Month: February 2017

Dividend Tycoon has not packed it in..I am in fact more committed than ever to becoming a Dividend Tycoon. So what is this talk about becoming a property developer?

Since selling my hotels became a distinct possibility, I stepped up my search for great companies in which to invest. I needed to reinvest the capital from my hotels being sold. As I have said before, the hotels were not a great business, but the assets were exceptionally cheap, and I made a healthy profit. However, this is no longer the type of business I am looking for. I am now focused on finding companies which are focused, extremely profitable, have some barriers to entry, and preferably are led by an intelligent fanatic.

All the above has led me to become a property developer, because I have invested a significant amount into a company called Balwin Properties. They are the largest developer of sectional title property in South Africa (basically they build apartments). However, they do not build run of the mill apartment complexes, they build huge 600 unit + schemes, some well over a thousand units. They focus on these, and the large size of the schemes leads to excellent economies of scale, which translates to gross margins of over 40%. In simple language, an apartment they sell for $100000 only costs them $60000 to build.

Why I am positive

They operate in the lower to middle residential market, where the demand exceeds supply. The apartments are affordable and are built with excellent security in mind, as well as features such as a clubhouse, which is only really possible when you build with this scale, as such a feature would not be economical on a scheme with say a hundred apartments. The company has a good name with regards quality and after sales service. You can see their website here should you be interested, www.balwin.co.za as I do not want to sound like a salesperson for their apartments.

Why a good fit for a Dividend Tycoon?

• Well most importantly and obviously, they pay a dividend! They have agreed to pay 30% of profit out as dividends, the remaining 70% will be retained to use as capital for expansion.
• The word Tycoon is important. I like to see my companies as an extension of myself. I like to understand what it is I am doing. It is easy here, every year we (the whole company) are building around 3000 apartments. As a co-owner of the company I have worked out that I personally, by default, am building and selling one apartment every 15 months or so. Now I do not know about you, but building an apartment sounds like hard work! I know I do not have the technical skills to do it either. So I am partnering with the best property developer in the business, and letting them use some of my capital, and letting them get on with the job. It would be silly for me to try and compete with them, I doubt I would do a good job painting the inside walls, never mind the rest of it!
• I like companies where I can see a business that will be durable. I have not invested in technology shares for this reason. I cannot tell how these companies will look 5 or 10 years from now. I do however see a good future for companies building affordable and quality apartments in a country with a growing population and a housing shortage. I also try and keep Amazon in mind when investing these days, and I am confident they will not be dispatching whole apartment blocks anytime soon..I hope.
• The stock is cheap. I am looking for an edge in order to become a Dividend Tycoon, so I want as much stock for my money as possible. This stock was priced around R7 when I bought and will earn between R1 and R1.50 per year, which equates to a yield of between 14% to 21%, which is very good. The dividend yield is between 4% to 6%. Note that these figures are my own estimates and should not be relied on.
• Management are significant shareholders. I like the fact that the CEO owns 35% of the stock. Clearly he has the most to lose should things go wrong. As part of my research I watch and read interviews given by the CEO. My impression is that this company has been his life for the last 20 years, and he does not want to let the shareholders down. I sense he has pride in the product and will continue to drive growth in this company for many years.

Flaws?

Things are never so easy. There are always risks. Property developers go bust all the time. They use debt, and interest rates can rise, the economy can slump.

However, I have committed my capital to this company as I believe they are good operators, have experienced many economic cycles, and have built a business model that is very resilient. They sell their developments in phases, so cannot get stuck with a mass of unsold property, they pre-sell much of their stock, and ring fence each development.

In addition they have a product that has a definite utility. Should the economy take a serious dip and people do not buy the apartments, they have the ability to rent the apartments out at good yields until better times come around. It is not like they build smartphones or forklifts, which will sit unused until such time they are sold. They will also not become obsolete.

Conclusion

I am excited about this new addition to my portfolio. I did the research on the company first, and then went to see one of their developments as a prospective buyer. Seeing the quality of the apartments and the size and scale of the scheme convinced me this was a good buy.

I am increasingly interested in property investments, and am currently researching a few other opportunities in the property sector, but for now I will be monitoring this investment and any dividends received will be reinvested back into the company should the price remain reasonable.

Now where is my hard hat…I have work to do!

Disclaimer: As usual, this is a small cap stock, so it is risky. Do your own research before deciding to buy or sell.

 

 

 

 

 

I have not been shy to admit that I am a huge fan of Warren Buffett. He is an inspiration, not only in terms of investing, but also on the subject of leading a good life and being the best you can be. I like the fact that he has a good sense of humor and is very down to earth. At the age of 86 his enthusiasm for his work is still strong and he is very sharp. I wrote an article about him on this site, Warren Buffett – Dividend Tycoon?

However, as brilliant as Warren Buffett is, many regard his business partner for the last 50 years or so, Charlie Munger, to be the intellectual giant of the two, and a true genius. Perhaps he has not contributed as much to the amazing returns of Berkshire Hathaway as Buffett, due to the fact that he is more a sounding board for Buffett, and Buffett is the CEO and runs Berkshire from Omaha, whereas Munger lives in Los Angeles.  Munger is now 93, and at the AGM last year still sounded pretty sharp.

Munger is perhaps best known for his deep thinking and work on mental models. He is a voracious reader of subjects such as psychology and has written on this extensively. One of his most famous papers was “The Psychology of Human Misjudgement”. I follow the well known investor Mohnish Pabrai and it is well worth watching some of his talks on youtube as he has a deep understanding of Munger’s concepts, and is very interesting himself.

