Category: Strategy

It has been a long tme since my last post Trading value for exceptional Value (Group) which in fact did turn out better than expected, as the company was bought out at a substantial premium. While it was sad to see this fine company leave the stock exchange, it did provide fresh capital with which I was able to buy some more very undervalued South African small cap shares, which have done well.

So in general, it has been a good period for Dividend Tycoon HQ. I should also mention, for the long time readers, that my Choppies (fast growing Botswana grocery retailer) saga has come to an end. The company was reinstated on the stock exchange. Initially I sold some and kept some, but of late have completely sold out. This was my biggest investing error to date, but at the end of the day I manged to get about 80% of my capital back, a deal which 18 months ago I would have jumped at. Never nice to lose money, but I count this as a victory.

Basically all my funds are in 5 stocks, all with strong balance sheets, all with P/E ratios under 5 when taking the net excess cash they have into consideration.

Resisting FOMO

This leaves me with mixed feelings. On the one hand I have a portfolio that is insanely cheap, and I think it could easily double in value should things turnaround with the economy, or even if they do not as most are increasing earnings despite the economy. On the other hand it is like watching paint dry, growth in the South African economy is muted, and it is difficult to see a catalyst to re-rate these shares. Combined with that is that shares in other countries have been flying. Look at the Dow Jones and Nasdaq, look at the big tech names. I feel like I am being left behind. Maybe I am, seriously. My stocks will never grow like these companies.

However, what do I do at this juncture? Do I capitulate, admit I was wrong, and sell these cheap shares, and load up on Amazon, Netflix and Tesla?  I feel this would be a mistake. At these times I always try to think of Howard Marks, and his assertion that a great business is not a good investment if priced too high, and a poor business can be a great investment as long as it is priced correctly. My stocks are good businesses, I personally think a few of them are great, but I definitely believe all are priced way too cheaply.

Rotation from growth to value

I have read quite a few articles saying that asset managers/investors are rotating from growth to value again. So for example selling Tesla for a retailer on a 10 P/E, or even a SA small cap on a 3 P?E, although I do not think they have thought of that yet. The point of this article is that they can only do this if we allow them to buy our cheap shares, and we buy their expensive shares to give them the funds to do so.

NOT bailing out the rich!

Investors in the right Nasdaq shares for example have made a fortune in the last few years, they have gotten rich out of these shares. This is not something to be jealous about, because they were correct in their assessment of where things were headed, and in the potential of some of these shares. Some of these shares though are very expensive on almost all metrics now, some would say they are in a bubble. I am not entirely sure. So, all I can control, is what I do now. One thing I will not do is bail out the rich, by buying these shares off them, and to add insult to injury, then go and sell them my insanely cheap small cap South African shares.

PS: I know that I as an individual am totally inconsequential in any of this, it is the collective principle I am writing about, what investors as a group may or may not do. My advice: Do NOT bail out the rich. But also read my disclaimer and make your own decisions, it might prevent you from becoming or staying poor..

 

 

 

 

 

 

 

 

My last post was about my new model, the Berkshire model, whereby I find great companies managed by great people, and hold them. This lets them do the hard work, while I just need to keep tabs on them, monitor developments, and then if all is well, hopefully receive the dividend.

This was going quite well. The only mistake and issue still lingering in my portfolio is my substantial stake in food retailer Choppies. The share is still suspended so there is nothing I can do, although they have now released all the outstanding financial statements, and I am hoping that the share will trade again soon. The business itself seems to be intact.

Pandemic strikes

Then however came a pandemic. The world changed. Fortunately, I was well positioned in that I have generally avoided companies with high debt, and had no exposure to the gaming/hospitality/travel/restaurant sector. My biggest holding by far is a boring plastics and packaging business with no debt, lots of cash, and that continued grinding out containers for sanitizers/cleaning products and a myriad of other essentail products even while most of the businesses in the country were under a hard lockdown. It was a good feeling with all the stress related to lockdowns/pandemics/economic devastation etc. to wake up in the middle of the night knowing that you at least have a stake in a business that even at 2am on a stormy Cape Town winters night is carrying on 24hrs a day/5.5 days a week, producing things everybody needs, in contrast to the thousands of businesses that could not even open their doors and subsequently and tragically had no income.

