Month: May 2016

Just over a year ago I sold my house in a beach suburb. This was for personal and practical reasons, as the suburb was quite remote and made commuting difficult. I really enjoyed living there, and while it is better now from a personal and practical point of view, and more central to many amenities, it has also to a certain extent reduced the quality of my investment decisions. It was a beautiful area with great waves for surfing and was just generally very peaceful and relaxing. The area I now live in is pleasant and has its own beauty, but does not quite match. You may be more puzzled by my statement that the quality of my investment decisions has reduced, so let me explain:

Investment decisions

Warren Buffett has on many occassion said that investors would be better off if they received a punch card with twenty tabs, and that was all they had for their investing life. You would certainly be very careful as to which stocks you chose, and would reduce the temptation to trade in and out of stocks. I believe that we often trade in and out of stocks due to boredom, or to tell ourselves that we are doing something useful. In reality the best thing we could be doing most of the time is nothing! It is though difficult to explain to significant others and family that you have been extremely busy doing nothing, but even Charlie Munger has said that the greatest contribution you can make to your portfolio is inactivity.

What he meant by inactivity was in terms of trading, not work. You should continue to read, research and keep up to date with company filings, industry shifts and business trends, so sitting on the beach is not the way to make a million.

However, I do sometimes find that I do not feel like I am actually working or making progress unless I actually trade and buy or sell stocks, no matter how much other work I do.

Surfing

Now, getting back to that beach suburb, I did find that when I had been sitting at my desk for some hours and then took a break to go for a surf, it accomplished a few things:

• Exercise, because a healthy body equals a healthy mind, right.
• A break away from stock prices and the endless movement of stock prices. You cannot monitor your portfolio in a raging sea. Well not yet anyway..
• Time to reflect. You realize that the stock you have been itching to sell because it has not moved in price for six months, is not a bad stock, it is just that the market is doing what the market does, trying to trick you into making irrational decisions.

With a refreshed mind and body, I would usually happily go back to reading and research, the need to ‘do something’ had abated.

Now, not everybody lives in a beach suburb with good waves, so we all have to find our own ways to take a break when the need to ‘do something’ at all costs becomes too strong. I have found the following are quite good – going to a local coffee shop for a really good coffee, going for a walk, reading a non-investment related book or going to the movies. Personally I find the best solutions are those that involve some exercise, but walking to the coffee shop is the best of both worlds.

I think that getting away from the markets is especially important when you are not really 100% sure of a decision to buy or sell a stock.

So what do you do to refresh your mind and improve your chances of becoming a Dividend Tycoon?

 

 

 

 

 

I was recently watching a documentary about a pop band from Sweden (not ABBA..) which my girlfriend is crazy about. I also enjoy their music, although not quite as devoutly as her. What got me thinking though while watching was that they are enormously wealthy, and have been going for 30 years. The great thing for them, is that they continue to earn royalties from songs written over 20 years ago. Every time you hear one of their songs on the radio or being played in a store or restaurant, they earn a royalty. This led me to come to the realization that by becoming a Dividend Tycoon, you are in a way investing like a pop star!

Investing like a pop star

By purchasing a stock which is consistently profitable, and which pays out part of that profit as a dividend, you are in effect creating a stream of royalties for the future. Like the pop star earning every time their song plays on the radio, you are earning every time: (assuming you have some stock)

– somebody drinks a Coca-Cola or a Fanta (stock Coca-Cola)

– somebody cleans their house with Domestos (stock: Unilever)

– somebody brushes their teeth with Colgate toothpaste (stock: Colgate)

– somebody drinks a Guiness (stock: Diageo)

– somebody drinks a coffee from Costa Coffee (stock: Whitbread)

– somebody shaves with a Gillette razor (stock: Proctor & Gamble)

– somebody eats a Pizza from Pizza Hut (stock: Yum Brands)

I think by now you see what I am getting at. The notion that you earn every time these things happen is very powerful. Warren Buffett himself once said that he sleeps well at night knowing that around the world millions of men have whiskers growing while they sleep. He owned a large chunk of Gillette, so he would have slept well!

