Friday, July 21, 2017

the minimum wage

[1/23/13] Governor Abercrombie is proposing a hike in the minimum wage saying it would help the economy.

But would it?

Googling, I find this December 2012 article at learnvest (the author FWIW is Gabrielle Karol who has a B.A. in English from Yale -- so she's not an economics expert but is presumedly smart and should be able to think/write clearly enough to be understandable).

this summer, the Fair Minimum Wage Act was introduced in Congress to raise the minimum wage from $7.25 to $9.80 and index it to inflation, making it a current political issue. Though the bill is currently sitting with a committee awaiting further action, if it passes, it could significantly change millions of Americans’ answer to the question: Are you better off than you were four years ago?

The first minimum wage law was passed in 1938, guaranteeing workers at least 25 cents an hour (woo!). The heyday of the minimum wage was in the late 1960′s, when the wage was high enough relative to the cost of living to provide a secure income. Since then, it’s risen slowly but surely to $7.25 an hour, which adds up to $15,080 a year for full-time employees.

While the dollar amount has increased over time, the real value has not—it has declined by 30% since 1968, because over the years, the minimum wage has not kept pace with inflation, which is the increase in the general cost of goods and services over time. That means workers aren’t getting as much bang for their buck, so to speak. (Find out why inflation is expected to rise very soon.)

The yearly $15,080 made by a full-time minimum-wage worker, who typically works in retail or food preparation, or as a personal and home care aide, office clerk, customer service rep, waiter/waitress or construction laborer, is below the poverty level for a two-person household. And for tipped workers, the minimum wage is even lower—a measly $2.13 an hour. [so make sure to leave your tips]

While the minimum wage barely provides a solid living as is, studies have shown that workers earning the minimum are actually being underpaid by their employers. A 2008 study of low-wage workers in Chicago, Los Angeles and New York showed that 26% were paid less than the minimum wage, 70% worked off the clock before or after their shift and 76% were underpaid for overtime hours. All told, this resulted in an average loss of $2,634 in earnings for these workers.

Proponents of the Fair Minimum Wage Act argue that raising the minimum wage to $9.80, and then “indexing” it to inflation so it rises at the same rate would help ensure that these low-wage earners would take home enough salary to live on and pay for basic goods and services. But would it?

A living wage ensures that a worker can pay for basic necessities like housing, food, transportation to work and health care. A common definition states that the living wage should be high enough that no more than 30% of take-home pay needs to be spent on housing.

But full-time employees being paid the current minimum wage will have incomes below the living wage in most areas of the country. In dollar terms, that means that if you are a full-time worker supporting a family of four on the current minimum wage, your household income is $7,000 below the poverty line. Proponents of raising the minimum wage to a living wage argue that doing so would give workers and their families a better chance of climbing out of debt and poverty.

As an increasing number of workers take on low-wage jobs, poverty in the United States has increased: In 2005, 12.6% of Americans were living in poverty, compared to 15.7% this year (almost 50 million citizens)–the highest rate of poverty since 1965. Raising the minimum wage to a living wage would hopefully help to reverse this trend.

Higher wages don’t just benefit the individual earner, they also help the economy at large by increasing consumer spending. One 2011 study by the Chicago Federal Reserve Bank showed that every dollar added to the hourly minimum wage resulted in $2,800 in yearly additional consumer spending by that worker’s household.

Additionally, a 2009 study from the Economic Policy Institute predicted that upping the minimum wage to $9.50 an hour would result in $60 billion in additional spending over two years. Furthermore, this additional consumer spending would lead to more job creation—an estimated 100,000 new full-time jobs.

Many workers who earn more than the minimum wage—28 million, in fact—would also see their earnings increase as a result of raising the minimum wage, says the Economic Policy Institute. Why? The minimum wage is seen as the base number from which their wages are calculated, so if that number is raised, their earnings will increase accordingly … which will lead to even more consumer spending.

With all the seeming benefits to raising the minimum wage, is there a compelling reason not to raise it, at the very least to a living wage? And why shouldn’t it be indexed to inflation?

Those opposed to raising it often argue that doing so will put too great a strain on employers concerned with keeping costs down, which will ultimately lead to companies being forced to slash jobs to stay afloat. However, economists like Arindrajit Dube of the University of Massachusetts-Amherst showed that over a 16-year period, areas that raised the minimum wage did not see more employment loss than comparable areas with lower minimum wages.

While over 100 Democrats helped to introduce the bill in the House of Representatives during the summer to raise the minimum wage, most Republicans will likely argue that the fragile economy prohibits such a drastic change to the minimum wage. Though President Obama campaigned in 2008 on the promise to raise the minimum wage, he has not been active in that fight in some time, and in March, Mitt Romney retracted comments he had made as recently as January saying that he would like to see the minimum wage indexed to inflation.

