Creating income in order to sow wealth seeds

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I have posted a flurry of property related articles of late.

First was the big one, becoming a property developer. This is a cornerstone stock for me, and after an additional purchase of stock, I will now, via my shareholding, be developing and selling one apartment per year.

Secondly came my long desired purchase of a self-storage stock. Hopefully more of this stock to come in future.

This week I wrap things up on the property side.

Renting out apartments and a UK bargain hunt.

I trimmed a few holdings of stocks that were lagging a bit on the earnings side and where I was perhaps too concentrated. I have used the proceeds to buy a variety of property stocks. One I am very excited about is called Indlu Place. This is a residential property stock, yielding over 9%, with low gearing. The kicker for me is that it pays a quarterly dividend. So far each quarter has paid a higher dividend that the quarter before. Like the self-storage stock, I like the fact that this stock is not in shopping malls or offices. I believe there will always be a demand for residential accommodation, especially in the lower income brackets where they play.

indlu4
A few of my new apartments

I have also been taking advantage of the currently strong currency where I live to invest in two UK property stocks and one German property stock. These stocks had all fallen quite a bit since Brexit, so I believe I have paid a fair price, some were half the price compared to a year ago. Two have the option to reinvest dividends, which I will take up in order to compound the investments.

Now to use income to plant dividend seeds

I never expected to start a property business. Investing seldom goes according to plan, which is one of the things I like about it. Circumstances, currencies and markets are always changing. When I started to feel over exposed to two stocks, which made up close to 60% of my portfolio, and they offered attractive exit prices, I decided that I wanted to convert a portion of that equity into safe income. Also selling my hotels allowed me to buy a property development stock.

However, my income needs for now have been met by the recent purchases. That is not to say I do not want or need more income, but I feel I have created a decent income stream, and can now get back to the process of creating wealth again.

I believe wealth will ultimately come from owning great stocks, the great compounders. The Coca-Cola’s, the Wal-Marts and the Unilevers. However, ideally one needs to find early versions of these stocks to achieve maximum benefit. The property stocks will buy me some more time and some income with which to find and invest in these stocks when I find them.

I currently have five or six of these potential wealth seeds in my portfolio, now it is time to accumulate some cash again, and look for the next great one, or add to my existing wealth seeds.

Conclusion

It will just take a few of these wealth seeds to come to fruition to really change my financial future. You have to be in it to win it after all, and now I can at least look forward to a quarterly dividend from my apartment tenants, they will not make me rich but will at least help keep me in the game a bit longer, and the great thing about a property stock as opposed to the physical property is that they will not call me in the middle of the night with a blocked drain! I will also sleep a little easier knowing that I have some euro and pound income trickling into Dividend Tycoon HQ, especially given recent political developments in my home country.

I hope I have inspired you to create an income stream of your own which will buy you a little more time, and help accumulate funds, to go after the really big winners. For myself I do feel that becoming a (minor) property tycoon will be a benefit in the ultimate goal of becoming a (major?) Dividend Tycoon.

 

 

 

 

Owning a self-storage business, at last!

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My last post was about me becoming a property developer. This was possible since I sold my hotels. Becoming a property developer was the first step in my new quest to become a property tycoon, which naturally fits in very nicely with being a dividend tycoon.

While my property development company will in fact pay out a healthy dividend, they do also retain 70% of the profits for new developments, which limits the income yield compared to a pure property stock. As such I felt I also wanted some property stocks that will pay me rental income come rain or shine. The development business could be up and down depending on the economy, but a decent REIT (Real Estate Investment Trust) should pay out under all conditions.

Given the above, I was very happy to have some funds from the sale of my hotels in order to buy a stock I have had my eye on for ages. It is a self-storage REIT, called stor-age. (https://stor-age.co.za/)

Why I wanted a self-storage business?

The self-storage business has been appealing to me for some time. It looks so easy and profitable. I often drove past a fairly large one close to where I used to live. From the outside you could see lines and lines of garages. At one point I needed storage and found out that it was basically full up. What struck me however was that whenever I drove past, there was rarely any movement or activity. You might think that strange but when you consider that once a person takes out storage, the average time they leave their goods in storage is well over a year. So while perhaps a couple of people move goods in or out each day, you have a couple of hundred garages each silently generating revenue. Being garages, you do not have plumbing problems or difficult tenants. They also do not need to be upgraded every couple of years with the latest floor tiles or bathroom taps. Sounds good to me!

With this promise of easy and almost passive income you cannot blame me for wishing I owned a self-storage business. Alas the capital requirements are huge and I would not be able to raise it myself from banks, besides the fact that I do not have any actual experience in the storage business.

However, the beauty of the stock market is that you can become a part owner of some of the best businesses in the world by buying a share in the business. I have been watching this particular share since it came to the stock market in 2015. I also know them from their large sites that one can see dotted around as they have a very distinctive red color theme.

stor-age1
A typical outside image
Stor-Age-Self-Storage-Claremont-Retail
Clean and modern inside

I also know them as I once visited a branch as a prospective client, in the name of stock research of course, and was very impressed by their modern and clean facilities, as well as friendly staff. It is a well managed business, and I would say is the best in this particular niche of the property business.

