Categories
Income Investing

Why Invest in Dividend Stocks

There are great reasons to invest in dividend stocks. And most are not taught in business school.

Anyone who went to school for finance learned that – all things equal – a company’s dividend policy should theoretically have no impact on your investment decision-making.

Since transaction costs are minimal and taxes a wash, you should be indifferent as to whether you are paid a dividend or manufacture a dividend (by selling shares). In theory, a dividend simply takes something that is already yours (cash on the corporate balance sheet) and places it in your personal bank account.

Reality is quite different – there are great reasons to invest in dividend stocks.

At the corporate level, there are a number of arguments as to why some companies should pay dividends. Perhaps the biggest is that dividends enforce discipline on company management by restricting cash flow. This forces managers to limit projects to those with a higher IRR (Internal Rate of Return).

In contrast, cash-rich companies that don’t give cash back to shareholders are more likely to waste money on low IRR projects or acquisitions that only serve to bolster executive pay. Instead, these companies should be giving cash back to shareholders who can then re-allocate to companies with higher return projects.

Dividend policy can also signal insiders’ confidence in the future. The current economic crisis is a perfect example. While some companies have recently cut their dividend (e.g. Wells Fargo) to free up cash in a collapsing environment, others have actually raised dividends. A company that raises its dividend during an economic depression signals to the market the resilience of its cash flows. In today’s environment, I’m much more comfortable giving my hard-earned cash to companies that are still raising dividends.

At a more personal level, I like dividends because they help me stay disciplined. A stock with a 5% dividend yield at the time of purchase provides me a 5% return regardless of the stock price. Knowing this, I’m less likely to make emotional buy and sell decisions. It’s purely psychological, but a known cash return that accumulates in my account beats an unknown potential return that sits in a company’s account (or is tied up in other corporate assets).

While I can manufacture those cash dividend returns by selling shares as they increase in value, this requires more intervention on my part. Do I systematically sell each quarter? Or only sell when share prices rise to crystallize some of my gains? Do I sell a fixed percentage or dollar amount? Do I stop selling when prices fall?

While these questions can be answered and a systematic process created, the emotional gyrations of the market could make me change the process at the worst time. In contrast, if a stock declines but I know I’ll continue to receive my 5% dividend I’ll be more inclined to hold on.

If you’re like me, activity is detrimental to your investing returns. The more I sit tight, the better I do. So any investing strategy that helps me avoid unnecessary activity is helpful.

Categories
Work

CIA: How to Destroy Companies

During World War 2, the OSS (precursor to the CIA) created a manual to help its spies break down the efficiency and morale of enemy organizations.

The targets of these sabotage efforts were anything from strategic military planning departments to armaments manufacturers. The intent was to weaken the operational efficiency of organizations supporting the enemy’s war effort.

These sabotage techniques weren’t what you’d typically see in the movies – they didn’t require bombs or guns. Instead, the techniques used subtle behavioural ploys to slow decision making and progress. The techniques were as simple as asking irrelevant questions or seeking consensus where none was required. These techniques didn’t raise suspicion, because they simply spread bad business practices masquerading as productive work.

I’ve provided the list of techniques directly from the manual below. As you read through the list, what you’ll notice is that many of these sabotage techniques are things that happen every day in modern bureaucratic businesses.

Ever wonder why it’s so hard to get anything done at work?

Most people working in businesses today aren’t purposely trying to create inefficiencies. Yet, many people – including senior leadership – purposely behave in ways that align with the CIA’s suggestions for killing efficiency.

I believe this is because few people running businesses today pay attention to the actual science of running a business.

To get to their position, many leaders simply rose through the ranks after starting as functional experts with no real management training. While many of these people eventually get formal training, unfortunately business schools and corporate training programs do a poor job of actually teaching people how to run companies.

Consequently, many leaders go with their gut instead of their head. A combination of charisma, confidence and cunning make these leaders appear highly competent. The honest truth is in most bureaucracies it’s the blind who lead the blind. Few really know what they’re doing.

When you manage a business using your gut, you go with what feels right. Does it feel like work? Is it challenging? Does it involve a lot of people in high positions? We’re accustomed to equating these things with progress.

Corporate leaders and management inadvertently destroy their companies by adopting behaviours that feel like work, yet actually slow down their organizations.

Striving for consensus, doing everything by the book, creating committees, making speeches and haggling over minutia feel like the right things to do. However, you can spend 10 hours a day doing that stuff without actually moving the business forward.

Because many of these behaviours are ingrained in many corporate cultures, it takes intelligent, conscientious and honest leaders to cut activities that feel important to everyone yet produce nothing. Once indoctrinated into the corporate culture, these behavioural patterns are very difficult to change. This is why large companies can slowly drift right into an iceberg everyone sees coming from miles away.

For example, how can the big 5 Canadian banks – which essentially provide commoditized products and services – have varying degrees of success with some trading at persistent valuation discounts lasting years? It’s because the laggards have allowed corporate culture to fester into a gangrenous nightmare. This is not to say people hate working there, but that the culture supports (even enforces) inefficient and ineffective business practices.

If you want to build or lead an effective organization, I suggest reading the excerpt from the Simple Sabotage Field Manual below and doing the opposite.

I’ve pasted an image of the original text from the actual manual. If you find that difficult to read, I’ve also included the full copy below.

(Source: “Simple Sabotage Field Manual“)

(11) General Interference with Organizations and Production
(a) Organizations and Conferences (1) Insist on doing everything through “channels.” Never permit short-cuts to be taken in order to expedite decisions.
(2) Make “speeches.” Talk as frequently as possible and at great length. Illustrate your “points” by long anecdotes and accounts of personal experiences. Never hesitate to make a few appropriate “patriotic” comments.
(3) When possible, refer all matters to committees, for “further study and consideration.” Attempt to make the committees as large as possible — never less than five.
(4) Bring up irrelevant issues as frequently as possible.
(5) Haggle over precise wordings of communications, minutes, resolutions.
(6) Refer back to matters decided upon at the last meeting and attempt to re-open the question of the advisability of that decision.
(7) Advocate “caution.” Be “reasonable” and urge your fellow-conferees to be “reasonable” and avoid haste which might result in embarrassments or difficulties later on.