Dividends better than royalties?

In general, song royalties will decline as each year passes, due to newer songs coming along and people playing the older songs less. However with most dividend paying stocks the opposite is true. Most increase their revenue each year as they expand into new products and markets. Think of Starbucks, planning to open 500 new stores in China over the next year. The profit, and subsequent dividends should continue to increase for years, and hopefully decades, to come. The real dividend aristocrats such as Johnson & Johnson have over 50 years of steadily increasing dividends; you would be hard pressed to find many songs which can match that in terms of royalties.

So why not start your own pop band of stocks and start collecting those royalties? You could start to think about who your lead singer is going to be, or rather your main dividend spewing stock. Who will be the back up vocalists for reliable income, perhaps some property stocks? Who will be the bad boy drummer, perhaps a more risky IT stock that could go global? It is up to you, but investing like a pop star should pay off and eventually you may be as rich as the local royalty, like that band from Sweden.

 

 

 

 

 

An event a few weeks ago made me think about a stock that has been on my radar for a long time, but I have dismissed as being too expensive with a P/E ratio above 30, and having too low a dividend. The stock is Starbucks (SBUX) and the event was the opening of the first Starbucks in Johannesburg, South Africa. There were long queues, much fanfare, and it was a massive success. I believe it will be highly successful in South Africa.
I also like the fact that there has been a recent pullback in the stock price due to weaker than expected numbers. When it comes to stocks I like to think of myself as a business owner, and if I find a suitable investment I think in terms of performance over decades, not quarters.

Global coffee culture:

Now, why would the opening of one store, in a country beset with economic problems, make me sit up and think? After all, Starbucks has more than 23000 stores in around 67 countries. Quite frankly I believe the opportunity for Starbucks is massive. Other than a few Starbucks in places like Morocco and Egypt, Africa is virtually untapped. Just in Cape Town, where I live in South Africa, there are hundreds of coffee shops, and a big coffee culture. Detractors may say that the existing chains will limit the potential growth of Starbucks, but will they? I remember reading the excellent book called “Starbucked” by Taylor Clark, in which the author pointed out that when Starbucks entered a neighborhood, the existing coffee shops often increased their sales. Starbucks has the effect of encouraging a coffee culture, and then in time they become the main beneficiary of this, due to the fact that they are a “third place” away from work and home where people feel comfortable and where it is also seen as the place to be. I believe the quality of the coffee is good enough, but that it is not the deciding factor for most people in going to Starbucks.

Comparison to Coca-Cola in the 1970’s:

Now, when one thinks of the massive gains a stock like Coca-Cola has made since the 1970’s, it puts the Starbucks opportunity into some perspective. I grew up in South Africa in the 1970’s and Coca-Cola was already in every corner store, every school canteen, every gas station, and Coca-Cola stock still increased massively in value since then.

So what is the opportunity for Starbucks when they are only just getting started in Africa? Not to mention the growth opportunities in places like China where stores are rapidly being rolled out, and the numerous other countries they have still to enter. I will not go into these as there have been quite a number of articles recently about the China effect, which while being huge, will not be the only driver of growth.

Another reason which made me think about the opportunity is the fact that I have a headache most mornings, if I do not get my caffeine fix. As the coffee culture grows around the world I will not be alone with this ailment, and Starbucks will certainly benefit from selling a product, that lets face it, is rather addictive.

Conclusion:

I do in fact think that the stock is expensive at around $56. I hate paying over 30 P/E for a stock, but perhaps sometimes one has to make an exception when you think the stock itself is an exception to the norm. I do not have the funds at present to pull the trigger, so I will be closely monitoring the price, if it sinks further and becomes a bargain I will reallocate capital to this opportunity. Had I been able to buy Coca-Cola in the 1970’s on a P/E as high as Starbucks, I would today certainly be very glad I was brave enough to have taken the chance and that I had the vision to see what lay ahead. Oh, and since I started writing this article, the second store has opened in Johannesburg..

*Not a recommendation to buy or sell. Please do your own research.