 2007 highs to the current winter 2014 lows which is a tough measuring period that shows the resiliency of the company—you got 6% growth plus a nice dividend even during this unfortunate comparison period).

I would think that, at a certain, people would want to stop repeating past mistakes. In the summer of 2008, Chevron traded at $104 per share. Then, it fell to $90. Later that year, to $80. Then, $70. And it didn’t stop there as the stock price crossed the $60s, and then into the $50s. The snapback with oil stocks, which is often quick and unpredictable, came in 2010 and 2011. Chevron grew its profits from the low of $5.24 in 2009 to $9.48 in 2010 and then up to $13.44 in 2011. The important thing is that Chevron possessed the quality to grow its dividend from $2.53 in 2008 to $2.66 in 2009 to $2.84 in 2010 to $3.09 in 2011. You collected a little over $11 in cash dividends from 2008 through 2011, some of which got reinvested at a price in the $50s and $60s, and people just looking at the price volatility of oil stocks will miss out on the important role those reinvested dividends play in total returns (e.g. someone who bought at the absolute high in the summer of 2008 at $104 would have made 4.7% annual returns all the way to 2014 even when the price there was at $104 as well).

And if you bought the stock in 2007 before it had its crazy 2008 spike in price, you’d have 8.9% annual returns to the present day. Oil dividend becomes lucrative, and not scary in the way it is portrayed, when you let the dividends get reinvested for a few years in a row. I have particular fondness for Exxon and Chevron because those two companies have the highest likelihood of raising dividends through a period of extended lower prices, and if it is accompanied by a lower stock price, a growing dividend mixed with a favorable reinvestment price plays an important role in giving you excellent risk-adjusted returns.

If someone isn’t cut out for oil investing, there are other intelligent things you can do. For instance, there are a lot of investors that like to see stable earnings and annually rising dividends, and look to food stocks to meet this criteria. Nestle is probably the best option in this field, but there are also investors that: (1) are investing in an IRA and don’t want to surrender a tax from the annual payment to the Swiss government, or are (2) investing in a taxable account and don’t want to go through the paperwork of getting tax credits and worrying about currency fluctuations.

For these people, I offer the solution: J.M. Smucker. It is an excellent company that I haven’t covered much, but plan to in the future. The quality of its brands, which include Pillsbury, Dunkin Donuts, Folgers, Jif, and Crisco, among dozens of others, is outstanding. It has never had a three-year stretch in its corporate history in which profits failed to grow (e.g. if you compare 2011 profits to 2008 profits, 2005 profits to 2002 profits, or choose any three-year comparison period, the earnings are always improving over time). The dividend goes up every year, and the current payout ratio is only 40% (whereas a lot of other food companies are currently paying out over 60% of profits to shareholders as growth has been slow of late).

One of Smucker’s advantages is size. It is only a $10 billion company. Nestle is a $235 billion company. Smucker’s earnings quality is nearly as high as that at Nestle, but it has a much more favorable growth profile due partly to its smaller size. You have perfect symmetry between the earnings growth and dividend growth, as both have gone up by 10% annually since 2004.

It doesn’t get a lot of attention, because the business is “boring” and the price of the stock is $100 for a P/E ratio of 19, which doesn’t scream discount. What gets ignored is this: Earnings march forward every year, so that the price of the stock continually marches forward with time. Here’s how the price marched up from 2006: highs of $50.00 in 2006 became $64 in 2007, before retreating to $56 in 2008 and $62 in 2009. As the country moved out of recession, the highs hit $66 in 2010, $80 in 2011, $89 in 2012, and then $114 in 2013. Plus, you get a dividend that started around 2.5% and grew each year throughout that measuring period. When viewed through that lens, the current price of $100 isn’t a bad deal at all.