(8) Be worried about the propriety of any decision — raise the question of whether such action as is contemplated lies within the jurisdiction of the group or whether it might conflict with the policy of some higher echelon.
(b) Managers and Supervisors
(1) Demand written orders.
(2) “Misunderstand” orders. Ask endless questions or engage in long correspondence about such orders. Quibble over them when you can.
(3) Do everything possible to delay the delivery of orders. Even though parts of an order may be ready beforehand, don’t deliver it until it is completely ready.
(4) Don’t order new working materials until your current stocks have been virtually exhausted, so that the slightest delay in filling your order will mean a shutdown.
(5) Order high-quality materials which are hard to get. If you don’t get them argue about it. Warn that inferior materials will mean inferior work.
(6) In making work assignments, always sign out the unimportant jobs first. See that the important jobs are assigned to inefficient workers of poor machines.
(7) Insist on perfect work in relatively un important products; send back for refinishing those which have the least flaw. Approve other defective parts whose flaws are not visible to the naked eye.
(8) Make mistakes in routing so that parts and materials will be sent to the wrong place in the plant.
(9) When training new workers, give in complete or misleading instructions.
(10) To lower morale and with it, production, be pleasant to inefficient workers; give them undeserved promotions. Discriminate against efficient workers; complain unjustly about their work.
(11) Hold conferences when there is more critical work to be done.
(12) Multiply paper work in plausible ways. Start duplicate files.
(13) Multiply the procedures and clearances involved in issuing instructions, pay checks, and so on. See that three people have to approve everything where one would do.
(14) Apply all regulations to the last letter.

(c) Office Workers
(1) Make mistakes in quantities of material when you are copying orders. Confuse similar names. Use wrong addresses.
(2) Prolong correspondence with government bureaus.
(3) Misfile essential documents.
(4) In making carbon copies, make one too few, so that an extra copying job will have to be done.
(5) Tell important callers the boss is busy or talking on another telephone.
(6) Hold up mail until the next collection.
(7) Spread disturbing rumors that sound like inside dope.
(d) Employees
(1) Work slowly. Think out ways to in crease the number of movements necessary on your job: use a light hammer instead of a heavy one, try to make a small wrench do when a big one is necessary, use little force where considerable force is needed, and so on.
(2) Contrive as many interruptions to your work as you can: when changing the material on which you are working, as you would on a lathe or punch, take needless time to do it. If you are cutting, shaping or doing other measured work, measure dimensions twice as often as you need to. When you go to the lavatory, spend a longer time there than is necessary. Forget tools so that you will have to go back after them.
(3) Even if you understand the language, pretend not to understand instructions in a foreign tongue.
(4) Pretend that instructions are hard to understand, and ask to have them repeated more than once. Or pretend that you are particularly anxious to do your work, and pester the foreman with unnecessary questions.
(5) Do your work poorly and blame it on bad tools, machinery, or equipment. Complain that these things are preventing you from doing your job right.
(6) Never pass on your skill and experience to a new or less skillful worker.
(7) Snarl up administration in every possible way. Fill out forms illegibly so that they will have to be done over; make mistakes or omit requested information in forms.

(8) If possible, join or help organize a group for presenting employee problems to the management. See that the procedures adopted are as inconvenient as possible for the management, involving the presence of a large number of employees at each presentation, entailing more than one meeting for each grievance, bringing up problems which are largely imaginary, and so on.

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Categories
Income Investing

8 Recent Dividend Raises by Canadian Companies

Why are dividend raises important?

Because any management team that has the conviction to raise a dividend during an economic depression is confident in their company’s ability to pay that dividend in perpetuity. They have every excuse to not raise the dividend, yet they made the explicit choice to do so. This level of conviction from company insiders gives me – the investor – greater confidence in the viability of the business and its ability to pay its bills while generating enough free cashflow for stockholders.

Here are a few Canadian (TSX-listed) companies that have recently raised their dividends. This isn’t necessarily a recommendation to buy, but use this information as part of your mosaic of research into dividend paying stocks.

These announcements all happened between June and August 2020:

Barrick Gold

Declared a dividend of 8c (US$) / share, a 14% increase on the previous quarter’s dividend.

Ritchie Brothers Auctioneers

Increased dividends by 10% to $0.22.

TMX Group

Increased dividend by 6% to $0.70 per common share.

Centerra Gold

Increased quarterly dividend by 25% to C$0.05 per common share.

Capital Power Corp

Declared a quarterly dividend of $0.5125 per common share compared to the previous $0.48 dividend represents a 6.8% increase, and an annualized dividend of $2.05 per common share.

Yamana Gold

Increased its annual dividend by a further 12% to $0.07 per share.

Canadian Pacific

Increased dividends by 14.5% to $0.95.

Empire Company Ltd

Declared a quarterly dividend of $0.13 per share, an increase in the annualized dividend rate of 8.3%.

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Categories
Investing

5 Ground Level Charts on the Economic Recovery

No comments today. Just the charts.

Categories
Real Estate

12 Charts: Toronto Housing Market

Despite the worst recession since the Great Depression, Toronto real estate is booming.

The boom isn’t occurring because of affordability. The proportion of income used to pay mortgage principal and interest, property taxes and utilities is approaching the 1989 high.

Follow TRREB: @TheReal_TRREB

The Toronto housing market is bifurcated. Condo listings have risen dramatically, as Airbnb hosts abandon ship. Meanwhile, listings of detached homes have plummeted. Prices have reacted accordingly, with condo price appreciation lagging behind. The median detached home in Toronto has appreciated by 28.2% over the past year.

Despite the difference between listings, months of inventory for both condos and detached homes in Toronto remain very low. Toronto remains a tight housing market.

