Keeping Your Dividend Edge

Available here.

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.

Enjoy!

Brian

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The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First

I enjoyed reading The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First by financial journalist and sportswriter Jonah Keri (@jonahkeri). Keri has a podcast and is also the author of a book on the Expos. He’s active on Twitter and a great guy to follow.

The Extra 2%  is a mix of many interests of mine like sports, finance, and business. With the NHL and the NBA finished for the year, it’s time for summer sports and summer reading. Baseball holds a special place. Maybe it’s because I played it when I was a kid. Maybe it’s because of the 1994 Expos and their possible come back. Or maybe I played too much Ken Griffey jr. the video game. Or maybe it’s because baseball is such a different sport from all the other major sports. There’s no clock; you go home after 27 outs. Or the real reason is probably because it’s so goddamn much fun to hit a ball with a bat.

The book documents the turnaround of the Tampa Bay Rays by three financial wiz kids from possibly one of the worst run franchises to a team that’s making the mighty Red Sox and Yankees sweat. And that’s with a tiny fraction of their budget. If the Rays considers spending $8 million on a closer, it’s a huge decision with many implications. If the Red Sox or Yankees spend $8m on a closer and it doesn’t work out, it’s a rounding error.

It’s the classic David vs Goliath story. The only difference in this story is that the large majority of fans are cheering for the two Goliaths. Since the Rays can’t compete on financial ground, they need to find another way to win games. They have to find an edge else where. They have to do things differently. They have to be creative. This is a good follow up book on Michael Lewis’ Moneyball. It’s a similar play. Both the A’s and the Rays are a small payroll team that was willing to discard old baseball wisdom. If you dare going against 100 years of conventional wisdom, you better make sure you are right.

The book is a great case study. Stuart Sternberg, Matt Silverman and Andrew Friedman accomplished so much in so little time. They turned a perennial loser into a contender. They are lessons to learned. The title, the extra 2%, reminds of something Anthony Robbins said (I think it was him). He said something like if you only try to improve 1%, it can make a huge difference in the long run. You might not noticed it at first, but that 1% will add up. Just think of what happened to a golf ball when it you hit it a couple degrees off. It matters.

In a way, the book could have been published now. Stuart Sternberg is still the owner. The Rays are still fighting the mighty Red Sox and Yankees. The Rays are still hustling for a division title. They are still a low budget team. They still don’t have anybody watching them. And they still don’t have stadium deal. Also I should mention that Mark Cuban, owner of the Dallas Mavericks, wrote the forewords.

I don’t really care about the Rays but I pay attention to them from a distance, that is their stadium saga. Rumors in Montreal is that if the Rays can’t get a stadium, Montreal is waiting in the wings to welcome them. Montreal first need to built a stadium and there’s a team of investors working on that. Despite the success of the Rays, Tropicana Field is empty. Tropicana Field is awful and the Rays have a lease until 2027. Is Montreal going to wait another 9 years for a team?

I don’t blame the fans in Tampa or surround areas. I think it’s a Florida problem in general. Most major sports franchise in Florida are not major hits. It’s a college state (and Nascar). Floridians love their college sports. People in Tampa are baseball fans, but they are Cubs fan, Red Sox fans, and Yankees fans. Most Floridians are from there and cheers for their former home club.

To conclude, it would be interest to hear an update from Jonah on the Tampa Bay situation.

Regular season results. Source Baseball-Reference.

Jeff Bezos Explains Why Amazon Makes No Profit

In this 9 minutes video, Jeff Bezos is brilliant in his response to the question “Why Amazon Makes No Profit ?” In the video JBezos explains his business(es), shares great insights, and throws in a couple in Buffett and Graham quotes.

• Subjects: Free cash flow (FCF), profits, Return on invested capital (ROIC), what drives the stock price, customer obsession, operational excellence, long-term thinking etc…

If you have read it, read the Amazon 1997 Shareholder letters.  Back then Bezos laid out the vision and his multi-year thinking process.

2019 Berkshire Hathaway Shareholder Meeting Notes

Here’s 78 pages of notes from the 2019 BRK Shareholder Meeting last weekend.