The trade

The pandemic made me again reassess my portfolio, and I decided to make one fairly substantial change. I want businesses that can operate under fairly extreme conditions, including a pandemic. A business that I have owned before and have continued to follow, Value Group, was available at a very cheap price (a price earnings ratio of about 4 at time of purchase). This business is in logistics and so moves among other things, essential goods, around the country. It is a very good operator, generates a lot of cash,  has been consistently profitable and  paid dividends in good and bad times. It has even been buying back its own shares. Unfortunately, if I bought something, I had to sell something. I took advantage of a spike in the value of a property developer’s shares I held. This company is also very cheap, perhaps even slightly cheaper, but to me the risk was much higher. In a recession/depression people will be less likely to buy apartments than the need for goods to be transported and warehoused, they also rely on debt to build the apartments before selling them. Value Group’s results which came out after my purchase were excellent and the business continued through lockdown, and declared a dividend. The property business was closed for two months and had to skip the dividend.

I have a lot of respect for the property company, and may buy back some shares sold, but for now I want safety, and need dividends.

It has not been an easy time for investors, especially those exposed to South African shares, which unlike their foreign counterparts, have not recovered. I do though believe that their is fantastic Value (excuse the pun) available, and together with these stocks I now have in my portfolio, hope to ride out the storm.

Reducing risk

A side benefit of my experience with Choppies has been to be extra vigilant to risk and to reduce it where possible. This portfolio change has so far worked well on a comparative performance basis, but even if it does not, the risk has definitely reduced. Has your appetite for risk changed? Let me know if this pandemic made you reassess your portfolio? Thank you for reading and stay safe

Disclaimer: As usual, please do your own homework on any shares I write about. Not everybody would agree that this share is a safe bet.

 

 

It has been over a year since my last post. I said in that article that I would write more often, but I failed to do so, so this time I will just say that I would like to write more, and hopefully I will.

While writing has taken a backseat, I have been quite busy on the investing front. I have had both successes and disappointments, but I have used both to transform my portfolio to,  I believe, a better future.

The big disappointment has been a substantial investment in Choppies, the dominant grocery retailer in Botswana, which reminded me of an early Wal-mart. I can admit that I bought the ‘story’ and was not vigilant enough over the balance sheet or the price I was paying. While 80% of my purchases were made when the stock sank, and the story is not yet over as they are trying their best to resurrect themselves by exiting some markets etc, I have nonetheless written the value down to zero in my own mind. If the share trades again and I can recoup my investment, or even part of it, it will be a welcome bonus, but I am not relying on it for anything. The important thing is that it has taught me some good lessons which will serve me well going forward.

My Berkshire model

I have now adopted a ‘Berkshire’ model. Berkshire Hathaway relies on the managers of the various businesses it owns to run them, with very little help from HQ, or Warren Buffet the CEO of Berkshire Hathaway. This is possible because Buffett has immense faith in his various managers, as well as having a deep understanding of the investments that Berkshire owns.

In order to follow this model  I have whittled down my portfolio to only nine stocks. These companies are run by managers I trust and admire, and are businesses I can understand well. They were also available for purchase at a very reasonable price. There are only nine because these sort of investments are fairly rare.

I am not going to discuss specific stocks on Dividend Tycoon, except perhaps if it is to point out something specific like my stupidity in the case of Choppies, although some of you may be able to work out which stocks I am referring to.