Follow Toronto Real Estate Charts: @hannyelsayed

The state of the Toronto housing is also showing up in average days on market data. At all price points, home sales in Toronto are actually happening faster than in 2019.

Source: ZOLO.ca

As a result, prices have risen across all home sizes for detached homes in Toronto year-over-year.

Source: ZOLO.ca

Similarly, Toronto condo prices have risen across all sizes, but (as previously indicated) to a lesser extent.

Source: ZOLO.ca

Follow Zolo: @zolocanada

What happened to the real estate crash everyone was predicting?

While the lockdowns did create a dip in prices across Toronto. Prices have recovered from the dip. Note, however, Toronto got a boost from a hot market going into 2020 before the lockdowns occurred (see the February price increase).

Source: Toronto.Listing.ca

Follow Listings.ca: @listingCA

Government benefits are helping to keep the system whole.

48% of the Canadian workforce is currently receiving CERB (Canadian Emergency Relief Benefit). That equates to over 20% of the population for most provinces, with a huge proportion of beneficiaries residing in Ontario alone.

The question remains: are these benefits propping up the Canadian housing market and can they be gradually removed without creating significant housing market disruption?

Follow Better Dwelling: @betterdwelling

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Categories
Wealth

The Rising Income Trap

Desire is a contract that you make with yourself to be unhappy until you get what you want.

Naval Ravikant

When I was finishing my undergrad (in 2001), I remember thinking a $40,000 salary was a ton of money.

While in school, I made minimal income yet somehow went out on a regular basis. I wasn’t suffering. In fact, that was a great period of time in my life. Still, I imagined the things I could do with a massive $40,000 income.

Soon after graduation, I was earning $42,000. I was rich! Or was I?

Fast forward to today. I couldn’t even imagine how I’d survive on a $42,000 salary.

Today, I earn quite a bit more than I did in 2001. Yet, I fight a constant battle to ensure I don’t fall into the rising income trap.

What do I mean?

Money has a way of vanishing. The more you earn, the more you spend. Expectations rise and you can easily find yourself inadvertently living paycheck to paycheck.

Make a dollar, spend a dollar

People are masters at rationalizing increased spending after their incomes go up:

“I make good money now so…”

“…why not turn the heat up a little higher.”
“…why not move to a bigger house.”
“…why not buy that leather jacket.”
“…why not get that $65,000 car.”

Quickly, all the extra money generated by a higher salary is eaten up by a new set of automatic monthly bills and discretionary expenditures. Some refer to this as ‘lifestyle inflation’.

Don’t let the Lexus fool you!

Despite appearances, many high earners are actually broke. In fact, many high earners live precariously close to the edge of bankruptcy because they are so dependent on their paychecks to cover their massive monthly fixed costs.

The true cost of graduating from a Ford to a Lexus is economic security and financial freedom. Financial freedom is only available to those who have money tucked away in savings accounts, investments, real estate and other assets.

As your pay rises you have the opportunity to use the surplus income to build lasting wealth. In contrast, by spending your surplus you are trapping yourself in a cycle of financial dependency. You are locked into a job you might hate because you need it to make your monthly mortgage payments. This is the rising income trap.

Retail therapy is bad for your financial health

It’s easy to get stuck in the rising income trap. Marketers exploit your primal instincts to desire more and have developed cognitive techniques to make shopping feel therapeutic.

The pressure doesn’t just come from marketers. Your boss wants you to be up to your eyeballs in debt. The less financial freedom you have, the more he or she owns you. Your friends want you to live paycheck to paycheck because they lack self control and feel better knowing everyone else is just as irresponsible. The system is simply built so you live hand-to-mouth in one way or another.

Stop. No matter what your income, I suggest you take a moment to look at all your expenses.

Are you spending to fulfill some unnecessary desire? Do the things you spend money on bring you happiness that lasts beyond a couple days?

The trappings of a consumerist society don’t lead to happiness. Keeping up with the Joneses doesn’t lead to happiness. Owning a bunch of stuff doesn’t lead to happiness.

It’s time to cut the crap from your life and start building some financial security so you can actually do what makes you happy.

When you get your next raise, calculate how much extra after tax dollars you’ll receive each paycheck. Allow yourself to keep 30% as money in your account and increase automatic debt repayments and investment account contributions to soak up the remaining 70%. Call your lender and financial advisor asking them to set this up. If it’s automated there’ll be less temptation to cheat because you’ll never see the money sitting in your account.

Do this for five or ten years (I know that sounds like a long time, but it’ll fly by and future you will thank you) and you’ll get a huge head start in building wealth and attaining financial freedom.

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Categories
Work

My Boss Quit

A couple weeks ago my boss, who is part the executive team at my company, told he he quit.

Good for him.

He’s been screwed over by the company too many times and his career hit a brick wall. He is leaving for a better position (and presumably better pay).

His departure creates a vacuum for my department. That vacuum attracts all sorts of people vying for power. But it also raises the question for me, as one of his natural successors: do I go for his job?

Of course, this assumes the company doesn’t restructure my boss’s position away to save money. We could all just get haphazardly lumped into another group. After all, budgets are under huge pressure so getting replacement headcount is very difficult.

But let’s imagine his position is made available.

Before simply applying I have to know if I really want his position. I’ve risen in the ranks enough to have a good-enough income and a great balance between strategy and execution. I’ll be honest…I’m comfortable. Ten years ago I wanted to aggressively increase my income. Today I’m more interested in writing, family, health and becoming financially independent than climbing the corporate ladder. I’d rather build alternate sources of income (which I’m doing) than double-down on my current source.

Besides, do I really want to be even less in touch with the day-to-day action and more involved with corporate bureaucracy?

The higher you go the more you need to align with the corporate propaganda, which I already find sickening. Is it worth selling your soul for a better title and slightly better paycheque.

People who are promoted tend to get less money than those who move to other companies. Most employers are cheap. They think they’re doing you a huge favour by promoting you, which they use as justification for a weak raise.

