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Wealth Creation: Creativity Beats Oil

 By Shlomo Maital

  

A brilliant long-view analysis of capital markets is provided  by the New York Times (Karl Russell)..   The graph above shows “years publicly traded since 1926” on the X axis, and “total wealth creation since 1926” on the Y axis. The area of the circle shows the annualized stock return (capital gains and dividends). So this lovely graph shows us 3 pieces of information in two dimensions.

   The 90-year old companies are mainly resource-based (oil, e.g. Exxon, Conoco, ), consumer products (Pepsi) and Pharma.

     The newer companies are high-tech and digital.  

     Most striking:   Apple has, in 2017, overtaken Exxon as a wealth creator, even though it is half Exxon’s age. This is because of Apple’s astonishing 30% +   annual return.   And Microsoft has created more wealth than, say, General Electric or IBM, with over 40% annual return.   The tech stocks (the fat circles) have generated much higher annual returns than the traditional old-line companies (fairly slim circles).

       What this means for individuals, companies, small businesses, and whole countries, is simple.   The digital revolution is real. If you haven’t got on board yet, you’ve missed the boat. But maybe it’s not too late.   If your country is still resource-based (oil nations, like Russia, Chad, Gulf States, Iran), you are out to lunch. Your leadership has be asleep.  

       What will this graph look like ten years hence? Fifty years hence?   I’d give a lot to know. 

    

Why U.S. Stock Price Rise IS a Bubble — Beware

By Shlomo  Maital

Bubble

  The Standard & Poor 500, the broad index of Americna stocks, has set new records this summer.  This, despite the flagging U.S. economy, an unpopular President, gridlock in Congress, and mountains of cash held abroad by U.S. multinationals, stubbornly refusing to invest it in their own country.

   Writing in the London Telegraph, Andrew Davis notes:  “US shares are undoubtedly expensive – on some measures such as the Cyclically Adjusted Price-Earnings ratio, which uses a 10-year average of earnings to calculate their current valuation, they have only been more expensive a few times in the past century. “

   What is going on?  Is it a bubble?

   Andrew Davis has a simple answer.  Stock buy-backs.   

“Companies are using their cash, and cheap interest rates, to buy their own stock, in large amounts.  That said, it is clear that one of the forces that has driven the long rise in US equity prices has been the willingness of companies to buy back their own shares. A lot of this buying has been funded by companies taking advantage of extremely low interest rates to issue debt and using the proceeds to buy in their own equity.”

     Personally I would not invest in companies that have nothing better to do (R&D, innovation, HR, infrastructure, facilities, IT) with their cash than curry short-term favor with myopic shareholders by artificially pumping up their own stock price.  When I tell this to CEO’s, they frown, or worse – but they agree, in their heart of hearts.  They simply feel they have no choice but to buckle under shareholder pressure.   

   They DO have a choice.  Present a capital investment program. Invest when other companies are afraid to.  Then, when the recovery finally comes, you will have a major competitive advantage —  and your stock price will rise for the right reasons. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
July 2020
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