Now I realize that owning stock is not the same as owning a whole self-storage business myself, but it is a start, and I can think of a few good reasons for rather owning the stock:

  1. I do not run it myself. I say it is an easy business, but it would still require your presence and time, you would still need to hire potentially difficult employees. Sitting at a desk looking into stocks is probably a better job.. and the only difficult employee is me..
  2. There are lots of rather shabby looking self-storage businesses around. I got to pick the best run one, the most innovative one, and a business with very ambitious expansion plans.
  3. I did not need to take out a large loan in order to enter the business, as one would most likely need if starting the business yourself.

I would also say that while I may have a fairly small portion of a self-storage business, I do not plan to stop here. As long as the price is reasonable I will add to my holding over time and look to re-invest the dividends back into the business. As such my stake in the business will get larger over time. I also do not plan to sell my stake even if the stock gets a little bit expensive.

My entry price was at at a dividend yield of just over 8% and the price has moved up a bit since then, but I have not completed the building of my own self-storage business yet.

Conclusion

I hope you can see from this post why I believe that you can become a dividend tycoon by owning stakes in great businesses, just like a tycoon would start any other business.

This business happens to be in the property business. My recent efforts have been aimed at property, and I now have three good businesses in the property business. In fact I have five but I will write about the new additions in a later post. I feel good about the diversification the property businesses have added on my path towards becoming a dividend tycoon, and especially like the high dividend yields they provide.

My focus is still on operating businesses, rather than property itself, but hey, everybody needs a roof over their heads, or at least a place to store their goods.

 

 

 

Becoming a property developer!

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Dividend Tycoon has not packed it in..I am in fact more committed than ever to becoming a Dividend Tycoon. So what is this talk about becoming a property developer?

Since selling my hotels became a distinct possibility, I stepped up my search for great companies in which to invest. I needed to reinvest the capital from my hotels being sold. As I have said before, the hotels were not a great business, but the assets were exceptionally cheap, and I made a healthy profit. However, this is no longer the type of business I am looking for. I am now focused on finding companies which are focused, extremely profitable, have some barriers to entry, and preferably are led by an intelligent fanatic.

All the above has led me to become a property developer, because I have invested a significant amount into a company called Balwin Properties. They are the largest developer of sectional title property in South Africa (basically they build apartments). However, they do not build run of the mill apartment complexes, they build huge 600 unit + schemes, some well over a thousand units. They focus on these, and the large size of the schemes leads to excellent economies of scale, which translates to gross margins of over 40%. In simple language, an apartment they sell for $100000 only costs them $60000 to build.

the-blyde-600x300

Why I am positive

They operate in the lower to middle residential market, where the demand exceeds supply. The apartments are affordable and are built with excellent security in mind, as well as features such as a clubhouse, which is only really possible when you build with this scale, as such a feature would not be economical on a scheme with say a hundred apartments. The company has a good name with regards quality and after sales service. You can see their website here should you be interested, www.balwin.co.za as I do not want to sound like a salesperson for their apartments.

night_scene

Why a good fit for a Dividend Tycoon?

  • Well most importantly and obviously, they pay a dividend! They have agreed to pay 30% of profit out as dividends, the remaining 70% will be retained to use as capital for expansion.
  • The word Tycoon is important. I like to see my companies as an extension of myself. I like to understand what it is I am doing. It is easy here, every year we (the whole company) are building around 3000 apartments. As a co-owner of the company I have worked out that I personally, by default, am building and selling one apartment every 15 months or so. Now I do not know about you, but building an apartment sounds like hard work! I know I do not have the technical skills to do it either. So I am partnering with the best property developer in the business, and letting them use some of my capital, and letting them get on with the job. It would be silly for me to try and compete with them, I doubt I would do a good job painting the inside walls, never mind the rest of it!
  • I like companies where I can see a business that will be durable. I have not invested in technology shares for this reason. I cannot tell how these companies will look 5 or 10 years from now. I do however see a good future for companies building affordable and quality apartments in a country with a growing population and a housing shortage. I also try and keep Amazon in mind when investing these days, and I am confident they will not be dispatching whole apartment blocks anytime soon..I hope.
  • The stock is cheap. I am looking for an edge in order to become a Dividend Tycoon, so I want as much stock for my money as possible. This stock was priced around R7 when I bought and will earn between R1 and R1.50 per year, which equates to a yield of between 14% to 21%, which is very good. The dividend yield is between 4% to 6%. Note that these figures are my own estimates and should not be relied on.
  • Management are significant shareholders. I like the fact that the CEO owns 35% of the stock. Clearly he has the most to lose should things go wrong. As part of my research I watch and read interviews given by the CEO. My impression is that this company has been his life for the last 20 years, and he does not want to let the shareholders down. I sense he has pride in the product and will continue to drive growth in this company for many years.

Flaws?

Things are never so easy. There are always risks. Property developers go bust all the time. They use debt, and interest rates can rise, the economy can slump.

However, I have committed my capital to this company as I believe they are good operators, have experienced many economic cycles, and have built a business model that is very resilient. They sell their developments in phases, so cannot get stuck with a mass of unsold property, they pre-sell much of their stock, and ring fence each development.