You could intelligently make the argument Smucker is one of those ten stocks that could be the “signature stock” of a portfolio, built to grow dividends through thick and thin, and have profits hold up even during the worst of times (e.g. profits actually grew throughout the Great Recession, from $3.77 in 2008 to $4.37 in 2009 to $4.79 in 2010). I expect I’ll continue to focus on energy stocks in the near future, as that is where the best value is at. However, there are other options. The fair value offered by J.M. Smucker right now, for investors that want a lifetime holding that will reliably grow dividends every year and profits much year, is something worthy of due diligence.

Every now and then, when I am looking to procrastinate before I get down to write an article, I check through the search engine traffic to see what is bringing new people to the site. Pretty consistently over the past several months, many of you have stumbled onto here by looking for ways to buy shares of Exxon through Computershare.

Although googling something and actually doing it are two separate things (imagine a chart comparing people who googled “how to lose 20 pounds” compared to those that actually do it), I am glad to see that topic be on the minds of people because regular investing with Exxon Mobil is probably one of the surest paths to long-term wealth for someone who is committed to spending decades increasing their ownership in a particular position.

Exxon tends to come with two advantages that you can’t get by dripping, say, Coca-Cola or Altria through a Computershare account—first, there are no fees on the purchase of stock or reinvestment of dividends. This might be a moot point for someone investing $500+ each month, but if you are starting out by having $50 taken out of your checking account each month to buy stock, then having to deal with a $1 or $2 fee when you buy stock or reinvest dividends is a real burden dragging your returns.

But there’s more to the story than that, which makes Exxon particularly unique for perpetual dollar-cost-averaging. First of all, it rarely has a tendency to get overvalued. With the exception of a couple months in 2007, there’s really no point in Exxon’s trading history over the past two decades in which you’d look back and think, “Yeah, that would be a bad time to make a lump-sum investment, there.” When you’re a $400 billion energy behemoth, people know what you can do and they won’t think things like, “This baby is going to grow at 15-20% for the next ten years” so the stock tends to rarely trade above a fair price. With Hershey, things occasionally hit 30x earnings for a couple years here and there, and those prolonged periods of expensiveness due put a drag on earnings (although you’re still building wealth, so I am splitting hairs between the difference of 8.5% annual returns and 10.5% annual returns).

In terms of structure, Exxon has one of the best perpetual buyback programs in the world—there’s almost nothing like it, save for IBM, Wal-Mart, and Autozone, and perhaps a few others that don’t come to mind. Because Exxon generates so much free cash flow, they are able to retire 1.25% total shares each quarter. In other words, investors get about 5% annual returns automatically, just from Exxon using its free cash flow to reduce its share count. The profits are sturdy—coming in at $20 billion or so across 48 countries—and seem to provide the platform for a sustained buyback that will continue many years into the future.

And better yet, Exxon actually reduced its share count back in 2009, proving it didn’t fall victim to the common temptation to repurchase lots of stock when times are good and then turn off the spigot when a recession and a discounted stock price arrive. No, Exxon isn’t like Buffett, Singleton, or Tisch when it comes to only repurchasing stock during times of deep undervaluation, but compared to what you see against the rest of the large companies in the S&P 500, they are quite good at sticking to their plan (even if they didn’t increase their buyback during the most recent recession).

I also think investors could be receiving 10% or so annual dividend increases, as Exxon slows starts to increase its dividend payout ratio. It’s been increasing for three decades (and has been uninterrupted dating back to the Standard Oil days in the 1880s) and lets you quietly build wealth in a way that has a very high probability of occurring.

When you dollar-cost-average into Exxon stock, you are combining a lot of good things that are consistent with conservative principles of wealth creation. You are paying no fees. You are selecting a company with a great track record, and promising future business prospects. You are perpetually buying a stock that rarely gets expensive. Finding a way to get your hands on a couple hundred dollars worth of Exxon stock each month is one of those things that will lead you to wake up in twenty years and wonder, “How the heck did I get so loaded?”

Coca-Cola. PepsiCo. Chevron. Exxon. Colgate-Palmolive. Procter & Gamble. Johnson & Johnson. Those are the companies that I have in mind as signature “this is my largest investment which I will rely on for retirement income” companies that ought to be a hallmark of blue-chip portfolios build to last throughout whatever economic environment presents itself in the coming decades. There is another company that deserves consideration on that list: Nestle.

