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:
- 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.
- 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)
- 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)
- 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.