My largest position is now about 30% of my portfolio. I consider it a core position that will not be sold unless there is some drastic change. It should help feed me and my family through thick and thin. While for most investors this would be complete madness, I am quite comfortable with it.  (I would not however recommend this to others). It is a business close to where I live, I have visited it many times. I have spoken to the CEO  and financial director at various presentations and AGM’s, and I think they have high levels of integrity and honesty. The company is frugal and conservative, and has many of the attributes I would look for in a business I was looking to buy privately. They have zero debt and currently have almost 70% of their market cap in cash in the bank. They are perennially profitable and pay regular and consistent dividends.

So if I have found a business like this, why should I not devote a lot of my capital to it? Why spread it around to other businesses which are far more risky? This business is my core holding, around which I intend to increase my stakes in other good businesses.

In constructing this portfolio I am taking the advice of Charlie Munger who has said that it is the wise investor who buys a few good businesses, when they are available at a reasonable price, and then sits on their ass.

My Job

I will continue to research and study businesses in the time I have available, because one needs to be prepared to act. Capital to invest could become available from:

1. Dividends exceeding living expenses. Not likely at this stage or anytime soon.
2. Any other income I can earn.
3. Buyouts of my existing holdings. South African shares are currently at very cheap levels, so this is always possible.
4. Sales of one of my holdings should I lose faith in management or feel the industry has changed/been disrupted.
5. Sales of Choppies shares, should the share suspension be lifted. I would need to assess the situation and try and speak to the CEO to get a fuller picture of the situation, but at the moment my faith is naturally diminished given the circumstances.
6. Selling a current holding should there be an opportunity I simply feel I cannot miss. In the recent share crashes there were two stocks I have wanted to own for a long time but they were always too expensive. I did sell some stocks I would rather not have sold to acquire them, but this will be only when I feel the opportunity is really exceptional.

I am very comfortable with this new model. It fits my ‘time limited’ lifestyle, it requires few decisions by me (my managers make them). it is nice to have a few long standing stocks which I can watch closely and enjoy their successes.

The current market has been a very difficult time, but I plan to keep my head down and focus on quality. Dividend Tycoon HQ is still operating and has not applied for a bailout yet, so watch this space for further news as I have learnt a few other lessons over this difficult period which you may find interesting.

 

 

 

Those of you who still read this blog, given it has been over 6 months since my last post, may be wondering if the very poor market in South Africa has resulted in me hanging up my boots and giving up. Well, not yet. I am though continually repeating to myself Warren Buffett’s mantra to ‘Be greedy when others are fearful, and fearful when others are greedy’. Being an investor in South Africa in 2019 squarely places me in the ‘Be greedy when others are fearful’ camp. It is not easy though.

You may also be wondering about my last post “My ‘Worst Trade Ever’” where I wrote about my investment in the South African company which holds the Burger King franchise, Grand Parade Investments. I wrote about why I was sticking to my guns and holding out, not selling while the share traded well under Net Asset Value. I wrote that selling may turn out to be ‘The worst trade ever’. To cut a long story short, I have sold out.

Somebody (I am not sure who) said something along the lines of ‘when the circumstances change, I change my mind’.  So why the change of heart?

Shareholder activism was initiated during the course of 2018, resulting in a series of special general meetings to try and change the board of directors. This met with resistance from the company who tried to prevent a new board of directors being installed. As one of the larger non-institutional shareholders I was contacted by the company asking me for my vote. I decided I would listen to both sides of the story and on the back of this request I was granted a one on one meeting with the CEO of the company.

I was given certain assurances of actions that would be taken in the short term, none of which actually occurred. The company has also not paid the annual dividend they normally pay, and in the last set of results they made an overall loss on the back of heavy losses on all the food businesses, including Burger King.

So in essence my lack of faith in management, loss making operations, and the abundance of other cheap (and profitable) companies, resulted in me selling out completely. Fortunately, due to the shareholder activism, the share price had increased from around R2 to R3.50, so at least I did not lose money on my investment.

Sure, it is still trading under Net Asset Value, and the shareholder activists will no doubt still manage to get more value out, but nothing is a sure thing. I now need sure things, or as close as I can get to sure things. I have traded Promises for Profits. I must also trust management.

