2015 Q3 Newsletter
September 30, 2015
I was only nine years old in May of 1977 when George Lucas’s original Star Wars film was released. Already somewhat of a geek, I begged my oldest brother Ken to drive me to the theater at Eastview Mall in Fairport, New York, so I could count myself among the first humans to experience this epic adventure. Ken agreed, on the condition that I would load my jacket pockets with Goobers from Mom’s cupboard instead of asking him to pay the outrageous movie theater concession-stand prices. (Frugality is just one of many virtues I am indebted to Brother Ken for instilling in me.)
Once I settled into my seat, my fear of being arrested by the Goober Police was quickly displaced by unmitigated awe during the opening scene. Through the deafening blare of trumpets and mighty orchestral fanfare, I frantically read the bold yellow three-dimensional text that detailed the story’s setting before it shrank into the distant stars… “A long time ago, in a galaxy far, far away…” For the next one hundred and twenty one minutes I was gleefully teleported into George Lucas’s brilliantly imagined Galactic Empire.
After captivating audiences around the globe to the tune of more than $27 billion in revenue over the next thirty-five years, George Lucas sold his own Star Wars Empire for $4.1 billion in stock and cash to Disney in October of 2012. In December of this year, Disney plans to release the seventh installment of the Star Wars franchise, aptly titled The Force Awakens.
George Lucas faced the challenge of convincing a potential audience of 4.2 billion people to experience his original Star Wars film as I did, via light projected through film onto a screen inside a flat-floored movie theater. Today Disney is marketing The Force Awakens to over 7.3 billion people, many of whom will experience it not only inside HD, 3-D, and IMAX digital theaters (with stadium seating, no less!), but on cable/satellite television , DVDs, smartphones, and computers via Netflix, Amazon, and others. Given the phenomenal Star Wars subculture that has evolved over the past thirty-eight years, the 75 percent increase in its potential audience, and the at least tenfold increase in distribution channels, it seems very likely that Disney will soon have the distinction of owning the highest-grossing movie of all time.
What does the Star Wars franchise have to do with investing? Consider that Disney shareholders owned a claim in approximately $48 million worth of box office revenue from its animated classic The Rescuers back in 1977. By contrast, today’s shareholders will share in an expected $2.2 billion in worldwide box office revenue from The Force Awakens…even before Disney sends things into hyperdrive via merchandising, theme parks, video games, etc. Because of its meteoric rise in sales/earnings/dividends, Disney’s stock has skyrocketed from a 1977 split-adjusted price of $0.46 to today’s $102.20, rewarding patient, long-term, buy-and-hold Disney shareholders with something north of a 15 percent annualized return (excluding dividends).
The point of this essay is to offer a tangible reminder during the recent (and perfectly normal) market correction that we do not invest in an arbitrary stock market. Instead, we invest our capital in real companies from around the world that create real products and services, collect real revenues, generate real earnings, pay real dividends, and grow over time. Companies like Disney. Does it seem likely that the slowdown in China will stop lifelong Star Wars fans like me, my children, and future grandchildren from happily exchanging ten dollars to be entertained by this beloved franchise? Companies like Apple Computer. Do you think an increase in the federal funds rate from 0.25% to 0.50% will somehow prevent Apple’s millions of loyal enthusiasts from eagerly upgrading to the new IPhone 6, 7, 8, and 100? Companies like Nestle. Do you think the outcome of the 2016 presidential election will somehow slow the global demand for Gerber baby food, Haagen-Dazs ice cream, Nestea iced tea, Goobers candy, and Alpo dog food?
Our low-cost, globally diversified portfolios give us a claim to the profits of thousands of the World’s Great Companies managed by the World’s Smartest People. The profit motive combined with the invisible hand of capitalism inevitably result in real wealth creation for those of us willing to accumulate and, most importantly, hold on to shares of these Great Companies through each and every temporary decline. During these times it is helpful to remember that The Force Is With Us.
Senior Portfolio Manager
Disciplined Equity Management
Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise