Letter to shareholder’s of Dividend Tycoon Inc

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

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.