The Best Investments Are Easy To Find. Assuming You’re Looking.

June 21, 2013
This is what money looks like.

This is what money looks like.

 

When’s the last time you bought a 900-to-1500 ft2 diatomaceous earth filtration unit? Alright, that question was kind of specific. So when was the last time you bought a diatomaceous earth filtration unit of any size?

We’ve talked before about the Barbra Streisand investing strategy, in which you buy the stocks of products you use. (Ms. Streisand bought Starbucks stock because “we go to Starbucks every day.”) Taken to its logical extension, this would result in an economy that consisted solely of consumer products, which is impossible. A vibrant economy, or even a moribund one, contains plenty of goods and services that facilitate the delivery of your marked-up coffee and your social networking sites. You never think twice about those background goods, but would have great difficulty living without them. So…wouldn’t it make tons of sense to at least examine the stocks of the companies that make them? Especially since relatively few people are already doing it?

Unless you live in Houston, and even then, you’ve probably never heard of Schlumberger. Even its name sounds hopelessly square, like a 1950’s-era retail store. (“Ladies, come to Schlumberger’s for wash-and-wear clothes in all the latest space-age fabrics! You’ll love the selection, and your husband will love our prices! Dial KLondike 5-1239 for business hours. Now accepting charge cards.”)

Except Schlumberger a) was founded in France (it’s pronounced shlum-ber-zhay’) and 2) is light-years removed from that. It’s the world’s largest oilfield services company. What does that mean?

Well, say you have a claim (or “prospect”, to use the appropriate jargon) on a patch of seafloor in the Gulf of Mexico. Underneath it are millions of cubic yards of hydrocarbons, ready to be converted into petroleum and related fluids. You have a vessel that can contain the oil, or proto-oil, but how do you get it through vertical miles of ocean and into your hold?

With a subsea landing string/electrohydraulic operating system, that’s how. Basically a telescoping tube that collects your paydirt and sends it up. But you also want it to verify that it’s properly installed, given that you can’t exactly slap on some scuba gear and determine so for yourself. And it’d be nice if you could shut it off automatically in an emergency, preferably without getting your fingers wet.

These ain’t cheap, as you can imagine. Nor are directional drilling motors, nor flexible cement that seals your well off from the rest of the ocean and keeps the fish from getting dirty. Schlumberger is just one company that does all of the above and much else, and the next time you complain about how much you’re paying at the gas pump you should think about the tens of billions of dollars in capital investment it takes to fill up your precious fruity Prius.

The point is that there’s a vast sea of hidden value out there – the bottom of the iceberg, to introduce yet another tired and oceanic-themed analogy. Enormous corporations that provide vital services and products, and that no one outside of the industry gives a second thought to. Schlumberger pulled in $42 billion in revenue in 2012, and that number’s gone up every year. Its profit margins are huge, especially given what a capital-intensive industry it’s in. Despite the best efforts of solar and wind advocates, there’s no escaping the truth that oil provides denser and more easily obtainable energy than just about any substance short of uranium. In other words, demand for Schlumberger’s customers’ products (and by extension, Schlumberger’s products themselves) won’t be reducing anytime soon. There are other oilfield services companies, but Schlumberger is the largest.

Do you now how many individual investors own Schlumberger? Fewer than 10,000. At $73 a share it isn’t cheap in absolute terms, but that’s down from its 2008 apogee. Price/earnings ratio is 18, on the high end for the industry but not insurmountable. And of course there’s a dividend, currently $1.25 per year. (Like most companies of its size, Schlumberger pays its dividend out quarterly.)

It doesn’t have to be Schlumberger. There are scores of companies that are hiding in plain sight, making hundreds of millions of dollars apiece and comprising significant chunks of the S&P 500 and other indices. AXA. Allianz. Cardinal Health. Or from our last post, McKesson.

Okay, great. But I have no idea how to do this.

Sure you do. Read the chapter on investing in our book. It’s at least as easy to get through as this post is. Pick up our e-book, the obtrusive ad for which you probably ignored and reflexively closed when you logged onto the site just now. Refresh and try it again, because there really is an unglamorous secret to riches. Several secrets, in fact. And you’re not going to find them anywhere that intersects with pop culture and lowest-common-denominator mass media.

Filed Under: Capitalism, Investments Tagged With: , ,

You’re A Crucial Part of This Team

June 14, 2013
"I can't fire a broad. Looks like you got the short straw, Justin."

“I can’t fire a broad. Looks like you got the short straw, Justin.”

