After many weeks of back and forth, we finally got this episode done and it’s a big one. We mainly talked about the Brookfield Asset Management 2019 Investor Day that they held in New-York. We both attended the event as first timers and we share our take ways from the meeting. We also branched off and talked about cultural activism, Facebook/Instagram, Sears and malls, investing in India and China..and we could have talk a lot more. If you are interested, the whole event has been recorded is available with presentations here.
Brookfield (BAM) is a very interesting company. Only of few companies can do what they do. It has been one of my most successful investment and my bullish stance on it has been reinforced. Their business is only going to get bigger and more profitable over time. I’ve written and talked about BAM in the past if you are looking for a primer. If I ever get to it I plan on writing an article with my about the Investor Day. For now we have the podcast.
Before I get to the book I want to share a little story. Something positive actually happened on Twitter. It turns out that Twitter doesn’t have to be carnage pit filled with trolls. There’s a nice guy on it and his name is Todd Wenning (@ToddWenning).
A while back I read Harriman’s New Book of Investing Rules. The book is 500 pages of wisdom by some great investors. There are some well-known names and less familiar names like Todd. The investors profiled range in style and strategies. One of the articles in the book was written by Todd Wenning (@ToddWenning). I really enjoyed Todd’s piece and I reached out to him on Twitter to let him know.
Todd was a man of his tweet. I did received his book, Keeping Your Dividend Edge, and I was more than happy to read it. See, something positive came out of Twitter.
I like Todd’s philosophy on investing and dividends. His thinking really resonated with me. Invest like you are buying a business. Study the business, study the fundamentals, figure out the competitive advantage, and can you make a reasonable assumption that the company will be able to maintain its success for a decade or more to come. Focus on the long-term and get paid in growing dividends and capital appreciation.
Todd’s book is about dividend investing. It’s a short read with approximately 120 pages. There’s nothing wrong with a small read. It’s actually refreshing. The book doesn’t waste your time. It’s delivers on content. It goes straight to the point. It’s concise and clear. Just the plain blue cover signals no b.s., no hype.
You will become a better investor if you read this book and actually apply it’s principles. You will. Todd didn’t reinvent the wheel here. Dividend investing has been a staple strategy. But what Todd did is to remind us of the art of dividend investing.
I feel that dividend investing is a lost art. Or investing for income in general. Most income investors are doing it wrong. It’s like health. Everybody wants to be fit and healthy but they are doing it wrong by buying into trends and taking short-cuts. I feel it’s the same with income/dividend investing. People are approaching it the wrong way.
Investors are turned off by blue chips dividend payers because of the low ~2% yield so they chase high-yield stocks. We live in a world where investors are buying bonds for capital gains. The world has turned upside down. The most probable cause is the 10-year plus of ultra low interest rates is distorting financial markets. It’s been a tough stretch for savers in need of yield. Another cause is buybacks as the preferred way to return money to investors.
You can’t just invest for the dividend. If you don’t do your homework it could led to trouble. Dividends should be part of a grander strategy. A good strategy should include dividends as a part of total performance. It’s a key component of long-term share price movements. You can’t guarantee a dividend because a company doesn’t have to pay one, but with the right analysis you can have pretty good idea if they will pay one and raise it over time. If you aim for let’s say a conservative 6% to 7% annual return (S&P Index has returned 10%+ in the last ten years). With a 3% yield you have accomplished half your returns. One aspect of dividends I like is that it’s a tangible returns. It’s a real return. It’s real cash that you receive. And I like cash because it allows me to allocate more capital.
Dividend investing is about patience. Focus on the long-term. Focus on the business. Focus on the fundamentals. Focus on the cash flow because that’s where dividends are from. Dividends need to come from cash produced by the company (not accounting earnings).
Dividends are not a magic pill. A company can’t guarantee a dividend because unlike a bond, there’s no obligation to pay. Dividends can be cut. We have seen blue chips like GE, Pfizer, and more recently Vodafone slash their dividends. A company might take on too much debt and get in trouble. The share price of the company you invested in can languish, or worse disappear. Taxes could be an issue if not handle properly. Todd’s book has a whole chapter on avoiding dividend cuts. Usually the main reason is the lack of sustainable free cash flow. If a company can’t covert a dividend with free cash flow, they need to fund the payouts with cash on hand, debt, or asset sales. Expect trouble if that happens.
The holy-grail of dividend investing success is the compounding effect. The combination of the increased in value of your stock (capital gain), dividends, and growing dividends reinvested that creates bigger dividends, that gets reinvested can turn your investment into a snowball what creates wealth.