Moreover, you must consider the after tax impact of whatever pitiful raise you get. Often, if you break it down it might come down to an extra $50-100 per week in your pocket. For many, that wouldn’t be worth the extra work and stress.

A pay raise on its own – regardless of how insignificant – might still sound enticing. Why not just take the extra money?

In reality, there’s more to the decision than just money. The new position will come with huge expectations and uncertainties. You are selling your time, comfort and health for additional money that might not really make a difference to your life.

Of course, many just chase the titles. If that’s your bag then all the power to you. But if you have a life outside of work, then you need to look at the full picture.

If I don’t apply for my boss’s old position, others will. That opens up a whole other set of issues. A new person will want to make their own imprint and might try to fix things that don’t need fixing for the sake of ‘making a difference’. Do I really want to report to someone that doesn’t know what they’re doing?

A new boss from outside the company would also come with a new set of pressures. He or she would need to live up to high expectations, meaning the people reporting to him must follow suit. So regardless of whether I take the job or not, the pressure will be on.

Alternatively, perhaps a more familiar face – one of my colleagues for example – gets the job. If this happened, the pressure wouldn’t be as intense as if an outsider took the role. But how will it feel to report to someone who was once my equal? Indeed, there’s the possibility that I would report to someone who reported to me three years ago. That admittedly would be a big hit to my ego.

I have to remove emotions from the decision. I care about money, return on effort, intellectual stimulation, freedom and balance. I don’t care about titles, personal empires or corporate politics. I just want my highly specialized team and I to support the business the best we can.

This is not a decision to take lightly. Either I go for it or I don’t. Rejecting an offer on the table from your employer is a career limiting move. If I reject them, they will never make another offer to me again. If I apply for the role, I have to be prepared to accept it if offered. If I have conditions (e.g. pay), I have to be clear on day one what they are.

Even if I don’t apply, if they offer the role to me it is a potentially limiting move (although less so) to turn it down. To do so would require explanation, and I can’t think of any honest explanation that wouldn’t come across as apathetic or disengaged.

I’m still working through my thought process, but I think if they offered me the role I’d take it. I would do my best to maintain my current work-life balance and I’d craft the position into something I’d enjoy. Importantly, I wouldn’t lose sight of my ultimate goal to create lasting wealth and financial independence.

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Categories
Investing Work

Jeff Bezos Pours His Heart Out to Congress

Statement by Jeffrey P. Bezos
Founder & Chief Executive Officer, Amazon
before the U.S. House of Representatives
Committee on the Judiciary
Subcommittee on Antitrust, Commercial, and Administrative Law
July 29, 2020

Thank you, Chairman Cicilline, Ranking Member Sensenbrenner, and members of the Subcommittee. I’m Jeff Bezos. I founded Amazon 26 years ago with the long-term mission of making it Earth’s most customer-centric company.

My mom, Jackie, had me when she was a 17-year-old high school student in Albuquerque, New Mexico. Being pregnant in high school was not popular in Albuquerque in 1964. It was difficult for her. When they tried to kick her out of school, my grandfather went to bat for her. After some negotiation, the principal said, “OK, she can stay and finish high school, but she can’t do any extracurricular activities, and she can’t have a locker.” My grandfather took the deal, and my mother finished high school, though she wasn’t allowed to walk across the stage with her classmates to get her diploma. Determined to keep up with her education, she enrolled in night school, picking classes led by professors who would let her bring an infant to class. She would show up with two duffel bags—one full of textbooks, and one packed with diapers, bottles, and anything that would keep me interested and quiet for a few minutes.

My dad’s name is Miguel. He adopted me when I was four years old. He was 16 when he came to the United States from Cuba as part of Operation Pedro Pan, shortly after Castro took over. My dad arrived in America alone. His parents felt he’d be safer here. His mom imagined America would be cold, so she made him a jacket sewn entirely out of cleaning cloths, the only material they had on hand. We still have that jacket; it hangs in my parents’ dining room. My dad spent two weeks at Camp Matecumbe, a refugee center in Florida, before being moved to a Catholic mission in Wilmington, Delaware. He was lucky to get to the mission, but even so, he didn’t speak English and didn’t have an easy path. What he did have was a lot of grit and determination. He received a scholarship to college in Albuquerque, which is where he met my mom. You get different gifts in life, and one of my great gifts is my mom and dad. They have been incredible role models for me and my siblings our entire lives.

You learn different things from your grandparents than you do from your parents, and I had the opportunity to spend my summers from ages four to 16 on my grandparents’ ranch in Texas. My grandfather was a civil servant and a rancher—he worked on space technology and missile-defense systems in the 1950s and ‘60s for the Atomic Energy Commission—and he was self-reliant and resourceful. When you’re in the middle of nowhere, you don’t pick up a phone and call somebody when something breaks. You fix it yourself. As a kid, I got to see him solve many seemingly unsolvable problems himself, whether he was restoring a broken-down Caterpillar bulldozer or doing his own veterinary work. He taught me that you can take on hard problems. When you have a setback, you get back up and try again. You can invent your way to a better place.

I took these lessons to heart as a teenager, and became a garage inventor. I invented an automatic gate closer out of cement-filled tires, a solar cooker out of an umbrella and tinfoil, and alarms made from baking pans to entrap my siblings.

The concept for Amazon came to me in 1994. The idea of building an online bookstore with millions of titles—something that simply couldn’t exist in the physical world—was exciting to me. At the time, I was working at an investment firm in New York City. When I told my boss I was leaving, he took me on a long walk in Central Park. After a lot of listening, he finally said, “You know what, Jeff, I think this is a good idea, but it would be a better idea for somebody who didn’t already have a good job.” He convinced me to think about it for two days before making a final decision. It was a decision I made with my heart and not my head. When I’m 80 and reflecting back, I want to have minimized the number of regrets that I have in my life. And most of our regrets are acts of omission—the things we didn’t try, the paths untraveled. Those are the things that haunt us. And I decided that if I didn’t at least give it my best shot, I was going to regret not trying to participate in this thing called the internet that I thought was going to be a big deal.

