Month: September 2016

Greed is NOT good when it comes to investing – lessons from Canary Wharf

I am sure many of you reading a site called ‘Dividend Tycoon’ may also have seen the film ‘Wall Street’. The film tells the story of Bud Fox (Charlie Sheen), a young stockbroker who becomes involved with Gordon Gekko (Michael Douglas), a wealthy, unscrupulous corporate raider. The most well known phrase from the film was when Gordon Gekko uttered the phrase “Greed is good”.

However, this post is not a rant about Wall Street or greed in the financial services industry, or Wells Fargo.. It is more about us as investors and why greed may trip us up or derail our chance of financial independence. Wall Street and others will always push the boundaries and banks will fail or cheat, but we can at least control our own mistakes, and one way to fail on the journey to financial independence is by being greedy.

What initially made me interested in this topic was a book I have just finished reading for a second time, which if you will allow me I will give a bit of background to, as it has some personal significance as well as being quite a fascinating story. The book is ‘Towers of Debt: The rise and fall of the Reichmanns’ by Peter Foster (published in 1993).

Towers of Debt: The rise and fall of the Reichmanns

Canary Wharf
Canary Wharf

I first traveled to London in 1992 with my father, who was there to conduct some business. We stayed with my aunt Alex, and one of the things I distinctly remember was that she took us for a drive and we went through the newly completed Canary Wharf, the mega development in the east end of London on formerly derelict land. Coming from South Africa I was quite impressed with the scale of the place. I still to this day find it interesting that you can see the main building from so far away in various parts of London. Today it is absolutely huge and an amazing success, property there is very sought after. However, at that time it had all collapsed for the developers, the Reichmann family.

I did not know this at the time, but when I saw this book in my local library more than 10 years later, with a picture of Canary Wharf on the front cover, I immediately picked it up.

The Reichmann’s were a family who fled Europe and the Nazi’s, starting in Tangier (Morocco) and ending up in Toronto, Canada. They started in the tile business in Canada, then built their own warehouses for the tile business, then moved onto bigger building projects, culminating in the construction of Canada’s tallest building (72 stories), First Canadian Place. The three brothers, Paul, Albert and Ralph were seen as quite mysterious figures, with their strict adherence to Orthodox Jewish beliefs. They shunned publicity and lived very privately. Paul Reichmann was however exceptionally ambitious, and no doubt a genius at business.

In 1977, they concluded what is still considered one of the best business deals of all time. New York was going through a terrible financial time, businesses were leaving due to excessive taxes, and New York got very close to bankruptcy. This uncertainty and fear led to the sale of 9 large buildings known as the ‘Uris package’ to the Reichmann’s for $320m, it included two giant towers on Park Avenue, today $320m would not get you one of those buildings. It was an absolute bargain, although everybody else at the time thought they were crazy.

The Reichmann’s continued to buy more property and got involved in many public companies and takeovers, not all welcomed by those being acquired. It was the Reichmann’s legendary business acumen and almost mystic status that led the banks to lend them ever more money, often without even properly looking at their financial statements.

Fast forward to 1987 and the Reichmann’s became involved with Canary Wharf and became the developer for this massive project. There is a lot to the story, and I cannot easily summarize a whole book, suffice to say that eventually the Reichmann’s had bitten off too much. In fairness this was also partly due to a severe recession at the time, and problems in the transport infrastructure which would make Canary Wharf more accessible to Londoners. However, the main culprit was far too much debt, the banks had not known the extent to which other banks had also lent money to the Reichmann’s. The Reichmann’s could also have issued equity earlier instead of using debt, but did not want to dilute their ownership.

It is not my intention to bash the Reichmann’s as they achieved amazing things in their lives, Canary Wharf today is a massive success, the quality of their buildings was seen as excellent. What fascinates me though is that even before they moved out of Canada, they were fabulously wealthy. The New York buildings would have been giving them hundreds of millions in cash flow a year. But they risked it all, quite recklessly it turned out. And lost it all.

Get rich, but not too quickly

One of the reasons I have started on this journey of becoming a Dividend Tycoon is that it is a fairly safe way to build wealth. Being greedy though will not help, whereas patience will. It is not get rich quick, but get rich slow. You do not need to borrow money, you do not need to take massive risks. You do need to put in time and effort, and prevent greed manifesting itself in excessive portfolio churning and buying/selling at the wrong time due to fear and greed.