Another Control Your Cash® patented one-sided conservation question, one-sided since we don’t bog our site down by allowing comments. So you’ll have to answer in the comfort of wherever you’re reading this (home, maybe an airport, hopefully the office – the last of which we’ll elaborate on in a second.) The following question is not, repeat, not, rhetorical:

All things being equal, to the extent that they can be, would you be more or less inclined to work for a company whose official policy includes some variation of the following declaration?:

Employees are our most valuable asset(s).

If you answered ‘More’, there’s lots to unlearn.

“Employees are our most valuable assets.” Think about what that means. The company is profiting off them more than it is off the net receivables, or the cash and cash equivalents, or the property, plant and equipment, or any of the other assets that are supposed to stimulate cash flow and enrich the owners. $45,000 in inventories, if sold at a 100% markup, and subtracting a few dollars for warehousing costs, might realize a profit of $40,000. Meanwhile $45,000 paid to you, the deputy assistant regional manager, might realize a profit of $50,000 if you move enough product and work enough uncompensated overtime to impress the assistant regional manager: the guy whose job you claim you want to have one day.

Any company that tells you that you’re among its most valuable assets and expects you to take it seriously is patronizing you. The kind of employees who are dumb enough to swoon from and find validation in a timeworn line specifically written to make them feel that way are, self-fulfillingly, indeed pretty valuable assets. Because if being told you’re important makes a difference to you, you’re probably underpaid. Because you think you can eat non-monetary, psychological rewards such as compliments.

You negotiate in plenty of other aspects of your life, right? If you comparison shop, then you’re negotiating, kind of. You certainly wouldn’t buy something expensive like a car or a house without looking around and trying to get the seller to come down as much as is prudent. Well, what kind of lunatic determines which supermarket sells the cheapest per-unit laundry detergent, and maybe even uses a coupon, but doesn’t care how many tens of thousands of dollars her employer is making off her? (And then try to whittle that number down a little?)

Your value to your company is measurable. Of that value, or of the revenue that derives from having you around, you keep some and the rest goes to your employer. This is so obvious that it’s easy to miss, yet almost everyone does. Employees think that a salary is a product of an initial round of mediation held during an interview. Some think it’s even less complicated than that, and that a salary is simply what the employer deigns to pay you. It isn’t. Once again, it’s the difference between what you bring in and how much of that the employer decides to pocket. Even Karl Marx understood this, and Marx was one of the most overrated thinkers of all time. (Come to think of it, this was about the only thing he understood.)

Finally, as investors we could give a damn about any company that claims that its employees are #1. Your customers should come first. Well, your investors should come first, but that usually implies having customers. Satisfied ones, repeat ones, as many as possible. Brinker International, parent company of Chili’s, generated $2.82 billion in revenue last year. You know what its “most valuable assets” are? Hint: Not the flair-wearing hostesses and servers, thanks.

The beer kegs. Each one contains about 140 pints, which the restaurants can sell for 3 or 4 times what they paid. Few employees offer that kind of return, and if they could, they’d be crazy not to demand far more money. Beer kegs can’t negotiate. Nor can the soda fountains, which offer an even greater profit margin, albeit on smaller volume.

It’s like politicians who say “children are our most valuable resource”, a proverb which was cloying if inaccurate back when people started saying it in the 1970s, and which should only incur scorn today.

From an employee’s perspective, you want the profit margin on you to be as low as possible. Not so low that it costs money to keep you around – in which case the sensible thing to do is fire you – but low enough that you’re earning a lot relative to your value.

Every commodity – beer, soda, cigarettes, labor – has a markup. People think that the last one shouldn’t be on the list for some reason, or that jobs can’t be quantified and subjected to cost-benefit analysis the same way that non-human assets can. But of course they can. No employee has ever been fired because he made too little money. In fact, the opposite is true. Employees who make “too little” (which, obviously, management would never cop to) are instead held up as emblematic of something larger: the “valuable assets” worthy of mention in the company mission statement. Or vision statement, whichever. Meanwhile, every hour of every day some employees somewhere get fired because management can no longer justify their salaries. Short of stealing company secrets or having sex on the photocopier, overpayment is the #1 reason for being let go.

With the possible exception of pack animals, no asset was ever more valuable than a slave. You got your cotton picked, you got musical entertainment, and you didn’t even have to pay a living wage.

Filed Under: Capitalism, Healthy Living, Making Smart Choices, Math Tagged With: , , , ,

The Lats Hurrah

June 7, 2013

 

The only international coin with Ron Jeremy on it.

The only international coin with Ron Jeremy on it.