The initial start-up capital for Amazon.com came primarily from my parents, who invested a large fraction of their life savings in something they didn’t understand. They weren’t making a bet on Amazon or the concept of a bookstore on the internet. They were making a bet on their son. I told them that I thought there was a 70% chance they would lose their investment, and they did it anyway. It took more than 50 meetings for me to raise $1 million from investors, and over the course of all those meetings, the most common question was, “What’s the internet?”

Unlike many other countries around the world, this great nation we live in supports and does not stigmatize entrepreneurial risk-taking. I walked away from a steady job into a Seattle garage to found my startup, fully understanding that it might not work. It feels like just yesterday I was driving the packages to the post office myself, dreaming that one day we might be able to afford a forklift.

Amazon’s success was anything but preordained. Investing in Amazon early on was a very risky proposition. From our founding through the end of 2001, our business had cumulative losses of nearly $3 billion, and we did not have a profitable quarter until the fourth quarter of that year. Smart analysts predicted Barnes & Noble would steamroll us, and branded us “Amazon.toast.” In 1999, after we’d been in business for nearly five years, Barron’s headlined a story about our impending demise “Amazon.bomb.” My annual shareholder letter for 2000 started with a one-word sentence: “Ouch.” At the pinnacle of the internet bubble our stock price peaked at $116, and then after the bubble burst our stock went down to $6. Experts and pundits thought we were going out of business. It took a lot of smart people with a willingness to take a risk with me, and a willingness to stick to our convictions, for Amazon to survive and ultimately to succeed.

And it wasn’t just those early years. In addition to good luck and great people, we have been able to succeed as a company only because we have continued to take big risks. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Outsized returns come from betting against conventional wisdom, but conventional wisdom is usually right. A lot of observers characterized Amazon Web Services as a risky distraction when we started. “What does selling compute and storage have to do with selling books?” they wondered. No one asked for AWS. It turned out the world was ready and hungry for cloud computing but didn’t know it yet. We were right about AWS, but the truth is we’ve also taken plenty of risks that didn’t pan out. In fact, Amazon has made billions of dollars of failures. Failure inevitably comes along with invention and risk-taking, which is why we try to make Amazon the best place in the world to fail.

Since our founding, we have strived to maintain a “Day One” mentality at the company. By that I mean approaching everything we do with the energy and entrepreneurial spirit of Day One. Even though Amazon is a large company, I have always believed that if we commit ourselves to maintaining a Day One mentality as a critical part of our DNA, we can have both the scope and capabilities of a large company and the spirit and heart of a small one.

In my view, obsessive customer focus is by far the best way to achieve and maintain Day One vitality. Why? Because customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and a constant desire to delight customers drives us to constantly invent on their behalf. As a result, by focusing obsessively on customers, we are internally driven to improve our services, add benefits and features, invent new products, lower prices, and speed up shipping times—before we have to. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it. And I could give you many such examples. Not every business takes this customer-first approach, but we do, and it’s our greatest strength.

Customer trust is hard to win and easy to lose. When you let customers make your business what it is, then they will be loyal to you—right up to the second that someone else offers them better service. We know that customers are perceptive and smart. We take as an article of faith that customers will notice when we work hard to do the right thing, and that by doing so again and again, we will earn trust. You earn trust slowly, over time, by doing hard things well—delivering on time; offering everyday low prices; making promises and keeping them; making principled decisions, even when they’re unpopular; and giving customers more time to spend with their families by inventing more convenient ways of shopping, reading, and automating their homes. As I have said since my first shareholder letter in 1997, we make decisions based on the long-term value we create as we invent to meet customer needs. When we’re criticized for those choices, we listen and look at ourselves in the mirror. When we think our critics are right, we change. When we make mistakes, we apologize. But when you look in the mirror, assess the criticism, and still believe you’re doing the right thing, no force in the world should be able to move you.

Fortunately, our approach is working. Eighty percent of Americans have a favorable impression of Amazon overall, according to leading independent polls. Who do Americans trust more than Amazon “to do the right thing?” Only their primary physicians and the military, according to a January 2020 Morning Consult survey. Researchers at Georgetown and New York University found in 2018 that Amazon trailed only the military among all respondents to a survey on institutional and brand trust. Among Republicans, we trailed only the military and local police; among Democrats, we were at the top, leading every branch of government, universities, and the press. In Fortune’s 2020 rankings of the World’s Most Admired Companies, we came in second place (Apple was #1). We are grateful that customers notice the hard work we do on their behalf, and that they reward us with their trust. Working to earn and keep that trust is the single biggest driver of Amazon’s Day One culture.

The company most of you know as Amazon is the one that sends you your online orders in the brown boxes with the smile on the side. That’s where we started, and retail remains our largest business by far, accounting for over 80% of our total revenue. The very nature of that business is getting products to customers. Those operations need to be close to customers, and we can’t outsource these jobs to China or anywhere else. To fulfill our promises to customers in this country, we need American workers to get products to American customers. When customers shop on Amazon, they are helping to create jobs in their local communities. As a result, Amazon directly employs a million people, many of them entry-level and paid by the hour. We don’t just employ highly educated computer scientists and MBAs in Seattle and Silicon Valley. We hire and train hundreds of thousands of people in states across the country such as West Virginia, Tennessee, Kansas, and Idaho. These employees are package stowers, mechanics, and plant managers. For many, it’s their first job. For some, these jobs are a stepping stone to other careers, and we are proud to help them with that. We are spending more than $700 million to give more than 100,000 Amazon employees access to training programs in fields such as healthcare, transportation, machine learning, and cloud computing. That program is called Career Choice, and we pay 95% of tuition and fees toward a certificate or diploma for in-demand, high-paying fields, regardless of whether it’s relevant to a career at Amazon.