In addition they have a product that has a definite utility. Should the economy take a serious dip and people do not buy the apartments, they have the ability to rent the apartments out at good yields until better times come around. It is not like they build smartphones or forklifts, which will sit unused until such time they are sold. They will also not become obsolete.

Conclusion

I am excited about this new addition to my portfolio. I did the research on the company first, and then went to see one of their developments as a prospective buyer. Seeing the quality of the apartments and the size and scale of the scheme convinced me this was a good buy.

I am increasingly interested in property investments, and am currently researching a few other opportunities in the property sector, but for now I will be monitoring this investment and any dividends received will be reinvested back into the company should the price remain reasonable.

Now where is my hard hat…I have work to do!

Disclaimer: As usual, this is a small cap stock, so it is risky. Do your own research before deciding to buy or sell.

 

 

 

 

 

Charlie Munger – my favorite lessons

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I have not been shy to admit that I am a huge fan of Warren Buffett. He is an inspiration, not only in terms of investing, but also on the subject of leading a good life and being the best you can be. I like the fact that he has a good sense of humor and is very down to earth. At the age of 86 his enthusiasm for his work is still strong and he is very sharp. I wrote an article about him on this site, Warren Buffett – Dividend Tycoon?

However, as brilliant as Warren Buffett is, many regard his business partner for the last 50 years or so, Charlie Munger, to be the intellectual giant of the two, and a true genius. Perhaps he has not contributed as much to the amazing returns of Berkshire Hathaway as Buffett, due to the fact that he is more a sounding board for Buffett, and Buffett is the CEO and runs Berkshire from Omaha, whereas Munger lives in Los Angeles.  Munger is now 93, and at the AGM last year still sounded pretty sharp.

Munger is perhaps best known for his deep thinking and work on mental models. He is a voracious reader of subjects such as psychology and has written on this extensively. One of his most famous papers was “The Psychology of Human Misjudgement”. I follow the well known investor Mohnish Pabrai and it is well worth watching some of his talks on youtube as he has a deep understanding of Munger’s concepts, and is very interesting himself.

Much has been written on the subject of Charlie Munger, so I do not really want to reproduce in detail what has already been written about him, but I thought I would take a look at the things that I personally found most interesting in the articles, speeches and books that have been written by or about him. It could be something I just found interesting, or funny, or something I felt I should make a note of in order to remind myself.

So below is a selection of my Charlie Munger favorites:

I thought though that I would start with some context, just to show that he was not born with any particular advantage in life, and through his learning and mental models, made a huge success of his life. I copied this passage about him from an article I once read but no longer know where:

“At 31 years old, Charlie Munger was divorced, broke, and burying his 9 year old son, who had died from cancer. By the time he was 69 years old, he had become one of the richest 400 people in the world, been married to his second wife for 35+ years, had eight wonderful children, countless grandchildren, and become one of the most respected business thinkers in history. He eventually achieved his dream of having a lot of money, a house full of books, and a huge family. But that doesn’t mean he didn’t face unbelievable challenges and tragedies.”

Charlie Munger has said a lot about reading. He has in fact attributed much of his success in life to reading. I became an avid reader later in life, but regret not having started earlier. The best way to sum up his views on reading is the following quote from him:

“In my whole life, I have known no wise people who did not read all the time-none, zero. You would be amazed at how much Warren reads-and at how much I read. My children laugh at me, they think I’m a book with a couple of legs sticking out.”

Related to his views on reading is a theme I have recognized in his talks and writings, and that is that all one can do is try to improve yourself each and every day. There is not one big thing that one can do, but it is a progression of small things, and the theory that eventually you get what you deserve in life. The most striking quote on this to me is the following:

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.”

So perhaps even if you only have 20 minutes free time on a particular day, do not waste it. Read a book that will make you a bit wiser than the day before, but eventually the small increments in knowledge will add up. It certainly does not need to be an investing or business book, as long as you can learn something about the world or about somebody that you never knew before. You will accumulate knowledge that will come together and help you in some way, or just make your time on earth more interesting.

Again related to this, was his answer to somebody at a Berkshire meeting when asked how to find a good spouse. His answer, was that the way to find a good spouse, is to deserve a good spouse. I use this answer as I think it is a good example as to how he looks at the world. Most people would not have given that answer.

This leads to one of his favorite concepts, inverting. He believes that often the correct way of looking at something in order to understand what will make it a success is to rather look at what does not work, and will lead to a lack of success. For example, do not look at why a particular investment could be great, rather think about what could go wrong. If you want to be successful in life, look at things which could cause you not to be successful. For example, do not become a drug addict. Munger has a great sense of humor and perhaps his best example of inverting is this: “All I want to know is where I am going to die, so that I never go there.”

Munger is also known as the grumpier one. Whereas Buffett is always cheerful and upbeat and tends to say the more acceptable things, Munger does not seem to care who he offends, and can be quite harsh in his criticism if he sees stupidity or something that does not work.

I recently came across a quote of his which represents what I mean. “I don’t let people do projections for me because I don’t like throwing up on the desk.” The context to this would most likely be that Buffett and Munger have a complete disdain for using consultants to advise them. They know when a business is good or not, and do not need some highly paid management consultant to advise them.