In case it wasn’t clear by now Todd makes the case for smart dividend investing. In case you need to read it again, if you want success in the stock market you need a long-term patient approach. Dividends helps you focus on the business. It helps you focus on the fundamentals of the business. It helps you forget about the daily gyrations of the stock market. I have no clue what the stock market is going to do, so it would be more profitable to forget it and concentrate on trying to find the right stock to buy. Dividends also help you take hit. If you have an investment that is down 15% (because it happens) and the business is sound, you have your dividends coming in and an opportunity to buy the business 15% cheaper.
Long-term thinking, patience, and persistence are qualities which should pertain to investors. Dividends delivers on these fronts. Keeping Your Dividend Edge deserved a place on your investing book shelf.
Phil Ordway from Anabalic LLC has made a great presentation on capital allocation. In everyday parlance, capital allocation is “how you use cash”. Everything involves tradeoffs based on opportunity cost and how you evaluate these tradeoffs is essential.
For those who read the excellent book The Outsiders (read it if you did not), you will enjoy Phil’s presentation. The presentation goes a beyond effective capital allocation. It address three things companies need to do that everybody would agree on.
Effective Capital Allocation
Meaningful communications with stakeholders
Point #2, “good” shareholders, is interesting and definitely not talked about enough. I’m glad Phil brought it up and should be the subject of further studies. Just having the “right” shareholders can make a significant difference. Think of the effect of having Warren Buffett as a shareholder did for Graham Holdings (The Washington Post). Point #3, meaningful communications with stakeholders, is not done properly. Most companies have some kind of Investor Relation “IR” department but don’t communicate properly.
This presentation is for investors, board members, executives, and anybody that runs a company.
Here’s a bonus presentation from William Thorndike, author of The Outsiders”.
I was back on the The Intelligent Investing Podcast with Eric Schleien of GSCM to discuss Cuba. In a previous post I talked about my recent trip to Cuba. While the post has more of a global approach to Cuba (politics, economy, reforms etc…), the podcast is more geared towards investing. Of course they are opportunities but it’s not easy to invest in Cuba and it would require a lot of work (even more if you American).
The podcast is a about 45 minutes long, perfect for the work commute. If you can’t stand my accent, or you prefer reading, Eric published a transcript on SA.
Charlie Munger used Monish Pabrai as an example because he’s one of the rare to used the original Buffett Partnerships free structure. Monish went 10 years without taking fees, just living off his capital. That’s tough. But this is the right way to do it. It’s extremely rare to see investment managers use that formula because it’s simply too hard.
The formula is 0/6/25:
0% Management fee
6% Annual performance hurdle with high water mark. That means you need a minimum of 6% gain to start getting paid. The high water mark is the highest peak in value that the investment has reached. The manager cannot collect an incentive fee unless the fund’s value is above the high water mark and returns are above the hurdle rate.
25% fee on gains over 6%
A good question is do you think that formula would incentive a manager to take higher risk just to get over the hurdle rate? Or does it align the interest of the shareholders with the manager? I think the answer depends on the manager.
Here’s the new Graham & Doddsville Fall 2018 Issue from the Columbia Business School. There are some great interviews in it with some good ideas to further study. Here’s the archives for the past newsletters.
My latest article, Getting Into the Weeds, hit #1 on Seeking Alpha! It’s an extension of The Intelligent Investing Podcast I did with Eric Schleien (GSCM). Eric’s podcast is doing very well and about to break the top #100 in the investment space. In the article I take the time to dig deeper into specific sector of the marijuana industry. With the legalization in Canada coming tomorrow (October 17) it’s good to have a sense of the buzz surrounding the space.
Just to be clear, I’m not an investor in the space. I’m also not recommending investing in the space. While on the sidelines, I know a lot of people making plenty of easy money on cannabis stock. We have seen Canopy Growth (WEED) go from $2 to $75 in a very short-time. Tilray, a company with just $20 million in first-half revenue, was briefly worth $30 billion. That’s more than Twitter, CBS, Harley-Davidson, Fitbit and American Airlines. At its height Tilray’s enterprise value surpassed 85x bullish estimates for its 2020-year sales and 340x that year’s estimated cash flows. Fast easy money is tempting and contagious. I’m happy for them but I believe the party is not going to last. We have seen this story repeat itself in the past.
To me the investor’s high on the marijuana sector is a red flag, and signaled that a sobering up may be imminent. The speculative craze is fueling a future crisis. This is the same story that repeats itself over and over. The tech bubble that ended in 2000, the pre-crisis U.S. housing craze, and the cryptocurrency bubble are some of the most recent examples of speculative manias. In each case, a defensible investment thesis – that technology will eventually dominate the economy, American housing prices could only move in one direction, and the blockchain was going to revolutionize everything – was extrapolated to a form of ridiculousness where no price was too much to pay for related investments.