I am sad to say goodbye to this investment as I have put a lot of time and thought into it over an 8 year period, but I have no regrets. The proceeds were invested in some profitable, growing businesses where I trust the management.

I may still though pop into Burger King occasionally, the Fierce Whopper is killer.

 

 

It has been a long time since my last post. Apologies for that, but the birth of my amazing daughter in January this year has meant I have had very little time for this blog. I am a first time parent at an age that is lets just say somewhat older than the average first time parent, so it does tend to take it out of you, but is worth every second.

The new year has also unfortunately also heralded a year of very poor investment returns. My stocks are mostly small cap South African stocks, which keep going from cheap, to even cheaper. This slow grind down has been rather depressing, but I am trying to stay positive as most of these stocks are not doing badly as far as their businesses go. Most will provide me with a higher dividend flow this year than last, and this is what I choose to focus on.

One stock in particular though has been a disappointment. If you have read this blog before you will know about it as it was the subject of a blog post In pursuit of my ‘The Greatest Trade Ever’ That post was rather tongue in cheek at the time as the share had already been performing poorly, and was based on a book by the same title ‘The Greatest Trade Ever’ by Gregory Zuckerman.

As the title of this post would suggest, it is more than ever looking like my ‘Worst Trade Ever’. The share is Grand Parade Investments (holds gaming and casino assets as well as food assets such as Burger King and Dunkin Donuts) and is down even more since I wrote that post.

There are a few factors contributing to this share price decline – rotating CEO’s/general economic malaise in South Africa/illiquidity of South African small caps and a general lack of buyers not wanting assets perceived to be risky in an already risky country.

Since the initial post I have however increased my holding in the company. In my view the share still holds substantially more value than the share price. The main drag on performance seems to be Burger King, which to date is not profitable. However, I am fairly confident that the June 2018 results will turn positive, and the share may well re-rate. If not then, by June 2019 I am almost 100% positive it will be profitable due to the far bigger store base and the closing of under performing branches.

Investing is about patience. As long as the intrinsic value of the share far exceeds the market value, I will remain invested. I believe I would be making a fundamental error by selling my equity in various quality assets at about a third of their Net Asset Value. I would be selling for the following reasons:

1. The share price keeps going down.
2. I am impatient.
3. I am frustrated by the lack of action by the company to unlock value.
4. Everybody seems negative about the stock.

In my view numbers 1, 2, and 4 are not good reasons to sell. Number 3 has some validity, but it is too early to call, it may be just around the corner.

It should be noted that this share is too big a part of my portfolio and that I do want to reduce it at the appropriate time, especially as I have found and researched another stock that I am itching to buy. However, I am going to be patient and disciplined, and not sell something offering tremendous value for less than a third of its intrinsic value.

I really do not want to to sell a big block of this stock now out of frustration, and look back on this episode and say “Boy, that was my Worst Trade Ever!”

Postscript: Since I started to write this post their has been an announcement of possible shareholder activism in the form of a general meeting and a proposal to remove certain directors. The share has re-rated slightly, but I would say it is still very early days.

 

 

 

 

Firstly, a happy New Year to both regular and new readers. May the new year be filled with happiness, and dividends of course.

2017 ended on a scary and at the same time fascinating note in South Africa. We have witnessed the implosion of one of our biggest companies, Steinhoff, due to accounting fraud it would seem. They had been acquiring companies at a dizzy pace for a number of years, not just in South Africa, but also companies like Conforama in France and Poundland in the UK. I will not get into the technicals, but it would seem debt and fancy accounting (fraud) are at the root of the problem.

Now this company was one of the golden companies, the CEO was the golden boy of South African business, he had the midas touch.  Fortunately Dividend Tycoon HQ was not exposed to this company as I was always a little doubtful, although did not think this would happen to be honest.

