Imagine it is 1987. Tiffany & Company is raising money by issuing shares to the public at $23.00 each. You have some savings and are thinking about starting a business. Instead of running your own enterprise, you decide to focus on your day job and become a co-owner of one of the most famous businesses of all time. You buy 5,000 shares of the jeweler on the first day of trading. Ignoring the relatively small brokerage commission, you would have needed to write a check for $115,000. You withdrawal the stock certificates, have them registered directly in your name, and lock them in a safe deposit box at the local credit union. It’s a lot of money, but still less far than it would have taken to buy into a McDonald’s franchise or construct an apartment building.
Within a few quarters, Tiffany & Company begins paying a cash dividend. At first it isn’t much; a little under $2,000 per year. You deposit the checks and use the funds to support your family, augmenting your salary. From time to time, the Board of Directors announces a dividend increase and the checks grow larger as profits expand. There are a handful of stock splits; every time you receive new shares, you take them down to add to your collection in the bank. Otherwise, you think nothing about the company except for the few hours you spend each year pouring over its annual report.
The past 25 years have been interesting. The real estate crash of the early 1990’s, the first Gulf war, the dot-com boom of late 20th century, the September 11th terrorist attacks, the Afghanistan and second Gulf wars, the worst housing bubble leading to the worst real estate collapse since the 1790s, and the Great Recession, marking the worst economic collapse since the Great Depression. In a significant portion of the years, had you watched the price of your ownership in Tiffany & Company, you would have seen it fluctuate by 50% or more, leading to large paper gains and losses in the short-term. As a long-term investor, though, you treated it as you would a family company you owned outright. You focused on the things that mattered: Sales, profit margins, operating leverage, and return on equity.
That focus, and a couple decades of selling diamond engagement rings, emerald brooches, and sterling silver flatware, served you well. As of this afternoon, your 5,000 shares of Tiffany & Company would have grown into 60,000 shares. At a current market price of $53.75 per share, you would be sitting on $3,225,000 worth of stock.
That isn’t even the best part. You would have enjoyed nearly a quarter century of cash dividends mailed to you, which by themselves exceeded your initial investment. In fact, with expected dividends of $1.16 per share for the year, the checks mailed to you by Tiffany & Company would amount to $69,600 annually, or $5,800 per month. You could have lost everything else and still earn significantly more than the median American household does with two working adults selling their time, all from a single wise decision. You didn’t have to work an hour. You didn’t have to miss family baseball games. You didn’t have to fall asleep at your desk trying to build your own empire.
The down side is that very few families will ever enjoy that kind of success because they make one of two mistakes. 1.) The moment something happens, they panic and sell their stock, or 2.) They pay ridiculously overvalued prices that cannot be justified. I think a lot of the reason is because everyone is searching for an Apple, Inc. They want a stock that turns $100,000 into $10,000,000 in a few years. There have only been a handful of companies in history that have done that, but it is enough to cause people spend their entire lives chasing it. They then lose out on the great investments that could have gotten them to the same place, albeit a bit slower, and find themselves with nothing living on Social Security during retirement. It goes back to the old saying, “the perfect is the enemy of the good”.
It Has Been a Year Since We Looked at the Valuation of Tiffany & Company Stock
Last May, we talked about the valuation of Tiffany & Company common stock. The shares were at $76.04 on earnings of $2.87. Now they are $53.75 with earnings of $3.41. That is a much more reasonable multiple. It’s certainly not a bargain, but it at least seems fair for long-term holders by offering a return on current earnings of twice the 30-Year United States Treasury bond yield and the potential upside of much higher growth in profits over the next eight quarters, if analyst projections can be trusted. I’d say it is fairly valued; maybe ten percent below where it would sell in a perfectly rational private purchase that didn’t involve a bidding war.
This underscores one of the most important lessons you can ever learn regarding your portfolio: The ultimate determination of the return you earn on an investment is the price you pay relative to the net-after tax, inflation-adjusted cash it generates, discounted for time. It does not matter if we are talking about jewelry or insurance, oil or real estate, software or restaurants. A great business becomes a terrible investment at a certain price. Never forget that.
Your success as an investor will come down to how well you use your money to buy additional household income so that more and more cash flows through your CCDA every year. That is why I cannot stand when someone asks me, “Is Tiffany & Company a good investment? Is McDonald’s a good investment? Is Johnson & Johnson a good investment?” It goes back to Benjamin Graham’s rules: “On what terms and at what price?”.
That Is the Secret to Building Wealth and Growing Your Net Worth
If you want to be rich, the recipe that will work for most of you is to perfect your primary occupation or business; the activity or asset that generates most of the cash for your family. Use it as a source of funds to buy ownership in companies or real estate that will grow over time. Pay reasonable prices. Structure it in a tax-efficient way. Wash, rinse, and repeat for 10, 20, 30, or 50 years, and you can make a fortune without having spent your entire life slaving away for money.
If you want to be richer, fine. That’s okay. It will require more commitment. But it is unnecessary if you spend the years between 18 and 40 planting seeds left and right in the greenest pastures you can find. A moderately successful doctor making a couple hundred grand in the Midwest should leave an estate of at least $15 to $20 million. There is no excuse if you don’t. It’s all harnessed mathematics. There is no magic about it. Add in diversification and you should be set – had you split your money between a handful of companies and one of them went bankrupt, the gains from the others would have more than offset them.