2019 Berkshire Hathaway Shareholder Meeting Notes

I didn’t type these notes. They were sent to me. The raw text is from CNBC.com and the personal responsible for the notes compiled them for their own reading. I though the notes were excellent and asked for permission to share.

Buffett.cnbc.com/annual-meetings is a great Buffett archived that you should check out.

Here’s the full CNBC interview with Buffett, Munger, and Gates.

Charlie Munger, Unplugged

Charlie Munger spoke to WSJ reporters Nicole Friedman and Jason Zweig for six hours over dinner in his Los Angeles home on April 23. He covered a wide array of subjects. Here is an edited transcript from that conversation and a follow-up telephone discussion.

Reposted from The Wall-Street Journal
By Jason Zweig and Nicole Friedman

Q: What do you make of the world-wide fan club that you and Warren Buffett have attracted?

A: Well, the world is very peculiar. And these people that like me are mostly nerds in China or India. It’s a very deep attachment. They’re so passionately interested in improving themselves. Some of them just want to get rich in some easy way, but mostly they’re trying to improve themselves.

An awful lot of graduates of great engineering schools are investors. I wouldn’t call a man who uses computer science to sift vast amounts of data for correlation, and then starts trading the correlation and if it works, keeps going, and if it doesn’t, stops, I wouldn’t call him an investor. It’s really, what he is is a trader. And those correlations are very peculiar…. Of course, the more people that try and trade that one correlation, once they find it, the less well it works.

Q: If you were just starting out as an investor, what approach would you take?

A: Well, the original [Benjamin] Graham approach of looking for cases where you’re getting more than you’re paying for is correct. All good investing involves getting a better investment than you’re paying for. And you’re just looking for it in different places, just as a fisherman can fish in one place or another. But he’s always looking for more value than [he’s] paying for. That will never go out of style. I mean, that is just basic and fundamental.

Some people look at it in stocks where the earnings are going up all the time, some look at consumer goods, some look at bankruptcies, some look at distressed debt. There are different ways to hunt, just like different places to fish. And that’s investing.

And knowing that, of course, one of the tricks is knowing where to fish. Li Lu [of Himalaya Capital Management LLC in Seattle] has made an absolute fortune as an investor using Graham’s training to look for deeper values. But if he had done it any place other than China and Korea, his record wouldn’t be as good. He fished where the fish were. There were a lot of wonderful, strong companies at very cheap prices over there.

Let me give you an example. One guy in Korea, he cornered the sauce market. And when I say cornered, he had like 95% of all the sauce in Korea. And he couldn’t stand anybody else  ever selling any sauce. So he could have made two or three times as much if he wanted to by raising the prices.

Li Lu figured that out. It’s called Ottogi. And of course we’ve made 20 for 1. There was nothing like that in the United States.

Berkshire Hathaway, Buffett, Munger, Gates Post-AGM Interviews

Here are the videos from the CNBC Monday morning post-BRK AGM.

Economic Transformation

Below are some of my favorite slides from the Fairfax India presentation.

Below is the Bangalore airport. Fairfax India owns 54% of the private airport.

The following picture is not from the Fairfax presentation but capture the same idea:

Fairfax AGM and YYX Toronto Value Symposium

This post is a little overdue. Better later than never I guess. With the Berkshire Hathaway AGM this weekend, I told myself to get this post done.

Three weeks ago I was in Toronto for the Fairfax Financial AGM (FFH), the Fairfax Africa AGM (FAH.U), and the Fairfax India AGM (FIH.U). That’s the “official” reason. But more importantly and more interestingly are the associated events surround the Fairfax AGM. It’s very similar to what you would find in Omaha for the Berkshire Hathaway AGM, except on a smaller scale. It’s my second time to the Fairfax AGM and I would argue that I prefer that one to the Berkshire AGM. I’m certainly not implying that Fairfax is a better company than BRK because it’s not. I just prefer the Fairfax AGM better but when I think of it, I don’t.