Influence on Buffett regarding investments:

Warren Buffett’s mentor was Benjamin Graham, the father of value investing. Graham wrote ‘The Intelligent Investor’ which Buffett says is still the best investment guide ever written. Graham however was only interested in deep value stocks, that is where the stock was worth less than the assets the business owned. This provided safety. However, Charlie Munger came to like only the great businesses. He could see that these businesses would in the long term outperform the poor businesses that were selling cheaply. Buffett slowly accepted this, and his purchase of Coca-Cola stock is proof that it worked.

The problem with the great companies is that the stocks are normally expensive. Of relevance to me was a question somebody asked Munger at a meeting, where they asked how to find great companies at a good price. Munger’s answer is below:

“How do you get into these great companies? One method is what I’d call the method of finding them small, get ’em when they’re little. For example, buy Wal-Mart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And its a very beguiling idea. If I were a young man, I might actually go into it.”

This was of relevance to me because I have been investing in a retail company called Choppies, which is growing in Africa, is still small and seems to be run by very ambitious entrepreneurs. Now, so far the investment has not been great, I am in fact down so far, but I believe in the story long term, and I am encouraged by the fact that Munger would give an example of a company so close in business model to that of my idea. (Note: Not a share tip, it is very risky).

Anyway, I will keep this stock unless anything changes, because Munger has preached sitting on your assets..

“There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass. You’re paying less to brokers. You’re listening to less nonsense. And if it works, the government tax system gives you an extra 1, 2 or 3 percentage points per annum compounded.” (In the last sentence he was saying that by not selling you do not get taxed on any capital profit for as long as you hold the stock)

Conclusion

I would encourage you to read what you can about Charlie Munger as I have barely scratched the surface here, but these were some his insights which I found particularly useful, although there are many many more.

In conclusion, I was wondering what Charlie Munger would say if you asked him how to become a Dividend Tycoon? I think his answer might be something along these lines, “Do not – become a drug addict, get into debt, become a gambler, neglect reading as often and widely as possible, buy expensive or faddish stocks or blindly follow the crowd.” “Invert, always invert.”

Okay then..thanks Charlie!

Recommended reading:

Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger (Great book if you looking for his early background and life as opposed to just an investment book)

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition

Charlie Munger: The Complete Investor (Columbia Business School Publishing)
 

 

 

 

 

 

 

Resolutions for a Dividend Tycoon – 2017

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I, Dividend Tycoon, resolve to:

  1. Keep my eyes open for the best businesses. The signs could be anywhere – in a shopping mall, in an airport, sitting at a bar, reading a newspaper or magazine, driving my car or watching a movie. Just make a note of it, and then go about researching the idea. Hint to self: Doing Christmas shopping I noticed that almost every trolley/shopping basket had a bottle of Coca-Cola in it. Despite the sugar fears, it is still popular where I live!
  2. Only invest in these great businesses referred to above. Do not feel you need to do anything else other than invest in the best. Have the courage to load up when you find one though.
  3. Listen more to others, but make your own decisions. Do not let others scare you out of a stock, although listen carefully to what they are saying, and think about why they are saying it.
  4. Look at stock prices less, and read/research more. Also turn off twitter feed for long periods, it is distracting. Focus on finding the great businesses and the good stock prices will surely follow.
  5. Find like minded people to talk about investing with, it is always good to hear other opinions before buying a stock. This blog does not make money but has already been a way to connect with some good people. I hope this will continue.
  6. Invest in US and/or UK stocks. This was the initial reason for this blog, as I am living in an emerging market country with fairly high political risk. There are however some great investment opportunities which I have deployed any capital I have had into. This may be partly due to inertia/procrastination or just home bias, but it ends in 2017. In 2017 I will make my first offshore acquisition and diversify my risk. Offshore though is not an excuse to pick anything offshore, the stocks must still be the best businesses. (See point 1)
  7. Surf more – it generally improves your investing! Not sure what that says about me though..
  8. Do not be afraid of cash! (Do not be confused, I embrace cash!) However, I have a rather bad habit of letting it go too quickly. I love owning stocks, so the temptation is always to quickly deploy new cash into new stocks. See point 1, and remember to be patient. Find the best businesses at a reasonable price. If you have to sit on your hands, or go surfing (see point 7), then do that!
  9. Read Get Rich with Dividends by Marc Lichtenfeld. This book was recommended to me by one of the new readers of this blog, and judging by the Amazon review could be well worth the cost and time it takes to read.
  10. Be patient! Okay I already said that, but this is my weakest point, so it is another reminder.
  11. Spend more time on Dividend Tycoon. I enjoy writing, hopefully (assuming you made it to point 11) you enjoy reading. Let me know if you have any resolutions for 2017.

Have a great 2017!

Being willing to change your mind when the story changes

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Being mid-December I thought things on the stock market front would be quiet by now. Last year December I received the motivation I needed to start this blog (which I did in February this year). The catalyst then was an event in South Africa, the firing of the then capable finance minister, to be replaced by a political appointee. This resulted in a massive devaluation in the value of the South African currency and dramatic fall in share prices. My aim then was to diversify my portfolio out of South Africa. It still is, although it is taking longer than anticipated. The currency has rebounded quite strongly and the time (and funds) are approaching.