It is widely underrepresented in the financial literature on long-term investing for a couple of reasons: it is a foreign business, and the reported profits and dividends don’t quite have the smoothness that you get from, say, checking out a profit and dividend history of The Coca-Cola Company. But still, the trajectory for Nestle owners is pretty darn upward over time. The payment is annual, with the company typically declaring a dividend in April and then paying it out to shareholders in May.

Also, the taxation situation is slightly trickier. With U.S. companies in an IRA, the situation is clear: The dividends aren’t taxed when they’re paid out. With taxable dividends, your rate can vary from 0%, to 15%, to 20%, to 23.8%, depending on your ordinary income tax rate. Nestle dividends are different. They are taxed at 35% in a regular taxable brokerage account, and then you fill out a firm to get twenty percentage points reimbursed to lower the tax rate to 15%. In something like a Roth IRA, you have to pay a 35% tax on your Nestle dividends, and you don’t get it back. I hope that will change with time, because Nestle as a business is the perfect retirement company because of the perpetual demand for its cookie and milk products, and it’s unfortunate that the tax code significantly deters someone from owning Nestle in an IRA.

Sure, there are backdoor ways, like owning The Harding Loevner International Equity Fund, which owns some of the greatest blue-chip stocks in the world that don’t get the press of the likes of Coca-Cola and Johnson & Johnson, but there are three drawbacks to that: (1) only a little under 4% of the assets are in Nestle, (2) the mutual fund can sell the Nestle stock whenever it wants, and (3) even though the fees are tolerable for the great collection of assets that are put together, you are still going to pay $1,073 in aggregate over the next ten years for every $10,000 that you invest into the fund.

And even if someone did put Nestle stock in an IRA, and even though it is clearly a very disadvantaged form of capital allocation from a tax perspective, I can’t bring myself to condemn the decision as stupid. That’s because it is entirely possible that someone owning a gob of Nestle stock in an IRA for the next twenty years, even sacrificing 35% of the dividend payment at the altar of the Swiss treasury, could still have beaten most competing investment alternatives. You still would have received 12% annual returns only reinvesting 65% of your dividend payment into more shares of Nestle stock over the past twenty years.  How can you make fun of someone who chooses to play a game of basketball one-handed and still puts up twenty-five points?

When you pay $72 for that share of Nestle stock, you are buying an ownership stake in all of these Nestle brands.

If someone in 2008 decided that owning a bucketload of Nestle stock was a life task that needed to be accomplished, and found a way to invest $1,000 every month into shares of Nestle every month from January 2008 through 2014, you’d turn $84,000 into $168,000. It’s more impressive than it sounds because most of the contributions have hardly had any time to compound (i.e. the December 2013, January 2014, Feburary 2014, and so on contributions haven’t even been going for a year!). And yet, you would have built up a position in Nestle stock that would amount to 2,300 shares. Think about how awesome the month of May would be when you receive that annual payout: 2,300 shares x $2.42 = you’d get a $5,566 check. You’d initially have $3,617, fill out some paperwork, and eventually end up with $4,731 after your tax paperwork is adjusted. That’s your net, walking-around spending money.

What goes unnoticed is that it would be income of the highest quality. Not only have you established an awesome current situation, but it is entirely possible that the payout will double every six years due to the inflation-adjusted earnings power of the company. Those $4,700 could cross $10,000 in 2020. Then hit $20,000 in 2026, without any additional investments from your labor. The machine had been built, and the passive rewards would be coming your way. That’s a lifetime of oncoming rewards created from meaningful delayed gratification during the 2008-2014 stretch.

If the amount of invest is more modest, you delay gratification more to receive the benefits. Someone with $5,000 eighteen years ago that called up a broker to buy Nestle, and paid all his taxes while holding it in a standard brokerage account, would have 643 shares of Nestle stock today paying you $1,556 in May. Nestle would pay your mortgage your mortgage one month every year because of a decision you made in 1996.

