Becoming a property developer!

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.

the-blyde-600x300

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.

night_scene

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.

 

 

 

 

 

Charlie Munger – my favorite lessons

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)
 

 

 

 

 

 

 

Being willing to change your mind when the story changes

Being mid-December I thought things on the stock market front would be quiet by now. Last year December I received the motivation I needed to start this blog (which I did in February this year). The catalyst then was an event in South Africa, the firing of the then capable finance minister, to be replaced by a political appointee. This resulted in a massive devaluation in the value of the South African currency and dramatic fall in share prices. My aim then was to diversify my portfolio out of South Africa. It still is, although it is taking longer than anticipated. The currency has rebounded quite strongly and the time (and funds) are approaching.

This December has however not been any quieter. Fortunately the reason is not political, but more company specific. This has meant I have been rather busy changing parts of my portfolio, researching new stocks, and doing a bit more buying and selling than I would have liked.

Things can change quickly

My last post focused on two stocks in which I have my largest holdings. One of these is a company called Trustco, a Namibian financial services company. I have held this stock since 2010, and it has been a stellar performer, going from 35c (2.5c US) to around R3.60 (26c US) at present. I liked the story and the growth, but mostly that the value in the share was underpinned by huge tracts of land around Windhoek, the capital city, which was not being valued correctly by the market. You could have bought the whole company then for R270m, but the property alone was worth about three times that. I was so smitten by this stock that I borrowed as much as I could from my home loan in order to purchase more shares, not something I would normally recommend.

I have continued to buy more of the stock since 2010 and along with the price appreciation it has at times been over 30% of my portfolio. However, in recent weeks the results were released which while not bad had a few things I did not like, such as increased debt. There is also the fact that they are buying a diamond mine which is being bought from the CEO at an exorbitant price according to many analysts. Then there is the issue of the CEO having rather nasty battles on twitter with people criticizing the company. All these things have made me rather nervous, and I felt it prudent to sell one third of my position. For tax reasons I am loathe to sell more in this financial year as I will pay Capital Gains Tax. On the plus side I can sleep a bit better at night and have had some cash to invest.

It is also quite sad for me, as I really thought this was my ‘get rich’ stock. (I have one other one I have hopes for, so all is not lost..). But in hindsight I should have done this some time ago, it was too risky having such a high concentration in this stock, and I have replaced it with some high quality dividend paying stocks, which will certainly help me ‘get rich slowly’ if I allow them the time and have the patience to let them compound. I will not go into details now, but the majority went into three South African stocks: Woolworths (high quality retailer), Clover (high quality dairy and beverages) and Trellidor (best in market home security). I also made a small addition to a property counter I already own, Tower Property fund, which should see me obtain a yield of over 12%. All are nicely up since I bought.

Beware of anchoring

I think as investors we can get rather anchored to our ‘star performers’, thinking that past performance is an indicator of future performance. We should in fact search for stocks that have the characteristics that prevent us from selling, as it is best to leave your stocks alone to compound over time. Warren Buffett himself says his favorite holding period is ‘forever’. However, if the story changes, and the reason you hold the stock is no longer as valid, then it is better to take action sooner rather than later. Please note though that a decline in the stock price in itself is not a valid reason to sell, that may in fact be an opportunity to buy more.

Conclusion

So, I have been busy realigning my portfolio, and am delighted with some new additions to my dividend family. I am hoping that they will be with me for many years to come, but this time my mind is more open..

All that remains is to wish all readers of this site a blessed Christmas and a New Year filled with…lots of dividends!

 

 

 

No cash to invest, but I have been buying stocks anyway!

It has been a slightly frustrating time for me on my long term investment journey. I am fully invested, and have no free cash to invest. This is particularly frustrating when you know there are some stocks that are good value, and you just have to watch them creep up slowly from the sidelines. I have said before that my biggest mistake to date has been impatience so this is really my own fault, and is another lesson learned. I have also written about my hotel saga, which looks likely to conclude at the end of February 2017 (according to a company circular released this week), which has tied up about 10% of my portfolio in an illiquid stock, but at least there is a possible end date with the promise of a good return on investment and cash injection.

In the mean time I have been doing an enormous amount of research, I have requested annual reports from a number of target companies, and in general I have been preparing for better times.. I have done an interesting trade too, but will touch on that later.