This December has however not been any quieter. Fortunately the reason is not political, but more company specific. This has meant I have been rather busy changing parts of my portfolio, researching new stocks, and doing a bit more buying and selling than I would have liked.

Things can change quickly

My last post focused on two stocks in which I have my largest holdings. One of these is a company called Trustco, a Namibian financial services company. I have held this stock since 2010, and it has been a stellar performer, going from 35c (2.5c US) to around R3.60 (26c US) at present. I liked the story and the growth, but mostly that the value in the share was underpinned by huge tracts of land around Windhoek, the capital city, which was not being valued correctly by the market. You could have bought the whole company then for R270m, but the property alone was worth about three times that. I was so smitten by this stock that I borrowed as much as I could from my home loan in order to purchase more shares, not something I would normally recommend.

I have continued to buy more of the stock since 2010 and along with the price appreciation it has at times been over 30% of my portfolio. However, in recent weeks the results were released which while not bad had a few things I did not like, such as increased debt. There is also the fact that they are buying a diamond mine which is being bought from the CEO at an exorbitant price according to many analysts. Then there is the issue of the CEO having rather nasty battles on twitter with people criticizing the company. All these things have made me rather nervous, and I felt it prudent to sell one third of my position. For tax reasons I am loathe to sell more in this financial year as I will pay Capital Gains Tax. On the plus side I can sleep a bit better at night and have had some cash to invest.

It is also quite sad for me, as I really thought this was my ‘get rich’ stock. (I have one other one I have hopes for, so all is not lost..). But in hindsight I should have done this some time ago, it was too risky having such a high concentration in this stock, and I have replaced it with some high quality dividend paying stocks, which will certainly help me ‘get rich slowly’ if I allow them the time and have the patience to let them compound. I will not go into details now, but the majority went into three South African stocks: Woolworths (high quality retailer), Clover (high quality dairy and beverages) and Trellidor (best in market home security). I also made a small addition to a property counter I already own, Tower Property fund, which should see me obtain a yield of over 12%. All are nicely up since I bought.

Beware of anchoring

I think as investors we can get rather anchored to our ‘star performers’, thinking that past performance is an indicator of future performance. We should in fact search for stocks that have the characteristics that prevent us from selling, as it is best to leave your stocks alone to compound over time. Warren Buffett himself says his favorite holding period is ‘forever’. However, if the story changes, and the reason you hold the stock is no longer as valid, then it is better to take action sooner rather than later. Please note though that a decline in the stock price in itself is not a valid reason to sell, that may in fact be an opportunity to buy more.

Conclusion

So, I have been busy realigning my portfolio, and am delighted with some new additions to my dividend family. I am hoping that they will be with me for many years to come, but this time my mind is more open..

All that remains is to wish all readers of this site a blessed Christmas and a New Year filled with…lots of dividends!

 

 

 

No cash to invest, but I have been buying stocks anyway!

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It has been a slightly frustrating time for me on my long term investment journey. I am fully invested, and have no free cash to invest. This is particularly frustrating when you know there are some stocks that are good value, and you just have to watch them creep up slowly from the sidelines. I have said before that my biggest mistake to date has been impatience so this is really my own fault, and is another lesson learned. I have also written about my hotel saga, which looks likely to conclude at the end of February 2017 (according to a company circular released this week), which has tied up about 10% of my portfolio in an illiquid stock, but at least there is a possible end date with the promise of a good return on investment and cash injection.

In the mean time I have been doing an enormous amount of research, I have requested annual reports from a number of target companies, and in general I have been preparing for better times.. I have done an interesting trade too, but will touch on that later.

However, despite all that I have written here, suggesting that I have merely been a spectator to the market, I have been buying! I am sure you are wondering whether I have been drinking or am going mad due to watching the bargains slip away. Hopefully you are just wondering how that is possible.

Okay, technically I have not been buying stocks, but at least two companies, in which I coincidentally have my largest stakes, have both been or have plans to buy back stocks from the market. This is also known as a stock repurchase or stock buy back. Essentially the company buys its own stock and then either holds the stock in a treasury account or cancels the stock. The net effect is that my overall equity stake in the company will increase, without me laying any cash of my own down. To me this is as good as buying the stocks myself.

One of the stocks, Grand Parade Investments, which owns the Burger King and Dunkin Donuts franchise in South Africa, have recently announced that they have bought back 24 million of the previously 488 million shares. So without spending a cent, I now own an extra 5% of my Burger King and Dunkin Donut franchises, as well as other assets they own. I am especially happy because I feel the stock is undervalued, so it is a good use of the companies cash.

The other company, Trustco, is a diversified financial services company in Namibia. They have entered into an agreement to buy 41 million out of a total of 772 million shares from one of the large asset managers. Again, this will result in me effectively increasing my equity stake by 5%, for no money down. This deal is a little more difficult to evaluate as they are paying a premium to where the current share price is. However, it could be argued that in order to get your hands on a block of stock this size would cause the price to rise substantially.

