A few months ago I wrote an article for a business publication titled “How I bought a hotel at a third of the price”. I have reproduced it underneath this post. Basically it was about a stock which owns hotels and resorts, and the stock price was, and still is, about a third of the actual value of the real estate, net of all debt. One could call it an absolute bargain. However, this was a bad week financially for me and was a reminder that in the stock market, you should always have a margin of safety and be very sure of your facts. The company released results which showed earnings were down 45% . I was rather depressed about this, especially the fact that the dividend had been skipped for the year, which was a bit of a blow.
However, after some reflection, and re-reading some of the “Intelligent Investor” by Ben Graham, I feel a bit better, and feel the following lessons have been both learned and reinforced for me.
- Buy with a margin of safety. This stock was a microcap and hence risky. I did however buy with a significant margin of safety, which Ben Graham wrote so much about. So even though the stock is marginally down on my purchase price, it is not a complete disaster. Had I paid for the assets at market value instead of at a third of the Net Asset Value (NAV), it would be a disaster.
- Buy profitable companies. I was hoping that with the release of the financial results, my earnings yield on recent purchases would be about 13%, but even with the decrease in earnings, it will now be about 7%. Not spectacular, but also not a disaster. They are certainly still in business.
- Be prepared to be patient. There is limited liquidity in this stock, so it may be difficult to buy or sell at times, the founding family owns close to 80% of the stock. I have in fact communicated with the CEO of the company and I am confident that in future earnings will increase, but it now means I will have to wait a year or more to see the stock rerate.
- Do not borrow money to buy stocks. While this stock is a core holding for me and one I plan to hold for years and years, I must admit that I recently purchased more of it, with the hope that I would be able to sell at a profit when the results came out, which did not go according to plan. This has tied up funds I was hoping to use for other stocks, and put some strain on my personal cash flow. However, I will be able to weather the storm as I at least did not borrow money or buy the stock on margin, so I am not a forced seller.
I recommend reading ‘The Intelligent Investor’ when you doubt yourself, providing you follow the good investment principles as written by Graham. I started at the beginning again, as I last read it years ago. Chapter one (Investment versus Speculation) has already provided me with some comfort. I read the following, “Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying exerience”. This really helped me not to feel too despondent.
The other encouragement was in the introduction to the book where Graham writes that when the tangible asset value is greater than the selling price, then the investor can “consider himself the owner of an interest in sound and expanding business, acquired at a rational price – regardless of what the stock market might say to the contrary”. This was my light bulb moment. I may be stuck in this stock a while (although a large chunk of the holding I have no plans to sell at all), the price may decline further in the short term, but I am a part owner of a sound and profitable business, and I paid less than it would cost to try and build those assets from scratch.
I just need patience! Please see article below should you be interested in reading about the stock. Definitely not a stock recommendation though!
How I bought a hotel at a third of the price.
This may sound like the catch phrase of an investment scam or ponzi scheme, but is in fact the truth, and the amazing thing is it was done without paying huge commissions to brokers or financial advisers, nor is it an unregulated investment.
So how did I do it? I bought a share of a hotel business on the Johannesburg Stock Exchange, therefore I am the part owner of the business and the properties which it owns, albeit a part of a percentage of the hotels and resorts in question.
The hotels and resorts in question are all part of the Gooderson Leisure Corporation Limited (share code: GDN). Now many share market observers may well sigh and say “oh that old dog”, “the share price has done nothing for years”, and in a sense they are right. It is a small cap, or more aptly a micro cap, it is illiquid, and the share price has hardly moved in years. However, none of these arguments phase me, because my philosophy when it comes to my long term share investments is that I am buying businesses, not pieces of paper to buy and sell. I would be willing to hold Gooderson for 20 years or more if it continues to do what it does well. I have my own hotel chain without ever having to get up at 4am and start preparing breakfast and washing linen, why would I ever sell it? The only reason to ever sell would be if the value appreciates significantly, and better opportunities present themselves, but in the meantime, I collect a dividend and am being paid to wait.
One of the assets is the 168 room Tropicana Hotel, right on the Durban golden mile. How much is this property worth? How much would it cost you to build the same thing? I bet you would not get much change from the entire current market cap of Gooderson, currently around the R60m mark. Therefore the other 9 hotels and resorts are effectively free! This includes resorts such as the Drakensburg Gardens Golf & Spa Resort, currently valued at R44m on the balance sheet, but that is most likely conservative. The last reported Net Asset Value (NAV) of Gooderson was R1.55, and one has been able to buy the share at around 50c of late.
I find comfort in buying the assets at a third of the price, certainly it feels safer and easier than buying a hotel at full asset value, and having to run it yourself, but perhaps I have watched Fawlty Towers too many times.
*Not a recommendation to buy, small caps are risky. More a way to think about shares. I currently own shares in Gooderson.