However, despite all that I have written here, suggesting that I have merely been a spectator to the market, I have been buying! I am sure you are wondering whether I have been drinking or am going mad due to watching the bargains slip away. Hopefully you are just wondering how that is possible.

Okay, technically I have not been buying stocks, but at least two companies, in which I coincidentally have my largest stakes, have both been or have plans to buy back stocks from the market. This is also known as a stock repurchase or stock buy back. Essentially the company buys its own stock and then either holds the stock in a treasury account or cancels the stock. The net effect is that my overall equity stake in the company will increase, without me laying any cash of my own down. To me this is as good as buying the stocks myself.

One of the stocks, Grand Parade Investments, which owns the Burger King and Dunkin Donuts franchise in South Africa, have recently announced that they have bought back 24 million of the previously 488 million shares. So without spending a cent, I now own an extra 5% of my Burger King and Dunkin Donut franchises, as well as other assets they own. I am especially happy because I feel the stock is undervalued, so it is a good use of the companies cash.

The other company, Trustco, is a diversified financial services company in Namibia. They have entered into an agreement to buy 41 million out of a total of 772 million shares from one of the large asset managers. Again, this will result in me effectively increasing my equity stake by 5%, for no money down. This deal is a little more difficult to evaluate as they are paying a premium to where the current share price is. However, it could be argued that in order to get your hands on a block of stock this size would cause the price to rise substantially.

I am not alone in being pleased by these stock buy backs. Warren Buffett has often mentioned in his annual Berkshire Hathaway letter the effect of stock buy backs. His favorite example is that of Coca-Cola. He finished buying his stake in Coca-Cola in the early 90’s and at the time had 400 million shares (split adjusted) for an equity stake of around 7% of Coca-Cola. Berkshire Hathaway still owns 400 million Coca-Cola shares. Warren Buffett has not bought any more stock for over 20 years in the company, but they now own over 9% of Coca-Cola. If this seems petty to you, remember that you could also buy 2% of the Coca-Cola company for around 3.6 billion dollars if you have the money.. The reason for his ‘free’ extra 2% is that the Coca-Cola company has consistently been buying back its own stock. This makes Berkshire Hathaway’s 400 million shares a bigger proportion of the overall number of shares.

Hopefully a clever trade (and more free shares)

Related to the share buy backs is the fact that the company referred to above, Grand Parade Investments, owns a 10% stake in another favorite company of mine, called Spur, which is also in the restaurant and fast food business. They have increased dividends for over 20 years. Recently Grand Parade Investments has said that they have reached an agreement with a fund manager to buy up to 19 million shares in Spur. So I will also be getting more Spur shares, with no money down.

In addition to the ‘free’ shares, I have spotted what I believe to be a good trade. The shares of Grand Parade Investments do not price in the food assets, but only their assets in the gaming sector. So you are effectively not paying for the Spur shares. As such I felt it was a low risk trade to sell my Spur shares and use the proceeds to buy Grand Parade shares, as I would effectively be buying back Spur shares for free which are held by Grand Parade, while also getting the gaming assets.

Disclaimer: The above trade is risky and probably not recommended, but as an aspiring Dividend Tycoon I am looking for an edge and when I see a free lunch (excuse the pun), I grab the burgers! (and Donuts). Hopefully in time I will be proved right, but I may need to be patient.

 

 

 

 

 

 

 

 

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.

 

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.

 

Conclusion on Amazon.com, and a word on intelligent fanatics

I hope you enjoyed my first two posts on Amazon.com. If you missed them, you can read them here:

Why Amazon.com scares, and fascinates me – Part 1

Why Amazon.com scares, and fascinates me – Part 2

The focus of these two posts were the disruptive nature of Amazon.com. I looked at how reading a few books on Amazon.com had been enough for me to evaluate my current portfolio, and to put on hold any future investments. I really felt that I needed to fully grasp what Amazon.com has become, and more importantly what it will become in the future.

The impact of Amazon.com extends far further than the impact it has on retailers, and the online stores vs bricks and mortar debate. Among many others, it includes the impact on manufacturers and consumer brands. Does Proctor & Gamble have the same value it used to?, when a company like Dollar Shave Club can so quickly take away market share in the razor blade market, largely using Amazon.com for distribution.

