Many investors get caught up in various manias and when the craze strikes, investment diversification is forgotten. History is littered with bubbles that brought riches, but only for a short period of time. These include the Tulip Mania of 1637, the South Sea Bubble of 1720, and the madness that accompanied the late 1920s. Only to mention a few from “prehistoric” times.
More recently there was the craziness with oil. Prices never came close to the $200+ level some prognosticators forecast and actually dropped to around one-third of their historical high. And how can anyone who lived through it forget the technology bubble as the millennium approached?
While avoiding the resource sector can negatively impact returns, of course it is a mistake not to recognize that this arena also has dangerous speculative phases. Those who were old enough to have invested in silver when the Hunts tried to corner the market, or gold in the late seventies, will likely still remember the pain that occurred when prices collapsed. So yes, some diversification is a good thing and those who invest only in one sector do so at their peril.
As I outlined in my book, the best-selling The Contrarian Investor’s 13, overdiversification also comes with a price. Some people invest in a multitude of mutual funds or other investments that counteract each other. And as markets change, they ignore the fact that some of their choices no longer make sense, forgetting to sell. At the end of the day, that hurts returns.
One place that we looked to at Contra the Heard for diversification was General Electric (GE-NYSE). This company was badly beaten down during the financial crisis, touching below $6.00 in July 2009. While I was not wise enough to hop on to the stock then, it was acquired on the rebound at $15.56.
While things are volatile in some parts of the world, normalcy is returning to others, with GE being a beneficiary. One indicator of this is that GE Capital is paying a quarterly dividend to General Electric of $475 million. Hopefully, that kind of sum becomes the norm, because it’s one big chunk of change. Revenues and earnings last quarter were a relatively standard $35 billion and $3.5 billion respectively. The numbers on the balance sheet stayed pretty much constant, while the dividend remains at 17 cents quarterly, but that’s up from the 10 cents during the financial meltdown. Both are well below the 31 cents achieved in 2008. With 10.6 billion shares outstanding and an EPS of better than a buck a share, it is easy to see how the dividend will very likely increase again prior to the end of 2013. Maybe even a couple of times. That should boost the stock price further.
While not a massive gainer, GE is up a smart 34% since joining the portfolio two and a half years ago. Add on the dividend and the return is reasonably sexy. A lot more is expected, as the initial sell target of $35.24 remains a distance from the current price.
Unfortunately, there are no guarantees when investing. That is why one is wise to remember that old saying, “Do not put all your eggs in one basket.” That adage applies across the investment spectrum.
Benj Gallander will make a newsletter presentation on “How Contra has Achieved 15.3 Annualized Returns Over the Past 15 Years” on Saturday, Sept. 22, during the Chicago Hard Assets Investment Conference.