Steel is the One
Heath is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
We've been together since way back when
Sometimes I never want to see you again
But I want you to know, after all these years
You're still the one I want whisperin' in my ear
The opening lines from Orleans big hit “Still the One” aptly describe how I often feel about my ownership of Nucor Inc. (NYSE: NUE). I have been an owner of Nucor for the long haul, almost ten years, and I have never sold a single share. I just keep buying and reinvesting the dividends. Over ten years, I have no complaints, but when I gush over this company, many look at the past five years and give me an awkward look.
Ten Year Horizon
Five Year Horizon
charts are courtesy of Fool.com
That is where I think the Oracle of Omaha can shed some very discerning light. In his latest letter to shareholders, he decided to espouse a little on share repurchases, which led to an incredibly Foolish point:
“If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.”
If that does not slap conventional wisdom right in the face, I am not sure what would. He goes on to say:
“Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply."
The five year chart for Nucor looks lackluster, but to Warren’s point, it has been an incredible opportunity to buy a solid business that makes real money, produces real free cash flow, has outstanding leadership, and because their solid balance sheet allows it, has been investing wisely during an economic downturn. Consistently buying outstanding businesses, not timing the market, is what is going to make you wealthy (see, Shelby Davis). I think this has been one of those opportunities. Where many laud their ability to recognize that when the macro economic conditions are stagnant, steel suffers, they fall short of realizing that this is exactly when they should be investing, not when the economy is booming and steel is surging. By my own quick account, I own twice as many shares of Nucor today than I would have owned had the stock price just remained at its peak of around $80. Some might point out that both positions would have a roughly equal position today (forgoing the reinvested dividends), but only one of those positions will provide me with twice the cut of the earnings over the next ten years.
It all comes down to perspective. Are you trying to trade a stock price or are you trying to take ownership of earnings or better yet, free cash flow? Your perspective will greatly change your outlook and decision making process. After having filled out thousands of Schedule D’s over the years, I am convinced: speculators lose, but do not rely on my anecdotal evidence. John Bogle in his book “Enough” labeled this “A Giant Distraction”. As he points out:
“History tells us, for example, that from 1900 through 2007 the calculated annual total return on stocks averaged 9.5 percent, composed entirely of investment return, roughly 4.5 percent from average dividend yield and 5.0 percent from earnings growth...What I call the speculative return - the annualized impact of any increase or decrease in the P/E ratio - happened to be zero during this period, with investors paying a little over $15 for each dollar of earnings at the beginning of the period, and about the same at the end. Of course, changes in the P/E can take place over long periods; but only rarely does the long-term speculative return add more than 0.5 percent to annual investment return, or subtract more than 0.5 percent from it...The message is clear: In the long run, stock returns have depended almost entirely on the reality of the relatively predictable investment returns earned by the business. The totally unpredictable perceptions of market participants, reflected in momentary stock prices and in the changing multiples that drive speculative returns, essentially have counted for nothing.”
It is amazing to me how complicated we have made building wealth. Do not get me wrong, I immensely enjoy tracking companies, pouring over the numbers and looking for value. I just pray that it does not get in the way of continually buying great businesses that turn earnings into free cash flow. I have no doubt that something that simple will remain Foolish.
heathwcasey owns shares of Nucor. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.