The reality is that I don’t care about Fairfax and its AGM. The reason I go to Toronto is to reconnect with fellow minded investors and the associated events. There are value investing conferences, dinners, and other events like that. Even if the Fairfax AGM didn’t exist I would go only for these events.  While I was there I presented at the YYX Toronto Value Symposium, attended The Ben Graham Dinner, and attended the Premier Fairfax Financial Shareholder’s Dinner. There are other events as well such as The Ben Graham Centre’s Value Investing Conference but it conflicted with the the YYX Toronto Value.

Basically you are surrounded by like minded investors and you talk stocks for 2-3 days.

Can We Stop With The “Warren Buffett” Label?

Prem Watsa has been labeled the “Warren Buffett of the North” in the past and I doubt the moniker still holds. Sure they are some similarities. They both run massive conglomerates with insurance powerhouses that invest the float in a bunch of businesses. And the similarities stops there. Fairfax’s returns in the mid-80s and 90s were decent, but have been frustratingly subpar for a long time while Berkshire Hathaway has been outperforming the S&P left and right. People listen to every word coming out of Warren Buffett’s mouth. Every investment article has a Buffett quote. I can’t recall a Prem Watsa quote. I read Fairfax’s shareholder letter. It’s fine if you want to learn more about Fairfax’s businesses but it’s not the source of investment wisdom you would find in a Warren Buffett letter. This post is not a Prem Watsa rant. I might sound overly negative but by labelling Prem “The Buffett of the North”, you are comparing him to the best investor of all time and that’s impossible standard to live up to.

So can we stop with the “next Warren Buffett” moniker. And not just on Prem. The “Warren Buffett” label is like a curse. Look what happened to Bill Ackman and Eddie Lampert. These magazine covers didn’t aged well.

Eddie “The Next Warren Buffett” Lampert and Bill “Back Buffett” Ackman

Prem is Prem and that’s perfectly fine. Nobody else in the world is Warren Buffett. The expectations that come with the label, to put it mildly, are unreasonably high. Buffett has something like 50+ years of over-performance. In today’s hyper-speed era, we don’t have time for a 10-year, or even a 5-year performance table. Now crank you a couple years of decent returns you too can get the “Buffett Crown”. It’s dangerous because investors now expect you to repeat your past performance.

I have three messages: 1) Stop calling an investor on a good run “the next Buffett” and 2) the next time someone’s being lauded as the next Warren Buffett run the other way. History is not on your side. And 3) Warren Buffett is still alive and you can invest with him.

Fairfax’s Investment Portfolio

Fairfax mentions that could have earned a 15% return on equity if their stock portfolio achieved a 7% return and their insurance operations produced a combined ratio of 95%. The insurances companies produced a 97.3% combined ratio and only 3.1% on the stock portolio. Book value was down 1.5% in 2018.

Below is part of Fairfax’s investment portfolio. They have a $39 billion investment portfolio.

Source: Fairfax 2018 Shareholder Letter

I don’t know about this investment portfolio. Part of the uncertainty is that I’m not familiar with some of the companies. The hope is that it will pay out in the long term. It’s definitely different, than let’s say what BRK does with its float. One thing however is that you can’t accused Prem of being an closet indexer.

Blackberry (BB) seems to be turning things around but can Fairfax recuperate the losses from their six year old investment? Blackberry is a good company but the acquisition at the time was terrible timing at a bad price. FFH owns 95 million shares at a net cost of $12.30 per share. I believe Seaspan (SSW), under the leadership of David Sokol, will do fine in the long-term.

I find Prem’s action hard to understand. The macro predictions, shorting the index, the stock portfolio, the underperformance…

“Your Chairman continues to learn – slowly!!” – Prem Watsa

YYX Toronto Value Symposium

This is one of my favorite event to attend. I attended and presented at the YYX Toronto Value Symposium.  The event structure is similar to a ValueX conference. You have about 30 people, around 10 people present an investing idea for 15 minutes followed by quick a Q&A. If I have to estimate, half the room were Americans and Canadians.