I am not alone in being pleased by these stock buy backs. Warren Buffett has often mentioned in his annual Berkshire Hathaway letter the effect of stock buy backs. His favorite example is that of Coca-Cola. He finished buying his stake in Coca-Cola in the early 90’s and at the time had 400 million shares (split adjusted) for an equity stake of around 7% of Coca-Cola. Berkshire Hathaway still owns 400 million Coca-Cola shares. Warren Buffett has not bought any more stock for over 20 years in the company, but they now own over 9% of Coca-Cola. If this seems petty to you, remember that you could also buy 2% of the Coca-Cola company for around 3.6 billion dollars if you have the money.. The reason for his ‘free’ extra 2% is that the Coca-Cola company has consistently been buying back its own stock. This makes Berkshire Hathaway’s 400 million shares a bigger proportion of the overall number of shares.

Hopefully a clever trade (and more free shares)

Related to the share buy backs is the fact that the company referred to above, Grand Parade Investments, owns a 10% stake in another favorite company of mine, called Spur, which is also in the restaurant and fast food business. They have increased dividends for over 20 years. Recently Grand Parade Investments has said that they have reached an agreement with a fund manager to buy up to 19 million shares in Spur. So I will also be getting more Spur shares, with no money down.

In addition to the ‘free’ shares, I have spotted what I believe to be a good trade. The shares of Grand Parade Investments do not price in the food assets, but only their assets in the gaming sector. So you are effectively not paying for the Spur shares. As such I felt it was a low risk trade to sell my Spur shares and use the proceeds to buy Grand Parade shares, as I would effectively be buying back Spur shares for free which are held by Grand Parade, while also getting the gaming assets.

Disclaimer: The above trade is risky and probably not recommended, but as an aspiring Dividend Tycoon I am looking for an edge and when I see a free lunch (excuse the pun), I grab the burgers! (and Donuts). Hopefully in time I will be proved right, but I may need to be patient.

 

 

 

 

 

 

 

 

An update and change in direction..plus Dunkin Donuts!

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Regular readers of this blog may have noticed a drop in activity levels of late. This is partly because I have been finding it a bit more difficult to come up with new topics on a weekly basis, but also because this blog is more a means of documenting my investment journey, rather than a revenue source in itself (in fact it makes no money and costs some money to run). As such I have found that thinking of a topic every week and then writing it has distracted me a little from the primary way I earn a living, which is investing.

The initial aim of this blog was to document my journey with regard to dividends earned from US and UK stocks. So far there have not been any dividends from these sources, hence the slight change in direction. I am living in South Africa, and the aim is still to invest in the US and UK as a means to diversify out of an emerging market, that has not changed. However, what has changed since I begun this blog, in my opinion, has been the wonderful stock opportunities presented in South Africa. This combined with what was an extremely weak currency when I started this blog has made offshore investing less attractive to me, for now. Had I invested out of South Africa 6 months ago I would be looking at 30% losses purely on the currency movements.

New direction

In light of the above points I have decided to refocus this blog to be about investing in general, especially the psychological side of it, which I believe to be incredibly important. I will also share more about my stock market efforts in South Africa, as this is the market I know best and where I believe I have a competitive advantage. I will still share with you any analysis and moves I make into US and UK stocks, although I do not think the dividend updates will continue. I do think this is a rather crowded field and there are literally thousands of dividend blogs providing this sort of material. I am not sure how many of them are honest, but it is not a competition I want to compete in.

What has been happening

  • Hotels..

It has been a very good period of what I would call ‘Active patience’ which I believe is setting me up for some good growth to come. I am still sitting with my hotels, see last post on the matter here . This saga continues, but fortunately since my last update there has been a piece of good fortune, the buyout price from the majority holder of the stock was raised from 65c to 85c. This was always on the cards, but not expected. There is still the matter of a circular and a vote to contend with, and so it is not a done deal, but at this price, if it is successful, it means my return on investment increases remarkably, and will be close to 70% profit on a fairly short holding period. Here is the graph of the stock price on the day of the revised offer:

gdn-share-price

This ‘victory’ is one I am rather proud of, in that it is the first time I have been involved in any sort of shareholder activism, and I do believe the increased offer was due to a few of us minority shareholders voicing our discontentment with the price originally offered.

The downside is it has delayed the receiving of any funds, but for an extra 30% return, I am willing to be patient.

  •  Search for new ideas

The promise of a fresh injection of capital from the sale of my hotels has long been on my mind, but the boost received of late has refocused my research, and I have been working hard on researching some companies in South Africa which I believe will make for excellent investments when I have the funds. These include the manufacturing, property, retail, beverages and fast food sectors. Some of the value on offer is really good in what I believe are high quality companies. I will in due course share some of these ideas with you.

  • Reading

I do believe that the most important job of an investor is reading. It really is vital to try and obtain the best knowledge possible about the world around you, about various industries, companies and business leaders. I think it is sometimes difficult to justify to those around you that you are ‘working’ when reading a book or business magazine, but really that is what it is, even if you happen to enjoy it. Investing is accumulating knowledge and then applying it. It has been a particularly good period for me, where I have stumbled upon or found some incredibly good books. Two that I will mention because I can thoroughly recommend them are:

Keynes and the Market: This book is the story of how this world renowned economist, John Maynard Keynes, became an incredibly successful value investor, and ended up making a fortune on the stock market. His methods really resonated with me, and I will write about this at some point.