However, what an incidence like this does do, should you escape unscathed, is send a chill down your spine and make you look again at your portfolio with fresh eyes. Have I been complacent in reading annual reports too quickly and skimming over the difficult to read sections? How much debt do the companies in  my portfolio have? Are my position sizes too big?

How my views have changed

1. Understand the company

I must understand the company. I think I can give myself a pat on the back on this score, I have studied all my portfolio companies in detail – annual reports/AGM’s/interviews/twitter searches…anything to get an edge in understanding not just the numbers but also the DNA of the company. I need to be able to tell you exactly what the company does. In this regard I have tended to invest in smaller companies with easy to understand business models and easy to understand accounts.

This saga reinforces this strategy in my mind. I simply cannot get my head around large insurance companies or banks for example. I do not know the extent of their liabilities or whether they are accurately portrayed.  So why would I invest in such a company if there are easier to understand companies.

Same go’s for a company like Steinhoff. They had acquired so many companies that their accounts became a nightmare to understand. There was goodwill aplenty, lots of debt and it was difficult to compare to prior years because each year was muddled up due to new acquisitions.

One of the best things about the investing business is that one never, as Warren Buffett likes to say, has to swing the bat. So if something is too hard to understand, leave it alone. There are thousands of other companies to invest in, so you are never forced to do anything

2. Watch the debt

This is partly the same as point one. However if there is one thing that has to be very carefully understood it is the debt levels. Debt is the biggest danger most companies face. A debt free balance sheet for example allows you to sleep well at night, whereas a highly leveraged balance sheet can give you nightmares. Some debt is usually inevitable, but keep an eye on it.

3. Position sizing

Of the three points, this is the one where I have perhaps erred. I have a few very large positions in terms of their percentage in the portfolio. Steinhoff has shown that should you get a position wrong, and it is a large part of your portfolio, it can be very negative.

Due to the fact that I believe I have been diligent on points one and two I am not too concerned at the moment. My big holdings are easy to understand and have strong balance sheets. However, going forward I may adjust the portfolio sizes downwards as I make new investments and perhaps trim large positions where they look fairly valued or overvalued.

Conclusion

It has been quite startling to see how quickly fortunes can diminish, how quickly reputations can be left in tatters. It makes one realize that investing is a serious business, and complacency is deadly to your survival in this game. Besides the quickening pace of business disruption, political events and macro events, one has to be on top of your investments and watch them like a hawk.

I have committed to upping my game by reviewing all investments thoroughly and being far more circumspect when making new investments.

Take care and please also try your best to avoid any ‘Enron moments’ in 2018.

 

 

It has been a trying time again at Dividend Tycoon HQ. While there are a few exceptions, much of my portfolio is stuck in a no growth phase, share prices are stagnant to down.

While I have been reading and re-reading my article on organic growth, where I had stated that I do not want to make any changes to my portfolio for a while, sometimes plans get interrupted and stuff happens.

The stuff that happened of late, is that my property developer stock, Balwin Properties has sunk somewhat, to under R5. This stock earned R1,31 last year, so is now on a price earnings ratio of 5 or less, even if earnings were to sink to R1, which I believe is doubtful. That means it is likely to be yielding 20%, or more. Certainly in the next year or two things may be difficult because they are in the start up phase of some huge projects, and South Africa is currently in a difficult political/economic environment. But in a few years profits should flow nicely.

I felt I could not let the opportunity slip and have increased my stake in this company by 15%, making it my second biggest holding. I managed to acquire shares at R4.85 and will receive an interim 10c dividend shortly.

The bad news is I did have to make some sales to fund the purchase. My sales were some European property stocks, which were trading above their Net Asset Value and in the case of one on a very low yield after appreciating by over 50% in the last year. This would be contrary to what most investors would be doing right now in South Africa, as there is a great deal of pessimism around South Africa Inc stocks, and a love for anything ‘offshore’, given the uncertain political outlook. I do believe however that every asset has a price, and that I will be rewarded for the switch.