I think this event delivers a lot of value. You leave with a bunch ideas that you can further research. Most of the stocks pitched are companies I never heard of. Stuff under the radar, not followed, misunderstood etc…If you are an investor, you know how long it takes to find and analyze ideas.

A big thanks to James East for organizing such a great event.

Fairfax India & Africa

Two different funds in two different region. I attended both presentations and they both look promising. Both fund AGM are interesting, better than the parent AGM. They are more detail oriented. You get a walk through of the investments process and the results. I think the best investment they made is the Bangalore Airport in the India fund. That investment has produced great results and I believe it will delivery even better results in the future. The company is not public yet, so if you want exposure you have to buy the India fund or try to get Siemens to sell you their stake.

I’m not an investor in neither fund at the moment. I’m a little uneasy with the structure, the fees, and some of the investments. I also need to do further homework.

Conclusion

I wish I could spend more time talking about the events and companies involved. I could write about this all day but my time is scarce.

To concluce, the Fairfax AGM is not really about Prem or Fairfax. It’s about a bunch of value investors getting together, trying to learn and find new ideas.

Metro 2033

I read the book Metro 2033 by Russian author Dmitry Glukhovsky. For a change, I read of piece of fiction. Metro is an international best-seller and deservedly so.  Metro 2033 was originally published online in Russian for free because it was rejected by the conventional publishers. The book became a hit and an English version of Metro 2033 with its sequels Metro 2034 and Metro 2035 are available. The books were also adopted in a video game format, Metro Redux (includes both 2033 and 2034), and Metro Exodus just came out. The games are first-person shooter survival horror but I haven’t had a chance to tried it out and they do look good. Point your weapon and blow up stuff. Kotaku has a review of the Exodus here. There’s also discussion of a TV series or a movie. I hope a TV series format is adopted because there’s just so much stuff to cover that I don’t think a 2 hour movie would do justice. But again look what at what they did with The Lord of Rings trilogy or Harry Potter.

About Metro

Metro 2033 is based in the Moscow Metro in a not so far future (2033) after the nuclear weapons blew up the world. I didn’t know this, but the Moscow metro system is one of the world’s largest (196 stations) and it’s also used has a nuclear bomb shelter. Moscow is ready for nuclear war. Here’s a map of the Moscow Metro:

Moscow Metro has 196 stations and doubles as a nuclear bunker.

They also have another “secret” metro, Metro-2, that supposedly runs parallel to public one. Apparently it’s only for special government function. The Russian government has neither denied or confirmed its existence.

There’s a lot in this book. A lot. Artyom, the protagonist, has a mission that caries him across the metro. Each station has its own story. Artyom has various encounters with communists, neo-nazis, cannibals, cultists, bandits among others. All these people are leaving underground and they don’t really like each other. The book is very ambitious and quite an achievement for a first novel. I was intrigued to learn about the author. It would be fun to have a conversation with the author to learn more about his aspiration for such a book. Here are a couple interviews with Dmitry Glukhovsky:

• From pages to polygons: The storytelling of Metro Exodus
• An unabridged interview with Metro 2033 author Dmitri Glukhovsky
• Metro 2033: The Book’s Author Discusses the Game, Multiple Endings, and Too Much Dialogue

In some interview he mentioned the video games Fallout having an influence on him. I played the originals (Fallout 1 & 2) when I was a kid and absolutely loved them. There are some difference however. Fallout presents the post nuclear apocalypse world as rough, tough, but playful and cheerful. Metro presents the post nuclear as rough, tough, gritty and dark. One version is Americanized and the other is Russianized. In Fallout exploring the world is the fun part. In Metro you don’t leave you station. In Fallout, a mutant can become your friend. In Metro you avoid monsters. Fallout is for a younger audience. Metro is for a more mature audience.

The post-apocalyptic theme might seem over-exploited.  It’s really in vogue right now with all the zombie shows/movies/games coming out. Metro is not another run of the mill product. Dmitry did not simplifying the theme and the tone of his work is not water down. This is not a series for idiots. It’s complex. It’s high-quality. I believe that by not trying to be a mass-market product, by not trying to be everything for everyone, Dmitry has built something extremely solid that became has became a massive international best-seller.

