For this week and also on December 8th I have the pleasure of presenting interviews with two dividend investors of distinctly different ages, investing backgrounds and from different parts of the world.
The DIV-Net, its member sites and Triaging My Way To Financial Success are excellent sources for topics on dividend investing, but gaining new perspectives from other investors is a great resource to have for those looking to learn as much as they can about this style of investing.
With 2008 drawing to a close I felt these interviews might be helpful for readers looking to develop some new year’s resolutions for your investing approach. My hope is that these interviews will provide meaningful insights into investing and provide as a compliment to what I present here on this blog.
Dividend Investor Interview I:
Paul (aka: Augustabound)
First can we explore your current investor profile with some back ground information if you don’t mind?
Can you give readers some demographics?
I’m thirty-four years old, born and raised in Hamilton, Ontario Canada
I was raised by my Mom who has no investing experience or real understanding of the investing world and no inclination to know either. She’s into real estate as a career and has some investments in real estate.
I’m married, no kids yet.
We own a home in Newmarket Ontario (mortgage, so the bank owns it). We’ve been in it for 2 years and want to start making annual lump sum payments and will start rounding up payments to the nearest hundred next renewal time.
I’m a contractor, self employed, have been for 4 years.
Our household combined income is around $150 000 per year.
With all the turmoil in debt and equity markets what would you consider to be your risk tolderance?
I’d say my risk tolerance is high since I have 20-25 years until full retirement, but I’m not as risk taker per se. I would say that I could devote 5% of my portfolio to riskier investments. I haven’t as of yet though so the first sign of a loss might make me re-think that strategy.
Do you mind explaining to readers how you define risk?
What you would consider to be risky investments?
How do you go about minimizing risk in your investing activities?
I’d say risk to me is the potential for losing my investment. Currently I don’t see losing money in the great blue chips that are on sale. Investing in a company with a strong balance sheet, management who has the experience to guide the company through tougher times and a product or service that people will continue to need with limited competition.
Risky investments to me would be the opposite of my example above. Some riskier investments that I would see myself studying would be alternative energy companies, specifically green energy for the building industry, geothermal and solar power for example. Small cap companies who may have a strong balance sheet and good management but they may be in an unproven industry or sector would be another risky venture.
The longer this housing bubble unravels I think the more people are seeing how the lack of transparency affects our banking industry (more so in the United States than Canada). If Warren Buffett can’t understand a prospectus (as he said in an interview) for some of the financial derivative contracts out there, then how is an independent investor going to understand it? These also encompass some of the banks in the United States. I read a report last year that Citigroup (C) had over 2000 subsidiary companies. How does the independent investor decipher that annual report? They don’t, and most professionals don’t, yet still invest in these big, strong, secure and safe banks. That’s risk.
If you don’t understand what you’re investing in fully and completely, that’s risky. To minimize that you need to know what that company does to make money. Some of the most successful companies of all time can be summed up in a short paragraph as to their business operations and how they generate revenue. Coke (K), Pepsi (PEP), Anheuser-Busch (BUD), 3M (MMM) etc. I like Warren Buffett’s quote, “Diversification is insurance against one’s own ignorance.”
I interpret that to say, most diversify because they lack the skill or desire to fully understand what they’re investing in and are taking the somewhat easier road. I believe hedging and diversifying are two different ideas that most think are one in the same. Hedging is attempting to limit your risk in something that is out of your control. Currency might be an example of that. Instead of focusing on American companies, I buy what I think are great businesses around the world to limit my exposure to a catastrophic event in the US or a political upheaval or unrest. Diversifying is buying more companies stock or more mutual funds because “more is better”, and some think they are limiting the down side risk by doing that. If a company files for bankruptcy it may only be 2% of my portfolio, it won’t hurt a bit. But if I had done my research and investigated all avenues I more than likely would have seen the increasing debt load, for example. Or the fact they’ve taken longer time to pay suppliers, or are even delinquent on some accounts. Usually all the red flags are there, you just need to find them
When did you first begin investing?
