The Most Lucrative Profession in the U.S.

The Most Lucrative Profession in the U.S.

The Law of Unintended Consequences

One Good Stock

Not too long ago, the top earners in the U.S. were doctors and lawyers.

Today, they’ve been joined-even surpassed-by a wave of investment professionals who’ve grown accustomed to salaries topping a million dollars.

What changed?

How did the investment industry evolve from one populated by sober, risk-averse bankers to one led by aggressive mutual fund managers, jet-setting private equity investors and billionaire hedge fund managers?

According to Neil Swidey, a reporter for The Boston Globe, it started in 1963, when Studebaker went bankrupt. (My grandmother drove a Studebaker, but not enough other people did.) Unfortunately, the company’s pension plan wasn’t fully funded, so some younger employees got stiffed.

That led to a demand for a government insurance program that would guarantee private pensions. And that eventually resulted in the Employee Retirement Security Act (ERISA), signed into law by Gerald Ford in 1974.

ERISA forced employers to increase their level of financial contribution and to ensure that those funds were invested wisely. And while that did deliver the pension security that ERISA had been designed for, there was one huge unintended consequence.

In short, the growing piles of money to be managed, combined with the increased appetite for growth, had the effect of fueling a race for performance that no one could have predicted back in 1974.

It started with the growing popularity of mutual funds. (In fact, when I joined Cabot full-time in 1986, my first job was analyzing and writing about mutual funds.)

Peter Lynch was the most highly paid mutual fund manager through the 1980s, and when he retired from Fidelity in 1990, he may have been earning as much as $10 million a year. It seemed like a lot of money back then.

But in the decades since, the moneymen kept on getting richer-even while navigating both an Internet Bubble and a Mortgage Bubble!

Last year, Jamie Dimon, who heads JPMorgan Chase, made $20 million.

Leon Black, of Apollo Global Management, made $563 million.

And David Tepper, of Appaloosa Management, made $3.5 billion!

Admittedly, there have been other factors at work as well. And David Tepper may well have been able to earn his billions even if ERISA had not become law. But I think it would have been more difficult, and I think it’s worth remembering that small acts sometimes have major unexpected long-term consequences.

In this case, a law designed to help the working middle-class appears to have been instrumental in kicking off a trend toward enormous salaries in the investment industry.

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Circling back to the doctors mentioned at the start-who previously topped the earners list-their world has changed dramatically, too.

But for the worse.

While once upon a time, a doctor had some control over how he treated his patients and how much he earned, over the course of the past few decades he’s lost that control to insurance companies, PPOs, HMOS, HIPAA and now the Affordable Care Act (ACA).

These entities were all designed to provide health care benefits to growing numbers of people-which is just as fine a goal today as ensuring pensions was 40 years ago.

But in the process, they’ve stripped the doctor of his autonomy, his job satisfaction and a substantial portion of his income. Today he keeps on practicing medicine and trying to help patients, but he watches the moneymen at those intermediary institutions getting rich and wonders where he went wrong.

The answer: He didn’t. But well-intentioned efforts (once again) to help the majority had significant negative unintended consequences for doctors in particular.


Now, obviously, our business (founded in 1970, four years before ERISA became law) has benefited to some extent from the growth of the investment industry.

But the biggest difference between those men mentioned above and our business is that they manage money, while we at Cabot recommend how you should manage your money.

They make their money by taking a percentage of assets under management, sometimes with a sweetener for good performance.

We make our money by selling subscriptions to our investment advisory services (originally called newsletters).

We don’t carry ads, so there are no advertisers to cater to.

And we never, ever accept money from a company to promote its stock.

Thus, with all our revenue coming from you the reader, our major goal is to serve you well, so that you become a paying subscriber, and remain a paying subscriber, for years to come.

Happily, we have a very competent team at Cabot that helps me achieve that job.

There are old-timers who’ve been through many market cycles and know how to roll with the punches (the first non-family employee-hired more than 39 years ago-just retired last month).

And there are newer members of the team, from those who help us stay current on communications technology (which is ever-evolving) to those who are expert with the latest investing techniques (like Jacob Mintz of Cabot Options Trader).

But at the center of all our work is you, the individual investor who’s looking for good advice about investing.

Whether you’re an old friend who’s been with Cabot for decades and trusts us to help you navigate the ups and downs of the market-or a new arrival who started investing only recently-or an institutional investor (like roughly 8% of our readers), our one goal is to give you good advice week after week, year after year.

So, without further preamble, here’s today’s recommendation!

Praxair (PX)

Anyone paying any attention to the investing world knows it’s been a terrible year for commodities.

Over the past 12 months:
Gold is down 5.3%
Copper is down 12.2%
Platinum is down 13.0%
Corn is down 15.0%
Oil is down 17.8%
Tin is down 18.7%
Silver is down 21.0%
Sugar is down 28.6%

So why would you buy a commodity now?

Because it’s cheap, of course, and somewhere in the future, commodities will enter into an uptrend.

But how do you decide which commodity to buy?

Well, you don’t buy chocolate because you like Hershey Bars, you don’t buy coffee because you’re a big fan of Starbucks, and you don’t buy gold because you like jewelry.

No, the best way to select a commodity, or any undervalued investment, is to consult Roy Ward, whose totally objective, unemotional system consistently identifies high-quality companies that are temporarily “cheap.”

In his latest issue, published just last week, Roy recommended Praxair (PX), which has the following uninspiring chart.

And here’s what he said:

“Praxair is the largest industrial gases company in North and South America and one of the largest worldwide. The company produces, sells and distributes atmospheric and specialty gases and high-performance surface coatings. Praxair’s customers are in the aerospace, chemicals, food and beverage, electronics, energy, healthcare, manufacturing and metal fabrication industries.

“Sales and earnings growth stalled in 2012 and 2013, but growth is accelerating in 2014. Sales rose 5% and EPS advanced 12% during the 12 months ended 9/30/14. Sales and EPS will likely rise 8% and 10% respectively during the next 12 months. Dividends have been paid and have increased every year since Praxair was spun off from Union Carbide in 1992. Dividend hikes have averaged 19% during the past 10 years but will likely average 10% to 12% during the next five years.

Praxair sells at 19.6 times current EPS with a dividend yield of 2.3%. I expect PX to rise to my Minimum Sell Price of 148.31 within one year.”

Pretty simple, right?

Now, you could simply buy PX here and put it away until it tops 148 (a gain of 17%), but there’s one more detail to consider.

Roy not only has a Minimum Sell Price for Praxair (and for 274 other high-quality stocks in every issue), he also has a Maximum Buy Price-and that’s the key factor you need so that you don’t overpay when you buy the stock.

If you overpay, you lose the Margin of Safety, and that’s a key component of value investing.

So what you really should do is join Roy’s very satisfied long-time readers, so you can be kept up to date on PX and all the undervalued companies in Roy’s portfolio.

Details here. 

Note: Since inception on 12/31/95, Roy’s Cabot Value Model has provided an impressive return of 1,104.2% compared to a return of 554.2% for Warren Buffett’s Berkshire Hathaway. During the same 18-year period, the Dow has gained just 239.8%.

Details here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory


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