I wrote last week about the fact that I have a very concentrated portfolio. This is admittedly fairly high risk, but for me it is a risk worth taking because I know these companies very well, but the point is it cannot destroy my whole portfolio and put me back to square one. If one stock has a mishap, there will not be creditors lining up to take the others.

Greed could come in many forms with stocks : Buying on margin, buying ‘hot’ IPO’s, dotcom mania, excessive trading. However, if you stick to the principles of investors like Warren Buffett, you will become financially independent over time. See your stocks as part ownership of good businesses that pay you dividends and increase those dividends each year. You will perhaps be able to write a book one day called ‘Towers of Dividends – their rise and rise’.

Further reading:

Note: Caption below is from Amazon and clearest I could find, but look around as you can get book elsewhere for less.

Towers of Debt: The rise and fall of the Reichmanns

 

Concentrating helps you to think like a Dividend Tycoon

To clarify I am referring to concentration of your investments, not the act of concentration, although that would help too!

As the name of this site is Dividend Tycoon, I felt it appropriate to write something related to that name, as I believe my way of thinking about investing is slightly at odds with the mainstream.

Conventional wisdom says that you should hold a diversified portfolio. Not only should you hold a large number of stocks, but you should also be diversified among asset classes. For most people this is good advice, it spreads your risk, you do not have all your eggs in one basket.

As a future Dividend Tycoon I have taken a different approach to investing, mainly because investing is to a large degree my business. Investing to me is not something that is done with what is left at the end of the month, and putting those funds into a diversified mutual fund managed by some fund manager sitting in a fancy office somewhere. Rather I see my stock portfolio as my ticket to future financial independence, and I need it to keep growing at a high growth rate, and it should not be continually sucked dry by paying a fund manager, who will allocate 2 or 3% of my capital to their 30-50 best ideas, which I think is in itself a contradiction in terms, surely one can only have a few best ideas? What is more, there is a high probability that their best ideas are found by looking at what other fund managers are holding!

As an independent investor it is up to me to decide on my portfolio weightings, so if I have an idea regarding a stock that I believe is excellent, I can allocate any percentage of my capital to that idea. This has led me to having two positions which are each around 30% of my portfolio. This is not something to take lightly, you really have to be very confident that your analysis is right, and keep updating yourself with regard to these positions. I started acquiring a position in both these stocks in 2010, and have kept adding.

The effect of this concentration is that if you are right in your analysis and the stock does better than average, then you will beat the index, sometimes by a lot. As it stands, my one position has done quite a bit better than average, the other one has been average, but I believe the best is yet to come and I have to be patient to be fully rewarded.

However, performance aside, I believe the greatest benefit of concentration is that you think as a business owner, or a Tycoon. I really feel that I am an owner of these businesses, because my stake is material, especially to me! I am invested in keeping up to date with the company, always reading news about them, attending AGM’s and presentations. I cannot afford to become a passive investor and hope that management is doing well, I need to be watching them, closely. I need to visit their business sites and see how busy they are.

Now if I have allocated one or two percent of my portfolio to a company it does not feel like I am a true business owner, it feels like my portfolio is nothing more than a mutual fund, even if it is manged by me.

I should point out that I do have smaller positions in my portfolio, but they are perhaps just my initial steps towards acquiring larger stakes. Unfortunately one has to invest with the funds available, and while I would love to increase some of the smaller positions, it is simply not possible. New funds will come, I have some coming from my hotels (see last paragraph), and lastly I am hoping that the large positions I have referred to above, will become the stocks I think they will, and if I am right they will start to pay ever greater dividends, which I can use for diversification. I am not going to sell a large position for the purposes of diversification if I still believe in the potential of these businesses.