My first investments were employee sponsored pension plans when I was 18. I started with $25 per pay that was matched by my employer. Plain Jane Canadian balanced mutual fund from Jarislowsky Fraser. My human resource manager at the time basically told me she was enrolling me in the plan. Sixteen years later I know it’s the best thing anyone did for me since I didn’t notice the money coming off my pay. She’s a big reason I had $35,000 in the plan when I left the company, with out her I probably wouldn’t have done it myself and would be starting from scratch by myself now.
How did you start investing?
What was your style?
When I left that company 4 years ago and saw the $35,000 I kind of knew I needed to do something with it and wasn’t totally sold on mutual funds. Even early on I knew there was something wrong with a company charging 2-3% per year for a fund that has over 100 stocks and bonds in it (by this time the company plan was now under a different administration and we had the choice of McLean Budden and Standard Life funds). I knew there was something better to do with my money. I thought even there were better strategies than dollar cost averaging every 2 weeks like the plan does. At some point I started getting books out of the library on basic investing, then I read some Buffett books and was hooked. Value investing is for me. This guy went from a few thousand dollars working out of a room in his house to being the third richest (at the time) person in the world. Buffett’s ideas made sense to me, buy great companies when they’re cheap and hold on for the long term. So far that’s been my strategy.
How do you define quality when investing?
What sort of criteria do you look for?
That’s a tougher question than it seems. When I think quality I think Johnson and Johnson (JNJ) even Honda (MHC) or Toyota (TM). But I wouldn’t necessarily invest in Honda or Toyota because of the highly competitive, cyclical, low margin industry they’re in.
Fairfax financial. Prem Watsa is extremely good at what he does, seems candid with shareholders and has a long track record of doing what he does best.
Same with Buffett and Munger from Berkshire Hathaway (BRK.B). They have an abundance of quality companies under the Berkshire banner. Solid businesses that will be running profitably in years to come and most will be profitable in any economic environment. Again, same as Fairfax, they’re candid with shareholders and create money for their shareholders by doing what they do best.
I think most of all from Berkshire or Fairfax (FFH), they stay away from what they don’t understand, but most of all they allocate capital in way most beneficial to their shareholders.
Industry leaders are usually considered good quality. To be the best you need to know your role and capitalize on it. Nike (NKE), Caterpillar (CAT), Kraft (KFT), Wal Mart (WMT), Proctor & Gamble (PG), McDonalds (MCD) and Microsoft (MSFT) are examples in my opinion.
What were your previous investing objectives?
Put enough money away for retirement; plain and simple. For the most part that still holds true. I love my job, so working isn’t a problem for me. I would imagine when I decide to retire, it will only be semi retirement, I’ll do something I really love part time. Maybe build furniture in my shop in my spare time and I’ll probably be contracting even small jobs in my area a couple of days a week or even consult.
What has helped to influence you over the years you’ve invested?
(media, mentors, family, experience, etc)
I don’t have any personal mentors in my life but I try to learn what I can about Buffett, Munger, Graham, Whitman and another manager I’ve been newly interested in Bruce Berkowitz.
If anything the media has taught me is most of the everyday stuff that goes on is just noise as Graham has put it. No substance to what’s out there just unjustified emotion for the most part.
I stopped watching BNN (Canada’s Business News Network) because everyday there’s another reason the market is in bad shape or the country is going into a recession. I also got pretty tired of them having guests on that were regulars and they gave you their stock tips for this week that were totally different than last week. Having a TV show made Jim Cramer go from a former successful hedge fund manager to a circus clown who needed to come up with multiple stocks everyday to fill an hour on the air.
As far as family influences go, my Grandfather retired from Stelco with a good pension and a veterans’ pension so he was taken care of by his company and his country. I knew I wouldn’t be on taken care of on either account so I needed to do something myself.
I also racked up some credit card debt after college and knew I couldn’t spend my life always playing catch up. I saw the stats of people who carried credit card debt on for years and the outlook wasn’t good. I knew putting money away as early as I could would result in more years of compounding in my favour later on in life.
How long did you invest in actively managed mutual funds?