Pour Your Heart Into It: This is an early stage (1997) book by Howard Schultz who propelled Starbucks from a tiny Seattle coffee company into the global giant it is today. If you are a regular reader you will know Starbucks is on my radar, so this was a very interesting book for me. I have read more recent books about Starbucks, but it was extremely interesting to read a book about the earlier years.

Finally, taking a break at Dunkin Donuts..

One of my cornerstone investments is in a company called Grand Parade Investments. This is a company that I have owned since 2010 and have steadily been increasing my equity stake in. I go to the AGM every year, and follow them closely. The current focus is on building a large food business. They have had the South African license for Burger King since 2013, and now have over 60 stores. They have also obtained the license to operate Dunkin Donuts in South Africa. I think this will be successful and with every store opening, my business expands. I went a few weeks ago to see it for myself, I was especially keen to try the coffee which I have heard good things about. Unfortunately (or perhaps fortunately) the queues where so long I was not able to get a coffee and had to be content with buying some donuts on the side.

dd2
Queue at the first branch to open
dd3
Looking forward to tasting one of these!

 

They are opening another branch this weekend so I will perhaps try the original store again for a coffee. You may have read my article Visiting your dividend machines, this is my favorite part of the job, especially in this case..

Conclusion

Thanks for bearing with me. I hope you will find the change in direction agreeable, you are welcome though to let me know what you think.

Further reading:

Keynes: Made a fortune in the stock market
Excellent book on early Starbucks



Letter to shareholder’s of Dividend Tycoon Inc

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I attended an AGM a few months ago of an investment company run by a well known value investor. While I am not invested in the company other than a miniscule shareholding so as to ensure I get updates and annual reports, it is an interesting company and one that I probably should invest more into. (The company is called ‘RECM and Calibre’, see raclt.co.za)

However, what really interested me was that I received a compilation of Shareholder letters from 2011-2016. This made for interesting reading as it charted the course of the company from initiation to the present. The letters are well written, and have some good investment lessons.

As you will know from this blog I do my own investing, rather than investing in mutual funds or even passive index investing. So far it has been more profitable, and certainly more rewarding as I feel in control of the process. As I do my own investing I have come to see my portfolio as my business, or my own company, no different from any other you may see as you walk down the street. The various businesses in my portfolio sell products or services, and they all (currently) make a profit. Part of that profit is taken out the business and paid to me in dividends. The rest is reinvested in those businesses. I partly live off those dividends, and any excess cash can be reinvested in my existing, or new, businesses.

Reading the 2011 letter to shareholders, which I really enjoyed, resonated with me because it set out four Competitive Advantages they felt they had. It struck me that as I see my portfolio as a company, this letter could quite easily be adapted to being a letter to “The shareholder’s of Dividend Tycoon Inc”, and that I had the same, perhaps even more, advantages that this company has. Yes, I am the sole shareholder and the funds are a fraction of those written about in the letter, but the principles are the same. If you want to go about becoming a Dividend Tycoon I think these advantages could apply to you if you are willing to do some work yourself.

Here is the section of the letter referring to Competitive Advantages, which I have adopted, I may print it out and have it visible near my computer, to remind me of some of these principles.

Shareholder’s letter to Dividend Tycoon Inc

(please note I have reproduced this section word for word and added my commentary in red where applicable)

Our competitive advantages:

  1. Permanent Capital protects us from swings in investment sentiment. (It is my capital, so it is permanent, nobody can withdraw it except me). In open-ended funds (such as unit trusts) investors tend to panic when markets decline, and cash in their investment. This forces such funds to become sellers, at exactly the time that bargains are presenting themselves. (Dividend Tycoon Inc will never be a forced seller!) RAC (Dividend Tycoon Inc), with its permanent capital, can take a long-term view, buy when prices are low and hold onto bargains, all without the fear of client withdrawls. This is a major competitive advantage over open-ended funds.
  2. Because we are focusing on smaller companies (well Dividend Tycoon focuses on both big and small, but initial capital gains have come from small companies and this will most likely continue), we have much less competition from other buyers, which helps us pay lower prices. (I too have found most of my bargains in the small caps space) Also, due to the institutional imperative of growing assets under management, most investment houses are ruled out from buying shares in smaller companies. Basic micro-economic principles dictate that less demand equal lower prices. This competitive edge is very hard – if not impossible – for our competitors to match. (Well I am not a competitor, but I would say I can do this too)
  3. We have spent significant time and effort to build a reputation as responsible co-owners of businesses, with whom serious business people prefer to partner with. (Dividend Tycoon Inc are long term investors) This gives us an advantage over the run of the mill paper-shuffling trader who is continuously buying and selling in response to the markets gyrations. (Dividend Tycoon Inc would like to hold most of it’s current holdings for at least the next 20 years if nothing fundamental changes) I would add that we still have to do a lot of work on proving and exploiting this advantage, as we are nowhere near to having achieved our goal of having the reputation of being the leading business partner for good businesses. (Dividend Tycoon Inc is not perfect either..) In years to come I hope to be able to report to you that we have expanded the competitive advantage significantly. (So does Dividend Tycoon Inc)
  4. Finally, a word on costs, RAC has employed RCM as its investment manager. (Dividend Tycoon Inc has appointed yours truly to this position) For its services RCM is paid 1% of net asset value per annum. (This is the really good bit, I work for free! Dividend Tycoon Inc loses no assets to pay anybody) There is no performance fee, nor is there any form of reimbursement. (same here again. I think I should at least get the odd beer!) What you see is what you get. This 1% represents a very low cost of business – according to our research, it is one of the lowest costs amongst all listed companies. (Dividend Tycoon Inc not listed, but we charge nothing if you did not know by now) It is also cheaper than all actively managed unit trusts, and only slightly more expensive than index funds (including Exchange Traded Funds). (What can I say, Dividend Tycoon Inc really is a wonderful company!)