I will now need to be patient with this stock, it is now a cornerstone of my portfolio, and I will need the profit it can generate, and the resultant dividends (30% of profits) to build my portfolio further. There may be a few tough years, but it can start to churn out massive profits if the market picks up. I see it as my own business, and like any other property developer, I will be able to take some of that profit and build my asset base, although not necessarily in property. A stock that yields over 20% should help me with this far more than one yielding less than 5%.

It should be noted that I also invest based on what one could call qualitative factors, and I am quite impressed by the CEO of Balwin Properties. He has built a big business in 21 years and is hungry to do more. I have attended two results presentations now, and have come away from both feeling assured that I have partnered with a company that can do very well.

Hopefully not much will be happening in the long term portfolio, although I have a few ideas bubbling away.., so things may be quiet here till the new year. I will see though and may write another more general article before the Christmas break. If any readers are off on holiday, I hope you will enjoy them and return to Dividend Tycoon in the new year.

Disclaimer: As always this is a risky stock, in a risky industry. Do your own homework. What I have is written is merely my opinion and certainly not a recommendation.

 

 

 

 

 

I recently finished reading the book ‘The Greatest Trade Ever’ by Gregory Zuckerman. I can highly recommend the book. It is about various investors, but mainly John Paulson the hedge fund manager, who shorted the US housing market in the run up to the global financial crisis in 2007/2008.

I am not going to get into the specifics of the trade, mainly because I am not clever enough to understand it, but secondly it is rather complex and boring, but I can sum it up by saying they used derivatives to short pools of risky mortgage bonds. And if that is still confusing you like it did me, they made money when people could not pay their mortgage bonds.

Now this sort of trade is one that I personally would not be comfortable with for a few reasons, but the story reinforced a few things for me.

1.Have the courage of your convictions

This was a risky trade, the US housing market had been booming for so many years, the mantra was that property always goes up, there is a limited supply etc etc. The facts were however that housing prices had far exceeded income growth, and this led to even Ninja’s (ie. No Income No Job) loans being granted. Crazy, and you probably thought I was talking about a Japanese mercenary. A group of investors went against the tide and bet that it could not continue. They were ridiculed and had to wait longer than they thought, but their conviction was right, and many multiplied their capital ten fold or more.

2.Patience

Initially this trade did not work well. Housing did not go bust quickly, and even when house prices did start to fall, the price of the instruments being shorted continued to rise. One of the investors, Michael Burry, almost went insane, many of his investors left or wanted their money back. He would sometimes go to the office and close the door behind him and play heavy metal music for most of the day…Rest assured things have never gotten so intense at Dividend Tycoon HQ, my trades tend to be more of the plain vanilla equity type.

3.Wait for a fat pitch

Warren Buffett talks about waiting for a ‘fat pitch’. This is waiting for an excellent investment idea, not settling for a mediocre investment. He is trying to get across the idea that it is better to wait for an excellent idea, even if you have to wait years for it, than just invest in something mediocre. He likes to remind us that he read the Coca-Cola report for decades before deciding the time was right to invest in the company. You may also like to read my article on punch card investing.

Pursuing ‘The Greatest Trade Ever’

You may be asking what this book has to do with me. Well, I could identify somewhat with the characters in the book because I also have a had a ‘trade’ on the go for seven years, for which I have had to have plenty of patience and have had to have the courage of my convictions.

The company is Grand Parade Investments, which has both gaming assets, and a fledgling food business, mainly QSR restaurants like Burger King and Dunkin Donuts. I am very positive in the long term, but the share price has gone down 60% in the last three years. I have been invested since 2010 and have not lost money yet as bought very cheap, and have received good dividends and special dividends over the seven years, but I really expected more, and sooner. However, reading this book helped me realize that I should follow my own path and not be swayed by market commentators and other investors. The share is trading well under the Net Asset Value of the company, and I believe will be a great long term compounding investment. I believe it could easily multiply 10 times over the long term from here, but nothing is assured of course.(Disclaimer: This is a definite small cap and is risky, do not see this as a recommendation, it could go down as easily as up.)