I was in mutual funds for about 15 years through my defined contribution plan and group RRSP. Once I started studying the stats of the success or lack thereof for the mutual fund world I knew I needed my money to start working for me. Few mutual funds beat the indexes they track for more than a year or two and the fact they are somewhat confined to new money in and redemptions, those were a couple of variables out of my control that I didn’t like. The more money in means the manager needs to either buy new stocks to add to the already large amount in the average mutual fund or buy more of what’s in the fund at a possible higher price. Of course redemptions work in reverse of that. The manager might have to sell off a winner to keep the fund somewhat liquid. Too much mutual fund selling could possibly move markets lower which leads to more redemptions and thus, more selling. At least as a value stock investor I can take advantage of the sell offs like we’ve seen the last month, it’s not that easy when you’re in funds and most of the variables that make the mutual fund world work are out of your control.
I also think Canadian funds are somewhat weak compared to the US counterparts. There are some great money managers in the US that we don’t have direct access to. Of course there are some great Canadian managers but the likes of Stephen Jarislowsky are reserved for company sponsored plans or higher net worth individuals. Francis Chou is the only great manager I can think of that a regular do it yourself investor has access to.
What was it about dividends that immediately caught your interest?
I’ve read countless articles and books that show the proof that dividend paying stocks outperform non-dividend paying stocks over the long term. Combine that with a value investing approach and we should be on the road to a nice retirement.
I also like the fact that quarterly I get some cash in the investment account and I can buy whatever stock is on sale at the time, or hold it and wait for a bargain to come along. It’s easier than having to save cash to invest from the pay check.
Do you have a threshold, or minimum dividend yield you require?
I seem stuck on 2%. Not sure why though. I like Ben Graham’s minimum for the “lay investor” as he calls them. I think he requires 75% of the long term bond yield.
So I guess currently that would be (0.75*4.5%) = 3%
Some also say they look for a yield better than the average yield of whatever index the company is traded on. Again, I think we’re at or near 3%.
I really couldn’t tell you why I’m stuck on 2%…………or now maybe 3%. The yield is the main reason I hadn’t looked seriously at Canadian National Railway (CN), Canadian Pacific (CP) or Burlington Northern Santa Fe (BNI). I actually saw BNI at $77 in the spring and didn’t bite because I couldn’t get past that 2% wall. I watched it go over $113 in the next 5 months. I figured if I had owned it I would have locked in a partial profit by selling part off. Then I realized I probably would have held it all the way back down to $77 like it was last week. Now it yields an even 2% but our Canadian dollar is a full 20 cents weaker now, it was about 94 cents if I remember right when BNI was below $80.
Maybe there’s another potential blog topic for you to use. Currency strategy for us here on the good side of the border.
Do you have regrets? If so, what are they?
The same as most others, start sooner. Not racking up so much credit card debt which took me years to pay off. The money would have been better spent elsewhere, like investing it.
What has been your biggest mistake?
(not specifically a stock – but maybe something more fundamental)
Last fall I bought a stock that was outside of my investing objective. It was somewhat cyclical and I didn’t fully investigate the company’s direction and place in the market. Lesson learned, stay the course. If you have a solid plan then why deviate from it? Emotion, that’s why. I saw it as cheap and it was cheap for a reason. Bought at $24, sold at $14 when I knew that I bought for the wrong reason and the general outlook for the company wasn’t good, now it’s around $10.
What has been your biggest success?
(same as before)
Following through with the plan. I’ve become somewhat obsessed with investing. I read whatever I can get my hands on, I surf the internet for whatever ideas, philosophies and investment history, more specifically with the investing legends, Buffett, Munger, Lynch, Graham etc. They say so much with saying so little.
I don’t know what I would do being self employed if I didn’t have an interest in investing, how would I retire?
Cash money in the investment account quarterly. Dividends are usually paid by more stable successful companies so it’s also a kind of vote of confidence from the company telling me things are OK. That’s why I prefer a somewhat steady rise in the dividend and dividends paid over long periods of time. Buy the company when the stock price is one sale and you’ve usually got a winner. The old “buy a dollar for fifty cents” idea like Buffett, Graham and Klarman.
Where do you see yourself in 10-15 years from now?
Same place I am today, hopefully with mid six figure investment account and starting to plan the transition to semi retirement.
What advice would you give to an investor struggling with how to invest?
