A View from the Top of the Financial World

Every year there are a handful of shareholder letters that I urge people to read and at the top of the list is the letter from Jamie Dimon, the CEO of JP Morgan (JPM).

I know a lot of folks don’t.

If you are living a life, running a business, building a career, have a family, grandkids and all that comes with living… who has time for that?

I understand that, so since I read it as part of my job I will go ahead and break it down for you.

Some of you may be wondering why I care what Jamie Dimon thinks at all. After all, I do my own thing, have my own rules, and don’t pay a lot of attention to day to day news flow – all true.

However, Mr. Dimon runs the largest bank in the United States and the 6th largest in the world. They are growing their footprint by entering nine new markets this year alone. By 2022 they will be in 93% of all US markets.

On top of that, they are the number 1 ranked investment bank in the world today.

What they do influences markets and economies, so in my opinion, it’s just smart to know what the folks at JP Morgan think at a given moment in time.

The Model of Financial Efficiency

My first takeaway is that this is a damn good bank.

Mr. Dimon and JPM believe they can continue to earn a return of equity of over 15% a year. They think long term and pay little to no attention to quarterly reports other than to the extent they’re required by law. They pay their people well and provide tremendous benefits; between buybacks and dividends, they do a lovely job of taking care of their shareholders.

The total shareholder yield-dividend plus buyback rate is close to 7% and today’s price, and if it falls to the point that the total shareholder yield crosses into double digits, it becomes a must own.

I am not generally a fan of big banks, but this is an extraordinarily well-run company.

JP Morgan should be at the very top of your buy on a pullback, load up in a crash list.

The bank has grown its net asset value by about 7% over the last decade while increasing the dividend by 20% a year over the same time frame.

If you can buy that type of success at bargain basement prices, it is a no brainer.

A Wall Street State of the Union

Mr. Dimon goes on to talk about some of the challenges we face today.

The economy is doing okay and over the last decade has expanded by about 2% annually. While that is not awful in past recoveries, it has accelerated by roughly twice that rate according to Mr. Dimon’s letter.

As he puts it, “After a sharp downturn, economic growth would have been 40% over ten years in a normal recovery. Twenty percent more growth would have added $4 trillion to GDP, which certainly would have driven wages higher and given us the wherewithal to broadly build a better country.”

He then looks at some of the individual challenges, and I agree with his assessment of things like infrastructure, the education system, healthcare, and excessive regulation.

Yes, all of these are challenges, but within challenges are opportunities.

The companies that solve some of these major impediments to growth are going to make a fortune for their investors over the next decade.

The Two Most Immediate, Most Promising Problems

Infrastructure is a huge problem. As Mr. Dimon correctly points out, “Philip K. Howard, who does some of the best academic work on America’s infrastructure, estimates it would cost $4 trillion to fix our aging infrastructure, and this is less than it would cost not to fix it. In fact, a recent study by Business Roundtable found that every dollar spent restoring our infrastructure system to good repair and expanding its capacity would produce nearly $4 in economic benefits.”

I already own several firms that will benefit from repairing or replacing our aging infrastructure systems. I look for more all the time that trade at the type of bargain prices I am willing to pay.

Slowly but surely, I am gathering a mix of stocks that will benefit from a $4 trillion tsunami of cash that will flow into the industry at some point.

It is not if, it is when.

And I’m patient.

The second problem is education.

It is an issue I follow closely, not only because it is near and dear to my heart – I donate more to education and literacy programs than anything else – but also those companies that find ways to improve our education system will make incredible stacks of cash.

Firms that provide adult education on reasonable terms will make an incredible amount of money for their investors. So will the high-tech infrastructure firms that help wire our classrooms.

Protecting the Hearts and Checkbooks of the Future

I am also watching the healthcare partnership between JP Morgan, Amazon (AMZN) and Berkshire Hathaway (BRK.A) very carefully.

I have a lot more faith in the ability of Jamie Dimon, Jeff Bezos, and Warren Buffett to find a solution to fixing the quagmire that is our healthcare system than I do some faceless Washington DC bureaucrat of one of the bozos we have sent to Congress.

The model they develop will work and finding companies that supply that model or replicate will make us all a bunch of money.

If you asked what kept me up at night, it would be the prospect of the Red Sox winning the World Series for the second year in a row and the amount of levered lending in the shadow world of non-bank lenders.

Mr. Dimon warns that somewhere around $1.5 trillion of levered loans are in non-bank hands. While that may not be enough to blow up the world, it is enough to cause severe disruption in a recession.

I track these loans very carefully, and I am looking for signs of developing problems that could hurt the markets in the short run and create significant buying opportunities for those of us who think long term.

When I see them, you will be the first to know.

To the Max,

Tim Melvin

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