The other day my brother asked me about Ferrell Gas Partners.
His buddy was bragging about this stock and how he's owned it for 10 years and it pays him 10% like clockwork.
Sounds like the perfect investment to me.
He was going to plunk $5,000 into the stock. So, I jumped on my trusty IPad, fired up the stock quote and ran a performance history.
Here's the result.
Source: Morningstar as of 3/13/2013
Notice how the stock has underperformed it's industry and the stock market (as measured by the S&P 500 index) over the last ten years. While past performance is no guarantee of future results, it looks like a dog to me.
While his buddy was correct on the 10% return, he left out a key piece of information-the price return.
Remember, a dividend is simply a return of cash to shareholders. Kinda like a rent check on a rental property. However, you still have to account for the price change in the stock over the time period you are measuring.
When you factor in the price change and the dividend payment, you end up with a total return.
In the case of FGP, the total annualized return over the last ten years was actually 6.99% versus 22.45% for the industry benchmark and 8.64% for the S&P 500 index.
So much for that 10% return.
Worse, the S&P 500 index is the wrong benchmark since the company is riskier and behaves more like a small company value stock.
Compared to a small company value benchmark, the results are even worse.
The sad part of this story is his buddy is a savvy business owner-the kind of guy who could start with $10,000 and turn it into a million.
How can someone great in business be not so great in stocks?
Fortunately, you can be genius at stocks without even reading the footnotes in an annual report or running a discounted cash flow analysis.
Just follow Warren Buffett's advice and buy and hold a basket of index funds that represents the entire global market.
By owning the market, you are surfing the wave of capitalism.
Don't believe me?
Do a fact check. Just make sure you get the facts from the right source-third party peer reviewed academic research works for me.
Or just google the name "John Bogle active management" Here's some links if that's too much work.
Three Challenges of Investing:Active Management, Market Efficiency, and Selecting Managers
John Bogle on Active Management
Do you know your real return?
Do you know how the smart money invests?
Give us a call if you are smart enough to realize you can't outsmart the market.