How many times have you heard something like this?

“Here’s how you become a successful investor. You buy a company like McDonalds NO MATTER WHAT THE PRICE, and you hold it for 50 years. I guarantee you’ll be rich. Just look at the last 50 years.”

Not only are these people falling victim to hindsight bias, they’re also guilty in assuming the next 50 years for McDonalds (or Coca-Cola, or Philip Morris, or AT&T) are going to be just as great as the last 50. The stock is going to be able to return 12% per year and outperform the market simply because it has a history of doing so.

But when you actually crunch the numbers, you’ll realize how ridiculous it is to blindly invest in a company like McDonalds for the next 50 years.

In 1965, McDonalds became a publicly traded corporation. Say you invested in the stock in 1980, which is 35 years ago. On just share appreciation alone, you would have made about 13.7% annually. Let’s go with that as a return, because it gets our point across nicely.

In 1980, McDonalds opened up its 6,000th restaurant in Munich, probably close to where Hitler used to hang out. These days, there are approximately 35,000 restaurants around the world. That’s a growth rate of 5.2% per year for the stock to grow 13.7% per year. If we assume the same overall growth to new restaurants ratio, McDonalds will have to increase its store count by 3.8% annually to grow the stock price 10% annually.

If McDonalds could do that, it would have nearly 130,000 restaurants around the globe by 2050. I know there are plenty of places around the world the chain has barely cracked, but another 100,000 restaurants? For reals? The world is supposed to have more people, but only about 50% more than we have now.

Where’s the growth supposed to come from? It’s not like the 1960s and 70s when McDonalds practically grew unopposed. We probably eat out more than we did back then, but there are hundreds of new chains that have opened, most of which are better than what my buddy Tony calls McDumpsters.

If there’s one thing I’ve learned being an investor, it’s that the leader isn’t always the leader. It can and will get replaced, especially as the market around it changes. It’s obvious the strategy of buying and holding McDonalds forever isn’t going to work as well for the next 35 years as it did for the previous 35.

Song I like and therefore you should too

German heavy metal? Sure, let’s go with that.

Fun fact: if you listen to more than 20 hours of Rammstein, there is a 100% chance you will turn into the next Hitler.

The Office quote

Dwight: I can’t believe you came.

Michael: That’s what she said.

What you might have missed

I think Friday’s post was good for a few chuckles, but chances are you didn’t miss that one. Unless you were slacking like some sort of LAZY MEXICAN. Stereotypes are fun!

Are you one of those bastards with a gold-plated pension? Not only do the rest of us who actually have to save for retirement hate your guts, but it turns out your pension might not be as good as you might think. Is that disturbing enough for you?

Nelson’s so funny

I have changed my Twitter avatar to Stephen Harper kicking the air while the mascot of Quebec’s winter festival looks on. It is the greatest picture I have ever seen.

I’m like the clap. You’ll never get rid of me.

The more you know

This is the only part of the blog which is even remotely educational. I assume you’re all here for the scantily clad ladies, right? If you are, you’ve already scrolled past this without reading it.

Robert Anderson Cooke (1880–1960) was an American immunologist and allergist.

In 1916 Cooke and Albert Vandeveer demonstrated the role of heredity in the origins of allergy. According to Cooke, 48% of his allergic patients had allergies in theirfamily history. While the trait of allergy is transmitted through heredity, parents and children may be allergic to different substances.

In 1918, Dr. Cooke suggested a mechanism of action for allergen injections as a “desensitization or hyposensitization,” analogous to tolerance achieved in experimentalanaphylaxis induced in animals. This concept suggested that the injections of an increasing amount of allergen or antigen slowly neutralized those antibodies responsible for the allergic reaction.

This seems obvious now, but in 1918 that was some breakthrough crap. My new lifelong goal is to come up with something really awesome that won’t seen very impressive at all when I brag about it to my grandkids.

Kevin O’Leary’s stock pick

kevin-olearyEach week current BNN personality and Shark Tank investor Kevin O’Leary is kind enough to give us his favorite stock pick. 

 My stock pick this week is IBM, because it pays a dividend and trades at a low P/E, and I just look at those two things and declare myself a value investor.

I’m sure you all heard the news about both David Chilton and Arlene Dickenson leaving Dragon’s Den shortly after your’s truly did the same thing. What a bunch of copycats, just doing that thing I did first. I hope the next woman they put on the show isn’t as whiny as Arlene was. I made her cry 14 times one year. Jim Treliving even gave me a trophy to commemorate the occasion. The trophy was pizza.

After CBC execs called me and BEGGED me to go back on the show, I agreed to meet with Hubert T. Lacroix to discuss my demands. After some B.S. about how the show couldn’t afford my very reasonable salary of $2.5 million per episode, I did what was necessary. I went to his house, murdered his dog and then drank its blood.

Babe loosely related to finance

Happy belated Valentine’s Day to all the fellas in the house!

culotte-e-trasparenze

I’d post something for the ladies, but we all know they collectively did much better in the Valentine’s Day present department than the gentlemen did.

Time for links

Let’s start things off with an investing piece written by Captain Sexy here, me. If you’re looking for dividends, I’d suggest avoiding these 3 stocks. And then, just a few days after I wrote it, one of the stocks cut its dividend. I’m so smrt.

Over at LowestRates.ca, I took a closer look at what happens when you cancel your car insurance. It can be a good idea, assuming you’re careful about it.

101 Centavos profiles a relatively tiny British processed food company which is doing its best Wal-Mart impression, squeezing suppliers. Click on over to see whether he put any money into it.

Holy Potato gives a great walkthrough of how to defer your RRSP tax deduction to another year. That’s a useful tactic if you’re pretty sure you’re going to make more money in the future but have RRSP room now.

Hate paying bank fees? You could go to Tangerine, but I think there are various benefits to a) having a relationship with your banker and b) being able to pop into your local branch and get a problem taken care of. Luckily, Liquid Independence tells you how most anyone can get effectively free banking.

Vanessa took a close look at You Need A Budget, software that tracks your spending in exchange for $60. Or something, like I’m going to google that and look. See whether she enjoyed it or not.

And finally, I provided an update of the previously hosted at this blog Uproar Fund over at my new site, Canadian Value Investing. Last week was an exciting one for the fund; you’re not going to want to miss that.

And that’s about it. Have a good week everyone.

Tell everyone, yo!