So there you have it. If you invest for yourself, you really are doing little different to what a mutual fund for example does. It is worth noting the advantages we have as smaller investors, and I personally believe that if you give it your full attention and devote a lot of time to it, you can do better than the mutual funds and even the index funds, given these advantages.

Additional disclaimer: I love the investing process. That is why I work for free for Dividend Tycoon Inc. If you do not enjoy research and the investing process, then passive or index fund investing is probably the way to go, and even if you do enjoy it, passive or index fund investing is probably the way to go. A lot of research would say that it is a mistake to invest for yourself. Maybe, but I like the competitive advantages and I am happy to leave my capital in Dividend Tycoon Inc.

 

 

 

 

Punch card investing…a game of patience worth mastering

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I have read a couple of articles lately which have peeked my interest in this topic again. For those of you who have no idea what I am talking about, let me just give you a quick initiation.

I think Warren Buffett coined the phrase, and this is what he had to say about it. “I always tell students in business school they’d be better off if they were given a card with twenty punches on it. And every time they made an investment decision, they used up one of their punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five or three or seven, and you can get rich off five or three or seven. But what you can’t get rich doing is trying to get one every day.”

What Buffett is essentially saying is that one should make very few investment decisions during your investing life. He is saying that you do not have to try to invest in every stock that looks promising and to churn your portfolio in order to keep chasing the latest promising stock. He is in fact saying that good investments are extremely rare, and that you should wait for these rare opportunities.

I must be honest and say that to use a punch card is an area which I have only recently come to really appreciate and to understand. It is also the hardest part of investing to get right. I am always seeing stocks that I see as attractive and want to invest in. Then as soon as I have the cash, I dive in. On the whole my stock picks have been good and I have been compounding returns at a good rate, but it could have been better. I have written at length about a hotel stock that I am waiting to exit. While this will be profitable, I have had to pass up some other great opportunities. Had I followed the punch card rules, I would not have dared using a punch on the hotel stock, no matter what value I saw, except for perhaps a portion of my portfolio which was dedicated to such value stocks, more on that later though.

I have written before about my desire to own quality businesses. I want to partner with some of the best businesses in the world, wherever they are located, and to join them on their ride to success. Finding these businesses at reasonable valuations is the hard part. We all know some quality businesses, just look in your kitchen or bathroom cupboard and some names of these businesses will be staring back at you. The problem is that everybody else knows they are quality, and thus they are expensive. However, sometimes, rarely, prices of such businesses do not reflect their value, and this is when I will become interested.

Forgetting the punch card rule cost me

So far I think I have done a reasonable job, but allow me to give you an example of where I have slipped up fairly recently. About a year and a half ago I received the proceeds of a house sale. Once all debts were settled I had a reasonable amount left over to invest. The aim was to provide an income for myself, as well as growth. While I believe I made good decisions with 75% of the funds, I was impatient with the last 25%. The quality stocks all looked expensive with P/E ratios above 20. Being impatient I went ahead and invested the 25% in a logistics business which was trading on a P/E ratio of about 7 and a dividend yield of about 6%. While the company is not a bad business at all, and is well run, I have so far lost some money on it. These businesses are cyclical, and with a depressed economy they go down. It should have better days if I am patient enough to wait. The main reason I am annoyed at myself though is that I bought a good business, not a great business. This makes all the difference. This is where the punch card rules would have been useful.

Why a punch card is useful

  1. Discipline: You are disciplined to only go with your great ideas, not your mediocre ones.
  2. Research carefully: Not wanting to make a mistake, given your limited number of times you can invest, you will be meticulous in your research to make sure you are not making a mistake.
  3. Costs reduced: Trading and frictional costs are reduced as under this system you do less trading and more research. Less costs = more capital to invest.
  4. Tax reduced: Less buying and selling = less tax.

Now, this is the basic version of punch card investing, but I read another article recently related to this topic which I also found very interesting, and relevant to myself. The article touched on the fact that Warren Buffett, while espousing punch card investing, had in reality not practiced it himself. In a future post I will touch on this, and why perhaps some rules can be broken if one is investing intelligently.