Patricia Soto, one of our associates, is a Career Choice success story. Patricia always wanted to pursue a career in the medical field to help care for others, but with only a high school diploma and facing the costs of post-secondary education, she wasn’t sure she’d be able to accomplish that goal. After earning her medical certification through Career Choice, Patricia left Amazon to start her new career as a medical assistant at Sutter Gould Medical Foundation, supporting a pulmonary medicine doctor. Career Choice has given Patricia and so many others a shot at a second career that once seemed out of reach.

Amazon has invested more than $270 billion in the U.S. over the last decade. Beyond our own workforce, Amazon’s investments have created nearly 700,000 indirect jobs in fields like construction, building services, and hospitality. Our hiring and investments have brought much-needed jobs and added hundreds of millions of dollars in economic activity to areas like Fall River, Massachusetts, California’s Inland Empire, and Rust Belt states like Ohio. During the COVID-19 crisis, we hired an additional 175,000 employees, including many laid off from other jobs during the economic shutdown. We spent more than $4 billion in the second quarter alone to get essential products to customers and keep our employees safe during the COVID-19 crisis. And a dedicated team of Amazon employees from across the company has created a program to regularly test our workers for COVID-19. We look forward to sharing our learnings with other interested companies and government partners.

The global retail market we compete in is strikingly large and extraordinarily competitive. Amazon accounts for less than 1% of the $25 trillion global retail market and less than 4% of retail in the U.S. Unlike industries that are winner-take-all, there’s room in retail for many winners. For example, more than 80 retailers in the U.S. alone earn over $1 billion in annual revenue. Like any retailer, we know that the success of our store depends entirely on customers’ satisfaction with their experience in our store. Every day, Amazon competes against large, established players like Target, Costco, Kroger, and, of course, Walmart—a company more than twice Amazon’s size. And while we have always focused on producing a great customer experience for retail sales done primarily online, sales initiated online are now an even larger growth area for other stores. Walmart’s online sales grew 74% in the first quarter. And customers are increasingly flocking to services invented by other stores that Amazon still can’t match at the scale of other large companies, like curbside pickup and in-store returns. The COVID-19 pandemic has put a spotlight on these trends, which have been growing for years. In recent months, curbside pickup of online orders has increased over 200%, in part due to COVID-19 concerns. We also face new competition from the likes of Shopify and Instacart—companies that enable traditionally physical stores to put up a full online store almost instantaneously and to deliver products directly to customers in new and innovative ways—and a growing list of omnichannel business models. Like almost every other segment of our economy, technology is used everywhere in retail and has only made retail more competitive, whether online, in physical stores, or in the various combinations of the two that make up most stores today. And we and all other stores are acutely aware that, regardless of how the best features of “online” and “physical” stores are combined, we are all competing for and serving the same customers. The range of retail competitors and related services is constantly changing, and the only real constant in retail is customers’ desire for lower prices, better selection, and convenience.

It’s also important to understand that Amazon’s success depends overwhelmingly on the success of the thousands of small and medium-sized businesses that also sell their products in Amazon’s stores. Back in 1999, we took what at the time was the unprecedented step of welcoming third-party sellers into our stores and enabling them to offer their products right alongside our own. Internally, this was extremely controversial, with many disagreeing and some predicting this would be the beginning of a long, losing battle. We didn’t have to invite third-party sellers into the store. We could have kept this valuable real estate for ourselves. But we committed to the idea that over the long term it would increase selection for customers, and that more satisfied customers would be great for both third-party sellers and for Amazon. And that’s what happened. Within a year of adding those sellers, third-party sales accounted for 5% of unit sales, and it quickly became clear that customers loved the convenience of being able to shop for the best products and to see prices from different sellers all in the same store. These small and medium-sized third-party businesses now add significantly more product selection to Amazon’s stores than Amazon’s own retail operation. Third-party sales now account for approximately 60% of physical product sales on Amazon, and those sales are growing faster than Amazon’s own retail sales. We guessed that it wasn’t a zero sum game. And we were right—the whole pie did grow, third-party sellers did very well and are growing fast, and that has been great for customers and for Amazon.

There are now 1.7 million small and medium-sized businesses around the world selling in Amazon’s stores. More than 200,000 entrepreneurs worldwide surpassed $100,000 in sales in our stores in 2019. On top of that, we estimate that third-party businesses selling in Amazon’s stores have created over 2.2 million new jobs around the world.

One of those sellers is Sherri Yukel, who wanted to change careers to be home more for her children. She started handcrafting gifts and party supplies for friends as a hobby, and eventually began selling her products on Amazon. Today, Sherri’s company employs nearly 80 people and has a global customer base. Another is Christine Krogue, a stay-at-home mother of five in Salt Lake City. Christine started a business selling baby clothes through her own website before taking a chance on Amazon. She has since seen her sales more than double, and she’s been able to expand her product line and hire a team of part-time employees. Selling on Amazon has allowed Sherri and Christine to grow their own businesses and satisfy customers on their own terms.

And it is striking to remember how recent all of this is. We did not start out as the largest marketplace—eBay was many times our size. It was only by focusing on supporting sellers and giving them the best tools we could invent that we were able to succeed and eventually surpass eBay. One such tool is Fulfillment by Amazon, which enables our third-party sellers to stow their inventory in our fulfillment centers, and we take on all logistics, customer service, and product returns. By dramatically simplifying all of those challenging aspects of the selling experience in a cost-effective way, we have helped many thousands of sellers grow their businesses on Amazon. Our success may help explain the wide proliferation of marketplaces of all types and sizes around the world. This includes U.S. companies like Walmart, eBay, Etsy, and Target, as well as retailers based overseas but selling globally, such as Alibaba and Rakuten. These marketplaces further intensify competition within retail.