I have placed nearly 20% of my portfolio into this one stock, so I have a lot riding on it, I know it may not be ‘The Greatest Trade Ever’ in terms of a quick gain to be made, but I have come this far and am confident it will at least be a very good investment. My search for ‘The Greatest Trade Ever’ however continues and I have a few other positions developing with this title in mind, so hurry up Grand Parade Investments, your have some stiff competition for the title..

A change of mindset

My thoughts of late, and reflecting on this book, have changed to thinking of every stock, before I buy it, as potentially being ‘The Greatest Trade Ever’. If I do not think it can earn that title, I should not buy it. I think that if we invest in this way we will do our research thoroughly and avoid mediocre investments.

Let me know if you are pursuing your own ‘The Greatest Trade Ever’ and what you do to keep yourself getting discouraged when things take longer than you thought to play out.

 

 

 

 

I must confess that the phrase ‘organic growth’ always used to confuse me somewhat when I heard companies say they had ‘good organic growth’ or plan to grow ‘organically’.

What I now understand is that it is growing your business using the cash flows from your current business. It differs somewhat from acquisitive growth where you take over new businesses by selling current businesses or using debt or issuing shares.

A real example is when as a private investor in a property stock (or REIT) you are given the option to reinvest dividends in the property stock (or REIT) rather than receive the cash, thereby owning a greater share in the company.

In the last few months there has been quite a flurry of activity at Dividend Tycoon HQ. I have been selling out of a large holding where I had lost some faith in the management and did not like the debt levels they were starting to take on. I have also sold some other stocks where I found new or existing stocks too cheap and compelling to ignore and needed the cash in order to invest in them.

It does however always leave me with a slightly uncomfortable feeling, this process of buying and selling, of shuffling the deck so to speak. You are making hopefully good choices about allocating of capital, but you are also interrupting that formidable machine called compounding. The reason for this is every time you buy and sell you are incurring transaction costs on both legs of the trade, and quite likely incurring capital gains tax on the sale. You are shrinking the pie.

This feeling of shrinking the pie, along with a pie that is already shrinking due to a recession in the market where I am invested, is making me rather uneasy. I want my business to grow, not shrink.

I think that sometimes one has to take a bit of pain to get your business to where you want it, which is what I have done. I now feel I have a good business, consisting of stocks I feel will grow and prosper, as long as I leave them alone. Most of them are good dividend generators and will provide me with an income and some reinvestment opportunities.

Why is this so difficult?

I think the main problem is that as investors we crave activity of some sort. It is difficult to look at the same portfolio every day and not to tinker with it. I am always reading about stocks, doing research etc and it is natural to want to invest in new ideas and add a new name to your portfolio. It is not always the best thing to do though. In my current portfolio I believe I need to leave it to grow, why sell a good thing?

What I do however plan to do is to collect dividends and build up a cash base again for further investments. This must not however be at the expense of my current portfolio.

Unfortunately a lot of my dividend income is needed at present for living expenses, so I will be exploring other ways of raising cash. I am not sure how I plan to do this, but perhaps some part time work or freelance writing/business journalism (anybody listening?…) that allows me time to keep doing my passion which is researching companies and markets. Let me know if you have any ideas.

Conclusion

I am satisfied that for the first time in a long time Dividend Tycoon HQ holds a stable of good businesses, which include fast food restaurants, a grocery retail chain, a plastic packaging business, a logistics business, two beverage businesses, a finance business, a property developer, a self-storage business, an apartment letting business, and a few others beside. It is now time to let them grow through the current recession and not to reduce them in any way.

My job is now to sow what dividends are available back into growing these businesses, or new businesses if funds allow, as well as trying to increase my capital outside of the stock market. My mind though remains fixed on looking for good businesses, because if I leave compounding to do it’s job, it may be no time before I am on the job full time again.