The success also led to the creation of the Metro universe. There are over 100 books published in the world of Metro written by authors all over the world (*link in Russian).

This is a good franchise. My reading pile is growing and I will try to get them the rest of them. I don’t know when but I will.

Charlie Munger Google Talk?

I just recently found out that Charlie Munger was interviewed by Ruth Porat, CFO Alphabet Inc. I found a set of notes from this blog: http://d0j.blogspot.com/2016/09/notes-from-charlie-munger-talk.html. The notes are from 2016. Despite the weird formatting, it looks legit and it’s Charlie in the picture. However I can’t find any video evidence of this. Usually Google Talks are recorded, available on Youtube with 40 views. There’s nothing on Google either (I even tried Bing in case Google was suppressing results). It appears to be a private talk. If anybody know more about this feel free to share.

Other business: I got back from the Fairfax AGM and have a ideas for a couple new posts in the coming weeks.

I made a copy of the notes below just in case they get lost on the Internet. It seems to be the only copy I could find.

Charlie Munger notes from Alphabet interview. Sorry for the formatting. It’s straight copy and paste from the website.

Reposted from d0j.blogspot.com
By thus spake hareesh nagarajan

Notes from the Charlie Munger Talk
Charlie Munger was interviewed by Ruth Porat, CFO Alphabet Inc earlier in the Mountain View campus today. Here are some (unedited) notes I jotted down:

munger: “What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often. Opportunity comes, but it doesn’t come often, so seize it when it does come.”

take a simple idea and take it seriously
to get a good spouse, you need to deserve a good spouse
the google culture is unique
what do you like about google culture?
you got more brain power
larry created a different culture
ruth “incrementalism leads to irrelevance”
charlie: not all companies keep growing. you cannot compound infinitely
berkshire hathaway is decentralized
we are similiar to google in how to accumulate money. we dont know what to do with it.
investing money is difficult
professional investment used to be simple and stupid in old days
when u compete with idiots you can do well
ruth “competition is one click away”
audience “which sectors are attractive to you”
folks that have momentum
if i had to buy one tech stock id buy google
the Chinese are hungry. the engineers are coming out of poverty

berkshire is like a swimmer that keeps swimming with or without the tide. we dont anticipate swings in the tide.
vc in 2000 took 100B
sam goldwyn — “Gentlemen, You May Include Me Out “

we own the biggest carbide cutting tools company
these israeli guys run it as fanatics
we dont know anything about carbide cutting tools.
but these israeli guys are winning
the culture they’ve created fosters winning

berkshire avoids mistakes by continous learning
judging people has been crucial
our philisophy: if a guy can juggle 20 milk bottles, then why would we interfere?

a mistake we learned from:
guy we had from beginning from berkshire had cancer. we kept him. but he signed bad contracts. we learned from that. you dont want wrong compassion

advice for the young:
underspend your income.
you may not get rich but you won’t do badly.
keep at it.
investing money is harder TODAY
world today is radically different
you don’t have the time to find value stocks like warren used to.

ibm let gates put out software on their hardware. they lost.
“it’s never going to be easy”
avoid the crazyness
crazy bubbles should be avoided.

“i want a fair advantage”
you have to specialize to succeed
specialization works
5-10% time to think of your hobbies

what i learned from other fields:
psychology was most important. “why is everyone so crazy”
i was going to synthesize psychology with everything else i do.
psychologists on the other hand just focus on psychology.
but i’m trying to figure out how to use psychology in investing and everything else i do .

you have to be alert when the rare opportunity comes by. u have to have patience.
‘your opportunities are rare but you have to move’ said his great grandfather
few decisions get to be very important
venture capital is a bubble. there has been overpaying.

i dont understand computer software. i dont understand your culture.

but it can’t be easy
what we are good at: “we know how to buy businesses”

you need to be able to destroy your own idea.
you should be ok with making a dumb mistake

everyone is useful. he can always be used as a bad example