So I hope I have been able to convince you that Amazon.com is a factor to consider in making any future investment decisions. I am not an Amazon.com basher in that I like the convenience of their service, which I must say is very good and efficient. I do take the point that they have put many small independent stores out of business, especially book stores for example which I am sad about, but my question here would be, was this because of Amazon.com or because of changes in technology? If not Amazon.com then surely somebody else would have done the same. Amazon.com did not invent the internet or e-commerce, but you could argue they have perfected it. There are other issues like them not paying tax in certain jurisdictions/countries, but that is not within the scope of this post.

Lastly, before moving onto Jeff Bezos himself, I think a quote from the everything store book by Brad Stone sums up my reasons for considering Amazon.com as a factor to consider in any future investments. “Amazon may be the most beguiling company that ever existed, and it is just getting started. It is both missionary and mercenary.” And if that was not enough to get you worried, he continues to say “It will continue to expand until either Jeff Bezos exits the scene or no one is left to stand in his way.” Ouch!

Jeff Bezos, the intelligent fanatic

It was Warren Buffet’s business partner Charlie Munger who first coined the phrase ‘intelligent fanatic’. He used the phrase when describing business CEO’s who were fanatically building businesses, and who had the necessary intelligence, focus and energy to rise above competitors. He used the example of Sam Walton who, starting at the age of 44 and with one store in Bentonville, Arkansas, went on to build the massive retailer that is Wal-Mart. You would quite simply have to be fanatical to build such a big business so quickly. I read Sam Walton’s autobiography Made in America, and remember reading how he would be in the office at 4am, even on a Saturday! He was a retailing genius, but it was combined with fanatically hard work, focus and energy.

Jeff Bezos is without doubt also an ‘intelligent fanatic’. Starting Amazon.com in 1994, out of his garage, he has built it into what it is today. Not without help of course, because he had the foresight to hire only the most intelligent people right from the beginning. He is not easy to work for and drives people extremely hard.

However, reading the various books and articles about Jeff Bezos, the central theme is that he was fanatical about the customer having a good experience. In the early days, the book chain Barnes & Noble said they would crush Amazon.com. Jeff Bezos told his staff to wake up scared, but not scared of Barnes & Noble, but of not satisfying a customer. He has always been fanatically obsessed with the long term and doing things which will make Amazon.com a better company at the expense of short term profits.

I have recently been reading all the annual shareholder letters written by Jeff Bezos since 1997. He still includes the 1997 letter with each years annual report, because the vision was set then. He said then that the emphasis is on the long term and he wants to build a company with scale, before he worries about profits. The stock was punished for a long time because profits were slow in coming, but his vision has been validated. You could also have bought the stock in 1997 for under $5. Now you will pay around $760. So a $10000 investment in 1997 would be worth around $1.52m today. Even in 2007 you could have bought the stock for around $40.

I am now spending a lot of time looking at past annual report letters and articles on CEO’s, and trying to identify a future ‘intelligent fanatic’. It needs to be in an area that you are comfortable with. I for example would not be looking at a fanatical CEO of an auto stock. I may however look at a list of beverage businesses or retailers, and see who stands out.

You need to look at your own strengths, and be a little fanatical yourself in uncovering a great business, led by an ‘intelligent fanatic’. There are other future Amazon.com’s out there, although perhaps in other industries.

I must just add my appreciation to Ian Cassel here, whom I follow on twitter (@iancassel). I learnt the concept of an ‘intelligent fanatic’ by reading some of his posts, and he is writing a book on the subject which is being released on 15 September 2016. The book is called Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses. I am sure it will be an excellent read based on what I have read so far on his website.

Conclusion

Part of my reason for starting this blog was that it concentrates ones thoughts, and is a sort of memo to yourself.

So to conclude, the three main lessons I have learnt from writing these posts are:

  1. Amazon.com is a formidable company, you need to consider them whenever investing. Think of industries that have not yet been affected. I read recently that they are making inroads into the auto business. This list will get ever longer.
  2. Jeff Bezos is an intelligent fanatic. Finding an intelligent fanatic early, may lead to a life changing investment. Look at what CEO’s say in their letters, and then also what they do.
  3. Amazon.com may be an expensive stock, but I for one will be keeping an eye on it. It has been going 21 years, it is still a young company. It is run by an intelligent fanatic. Perhaps a great opportunity is still staring us in the face.