A big disclaimer

Please note that my strategy is not one that most people should follow. They should be widely diversified, they should allow a fund manager or an index fund to manage their money. They should not put all their eggs in one, or even a few baskets. This site though is about becoming a Dividend Tycoon, and doing something different. You need to decide what is best for you, this is just my strategy. However, I will leave you with a quote. “Diversification is protection against ignorance” That quote is from none other than Warren Buffett, the ultimate Dividend Tycoon.

ps. Quick update on my hotels. There was a stock exchange filing today stating that the circular has been delayed until 5th October. Rather irritating, but these things are par for the course. If you have no idea what I am talking about, see my previous article here.

 

 

 

 

 

 

Stockholder activist..to be or not to be

By now you may well be tired of me writing about my hotels. I do see them as my hotels, as I own a share of the company which owns the hotels. One of the principles I try to emphasize on this site is that as a stockholder you are a part owner of the company you have invested in.

For those of you who do not yet know the saga of my hotels, here are the prior posts:

My hotels are (almost) sold – a lucky escape for this Dividend Tycoon

Reflections on buying a ‘cheap’ hotel

As I have already subjected you to this saga, I felt I should update you as to where things stand and let you know what has been happening. The future prosperity of this Dividend Tycoon is somewhat dependent on these hotels. My future investment in some of the best companies in the world depend on me selling my hotels.

Since my rather gleeful post declaring that my hotels were almost sold, I have been in contact with a few other minority stockholders of the company. There is some dissatisfaction at the proposed price the majority stockholder has proposed to buy the minorities out at. The Net Asset Value of the company (or in plain language, the value of the assets less all liabilities) is roughly R1.50, and the proposed price is R0.65. This does seem to be a very cheeky and opportunistic bid. Quite frankly this is why I bought stock in this company in the first place, it was a bargain at the price, but now the majority stockholder’s family is trying to get that bargain all to themselves. However all is not lost at Dividend Tycoon HQ because we only paid around R0.50 for a large block of the current holding, so it will still be profitable.

What has happened so far:

  1. I have spoken to other stockholders. This is easier than it used to be. I connected with them through twitter. The ball started rolling when I saw a disgruntled tweet from a fellow stockholder.
  2. I have emailed the CEO (majority shareholder) to express my view that the price does seem low in relation to the value of the assets, and that perhaps a middle ground (a fairer price) was possible. The buyout will require a circular setting out the mechanics and reasoning for the buyout, it will also need to include a justification for the price offered. In light of this I asked how the price could be justified given that the 2016 audited annual report stated that assets were worth over R1.50. His reply, while polite, was rather weak and did not really address my questions, I certainly was not satisfied with the explanation given.
  3. There has been a stock exchange announcement from the company stating that there is a firm intention to buy out minorities at R0.65. This will require the approval of 75% of the non-family owned stock. In  other words, 25% could block the scheme. This is not a huge amount of the total stock given that it is a micro-cap stock and 80% is owned by the controlling family and they are not able to vote given they are the people proposing the buy out. This announcement says a circular will be released on about 13th September detailing the offer, along with the justification for the price.

So there you have it. We have to wait too see the circular, and then vote whether we approve or disapprove of the scheme. I am in two minds.

On the one hand the right thing to do would be to try and block the scheme, and demand a higher price. However, with that comes risk. Perhaps there will not be another offer, and a disgruntled majority shareholder could make life unpleasant for minorities, for example by not declaring dividends.

On the other hand, quite honestly, I am desperate for the cash as soon as possible. Dividend Tycoon HQ does not run on fresh air alone and a fresh injection of capital is sorely needed. At the moment I can only research, study and salivate at the great dividend paying stocks when they are on offer at a reasonable price. This micro-cap hotel stock was never high quality, it was just cheap. This has worked out fairly well in terms of the gain, but I have come to realize that I get far more satisfaction from owning the great companies, the companies you can buy and never have to sell, that send you a dividend payment every year like clockwork. That is what I want now.

This is the benefit of blogging, I think I have answered my own question just by writing this post. I do not want to be a disgruntled hotel owner, I want to be a satisfied part owner of Walt Disney or Colgate or Johnson & Johnson, or even Amazon.com.. Yes these stocks may all be too expensive right now, but I want to know that I can buy some should the price be reasonable.

What would you do, fight it or take the money? I will study the circular when it arrives and let you know of any further developments. However, I can feel my days as proprietor of Fawlty Towers slowly coming to an end..I hope.