Some of you may remember my post from a few weeks back which was Reflections on buying a ‘cheap’ hotel. I was feeling rather down at the time because I had invested in a company that was trading well under the value of the real estate it held, was profitable, and paid a dividend. The first two conditions still existed, but profits were down and the dividend was cut. This stock was illiquid to begin with, but since the dividend was cut it had been all but impossible to sell at a reasonable price. This had a negative effect on my cash flows, as I admit I had bought some stock with the intention of trading it after the results came out, which I thought would be better than they were. I was looking at having to sit at least a couple of years before the stock re-rated and I could sell some.
Then, Wednesday happened, and there was a loud cheer at Dividend Tycoon HQ. The majority shareholder (no doubt equally frustrated at the depressed price) announced a proposed buy out of minority shareholders, whereupon the company will be delisted. Below is the effect on the price.
The stock was trading at 39c, the offer they have announced is 65c. It is not final, but as the controlling family own close to 80% of the stock it is almost a done deal. While I have not exactly made a killing (I will be about 18% up on my average cost price and 30% up on recent purchases), it does mean that I will have liquidity again and will be out of a stock that was starting to cause me some discomfort.
This was a microcap in the true sense of the word. In my previous article I wrote that I would just have to be patient, as the business was profitable and had good assets. This was all true, and has been confirmed by the price of the buyout, but the one thing that was starting to frustrate me was the opportunity cost of not being able to invest in other stocks, while all my funds were tied up here.
So what have I learnt from this episode?
- Patience: I may sound like a stuck record, but I keep coming back to the importance of this in investing. Do not let boredom force you out of stocks with value. Believe me I was tempted to take 39c for this stock, because I have been itching to buy stocks like Starbucks and Coca-Cola, thinking surely they would be better than some tiny stock holding a few hotels in Africa, a stock which never seems to increase in price? But this leads me to my second lesson.
- Value still counts: Of course Starbucks is an infinitely better stock than Gooderson! But at what price? Howard Marks said in his book that any stock can be a bad investment at a certain price, and vice versa. This stock was deeply undervalued and hence had the possibility of a 60% gain, Starbucks may still have room to appreciate, but is a long way off gaining another 60%.
- Strategy: While I will continue to look for under priced bargains, I will not commit such a large percentage of my portfolio to them. As an aspiring Dividend Tycoon, I still want to trade in such stocks in order to create capital, capital that can be used for investing in world class dividend paying stocks. However, I admit that I bought too much of this stock out of a need to be doing something and should have rather left some of those funds as cash. They would have been incredibly useful when there were market panics, such as the Brexit fallout.
- Blogging is good for your investment returns: This is perhaps worthy of an article of its own, but has been a positive yet unintended consequence of starting this blog. While I have been blogging for only 4 months or so, and make no money out of it, this has been a nice side effect for me. I enjoy writing it (and hopefully you enjoy reading it..), but it is fairly hard work coming up with ideas for new articles, and the actual writing of the articles is fairly time consuming itself. The two greatest benefits I can see are the following:
- Eases the need to do something: Like my previous article on How surfing improved my investing, I could write something similar about the effects of blogging. While writing I am not busy checking stock quotes etc. Boredom is dangerous to any aspiring Dividend Tycoon.
- Allows me to put my thoughts into perspective: The article I wrote, Reflections on buying a ‘cheap’ hotel, literally saved me thousands of dollars. By the time I had written the article, I could see my reasoning for not selling out cheaply in frustration, it was there in black and white. It helps to put ones thoughts into perspective, and writing them down really helps.
So If any of you have been reading this, and have thought about starting a blog of your own, I would encourage you for this reason alone. Whether you ever make money out of your blog or not I would not be able to tell you, but I can say it will make you a better investor, and could at least help you avoid making costly mistakes.
Where to from here?
I am quite excited. While it may take some months for this deal to happen, perhaps up to 6 months, I am confident I will have funds to invest fairly soon. I can now go back to doing what I love with more determination. That is looking for some of the best dividend paying stocks the world has to offer. Let me know if you have any investment ideas of your own, I am open for business, as soon as my hotels finally close their doors..