Growing my business organically

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I must confess that the phrase ‘organic growth’ always used to confuse me somewhat when I heard companies say they had ‘good organic growth’ or plan to grow ‘organically’.

What I now understand is that it is growing your business using the cash flows from your current business. It differs somewhat from acquisitive growth where you take over new businesses by selling current businesses or using debt or issuing shares.

A real example is when as a private investor in a property stock (or REIT) you are given the option to reinvest dividends in the property stock (or REIT) rather than receive the cash, thereby owning a greater share in the company.

In the last few months there has been quite a flurry of activity at Dividend Tycoon HQ. I have been selling out of a large holding where I had lost some faith in the management and did not like the debt levels they were starting to take on. I have also sold some other stocks where I found new or existing stocks too cheap and compelling to ignore and needed the cash in order to invest in them.

It does however always leave me with a slightly uncomfortable feeling, this process of buying and selling, of shuffling the deck so to speak. You are making hopefully good choices about allocating of capital, but you are also interrupting that formidable machine called compounding. The reason for this is every time you buy and sell you are incurring transaction costs on both legs of the trade, and quite likely incurring capital gains tax on the sale. You are shrinking the pie.

This feeling of shrinking the pie, along with a pie that is already shrinking due to a recession in the market where I am invested, is making me rather uneasy. I want my business to grow, not shrink.

I think that sometimes one has to take a bit of pain to get your business to where you want it, which is what I have done. I now feel I have a good business, consisting of stocks I feel will grow and prosper, as long as I leave them alone. Most of them are good dividend generators and will provide me with an income and some reinvestment opportunities.

Why is this so difficult?

I think the main problem is that as investors we crave activity of some sort. It is difficult to look at the same portfolio every day and not to tinker with it. I am always reading about stocks, doing research etc and it is natural to want to invest in new ideas and add a new name to your portfolio. It is not always the best thing to do though. In my current portfolio I believe I need to leave it to grow, why sell a good thing?

What I do however plan to do is to collect dividends and build up a cash base again for further investments. This must not however be at the expense of my current portfolio.

Unfortunately a lot of my dividend income is needed at present for living expenses, so I will be exploring other ways of raising cash. I am not sure how I plan to do this, but perhaps some part time work or freelance writing/business journalism (anybody listening?…) that allows me time to keep doing my passion which is researching companies and markets. Let me know if you have any ideas.

Conclusion

I am satisfied that for the first time in a long time Dividend Tycoon HQ holds a stable of good businesses, which include fast food restaurants, a grocery retail chain, a plastic packaging business, a logistics business, two beverage businesses, a finance business, a property developer, a self-storage business, an apartment letting business, and a few others beside. It is now time to let them grow through the current recession and not to reduce them in any way.

My job is now to sow what dividends are available back into growing these businesses, or new businesses if funds allow, as well as trying to increase my capital outside of the stock market. My mind though remains fixed on looking for good businesses, because if I leave compounding to do it’s job, it may be no time before I am on the job full time again.

Postscript:

I feel like the news coming out of Dividend Tycoon HQ has been a tad glum of late, so I thought I would share a little bit of good news which came out a few hours ago, related to my last article about buying businesses, not stocks. The results of the company I used in this post to make my point, Bowler Metcalf, the boring old packaging company, released very good results today along with a 23% increase in the dividend. Being a core holding of mine this was great news!

Buying stocks can be scary, businesses less so

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Well another month has passed, and for me the stock market has not been a good place. I am invested in mostly small and medium cap shares in South Africa, and to be quite frank, the market has been terrible.

The reasons: Political instability, recession, lack of liquidity in these shares, and people just giving up on some of them.

Now you might think this has depressed me no end, and you would be partly right. Nobody likes to see their net worth decreasing on a sometimes daily basis. You may detect though that I am not totally downhearted about this, and in fact to some degree I take a certain pleasure out of it.

The reason for my pleasure can be traced back to the father of value investing, the man who Warren Buffett says he looked up to the most in investing, Benjamin Graham. He spoke of a Mr Market, who was a manic fellow at the best of times, sometimes happy and sometimes downright depressed. The only weapon we have as investors he said was to ignore Mr Market and to control our own emotions. He also said that the best time to buy was generally when Mr Market was depressed and throwing away good businesses at knock down prices. In my market, I believe that time is now.