There are some serious questions about just how profitable these companies can become under legalization. I think most investors do not understand what the space looks like, how competitive it is, what the margins look like. Distribution costs, advertising and sales taxes will further erode profit margins and cause price compression, possibly squeezing companies whose production costs are too high out of the market. Some of the companies that have gone public suffer from weak management, and investors need to be ready for a fall in marijuana prices because too many suppliers have entered the market. I see the valuations being attributed to places that have virtually no production, virtually no off-take agreements, which don’t operate in multiple countries and have a very limited R&D.
I’m not a market timer, I don’t have a crystal ball, and I don’t what’s going to happen. But I know that a company without profits can’t survive in the long-run. Right now these stocks are being valued like junior mining companies. They are valued in the “promised” of future riches. Eventually, once they start producing (legal sales in our case) they are valued based on their fundamentals (cost, margins, distributions, market, profits etc.). This is similar to a junior mining company transitioning from exploring to producing.
Canada is legalizing marijuana for recreational use on October 17, 2018.
The changes that are underway closely mirror the process that alcohol went through after prohibition ended in the 1920s: liquor regained social acceptance and the product proliferated.
Investors need to figure out what something is worth and try to buy it for less. Investing in the marijuana industry is not different in that regard.
Most investors do not understand what the space looks like, how competitive it is, what the margins look like. There are questions about just how profitable these companies can become.
The long-term prospects for marijuana are very positive. The question is how much are you willing to pay for it?
The cannabis sector has been on a two-year high. Cannabis related stocks are trading at sky-high valuation. “The sky is the limit” as the saying goes. Since August, the segment has surged to a new level of hysteria on a wave of announcements. The sector got a boost when Constellation Brands (STZ), the brewer of Corona and Modelo, agreed to add $4 billion to its investment in Canada’s lead weed company Canopy Growth (CGC, WEED). The hysteria got a new boost when Coca-Cola (KO) confirmed an interest in spiking sports drinks with cannabidiol (NYSE:CBD), the non-psychoactive ingredient of marijuana. And thanks to the DEAapproving Tilray’s (TLRY) plan to import pot from Canada, a company with just $20 million in first-half revenue was briefly worth $30 billion. Continue reading “Getting Into The Weeds”→
I had the privilege to be back on The Intelligent Investing Podcast with Eric Schleien (GSCM) to talk about the cannabis industry. With the legalization of marijuana tomorrow in Canada (October 17, 2018), it’s good to get sense of what’s going on in the space.
The first 23 minutes is a re-cap of the previous two podcasts we did together. We looked at what happened to Tesla and Brookfield Asset Management since. On the subject of Brookfield, they recently had their investor day in NY and all their presentations are posted on their investor relation website here. I suggest you take a look at that great company.
Then we get into the weeds. Choose you favorite platform to listen:
#36: Getting into the weeds on marijuana stocks (we aren’t so high on them) + Update on BAM & TSLA
This comes about the article on Disney I wrote back in May that got quite a reaction. The article has some thoughts and insights on the future of Disney and ESPN. Disney is a leader in content and that it has to figure out distribution in the modern internet era. It was a short article that I wrote fairly quickly. The podcast gave me an opportunity to expand on my analysis of Disney. There’s also some discussion on value investing and other stocks.
I hope you enjoy the podcast!
Brian Langis interview – 2:00 minute mark to 49:00 minute mark
2:00 – Reviewing Brian’s thesis and a new hope for Disney
7:45 – What are you watching for in the transition to streaming? When does the tipping point come?
16:00 – How big a deal is Fox (FOX) (FOXA), how much to worry about $20B extra? The running cost of content and the offense/defense game.
20:00 – Looking at Netflix (NFLX) across the aisle from Disney
24:45 – Getting to the numbers for Disney. What is the story there?
28:30 – How do we avoid getting attached to Disney shares when we enjoy Disney products?
35:30 – Talking value investing in an expensive market, and a cheesy answer. Getting to Alimentation Couche Tard (OTCPK:ANCUF) and Dollarama (OTC:DLMAF) as examples.
41:00 – What has changed in the past five years for your investing?
45:30 – The Iger risk for Disney.
Derek Thompson Interview – 50:00 minute mark to 1:30 minute mark.
50:00 – Setting the scene on Disney, one of the most interesting companies in the world
54:30 – Why does Disney have a good chance of pulling off the transition to streaming?
56:30 – Why relinquish ESPN to decline? What barriers are there?
1:01:30 – What do the economics look like once Disney makes it to streaming land?
1:08 – Are we at the tipping point where video is too easy to make, thus drowning out Disney’s advantage?
1:16 – How important is Fox?
1:19 – Vertical integration – is this business different? Why not work together with Netflix?