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Sometimes it’s good to get out and see new things. Well I recently took that to a bit of an extreme. There is nothing like a 3,000 mile RV trip with 4 kids, 2 dogs and 1 wife to remind you how big the country is – and how different parts of it are compared to where most of the readers of this letter live. Wyoming, South Dakota, and Montana are beautiful. If you haven’t been to Yellowstone, it is worth a trip. But there is something you should know – there are large areas that are completely devoid of cellular service. Or services in general. Driving a large RV with crappy gas mileage through remote parts of the country quickly gets you doing mileage calculations every 30 miles or so – and gets you checking the trucker guidebook we bought that lists all the gas stations at every highway off-ramp in the country to be sure you’ll make it. Relaxing? Not really. Informative? Most definitely.
Jack McCall: Should we shake hands or something, relieve the atmosphere? I mean how stupid do you think I am?
Wild Bill Hickok: I don't know. I just met you.
Deadwood, HBO, 2004-2006
One of the places we visited was Deadwood, SD. Deadwood is famous for being where Wild Bill Hickok was shot while playing poker in the Number 10 saloon on August 2nd, 1876 (happy anniversary Bill?). Apparently, this is still one of the most interesting things that has happened in that town. In Deadwood today, you can see reenactments of it in the main street about every 2 hours, followed by a trial of his killer, Jack McCall, in the evening at the elks lounge. As entertainment goes in the towns we were driving through, this qualified as exceptional.
But the trip through Deadwood was educational for another reason. It made me realize how fleeting “success” is in business. A little history: in 1868, the U.S. Government signed the Fort Laramie Treaty giving ownership of the Black Hills to the Lakota Sioux nation. But when gold was discovered in the northern Black hills in the 1870s, the government reneged on the deal. Deadwood was established in April of 1876 and by summer there were well over 5,000 miners staking claims along Deadwood Gulch. But just as quickly as it rose up, it fell back, as better gold mines were found in other hills. By 1890 the population had declined to 2,366 people. The population today? 1,264 people.
Al Swearengen: Announcin' your plans is a good way to hear God laugh.
Deadwood, HBO, 2004-2006
Another stop on our trip emphasized the theme of impermanence. After a night in a less-than-memorable RV “park,” we toured Butte, Montana. Butte is another mining boom town that’s quietly gone bust. The Anaconda Copper Mining Company was formed in 1881. Anaconda’s owner, Marcus Daly, had the good fortune to own the largest known copper mine at the same time that electricity was being installed across the country – and electrical wires need copper. Anaconda was immense, and the wealth it created also immense. But mining became less profitable, and the mines were eventually shut down. From a peak population in the 1920s of over 60,000 people, today Butte is a neat little town of 34,000 people with the country’s largest Superfund site as its main tourist attraction. You got it, the country’s most polluted body of water (yeah!) is something people pay money to see. We skipped that and instead spent a morning at the really interesting World Museum of Mining – which is definitely worth the time for the underground mine tour and its replica of what the town looked like in the early 20th century.
At this point, if you’re still awake, you’re probably wondering what this has to do with investing. Well, it has everything to do with investing, because as this history of boom and bust towns shows us, a “sure thing” in investing can, and most likely will, eventually fade away. Gold in the late 1800s and copper in the early 1900s proved to be impermanent – just like companies in many other industries. History is littered with failed once-great companies (Polaroid, Eastman Kodak, and Blockbuster Video as some recent examples). GM went bankrupt in 2009, but the government bailed them out, so they’re still here for now. Other iconic companies that are struggling and one day could either quietly fade away or be acquired are P&G, GE, and IBM. Don’t think that’s possible? GE traded for well over $100 a share in 1983 – today it closed at $25.50. IBM traded for over $175 a share in 1987 before falling to almost $40 in 1993. It recovered to make new highs in 1999 before falling back to $54 in 2008. Today it closed at $144.45, but hasn’t grown revenue in years, and is at risk of obsolescence.
Al Swearengen: Sometimes I wish we could just hit 'em over the head, rob 'em, and throw their bodies in the creek.
Cy Tolliver: But that would be wrong.
Deadwood, HBO, 2004-2006
This cycle of boom and bust in corporate America may well be why dividends have historically provided so much of the stock market’s total return – because once you’ve been paid the dividend, it’s a permanent part of your total return. In other words, the past yield can’t go to zero. But the stock of the company that paid it can. In the almost 25 years I’ve been in the investing business, I haven’t been a big dividend investor. To me, what was important was the free-cash flow generating power of the company. Many great investments haven’t paid dividends at all (here’s looking at you, Berkshire Hathaway, Google, and Amazon). But…looking around Butte and Deadwood and other old mining towns, I’m thinking that getting the cash out upfront isn’t such a bad idea. In other words, hitting a company over the head, robbing it of its distributable cash and dumping the body in the creek maybe isn’t wrong after all. Because eventually, all good things come to an end.
I know what you’re thinking - surely today’s market darlings won’t disappear. They’re just too integral a part of the economy, too essential to our everyday lives, and too entrenched to be unseated from their place at the pinnacle of the economy. You know, just like Sears. Oh wait… According to a Crain’s Chicago Business article from 2012:
As both Sears and America flourished, the company's goods transformed those dreams into middle-class realities. Sears' best-selling Craftsman tools, Kenmore appliances and DieHard batteries built, furnished and ran the American household. By the 1960s, 1 out of nearly