From Greg Wilson, chief analyst, the Legacy Portfolio: Here are my top four books for the budding Legacy investor in your family.
I’ve included the best lesson I learned from each, for your reference.
1. The Warren Buffett Stock Portfolio by Mary Buffett and David Clark
Comment: This is the book that started it all. Mark Ford read it during his travels. That’s when it struck him: “This is how I want to invest my money in stocks.” And from that, the Legacy Portfolio was born…
The most powerful idea I learned from the book is the concept of “the expanding equity bond.” It’s one of Warren Buffett’s favorite ways to evaluate a company.
A typical bond pays you a fixed coupon rate. For example, a $1,000 bond with a 5.5% coupon will yield $55 every year until the bond matures. At that point, the bondholder receives a return of his principal ($1,000).
Stocks work in a different way. A company may offer a 5.5% dividend yield… but there’s no guarantee it will keep it there. And the price you paid for the shares can vary over time. That’s why most stocks are viewed as higher risk than bonds.
There is a small segment of companies, however, that are like “bonds in disguise.” These companies are so dominant and gush so much cash, they have track records of increasing their dividends, every year, for decades on end. This helps stabilize their share prices. The result is a type of stock that approaches bond-level security.
Like Buffett, we want to own companies that can always increase their dividends over time… while still staying “bond-like” in terms of safety. This is a foundational Legacy principle.
2. F Wall Street by Joe Ponzio
Comment: Don’t let the crass name deter you. Joe Ponzio’s book is a must-have for the Legacy investor.
My favorite section is Chapter 7. It focuses on determining a business’s intrinsic value.
No matter what price a stock is trading for, its true value is the discounted value of the cash that can be taken out of the business during its lifetime.
Now, this may sound a little complicated… but Joe takes you through the process step by step. You’ll emerge with a far better understanding of how to value a business. This is a huge advantage.
Using Joe’s methods would have kept an investor out of Microsoft Corp. (MSFT) at the beginning of 2000. And it’s a good thing, because MSFT has returned an average of just 1.1% per year over 14 years.
However, this same knowledge led Joe into MSFT in April 2006. And since then, it’s returned a respectable 8.9% per year.
Knowing a company’s intrinsic value gives you a tremendous amount of confidence in your investment decisions. And it works.
3. The Little Book That Builds Wealth by Pat Dorsey
Comment: Pat Dorsey is the former director of equity research at the independent investment research firm Morningstar. Pat reveals why competitive advantages, or economic “moats,” are good indicators of great long-term investments.
I like the book because Pat discusses competitive advantages from every angle imaginable. When you’re done, you’ll never think about stocks the same way again.
Take the company Stericycle, for example. This relatively unknown company operates in the drab field of medical waste management. Picture a garbage truck service for hospitals. It’s not exciting in the least… until you start learning about its competitive advantages.
Stericycle is 15 times the size of its nearest competitor. It has the highest number of routes—and the densest ones as well. That means Stericycle can earn a lot more per route than its competitors.
In fact, its advantage is so wide, it could potentially underprice competitors and still make more money.
This is just one example among many Pat provides. The book’s list of similar stocks alone is worth the cover price.
4. The Future for Investors: Why the Tried and the True Triumphs Over the Bold and the New by Jeremy J. Siegel
Comment: Jeremy J. Siegel is a professor of finance at the Wharton School of the University of Pennsylvania… one of the highest-ranked business schools in the country. This book is a follow-up to his classic, Stocks for the Long Run.
Siegel provides many valuable lessons in this book. The one that’s stuck in my mind is his analysis on what he calls the “growth trap.”
To illustrate the growth trap, Siegel compares the performance of IBM with that of Standard Oil—now Exxon Mobil (XOM)—from 1950 to 2003. Before getting to the final return numbers, he shares the growth stats for each company.
From 1950 to 2003, IBM grew faster than XOM when measuring revenues per share, earnings per share, and dividends per share. Not only that, but IBM’s sector expanded over that time… while XOM’s contracted.
But XOM still beat IBM over the five decades. From 1950 to 2003, XOM returned 14.42%. IBM returned 13.83%.
A better valuation and higher dividends made all the difference for XOM. In 1950, XOM traded at half the valuation of IBM, with a dividend more than twice as large. You can’t underestimate the power of fat dividend payouts coupled with a company powerful enough to increase them relentlessly. These are the hallmarks of a genuine Legacy investment.
The ideas discussed in these books are the key concepts behind Legacy investing. With the Legacy Portfolio, we put our money in the highest-quality stocks on the planet. They pay us ever-increasing dividends each year. They buy back shares. And most important of all… they let us sleep well at night.
Reeves’ Note: Legacy is now closed to new subscribers, but you can join the waitlist here. You’ll receive updates and insights on the Legacy investment strategy from Mark, Tom, and Greg. And you’ll get the first crack at signing up at a discount during the next Legacy Portfolio “open season.”