 

(UPDATED, June 9: Correction made, thanks to an observant reader. We confused Latvia with Lithuania in one instance.)

This week Latvia became the 18th country to join the Eurozone. It’s easy to mistakenly equate “Europe”, or even “Western Europe”, with “nations that use the euro”, but there are some glaring omissions:

  • United Kingdom
  • Norway
  • Sweden
  • Denmark
  • Switzerland

Latvia becomes the 2nd former Soviet republic to join up, following Estonia in 2011. By this time next year Latvia’s current currency, the lats, will go the way of the franc (French, that is. The Swiss is very much alive) and the Deutschmark.

The Eurozone isn’t come-one come-all, like the Universal Life Church is. There’s a membership committee, a list of benchmarks you have to meet, even something of an apprenticeship program. So in that respect the Eurozone is more like a college fraternity. Specifically, any aspiring member has to spend 2 years in the European Exchange Rate Mechanism.

The hell is that?

It’s a precursor to the euro, developed in the late ‘70s. The idea was that since the major countries of free Europe planned to eventually unify their currencies, those currencies should be allowed to trade only in narrow ranges before unification. The mechanism was supposed to be a compromise between formally tying one currency’s value to another (like the Bahamian dollar is pegged to the U.S. dollar), and running the risk of one currency being arbitrarily devalued with respect to another (like the Zimbabwean dollar and everything else in the world.) So the lira could only trade between, let’s say, 200 and 250 to the peseta. That’s a gross simplification – the bands were usually narrower than that, except for certain currencies, and those only at certain times – but we try not to overwhelm you with semi-relevant data here. Anyhow, the lats now trades within 1% of the euro, which will be irrelevant a year from now when the lats goes defunct.

For what it’s worth – $1.89 right now – the lats is the 4th most valuable currency on the planet. And Latvian inflation is minimal, around 1.3%. Which makes sense, given the mechanism. Which brings up a question:

Why would Latvia join a club that would have Greece as a member?

The short answer is “politics”. See the line above about Estonia being the only former Soviet republic that uses the euro officially. Of the 6 unambiguously European former Soviet republics excluding Russia (the other 4 are Lithuania, Belarus, Ukraine and Moldova), each has had to make a momentous decision: embrace the West and all the resultant benefits from doing so, or set the clock back a few decades and re-hitch the wagon to Russia?

Belarus chose the latter, the others the former to varying degrees. By adopting the euro, it makes it extremely difficult for Latvia to fall under Moscow’s influence yet again. Short of an invasion, anyway, and if you think that sounds drastic tell it to the old Latvians who vividly remember the Soviet tanks rolling into Riga in 1940.

Is the euro shaky? Less so than a year ago. The bailouts have stopped, largely because the pool of rich nations to “borrow” from is finite. But more importantly, Latvia doesn’t exist in a vacuum. There are only certain options for its short-term economic future at its disposal, and maintaining the lats isn’t one of them. Joining the Eurozone is the least bad choice at Latvia’s disposal, and it might even turn out to be a good one. Besides, the nation can’t exactly backpedal after consenting to the exchange-rate mechanism in the first place. Extricating would be impossible, and probably not in Latvia’s best interests anyway.

Is this just a piece of international finance and geopolitical esoterica, or does it mean anything to your life? Well, first of all it doesn’t hurt to know a little more about how exchange rates work and how the euro gradually envelops the currencies of Europe into its cocoon of horror (awkward simile ©Peter McNeeley, 1996.) Second, damn straight there’s a microeconomic lesson here. If you need to put food on the table, you take the steady job (Eurozone membership) over the risk of unemployment (a currency of limited utility, and besides euros are accepted throughout Latvia anyway and have been since their inception.)

Criteria for membership in the eurozone are not trivial nor easily achieved. Latvia’s economy is humming, at least relative to its former Soviet counterparts. Its gross domestic product per capita is 50th in the world, and there are 200-odd countries across the globe. Once you start the conversion to the euro, it’s hard to go back, which is why the United Kingdom (wisely) never started. Accepting Eurozone membership now, effective in 2014, also puts Latvia ahead of the next countries scheduled to join: its neighbor and rival Lithuania, and Old Europe mainstay Denmark. The imprimatur of the euro distinguishes Latvia as a promising economic force. Also, symbiotically, it strengthens the euro’s status as a currency of importance. The more members the Eurozone has, the greater the likelihood of the euro supplanting the U.S. dollar as the international reserve currency of choice.

Filed Under: Capitalism, Finance Tagged With: , , ,
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