Nestle is a great place where you not only get amazing stability—it’s one of the few dozen firms that could remain profitable in a Great Depression type of scenario—but there is also a growth component at work as well. It gets ignored because of the tax complications, but it’s one of those things that once you spend a couple hours figuring out the paperwork, you wonder why on earth you were tepid about making the investment in the first place. Plenty of investors, looking for high-quality long-term growing income, skip this stock. Determining on the alternatives selected, this may be a mistake. The thing grows like a weed. Start your dollar-cost-averaging in June, buying a few hundred dollars worth—or whatever you can afford—every month, so filing the tax paperwork will be worth it the next May. And then, just sit on it, or add to it. The company will be sending four-figure dividend checks before you know it. And the real beauty will be found over time through the growing sustainability of it.

When I was a sophomore in college during the financial crisis, I was an assistant (TA by another name) for a senior that was best friends with a professor. The senior I was working for was an accounting major, and she would frequently discuss individual stocks and general portfolio management with the professor in question.

One day, in 2009, the professor said, “I just lost a million dollars officially. I can’t do this anymore.” She sold all her individual stocks, mutual fund holdings, and went to cash. I didn’t say anything because (1) I wasn’t part of the conversation, (2) I was an English major, and believe it or not, millionaires don’t want financial advice from teenagers that sit in the atrium reading Charles Dickens, and (3) my real-life personality is such that I don’t talk finances unless I’m invited to do so because I don’t take unsolicited advice seriously and it’s not my position to impose on others (especially those in what society would recognize as being in a superior position).

But still, the actions of others do have effects on me and I’m allowed to pick up life lessons vicariously so that hopefully I’ll make less than my fair share of mistakes in life.

Even though I knew much less about finance back then compared to now (side note: it was studying Warren Buffett’s life—real life, not the manufactured story of it that most finance sites cover–for more than forty hours per week in 2011 as if it were a full-time job that brought me up to speed with understanding investing), I was able to recognize that I was watching a regrettable decision being made.

Good financial planning begins with a deep reflection about yourself and what you can practically handle, rather than what you can theoretically handle. The understanding that a stock price can fall 50% while the business is actually growing more profitable is not a notion that is truly appreciated by everyone, and the good news is that the stock market isn’t the only way to build wealth.

I happen to like blue-chip investing because it is the only high probability way to build wealth I know in which you can be an “absentee owner” that only has to contribute cash and the long-term compounding of 8-12% annually takes care of itself while giving you cash to live your life so that you don’t have to sell assets to have walking around money in your pocket.

The worst thing you can do, though, is try and tap into the promise of 10% annual returns with common stocks but not be able to handle the inevitable volatility of 30% or more that shows up in every generation. It’s like a predetermined formula for growing poorer with time.

If the volatility of the stock market bothers, you’ve learned a valuable lesson about yourself: your general temperament is not cut out to have ownership stakes in things that are priced daily. You can still do very, very, very well for yourself by owning real estate or government bonds, or in some cases, private businesses outright.

It would be a disaster for someone to take $300,000, put it into the stock market, and then sell when that turns into $240,000 five years later because something like a 1974 or 2009 came around. If you sink that into two rental properties instead, you could generate $30,000 in rent, about $15,000-$20,000 of which you will be able to keep after taxes and other expenses. You’re not missing out on life by collecting $1,200-$1,700 in spendable cash income from your real estate investments every months—in fact, you would be receiving a benefit that most stock market investors don’t have by getting such a high starting income upfront that it might be worth the trade-off for what you sacrifice in growth. You’re not going to be bothered by turns in the real estate market as long as you can drive by the house and “see that it is there” and receive actual checks from real people living there.

There are only three common ways that people with lots of disposable income to invest screw things up: (1) they fail to properly diversify among different revenue streams, (2) they fail to maintain proper liquidity, or (3) they believe that they can handle price fluctuations when they really can’t, and thus sell low. There are lots of ways to get rich beyond stock market investing—and there is no reason to lie to yourself about it. The United States has a $15 trillion economy. There’s lots of ways to get where you need to be.

