Friday, March 16, 2018

How I really buy stocks

Investing is about accumulating assets that make money for you. It is an occupation that involves many different talents. But like any work, you can subdivide the tasks amongst your workers. Did I mention that running your investment portfolio is like running a business, better a holding-company, with you being the CEO and Chairman of the Board… and the Cleaner all at the same time?  But you can farm-out or delegate work to investment advisors; research services and brokers.  Those are your contractors; the ones you fire as soon as they don’t perform.

In daily life, I run a small business – a geological consulting business and to be honest, I never fired anyone.  Most people will move on, on there own accord and even stock brokers who work in my investment ‘business’ I never had to fire. Either they don’t get more of my dollars and then disappear on their own or they put up with me and my quirky attitudes. My current stock broker is with me for nearly 30 years. Sometimes I lose a worker in my consulting business – typically they find a better paying job in a more stable setting. In that case, I may regret the loss, but I am happy to have helped someone with a stepping stone to a more stable situation.  Consulting is not for everyone, but that is an entire different topic.
With tenants in real estate, nearly the same thing. There have been occasions I had to give notice, but rarely because the tenant was bad. Usually it is because I needed the property for some other purpose. When buying real estate I do some numbers analysis, but it is typically so simple that I can do the math in my head. 
That leads back to running your investment portfolio as a business. I understand the concepts of intrinsic value and the time value of an income stream as generated from a company or a bond. However, it is typically too tedious for me to do. Often, I know the companies I buy from their reputation and the endless discussions by ‘experts’ on BNN. A quick look on the Globe’s Watchlist or at Yahoo finance shows me the basic balance sheet and some income statements over the last 5 or so years.  But the data is often rudimentary. I check how much debt; the earnings and whether they grow and the EBITDA (earnings before interest, taxes, depreciation and amortization).  EBITDA is important and comparable with real estate’s Net Operating Income.  All the other charges, taxes and interest doesn’t tell me whether the business is profitable; those other charges just show how the business is financially engineered through debt and equity and how much data is manipulated through intangible concepts such as depreciation.  I do it in a few seconds. For the rest I use work of my research contractor, the news letter(s).
Calculating the numbers of investable companies is done by analysts and when earnings reports come out these guys are still out nearly 65% of the time. We call that ‘earnings surprises’ to the upside and the downside which often are reflected in subsequent dramatic moves of the share prices (assuming no insider trading). Some investors make solely a living of those earnings surprises by trading the shares around earnings time. Not for me.  With analysts being so often wrong then what about little me doing that job? But then many analysists do their work and spill the results to the public not because they are nice guys but because they have an agenda: selling or buying stocks. We even classify them, e.g. Sell-side analysts who must make a stock look good to the buying public as their employers prepare for yet another IPO.  My analysts are to be free of these particular biases. Not that they are completely bias-free – nobody is, including myself.
That is why I look to people like Gordon Pape a newsletter writer and analyst. Not that he tells the truth, but it is as unbiassed a perspective as one may expect.  He typically is more on our side than on the side of the publicly traded companies that try to use our savings as their equity. Those companies call us ‘owners’ but really we are not that much different than bond holders – we just share in the profits (after the big execs took a big bite for themselves) and for the rest they really would like us to ‘just shut up’. CEOs are not much more than sales people that shamelessly sell us equity in their company. That they make good money in good AND bad times does not seem to penetrate the skulls of most ‘investors’. These guys are not much different than hedge fund managers other than that they specialize in one stock. And you thought you have to be diversified to make money? Think again. A lot of money is made from being in control! That is what it is really about and when you are representing 30% of the shares you are typically in control. Similar to being the governing party of Canada with 30 to 40% of the vote.
That is why I tell people to invest in themselves by running your own company or owning real estate.  And with real estate you can control, in extreme cases with NOTHING or very little down. The latter is pretty risky as well and I don’t recommend it.  You want to own a rental property with nothing down?  This is an easy way of doing it – again I don’t recommend it – you put a line-of-credit on your home.  Say for $50,000 and use it as a down payment for your next real estate purchase. With 20% down you can buy $ 250,000 worth of real estate. Or.. with 10% down you can buy $500,000 worth of real estate. But, if the market value of your property falls by 10% then you lost ALL that equity that came out of your home.   No… not for me.
You see, many CEOs have a lot less than 5% of their money invested in the companies they control. They are definitely not aligned with the share holders’ interest.  And employee stock options handed to them for free fatten their purse even further. So, they soup up your investments with no more than a 1 or 2 year investment horizon, they cash in their options and move to the next company. What is the average shelf life of a CEO for a publicly traded company?  5 years or so. Does that promote long term vision?  Duuuh! 
The closest analyst you can trust are newsletter analysts who don’t own stocks and certainly those who have NOT invested in any publicly traded companies. I use such a research group in the U.S. for a lot of my corporate research. Over the years I learned that they are trustworthy, and I learned a lot from those guys.  Stockbrokers can’t be trusted but mine I do trust to some degree because he knows I will buy stocks over time anyway. If I do good I can buy more and so he will do good. But in the end, the buck stops with me. I am accountable and if I make a mistake it can be observed right away in my wallet.

When all is said and done: When investing in third party entities, I don’t trust anyone and I am happy with market performance. Besides, it is usually asset allocation that is creating the results in your portfolio NOT individual stocks. So, my paper investments are often ETFs and I spread them out more and more into international markets. My U.S. portfolio has outperformed Canada’s now for nearly 10 years and it forms a larger and larger component of my paper security portfolio. With Justin Trudeau in power and the NDP in Alberta and BC., who wants to invest in an anti-business and anti-success country like Canada anyway? I am not kidding! And with the U.S. on the decline (who can compete with 1.5 billion determined capitalists in China?)  I will spread my money beyond this continent. Even if I would choose to not do so consciously, the investment results will likely push me overseas anyway.  
In the meantime, I work most on what I can control. My business and my real estate. The only problem I have is that this is mostly located in Canada. But I may be working on that as well. By the way, you would be amazed about how diversified a real estate portfolio can be. It is not all residential properties which is a good thing when you have socialist governments that want to impose rent controls (yuk!).

BTW Did you hear Brett Wilson's rant on those stupid Canadians recently on BNN?

2 comments:

  1. Good post, here in Toronto it is hard to invest in real estate if you missed the boat the last 10-12 years. The prices are too high to buy as an "investment", but even though the stock market is high, you still have to invest you have no choice. I think you have to be more selective in a high valuation market as I would not buy an index. Out of curiosity, how is living in Calgary for someone who is contemplating the move from overpriced Toronto?

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  2. Calgary daily live is a lot more affordable than Toronto's. The problem is getting a job. With all the turmoil in the oil industry about pipelines, I feel a turn-around is not far off. A lot of media focus on the large discounts for heavy oil; but gradually companies start making more profits here as well as in the U.S. So, outlook for unemployment is looking better. If you are a bit of a risk taker and contrarian it might not be a bad idea moving here. If you currently have a job in Toronto, I wouldn't move to Calgary unless your employment here is secured.

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