Lastly, if you know of any other fanatics, let me know. Who says investing is not interesting!

Recommended reading:

 

 

 

 

 

Why Amazon.com scares, and fascinates me – Part 2

Last week I looked at why you need to consider Amazon.com when making investment decisions (see Part 1 here). I said that I had put all investment decisions on hold until I could grasp the effect of the story of a company called Dollar Shave Club, which has disrupted the razor blade market.

Here are a few more areas of concern, where I would not allocate capital without a great detail of research:

Food retail:

Amazon.com now has a grocery delivery service in London called Amazon Fresh. While still small, Amazon.com never seems to stay small, so what effect will this have on retailers in the UK like Tesco and Sainsbury’s? They are already in a deadly battle with discount retailers Aldi and Lidl. Sorry, but this Dividend tycoon will not be investing in mainstream UK retail stocks anytime soon.

I would probably extend this retailer investment ban on myself to retailers in the USA such as Wal-Mart, but I think many of these will be okay as long as they continue to develop their own online presence. Having said that my due diligence before investing in a company like Wal-Mart is higher than it used to be.

I have however invested in a small retailer in Africa, called Choppies. Very small, but a similar modus operandi to a 1970’s Wal-Mart, growing in small towns in countries like Botswana, Zimbabwe and Kenya. I am more confident that they will not be affected by Amazon.com for quite some time.

Property/Malls:

I read an article recently about America’s dying shopping malls. The article was specifically about some malls owned by General Growth Properties Inc. They had missed a payment on a mall in Detroit.

Now I am sure many malls will be fine, but older malls in poor locations are being hard hit by the rise in online shopping.

This is an area where I am still wanting to invest. I wrote a post on a stock which owns 9 prime malls in the UK, which I felt was showing value as a result of Brexit depressing the stock price. However, the amount of due diligence required before allocating capital to stocks which own shopping malls is certainly higher than ever.

Niche retailers:

Outside of food retailing, I believe the everyday products we buy from niche retailers, such as clothes, computers, kitchen products, and staples are in danger of being sold in ever greater quantities through Amazon.com rather than through traditional niche retailers.

Did you just read that I said ‘staples’? This idea came to me a few weeks ago when I was reading a 2013 issue of Fortune magazine. The title of the article was ‘Stocking up on Staples shares’. The article was positive on the prospects for Staples (a large retailer of office products), and in fact of the four main points they made, number two was that ‘Amazon won’t crush Staples’. The reason being that 80% of customers are business customers, not retail customers. At the time, the price was around $14, and an analyst thought that in a year or two it should be trading in the high teens.

I thought it would be interesting to see where the stock was now. Lo and behold it is around $8, so has decline massively. Some investigation shows that they have been trying to merge (unsuccessfully as it turns out) with Office Depot as they feel they cannot survive the onslaught from Amazon.com. Things change quickly.

The point being, that products like office supplies, are so easy for Amazon to slot into their system. Needless to say, the only staples I will be investing in are for my stapler!

Conclusion:

These are just a few examples of how Amazon.com is going to have an effect on the business landscape in years to come. Last week I spoke of the two books I have read, especially the everything store by Brad Stone, which I recommend you read in order to get a feel for Amazon.com. Reading this book you realize that Amazon.com is not the phenomenon it is because of the rise of the internet and online shopping. These things were bound to happen anyway. If Amazon.com was not around, others would be. However, the phenomenon that made Amazon.com the leader of the pack by far, is Jeff Bezos.

In my next post I will explore the reasons why Jeff Bezos has made Amazon.com into what it is today. I will also look at what a CEO like Jeff Bezos means in the world of investing, and why finding people like him, particularly if you can identify them early, can lead to life changing investments.

Full disclosure: I have not placed adverts on this site at all yet. If I do in future they will be for products I trust and believe in. However, in an act of irony I must disclose that the book I have recommended above is my first step into the e-commerce world and I am, yes, an Amazon associate now! If you cant beat them, join them! Anyway, the book really is a very good and informative read, and should you order it through this site, it would be greatly appreciated!