Sunday, August 2, 2015

What are you? An Investor or a Speculator?

Today I am sitting on my patio overlooking the backyard. Sitting at my luncheon table, a slight breeze is keeping me comfortable. For the first time in weeks I am entirely relaxed. It is a very long weekend with Friday to Monday off and I love it. For the first time in months I am nearly bored. There are some documents laying in my car; I can see them from my kitchen window which is above the parking stall. I just don’t want to even touch them. The stock markets are closed; I am baking muffins in the oven; I have not opened the Globe and Mail website avoiding noise over the Greek Debacle and the imminent collapse of…. Oh yes, of China this week.

No ‘End of America’ infomercials, please, and I just decided not to continue my subscription with perma-bear Bill Bonner. Life can’t get better than this. Why can’t life be always like this? I contemplate my belly button (prudely covered by a golf shirt) and meditate about investing. I realize that every day we’re overreacting to the news: There is an election coming, should I sell my Canadian Banks? After all, the Americans are selling them short and now Mulcair may become Canada’s first NDP Prime Minister!

 What does that have to do with investing in good businesses? Really, Canadian Banks are solid businesses that came out of the financial crisis nearly unscathed; in fact they increased their holdings in the U.S. financial sector – in particular TD Bank. Some claim that 50% of TD’s revenue is from the U.S. So if these banks are not solid first rate businesses than what are? Bombardier? Yellow Pages? In the short term the stock market is a voting machine but over the long term all that matters is financial performance. You can bet that the Canadian banks will keep on making money. For me, Canadian Banks are as solid if not more solid as Wells Fargo.

So when the newspapers whine and U.S. investors- or should I say robber barons, want to short our banks – just go ahead and if they’re cheap enough, I’ll buy some more. News Media make money by scaring people – oh it is so important that you know about all the scary things in Greece; and you should worry about the Middle East because tomorrow ISIS will bomb you in your nice backyard. Yeah right! So what do you do about it? You are glued to the web and read those darn News Website and their advertising. You panic and sell stocks that over the long term will perform just fine (but without you benefitting) and you pay prematurely taxes over the miniscule profits you have made since the last scare and a bunch of commissions as well.

Really, just buy ownership in good businesses that have a long term vision. Pieter Thiel in his book Zero to One, makes a very valid point about competition: ‘competition kills all profit margins’. You should hate competition. If everyone can make a product, like producing the same kind of oil, or making similar cars (how many car makers are there in the world?), or restaurants meals then the competition is fearsome and the profit margins fall.

 If on the other hand you have a competitive edge or as Warren Buffett calls it: a ‘competitive moat’, then you can create cash flow machines such as Microsoft, Coca Cola, Hershey, Cineplex or our banks with profit margins of 15% and higher. The only real question, you the investor has to ask is: what is a good price to buy?

Everyone these days hate the oil industry, but it is an extremely competitive industry. Profit margins in this sector are typically 8%. So why do so many hate ‘big oil’ and love ‘high tech’ where profit margins are 4 to 6 times higher? It is just because of market noise and a lot of misperception. Yes commodity industries can be highly profitable investments but a lot of that is based on plain market perception. Today everyone hates resources companies and their share prices have fallen 70, 80 sometimes 90% from their previous highs, in the meantime commodity prices have dropped by only 30 to 50%! So when those commodity prices start to turn around, investor mobs will suddenly love the resource companies again and drive prices to the other side of the spectrum; pricing those companies at absurd high valuations.

When people invest in these commodity stocks, they are often not truly investing, they are speculating on something that may happen that will result in a wild upswing of their share value. They are not investing in a specific profit stream and buying at prices below the intrinsic value of the underlying companies. Buying these commodity stocks is indeed a way of making money; but is it investing or is it gambling? And there is nothing like the noise of the News Media that is driving this market of speculators. All this noise, this acrimonious hysteria, is just a distraction for the real investor and needs to be filtered out.

Greece is not affecting the world economy, let be Canada. How fast will China grow? Who cares, the Chinese probably have never heard of TD or Brookfield and if anything, they infringe on Microsoft and Google patents. Do you really think that the Chinese buy real iPads rather than much cheaper ‘knock-offs’? How can you invest in a country that builds ghost cities galore, that continuously fakes its numbers and has a reputation of corruption? 'Investing' in China is speculation without having access to real data. That is not investing in solid long term income and profit streams. So what are you? An Investor or a Speculator?

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