The trust customers put in us every day has allowed Amazon to create more jobs in the United States over the past decade than any other company—hundreds of thousands of jobs across 42 states. Amazon employees make a minimum of $15 an hour, more than double the federal minimum wage (which we have urged Congress to increase). We’ve challenged other large retailers to match our $15 minimum wage. Target did so recently, and just last week so did Best Buy. We welcome them, and they remain the only ones to have done so. We do not skimp on benefits, either. Our full-time hourly employees receive the same benefits as our salaried headquarters employees, including comprehensive health insurance starting on the first day of employment, a 401(k) retirement plan, and parental leave, including 20 weeks of paid maternity leave. I encourage you to benchmark our pay and benefits against any of our retail competitors.

More than 80% of Amazon shares are owned by outsiders, and over the last 26 years—starting from zero—we’ve created more than $1 trillion of wealth for those outside shareholders. Who are those shareowners? They are pension funds: fire, police, and school teacher pension funds. Others are 401(k)s—mutual funds that own pieces of Amazon. University endowments, too, and the list goes on. Many people will retire better because of the wealth we’ve created for so many, and we’re enormously proud of this.

At Amazon, customer obsession has made us what we are, and allowed us to do ever greater things. I know what Amazon could do when we were 10 people. I know what we could do when we were 1,000 people, and when we were 10,000 people. And I know what we can do today when we’re nearly a million. I love garage entrepreneurs—I was one. But, just like the world needs small companies, it also needs large ones. There are things small companies simply can’t do. I don’t care how good an entrepreneur you are, you’re not going to build an all-fiber Boeing 787 in your garage.

Our scale allows us to make a meaningful impact on important societal issues. The Climate Pledge is a commitment made by Amazon and joined by other companies to meet the goals of the Paris Agreement 10 years early and be net zero carbon by 2040. We plan to meet the pledge, in part, by purchasing 100,000 electric delivery vans from Rivian—a Michigan-based producer of electric vehicles. Amazon aims to have 10,000 of Rivian’s new electric vans on the road as early as 2022, and all 100,000 vehicles on the road by 2030. Globally, Amazon operates 91 solar and wind projects that have the capacity to generate over 2,900 MW and deliver more than 7.6 million MWh of energy annually—enough to power more than 680,000 U.S. homes. Amazon is also investing $100 million in global reforestation projects through the Right Now Climate Fund, including $10 million Amazon committed in April to conserve, restore, and support sustainable forestry, wildlife and nature-based solutions across the Appalachian Mountains—funding two innovative projects in collaboration with The Nature Conservancy. Four global companies—Verizon, Reckitt Benckiser, Infosys, and Oak View Group—recently signed The Climate Pledge, and we continue to encourage others to join us in this fight. Together, we will use our size and scale to address the climate crisis right away. And last month, Amazon introduced The Climate Pledge Fund, started with $2 billion in funding from Amazon. The Fund will support the development of sustainable technologies and services that in turn will enable Amazon and other companies to meet The Climate Pledge. The Fund will invest in visionary entrepreneurs and innovators who are building products and services to help companies reduce their carbon impact and operate more sustainably.

We recently opened the largest homeless shelter in Washington state—and it’s located inside one of our newest headquarters buildings in downtown Seattle. The shelter is for Mary’s Place, an incredible Seattle-based nonprofit. The shelter, part of Amazon’s $100 million investment in Mary’s Place, spans eight floors and can accommodate up to 200 family members each night. It has its own health clinic and provides critical tools and services to help families fighting homelessness get back on their feet. And there is dedicated space for Amazon to provide weekly pro-bono legal clinics offering counsel on credit and debt issues, personal injury, housing and tenant rights. Since 2018, Amazon’s legal team has supported hundreds of Mary’s Place guests and volunteered more than 1,000 pro-bono hours.

Amazon Future Engineer is a global childhood-to-career program designed to inspire, educate, and prepare thousands of children and young adults from underrepresented and underserved communities to pursue a computer science career. The program funds computer science coursework and professional teacher development for hundreds of elementary schools, introductory and AP Computer Science classes for more than 2,000 schools in underserved communities across the country, and 100 four-year, $40,000 college scholarships to computer science students from low-income backgrounds. Those scholarship recipients also receive guaranteed internships at Amazon. There is a diversity pipeline problem in tech, and this has an outsized impact on the Black community. We want to invest in building out the next generation of technical talent for the industry and expanding the opportunities for underrepresented minorities. We also want to accelerate this change right now. To find the best talent for technical and non-technical roles, we actively partner with historically Black colleges and universities on our recruiting, internship, and upskilling initiatives.

Let me close by saying that I believe Amazon should be scrutinized. We should scrutinize all large institutions, whether they’re companies, government agencies, or non-profits. Our responsibility is to make sure we pass such scrutiny with flying colors.

It’s not a coincidence that Amazon was born in this country. More than any other place on Earth, new companies can start, grow, and thrive here in the U.S. Our country embraces resourcefulness and self-reliance, and it embraces builders who start from scratch. We nurture entrepreneurs and start-ups with stable rule of law, the finest university system in the world, the freedom of democracy, and a deeply accepted culture of risk-taking. Of course, this great nation of ours is far from perfect. Even as we remember Congressman John Lewis and honor his legacy, we’re in the middle of a much-needed race reckoning. We also face the challenges of climate change and income inequality, and we’re stumbling through the crisis of a global pandemic. Still, the rest of the world would love even the tiniest sip of the elixir we have here in the U.S. Immigrants like my dad see what a treasure this country is—they have perspective and can often see it even more clearly than those of us who were lucky enough to be born here. It’s still Day One for this country, and even in the face of today’s humbling challenges, I have never been more optimistic about our future.

I appreciate the opportunity to appear before you today and am happy to take your questions.

Categories
ETFs and Funds

How Can You Tell if You Should Pursue Your Business Idea?

You have a great business idea. Perhaps it’s something unique or something you’re particularly good at. How do you know whether you should invest in it or simply keep it as a hobby?

Adam Grant, Organizational Psychologist at Wharton, created the following graphic to help answer that question.

How to decide whether your idea should become a project:
1. Interest: do you think about it in your free time and bring it up in random conversations?
2. Importance: will it benefit others?
3. Contribution: do you have something novel to add?