Much has been written on the subject of Charlie Munger, so I do not really want to reproduce in detail what has already been written about him, but I thought I would take a look at the things that I personally found most interesting in the articles, speeches and books that have been written by or about him. It could be something I just found interesting, or funny, or something I felt I should make a note of in order to remind myself.

So below is a selection of my Charlie Munger favorites:

I thought though that I would start with some context, just to show that he was not born with any particular advantage in life, and through his learning and mental models, made a huge success of his life. I copied this passage about him from an article I once read but no longer know where:

“At 31 years old, Charlie Munger was divorced, broke, and burying his 9 year old son, who had died from cancer. By the time he was 69 years old, he had become one of the richest 400 people in the world, been married to his second wife for 35+ years, had eight wonderful children, countless grandchildren, and become one of the most respected business thinkers in history. He eventually achieved his dream of having a lot of money, a house full of books, and a huge family. But that doesn’t mean he didn’t face unbelievable challenges and tragedies.”

Charlie Munger has said a lot about reading. He has in fact attributed much of his success in life to reading. I became an avid reader later in life, but regret not having started earlier. The best way to sum up his views on reading is the following quote from him:

“In my whole life, I have known no wise people who did not read all the time-none, zero. You would be amazed at how much Warren reads-and at how much I read. My children laugh at me, they think I’m a book with a couple of legs sticking out.”

Related to his views on reading is a theme I have recognized in his talks and writings, and that is that all one can do is try to improve yourself each and every day. There is not one big thing that one can do, but it is a progression of small things, and the theory that eventually you get what you deserve in life. The most striking quote on this to me is the following:

“Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.”

So perhaps even if you only have 20 minutes free time on a particular day, do not waste it. Read a book that will make you a bit wiser than the day before, but eventually the small increments in knowledge will add up. It certainly does not need to be an investing or business book, as long as you can learn something about the world or about somebody that you never knew before. You will accumulate knowledge that will come together and help you in some way, or just make your time on earth more interesting.

Again related to this, was his answer to somebody at a Berkshire meeting when asked how to find a good spouse. His answer, was that the way to find a good spouse, is to deserve a good spouse. I use this answer as I think it is a good example as to how he looks at the world. Most people would not have given that answer.

This leads to one of his favorite concepts, inverting. He believes that often the correct way of looking at something in order to understand what will make it a success is to rather look at what does not work, and will lead to a lack of success. For example, do not look at why a particular investment could be great, rather think about what could go wrong. If you want to be successful in life, look at things which could cause you not to be successful. For example, do not become a drug addict. Munger has a great sense of humor and perhaps his best example of inverting is this: “All I want to know is where I am going to die, so that I never go there.”

Munger is also known as the grumpier one. Whereas Buffett is always cheerful and upbeat and tends to say the more acceptable things, Munger does not seem to care who he offends, and can be quite harsh in his criticism if he sees stupidity or something that does not work.

I recently came across a quote of his which represents what I mean. “I don’t let people do projections for me because I don’t like throwing up on the desk.” The context to this would most likely be that Buffett and Munger have a complete disdain for using consultants to advise them. They know when a business is good or not, and do not need some highly paid management consultant to advise them.

Influence on Buffett regarding investments:

Warren Buffett’s mentor was Benjamin Graham, the father of value investing. Graham wrote ‘The Intelligent Investor’ which Buffett says is still the best investment guide ever written. Graham however was only interested in deep value stocks, that is where the stock was worth less than the assets the business owned. This provided safety. However, Charlie Munger came to like only the great businesses. He could see that these businesses would in the long term outperform the poor businesses that were selling cheaply. Buffett slowly accepted this, and his purchase of Coca-Cola stock is proof that it worked.

The problem with the great companies is that the stocks are normally expensive. Of relevance to me was a question somebody asked Munger at a meeting, where they asked how to find great companies at a good price. Munger’s answer is below:

“How do you get into these great companies? One method is what I’d call the method of finding them small, get ’em when they’re little. For example, buy Wal-Mart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And its a very beguiling idea. If I were a young man, I might actually go into it.”

This was of relevance to me because I have been investing in a retail company called Choppies, which is growing in Africa, is still small and seems to be run by very ambitious entrepreneurs. Now, so far the investment has not been great, I am in fact down so far, but I believe in the story long term, and I am encouraged by the fact that Munger would give an example of a company so close in business model to that of my idea. (Note: Not a share tip, it is very risky).

Anyway, I will keep this stock unless anything changes, because Munger has preached sitting on your assets..

“There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass. You’re paying less to brokers. You’re listening to less nonsense. And if it works, the government tax system gives you an extra 1, 2 or 3 percentage points per annum compounded.” (In the last sentence he was saying that by not selling you do not get taxed on any capital profit for as long as you hold the stock)

Conclusion

I would encourage you to read what you can about Charlie Munger as I have barely scratched the surface here, but these were some his insights which I found particularly useful, although there are many many more.

In conclusion, I was wondering what Charlie Munger would say if you asked him how to become a Dividend Tycoon? I think his answer might be something along these lines, “Do not – become a drug addict, get into debt, become a gambler, neglect reading as often and widely as possible, buy expensive or faddish stocks or blindly follow the crowd.” “Invert, always invert.”

Okay then..thanks Charlie!

Recommended reading:

Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger (Great book if you looking for his early background and life as opposed to just an investment book)

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition

Charlie Munger: The Complete Investor (Columbia Business School Publishing)