Read, read, read. Find something that you can relate to like with Warren Buffett. When you find that inspiration, study everything you can about it. Buffett’s ideals just made sense to me, it doesn’t for others. To each is own. To invest on your own you need to be willing to put in the time to read and study your options and investment possibilities. If your not able to or have the inclination to, then go to a professional and get some advice. Or do what some others do and park your money in an index fund or exchange traded fund that tracks the broader market. If you can sleep tight at night knowing you’re on the right track then you probably are, if you can’t sleep with your current investment situation, then you need to change something. It needs to feel right to you, and each person is the best judge at knowing that about themselves.
In the contracting business we see it time and time again. Someone who has no business “doing it themselves” does it themselves and it’s usually wrong. Sometimes even worse, against the building code and/or dangerous. Know when you’re not skilled enough and ask for help. If you believe you’re skilled enough then keep going. Investing is one of those skills that always needs updating and is a continuous learning process.
The approach of “Measure twice, cut once”?
That’ a great analogy for me.
Would you be interested in giving five of your favourite stocks and a few reasons why?
Power Financial (PWF), a holding company which owns 56% of IGM and 70% GWO and 56% of Pargesa Holdings. Pargesa owns parts of Total SA, Suez SA, Imerys SA, Lafarge SA and Pernod Ricard. They have strong fundamentals and raised their dividend in July even amidst the recent fall out. They have a strong balance sheet and generate more free cash flow every year. Trading at a P/E of 10, it’s only been this low one other time in ten years.
United Technologies (UTX), a diversified company ranging from elevators, HVAC (heating, ventilation and air conditioning) to jet engines, most of their businesses are industry leaders and well positioned for future growth. Good fundamentals, balance sheet, free cash and dividends raised every fifth quarter since 1987. Trading at a ten year low P/E. It’s fallen from $80 last November to $47 currently, mostly as a result in a slowing economy and not business fundamentals.
The Coca Cola Company (KO). Maybe the most recognized brand world wide. In the second quarter of this year they got their balance sheet back in favour of their current assets. Their current liabilities crept past their current assets the last 2 years which is not usually a good sign, but Coke doing what it does best, kept their margins in tact, generating cash and raising their dividend selling Coke syrup around the world. They may have the most sustainable economic moat, able to raise prices when needed and has such a network worldwide that can’t be challenged. Also trading at a ten year low P/E and near their 52 week low. People drink Coke no matter the economic conditions.
Bank of Nova Scotia (BNS). One of the few banks to avoid the sub prime issues and doesn’t have large invested interests in the US like it’s Canadian counterparts and focuses more on Latin and Central America and parts of Asia for it’s non Canadian growth. Again, good fundamental and dividends. They seemed to get dragged down, more a guilt by association with other world banks. They have maintained their balance sheet and fundamentals in a tough environment the last year and are currently yielding over 5%. Their good financial position has enabled them to buy E*TRADE Canada from it’s parent Etrade Financial to help build their discount brokerage unit. Other companies aren’t able to make these kinds of deals because their too busy trying to cover their losses.
Rohm and Haas (ROH). I’ve just started looking into arbitrage situations and ROH is on my list. Realistically I’m not ready for special situation investing yet as I have more to learn, even about the basics. The deal is scheduled to close in the first quarter of ’09, whereby The Dow Chemical Company (DOW) has tendered an offer to ROH shareholders to buy the company. The offer is for the equivalent of $78 per share and the current share price is $68. Currently the deal is for close to 15% over market price. When the deal was first announced, it was for 74% over market value. Of course it would have been unrealistic to buy at that time not knowing the detail of the deal, but the stock price doubled overnight on the day of the announcement. Successful special situation investing hinges as much on the time you buy as the price you pay and the length of time until the deal closes. There are far too many variables involved to invest upon the initial announcement of the deal. Those who have followed the ups and downs of Bell Canada to go private in a deal with the Ontario Teachers Pension Plan know the risks in arbitrage. Both parties need to be in and stay in good financial condition and if there is third party financing, they also need to be in a position to follow through. Shareholders (and bond holders as Bell Canada found out) need to be in agreement of the sale and current market conditions should also warrant the deal closing. With the fear of a recession, deals aren’t happening as frequently as they have the past 3-4 years, companies can’t justify spending money if tough times could be ahead.
Many thanks to Paul for sitting down to share his thoughts on investing, dividends and investor fundamentals.
If you found this interview helpful please share your appreciation and comments below.