No alternative text description for this image

James Altucher – serial entrepreneur, author, podcast host – expands on this:

A) always good to have a couple of things going on at a time to see if they fall within the sweet spot of the diagram since so very few things do.

B) learn the skill of “experimenting” so you can take small steps with little downside and great upside to see what things “click”.

C) often something feels like it hits the sweet spot but then it stalls. Don’t be afraid to quit something that’s not quite clicking.

D) I always wait for my heart and mind to agree before I fully engage in a new activity.

Too often I did things for money that I did not love and too often I did things for my heart that had no other benefit to me.

The heart and the brain must be in agreement. Experiments helped me with that.

Example, I’ve spent the past 5 years doing standup comedy up to 20-30 hours a week. It’s not monetizable. But it added to my skills in podcasting, public speaking, ideation, etc.

But, mindlessly playing online chess for hours a day (which I am prone to do) is my heart talking but not my brain.

And starting a hedge fund way back when was my brain talking but not my heart. I hated every minute of it and not a good source of income ultimately.

Subscribe to Get Our Report on Getting Through the Economic Depression:

The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.

Categories
Income Investing Investing

S&P/TSX 60 Dividend Yields (July 31, 2020)

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Categories
Investing Life Work

Weekend Sponging: Jamie Dimon, Danielle DiMartino Booth & Jeff Gundlach

Here are a couple long-form interviews to absorb over the weekend.

How a Banking Titan Starts His Day

Jamie Dimon, CEO of JP Morgan, on his daily routine that starts with a ton of reading at 5am:

Economic Heavyweights on a Post-Covid World

Danielle DiMartino Booth, CEO & Chief Strategist for Quill Intelligence, in depth and personal with Jeffery Gundlach, bond king and CEO of DoubleLine Capital:

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The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.

Categories
Investing Small Business Work

The Great Wealth Transfer to Big Tech

Apple, Amazon, Facebook and Alphabet all reported blowout quarterly results this evening, with all beating analyst revenue expectations by billions of dollars. The market completely underestimated the growing market power these companies command.

This momentum – at a time when GDP declined by 32.9% – suggests the recent massive stock market out-performance of these companies vs most other companies might be justified. The economy has rapidly shifted from “face-to-face” to “virtual” and a relatively small proportion of companies are benefiting at the expense of the rest.

Much of this shift is permanent. I mean, virus or no virus, is anyone really excited about going to a fucking mall again? Or take the crowded bus? Even meetings are more tolerable now.

Nah, I’ll spend my commute time on doing something pointless on my phone, possibly even spending money. And when I’m working I’ll use MS Teams instead of airplanes to meet people. People and businesses have discovered cost savings they should have known existed.

And the companies that don’t benefit? Commercial real estate. Travel. Restaurants. All the places that sell the things we realized we didn’t need while under quarantine. Many are small businesses. Maybe eventually these businesses will recover, but until then it’s big tech’s time to gather all the nuts.

Is it any wonder why Amazon, Apple, Facebook and Alphabet have done so well? We’re witnessing a great wealth transfer to big tech.

Apple

Amazon

Facebook

Alphabet

Categories
Wealth

Visualizing the Billionaire Class

I believe people deserve to get rich if they work hard.

But there comes a point at which wealth is so obscenely huge that you have to wonder if it is really deserved. Can a single human really earn $150 billion without it coming at the expense of other humans?

While history has shown that humanity’s wealth pie can be expanded over the long run through productive innovation, over the short term it’s likely that hyper competitive behaviour is a zero sum game.

Today, Amazon is rapidly growing at the expense of small independent retailers. This has never been more clear than during the Covid-19 crisis, as lockdowns shut almost all of Amazon’s brick-and-mortar competition. While Amazon is probably creating long term wealth for society, right now it is succeeding at the expense of others.

The chief beneficiary is Jeff Bezos, Amazon CEO and founder, who is now worth over $150 billion. Amazon has added a ton of efficiency to our lives and Jeff Bezos deserves to be rich, but $150 billion is obscene.

At what point does genuine wealth creation transition into exploitation and hoarding? It’s not an easy question to answer, but that’s not the point. If wealth anomalies like Bezos don’t pass society’s smell test, action must be taken.

Society makes judgment on the scale of wealth differences between ordinary people and the 1%, deserved or not.

Ordinary people earn in the tens of thousands and can barely save for retirement. To most, millionaires are considered rich. Once you start talking about $ billions the sheer scale of wealth is baffling.

I recently saw an article that highlights how ridiculously wealthy billionaires really are. Below is a graphic visually comparing the difference between various wealth levels. Remember, Bezos is worth 150x the largest box below.

While ordinary people struggle to pay back their college debts, billionaires have to work hard to spend their money:

  • Elon Musk can spend a MILLION dollars EVERY DAY for 65 years
  • The Koch brothers can spend a MILLION dollars EVERY DAY for 242 years.
  • Bill Gates can spend a MILLION dollars EVERY DAY for 247 years.
  • Jeff Bezos can spend a MILLION dollars EVERY DAY for 306 years.

Anyone arguing that billionaires are created because they help generate societal wealth, should look at the following chart. While worker productivity has risen, average wages have stagnated. Meanwhile, income going to the top 1% (aka the billionaire class) has skyrocketed. In other words, billionaires are built off the backs of the average worker.

The top 1% has captured a growing share of societal wealth partly because the tax system has changed to favour the rich. The two charts below compare tax rates by income level in 1950 and 2018. In 1950 the top tax rate was 70%. In 2018 it was just over 20%.

While Amazon shares hit new highs and Jeff Bezos gets richer, 40% of US renters face the risk of eviction. Those are families and children and hardworking people, many of whom will soon be homeless.

For many the American dream has become the American tragedy. Gone are the days of collecting a paycheque and a comfortable retirement pension. Loyalty is irrelevant. You are on your own to build wealth for you and your family. For some this means building a bulletproof portfolio. For others it means constructing multiple sources of income.

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The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.