Postscript:

I feel like the news coming out of Dividend Tycoon HQ has been a tad glum of late, so I thought I would share a little bit of good news which came out a few hours ago, related to my last article about buying businesses, not stocks. The results of the company I used in this post to make my point, Bowler Metcalf, the boring old packaging company, released very good results today along with a 23% increase in the dividend. Being a core holding of mine this was great news!

Well another month has passed, and for me the stock market has not been a good place. I am invested in mostly small and medium cap shares in South Africa, and to be quite frank, the market has been terrible.

The reasons: Political instability, recession, lack of liquidity in these shares, and people just giving up on some of them.

Now you might think this has depressed me no end, and you would be partly right. Nobody likes to see their net worth decreasing on a sometimes daily basis. You may detect though that I am not totally downhearted about this, and in fact to some degree I take a certain pleasure out of it.

The reason for my pleasure can be traced back to the father of value investing, the man who Warren Buffett says he looked up to the most in investing, Benjamin Graham. He spoke of a Mr Market, who was a manic fellow at the best of times, sometimes happy and sometimes downright depressed. The only weapon we have as investors he said was to ignore Mr Market and to control our own emotions. He also said that the best time to buy was generally when Mr Market was depressed and throwing away good businesses at knock down prices. In my market, I believe that time is now.

I have been doing a fair amount of buying, and selling a long term holding which I have lost some faith in, in order to fund my purchases. I will not go into all my activity, but will touch on one stock I have been buying. The reason I will do this is because, like the title of this article alludes, we are buying businesses, and the key is not to just think of stocks as pieces of paper.

Buying a boring old packaging business

I have been accumulating shares in a company called Bowler Metcalf (stock code BCF on the JSE). This stock has been listed for 30 years on the stock exchange, has been consistently profitable, has no debt, has cash on the Balance Sheet, and most importantly of course, pays dividends! They make things like the plastic containers that are used for your bathroom cleaning materials and tubes/containers that hold cosmetics etc. They generally make the more specialized ones with advanced nozzles, but lets leave it there, I did say boring.

The share price though has been terrible, it is probably down over the last 5 years. Part of the reason for this is that a number of years ago the company bought into one of their clients, a beverage company which makes soft drinks. Subsequently they have merged their stake into a larger entity called Softbev, which is now a national beverage company which sell various soft drinks and energy drinks, as well as being the Pepsi bottler in South Africa. Unfortunately Softbev has had various teething problems, and Bowler Metcalf has had to write down the value of their 42% stake in Softbev.

The thing is that even if Softbev was worth nothing, which it certainly is not, then the core business of Bowler Metcalf, which is plastic packaging, is worth far more than the value the market is currently valuing it at.

I have recently bought some shares at R5.65, and a recent trading statement said that core earnings would be 65-82c, placing this business at an earnings multiple of 6 to 8. This for a well run business, that is conservatively managed. You effectively have a free option on Softbev, which may be listed as a separate business.

This is why I say stocks can be depressing, but businesses less so. This business is situated in my home town of Cape Town, so I go off to the AGM every year to hear the directors discuss prospects for the year. I see their soft drinks, including Pepsi, in the supermarket. I see this as my business, albeit as a minority shareholder. I enjoy reading their annual reports, which are easy to understand, being a fairly simple business.

I find a lot of comfort in a business like this. I have a few shares, such as Choppies, which is a supermarket group which has the whole of Africa into which it can grow, which could shoot to the moon over time, but equally fall flat on it’s face. Bowler Metcalf though is like a trusty old friend, somewhat boring, which keeps churning out profit and dividends. Unlikely to make me wealthy, but like anybody owning a business, I would like it to keep feeding my family and providing for my needs, and the stock price does not bother me, because I have no plans to sell something so important, especially to that horrible Mr Market guy!

Disclaimer: I have been discussing a small company I like, it is not a recommendation though, as all shares carry risk. Do your own research.