Despite the likely political standstill on the minimum wage issue, recent polls have shown that 70% of Americans support raising the minimum wage and believe that doing so has the power to help the economy in these uncertain times.

[So thinking it over, raising the minimum wage would force the employers to spend more on wages (assuming they don't have an offsetting amount of layoffs).  But then they would probably raise prices to offset the increase in costs.  The increased wages would be be likely totally spent by the minimum wage workers (rather than saved) and pumped back into the economy.  And it would eventually back up to the employers.  So the money would be circulating more.  Which is what you want for the economy.  But then the increase in prices would be more inflation.]

*** 4/27/14

Buffett not arguing against raising the minimum wage, but suggests that increasing the earned income tax credit may be a better way to attack the problem.

*** 5/5/14

Economists everywhere may soon be thanking Seattle Mayor Ed Murray. Not because of his inspired policymaking, but because Murray seems ready to turn his city into a gigantic laboratory for one of the most ambitious, and quite possibly misbegotten, labor market experiments in recent memory.

Yesterday, Murray announced a plan that would gradually raise Seattle’s minimum wage to $15 an hour and tie it to inflation, which won approval from a large committee of business and labor leaders, as well as some city council members. Today, Washington state’s minimum is a comparatively piddly $9.32. The full council still has to consider Murray’s proposal, but should it pass, Seattle might not just have a far higher minimum wage than its surrounding suburbs, where businesses can easily move; it might well have the highest minimum wage in the world.

I generally support a higher pay floor. And I love a good experiment. But I can’t help but wonder if Seattle is poised to take a step too far.

*** 7/21/17

Here's a study on what happened when Seattle raised their minimum wage twice.

Thursday, July 20, 2017

best performers since 1980

I’ve been doing some catch-up reading on banks recently and bumped into this fascinating table from a recent presentation by M&T Bank (NYSE:MTB). This table shows the best 30 stocks (as of May 31) out of the entire universe of 567 U.S.-based stocks traded publicly since 1980.



Of course this is not the list of the best 30 companies. For one thing, it doesn’t include any company that went public after 1980 so many of the best-performing stocks since then have been left out including biotech companies such Amgen (NASDAQ:AMGN) and Biogen (NASDAQ:BIIB) and internet companies such as Priceline (NASDAQ:PCLN). [Not to mention Microsoft.]

But there are so many interesting things about this table.

Fourteen companies have compounded faster than Berkshire Hathaway (NYSE:BRK.B), although a few by just the tiniest bit, including names that I would not have thought of such as Hasbro (NASDAQ:HAS) and Valspar Corp. (NYSE:VAL), which has just been acquired by another surprising top performer Sherwin-Williams Co. (NYSE:SHW).

I would never have guessed that Eaton Vance Corp. (NYSE:EV) topped the list with a whopping 23.3% CAGR.

Financials, industrials and consumer stocks dominate the list. There are seven financial stocks, 11 consumer stocks and five industrial stocks.

There were only two materials companies (now only one with Sherwin-Williams acquiring Valspar), one information technology company, one energy company and zero utility companies. I’m actually very surprised that there is an energy company on the list. Maybe there’s something special about HollyFrontier (NYSE:HFC).

Berkshire Hathaway and Warren Buffett (Trades, Portfolio)’s favorite sectors are financials, consumers and industrials.

Of the list 10% are specialty retailers, a segment that has been absolutely crushed recently by the Amazon (NASDAQ:AMZN) effect. Can Gap (GPS), L Brands (LB) and V.F. Corp. (VFC) ride out this Amazon storm and continue their 37-year track record?

The following companies did not surprise me: TJX Companies (TJX); Stryker (SYK); Danaher (DHR); Walmart (WMT); Berkshire Hathaway; M&T Bank; Walgreens (WBA); Astronics (ATRO); and Church & Dwight (CHD).

***

Here's Grahamites follow-up article on the best performers for the last decade.  Topping the list was Netflix.  AMZN is tenth.  AAPL is 40th.  ROST is 45.

A few observations:

None of the companies on the since-1980 top-30 list made it to the top 60 list for the last decade.

Very few stocks on the top 30 list made it guru investors’ portfolios. Most notably, Transdigm (NYSE:TDG) is owned by Wally Weitz, Priceline (NASDAQ:PCLN) owned by Dave Rolfe and Ebix (NASDAQ:EBIX) is owned by our lovely founder Charlie Tian.

Technology and biopharmaceutical companies dominated the list. Three of the FAANG stocks made the top 60: Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Apple (AAPL). Google’s parent company Alphabet (GOOG) surprisingly only ranks No. 299 with a 10-year annualized return of “only” 13.5%. Equally impressive is the new biotech giants such as Regeneron (NASDAQ:REGN) and Incyte (NASDAQ:INCY) with mind-blowing 10-year CAGRs north of 35%.