I have been doing a fair amount of buying, and selling a long term holding which I have lost some faith in, in order to fund my purchases. I will not go into all my activity, but will touch on one stock I have been buying. The reason I will do this is because, like the title of this article alludes, we are buying businesses, and the key is not to just think of stocks as pieces of paper.

Buying a boring old packaging business

I have been accumulating shares in a company called Bowler Metcalf (stock code BCF on the JSE). This stock has been listed for 30 years on the stock exchange, has been consistently profitable, has no debt, has cash on the Balance Sheet, and most importantly of course, pays dividends! They make things like the plastic containers that are used for your bathroom cleaning materials and tubes/containers that hold cosmetics etc. They generally make the more specialized ones with advanced nozzles, but lets leave it there, I did say boring.

The share price though has been terrible, it is probably down over the last 5 years. Part of the reason for this is that a number of years ago the company bought into one of their clients, a beverage company which makes soft drinks. Subsequently they have merged their stake into a larger entity called Softbev, which is now a national beverage company which sell various soft drinks and energy drinks, as well as being the Pepsi bottler in South Africa. Unfortunately Softbev has had various teething problems, and Bowler Metcalf has had to write down the value of their 42% stake in Softbev.

The thing is that even if Softbev was worth nothing, which it certainly is not, then the core business of Bowler Metcalf, which is plastic packaging, is worth far more than the value the market is currently valuing it at.

I have recently bought some shares at R5.65, and a recent trading statement said that core earnings would be 65-82c, placing this business at an earnings multiple of 6 to 8. This for a well run business, that is conservatively managed. You effectively have a free option on Softbev, which may be listed as a separate business.

This is why I say stocks can be depressing, but businesses less so. This business is situated in my home town of Cape Town, so I go off to the AGM every year to hear the directors discuss prospects for the year. I see their soft drinks, including Pepsi, in the supermarket. I see this as my business, albeit as a minority shareholder. I enjoy reading their annual reports, which are easy to understand, being a fairly simple business.

I find a lot of comfort in a business like this. I have a few shares, such as Choppies, which is a supermarket group which has the whole of Africa into which it can grow, which could shoot to the moon over time, but equally fall flat on it’s face. Bowler Metcalf though is like a trusty old friend, somewhat boring, which keeps churning out profit and dividends. Unlikely to make me wealthy, but like anybody owning a business, I would like it to keep feeding my family and providing for my needs, and the stock price does not bother me, because I have no plans to sell something so important, especially to that horrible Mr Market guy!

Disclaimer: I have been discussing a small company I like, it is not a recommendation though, as all shares carry risk. Do your own research.

 

Back from holiday, including how it saved me money..

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It has been quite a while since my last post, so apologies to those who are regular readers. I have been on holiday, a wonderful trip to the UK.

london

For regular readers, the holiday was made possible by the sale of my hotels, which generated enough of a return to let me take a portion of the profit and indulge in this trip. I have written before that investing is about more than just making money, and that it is best to have balance, and doing something special and enjoying life when your finances allow is also important. I did reinvest the rest of the profit into some stocks which will hopefully in time generate their own returns, and perhaps finance another holiday.. I should also mention that the holiday was also possible thanks to the fantastic generosity of family in the UK, which meant most nights we had accommodation provided by them.

In terms of my portfolio I have continued to add to my property holdings, including my property development company, my residential letting business and self-storage business. These purchases are not showing much in the way of capital profit, but I believe I have secured a pipeline of future income. I plan to hold all of these businesses for a very long time.

The market has also thrown up what I believe will be shown to be massive bargains in years to come. I bought a share called Grand Parade Investments, at a fraction of its intrinsic value. The share has two components, gaming and restaurants. The price I paid was less than what the gaming assets are worth, so thrown in for free were valuable restaurant brands such as Spur, Burger King and Dunkin Donuts. There was also an office block in a prime position. I have written about this stock before, and while the price is now less than my average holding, I am happy to wait for the values to be appreciated by the market. I believe this is a classic case of buying a dollar for 50 cents! Note though that this is a small cap and in a risky sector, so do your own homework!

There have been a few other small purchases, and some sales to fund the purchases, but the nature of this blog is evolving to becoming more a sounding board to myself and hopefully others, as to my investment thoughts. I find it useful to read past posts in order to collect my thoughts and review my thought processes at a certain time. An added bonus would be for others to find it useful, and hopeful to interact with me about their own ideas and thoughts.