In 2010, Coca-Cola made the decision to buy its North American bottling operations for $12.2 billion. Before that point, when you owned shares of the famous KO stock, you were really owning the maker of the syrup inside that can, cup, or bottle, as the bottlers were run by different families, and in some cases, publicly traded corporations. The reason why Coca-Cola did not own its bottlers previously is because it’s much easier to take over the globe through a model that mimics franchising rather than doing it yourself: it was a lot easier for Ray Kroc to hire wealthy individuals to put up a McDonald’s and then demand a share of their profits rather than coming up with a few hundred thousand dollars up front every time you want to roll out a new fast-food location yourself.

The Coca-Cola experience has been similar: Now that Coca-Cola spans the globe, its future growth in earnings per share will come from: population growth that gets more people consuming its existing brand of drinks, lowering costs + increasing efficiencies, stock buybacks, and selective acquisitions. The purchase of the bottling operations was obviously an example of the latter. The short-term effects have been substantial: Coca-Cola’s debt burden rose from $25 billion to $40 billion, and its profit margins have declined across the board by four percentage points to adjust for the fact that although bottling operations are profitable, they deliver lower returns in comparison simply modifying flavors that use water as the primary base ingredient.

And the acquisition has come with some benefits: Coca-Cola immediately increased its revenues from $35 billion to $46 billion, with profits going from $8 billion to $9 billion. I mention all of this to note that three last three years have been unusual for Coca-Cola from a capital expenditure perspective because it had to pay a lot of money upfront, and add a lot of debt to KO’s balance sheet, in order to own the bottlers.

That’s the context that is necessary to understand what Bloomberg reported this morning about Coca-Cola’s future dividend:

Coca-Cola Co.’s half-century streak of yearly dividend increases is in jeopardy because the beverage maker is “routinely outspending its cash flow,” according to David Winters, Wintergreen Advisers LLC’s co-founder and chief executive officer…

Coke spent $2.2 billion more than its cash flow in 2011 and gaps have persisted since then, Winters wrote in a report posted on his Mountain Lakes, New Jersey-based firm’s website yesterday that had a similar chart. The company has taken on debt to cover the outlays, the report said…

“Putting Coke’s record of annual dividend growth at risk is irresponsible,” wrote Winters, whose firm has 2.5 million shares and has been a stockholder for more than five years. Wintergreen oversees $2 billion in assets.

Debates over whether the executive compensation plan at Coca-Cola is especially egregious, and whether the acquisition of the bottling operations were the most efficient use of funds, are useful and fair debates. Public accountability proves time and time again to be an effective technique for curbing undesirable behavior, but extending the argument to raising concerns about the safety of Coca-Cola’s dividend has the unfortunate side effect of scaring old people and novice investors into parting with a stock during a time when it is slightly undervalued.

I mean, look at the company’s profit statement. It makes $9.2 billion in profits each year, and of those profits, about $5.3 billion get sent out to shareowners in the form of cash dividends. More likely, Coca-Cola’s purchase of its bottlers did this: destine Coca-Cola for dividend increases in the 6-7% range rather than the 10-12% range over the next couple of years.

This Bloomberg is yet another case study to add to the canon of “financial information hyperbole wrecks investor returns.” People understand how naturally profitable selling flavored water is, and we all know that people will be drinking Coca-Cola, Powerade, Minute Maid, and the other 496 brands that Coca-Cola owns twenty years from now. A study of its balance sheet indicates a dividend hike to $0.32 or $0.33 quarterly in February, assuming management gives out a dividend raise that corresponds to business performance. There’s a faction of investors that do not have the skill or passion to study finance intensely, and they will sell their stock of Coca-Cola (or anything else) after reading a headline questioning the dividend. Hopefully everyone reading this has a firmer grip on whatever it is that you own.