For those of you who are curious about where Berkshire (BRK.A) falls in the list – Berkshire Hathaway ranks No. 737 with a 10-year annualized return of 8.8%.

What about some of Berkshire’s largest holdings?

Wells Fargo: No. 914, 10-year annualized return of 7.454%.
Coca Cola (NYSE:KO): No. 740, 10-year annualized return of 8.746%.
American Express: No 1240, 10-year annualized return of just 5%.

Among the worst performing stocks of the last decades are a few easily recognizable names:

Fannie Mae (FNMA) and Freddie Mac (FMCC) – both suffered a negative 28% CAGR.
J.C. Penney (NYSE:JCP) – negative 23% CAGR.
American International Group (AIG) – negative 24.75%.
Sears holdings (SHLD) – negative 21.69%.

get rich slowly?

“The people who have gotten rich quickly are also the ones who got poor quickly.” - John Templeton

A July 1974 Forbes article profiled Sir John Templeton and highlighted some of the wisdom he implemented in his investment process. The article touched on his discipline of consistently praying to God “for wisdom and clear thinking” at the start of each directors' meeting for the Templeton Growth Fund. Templeton noted that even with prayer they still “make hundreds of mistakes, but we don’t seem to make as many as others.”

In the article, Templeton also advised that “ninety-nine percent of investors shouldn’t try to get rich too quickly; it’s too risky.” He advised, “Try to get rich slowly.” Templeton is on nearly every short list showcasing the most successful investors of all time, and certainly held in high esteem among value and contrarian managers like us.

... With that as a given, we want to remind investors of our role in all of this: we are long-duration investors. Contrarian investors make money when they buy into temporary misery and sell into excitement or mania. The great financier and investor Bernard Baruch would have illustrated good investing as “buy[ing] straw hats in the winter.” We would add by saying that once purchased, investors should simply do their best to get out of the way and allow the fundamentals of those businesses to drive the results. In Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) 1996 letter to shareholders, Warren Buffett (TradesPortfolio) advised:

“If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

At Smead Capital Management, we like to say that we are arbitrageurs of time. When the idea of having to wait becomes distasteful in the psyche of investors, they will greatly discount extraordinary – but perhaps mundane – businesses. We like to use those opportunities to acquire shares.

As contrarians who implement these tenets of investing, we own, in our view, a portfolio full of great businesses that lack current investor excitement. We operate on long-term ideas such as household formation, banking needs and the kind of sustained economic growth that paves the way for business and consumer spending to grow over time. We find attractive value in our banks, home-builders, media companies, health care and select retailers. We believe the economic needs our companies address will persist over time, and we want to be in front of the profitability and cash flow that can be gained in the process.

***

I wonder how good these Smead guys are?

I see they have a fund called Smead Value Fund.  Looking at the latest (2Q 2017) shareholder letter, SMVLX (the investor class shares) has returned 18.72%, 15.51%, 7.91% for 1 year, 5 years, inception (1/2/08).  The S&P 500 has returned 17.90%, 14.63%, 7.73%.  A very slight outperformance.  Which is actually good, because most funds underperform.

Looking at the website, their top ten holdings are AMGN, NVR, BRK.B, JPM, AXP, BAC, EBAY, PYPL, AFL, LEN.

I guess they're OK, but they're not really knocking it out of the park.

Wednesday, July 12, 2017

two things

I read an article today about successful marriage. In it, the author says that if you want to have a successful marriage, you only need to do two things: 1) find a good person; 2) deserve a good person yourself by being one.

Somehow this message in marriage reminds me of Buffett and Munger. In order to have lifetime long rewarding relationships, we only need to do two things: 1) be a high quality friend ourselves and 2) find other high quality friends. To achieve great investment results, we also need to do two things: 1) find good companies and keep learning about them; 2) be patient and concentrate.

-- Grahamites

Tuesday, July 04, 2017

indicators are high

The U.S. stock market remained significantly overvalued June 29, with Warren Buffett (Trades, Portfolio)’s market indicator reaching 133.2%. The high market valuation is partially driven by the deceleration of U.S. gross domestic product during the first quarter.

The Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO measures the total market valuation as the ratio of the Wilshire 5000 index to U.S. GDP. As of July 29, the index reached $25.35 trillion, approximately 133.2% of the last-reported GDP of $19.03 trillion. Based on the current market valuation, the U.S. stock market is expected to return -1.1% per year including dividends.

Since May, Robert Shiller’s cyclically-adjusted price-earnings ratio averaged 30, representing a new high since the 2008 financial crisis. The market Shiller P/E ratio is driven by significantly high ratios in the telecom, technology and real estate sectors, which are 29.8, 32.7 and 48.7 as of June 29. Based on the Shiller P/E valuation, the implied annual market return is about -2%.