Investing lessons for July 2017:

As per the title of this post, going on holiday actually saved me quite a lot of money. Let me explain. The share I have discussed above, Grand Parade Investments, was selling cheaply while I was away. Had I not been away (and vowing not to look at my portfolio while away), I would most likely have found a way to buy it. In the three weeks I was away, it got significantly cheaper and in the month since I have been back I have bought a fair amount at much lower prices than when I was away. Hence my point that going on holiday actually saved me quite a bit of money.

The take away for me is that when we stop looking obsessively at our portfolios and looking for things to do, we do better. It comes back to patience, and waiting for our best ideas to come to us, rather than us chasing them. It is hard to do because we feel we have to be busy all the time and that we are not being productive when we take a day off or go on holiday. Maybe I am just trying to justify my next holiday, or to go surfing for the day, or visit Dunkin Donuts for their delicious coffee..

dd3

but I will leave you with a quote from Warren Buffett:

“Lethargy bordering on sloth remains the cornerstone of our investment style”

Well, I would not go that far, I want to keep working hard finding investment ideas, but the point is that he is referring to the fact that they do not actually trade much, although he actually works incredibly hard finding things to invest in.

Let me know if you have any suggestions for future posts.

 

 

 

 

When stock prices are falling, income is the best motivator

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The majority of my portfolio is invested in South African stocks. The country was recently downgraded to junk status by two international agencies. This was largely on the back of political moves they see as damaging to the economy. My portfolio has taken a bit of a beating..

Now one can get depressed about this, sell everything and throw ones hands up. However, I firmly believe such times can be an opportunity as well. I also believe the stock prices are not how I measure my progress as an investor. It all comes down to one word, income. And yes, income comes in the form of dividends.

Some stocks have fallen as much as 20%. The dividends declared in most cases have however remained stable or increased. So why be bothered too much about stock prices. Most of my current stocks (businesses) are not for sale anyway.

I have one stock which I am slowly selling off but that has remained stable in price as it seems someone would like to buy out the company. It is also a stock I have lost some confidence in so it suits me. This is where the opportunity comes in. I am getting float from the one stock I am selling and investing some of that into stocks that have fallen a great deal. I believe I am acquiring future income at a discount.

As I see my stocks as businesses I am not too hung up on the price that is quoted each day for that stock. It would be like owning the local pizza joint and worrying about how much somebody will pay me for it. I would be happy just making a good income off the pizza joint. If the income continues to go up each year, then eventually somebody will want to buy the business (and resulting income) off me for a fair price.

Not being blind to reality

The above being said, one has to also keep your eyes open when investing, and take into account changing circumstances. As such I have been investing differently now compared to before the downgrade. The downgrade in all likelihood will lead to a depreciating currency and an increase in interest rates, as well as being generally negative on businesses which could lead to earning declines.

Therefore I have concentrated on the acquisition of two stocks which are debt free and growing their income. They are both on single p/e’s with high dividend yields. I will not name them here as have not quite finished buying, but if you ask me I do not mind disclosing them.

What I am buying is as important as what I am not buying. I have been writing extensively lately about building a property business, first as a property developer, then a self-storage owner, and finally a residential landlord. I am committed to keeping all these businesses, as they are good businesses and in the long term I believe I will do well out of them. However, due to the fact that property businesses are interest rate sensitive, I will not be adding to these businesses at the current time. Should the prices of these businesses fall dramatically (which they have not done as yet), I may become more interested. Again, that will be where the opportunity comes in.

Conclusion

The aim of being a Dividend Tycoon is to secure a large and ever increasing stream of dividends. I have documented my journey so far. I have succeeded in some areas, but still need for example to get my foreign portfolio going. The income stream will at some point be used for this purpose, but currently South Africa is the market I know best and where the yields are fairly high. The decrease in stock prices has not phased me too much and I have not been a forced or panic seller. These income generating stocks are jewels I need to harvest and nourish, not throw away at the first sign of trouble.

Certainly, these are troubling times, but I would like to end with two quotes. As it is the Berkshire Hathaway Annual meeting tomorrow, which I will be watching live via streaming video right here in South Africa, the quotes are from none other than Warren Buffett, and I believe tie in to my post:

“The future is never clear, you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

Thanks Mr Buffett, hopefully we will hear some more good advice tomorrow!

 

 

 

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!