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My investment process is (1) own rock solid businesses with healthy earnings and that pay me dividends, (2) spend less than I earn, and (3) reinvest what I don't spend into similar businesses, at the lowest price available at the time. I avoid selling, or dipping into principal.
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  • Papa Formigas

    It's fairly difficult to locate a source for whole turkeys here in Portugal. They don't celebrate Thanksgiving, obviously, but more generally speaking, they don't seem to frequently consume entire turkey's in one fell swoop. But that is not to say that there isn't a a fair amount of INTEREST in Thanksgiving here. We've invited our language teacher to come celebrate Thanksgiving with us (on this Saturday), and for the past several weeks, every single day when we show up to class, she asks with a great deal of excitement and anticipation whether we have gotten the turkey yet.

    Well, today I went in and finally picked up the turkey - no problem. But I decided to have some fun with our teacher. When I showed up to Portuguese lessons today, the teacher asked (as usual) whether I finally got the turkey, and I sort of winced and said well, not PRECISELY a turkey, per se. There was a slight problem, it seems, with the way my wife tried to pronounce the Portuguese word for "turkey" (which is "peru"). You understand how difficult it is for English speakers to pronounce Portuguese words. Our teacher looked DEVASTATED!

    So, I brightly informed her not to worry, because what we ended up with is far better than a turkey: I bought an aardvark. My teacher had no clue what I was talking about, so I went into my usual game of charades, making gestures to signify a long nose, digging at an imaginary termite mound, and that sort of thing. My teacher looked increasingly perplexed, so we ultimately resorted to a google image search of the term "aardvark" so I could show her exactly what was on the Thanksgiving menu.

    How do you politely excuse yourself from a Thanksgiving dinner where your hosts are serving roast aardvark? That's what I could almost hear my teacher thinking. Moreover, she simply couldn't understand how my wife managed to mispronounce the word "peru" for the Portuguese term for aardvark (which, as it turns out, is "papa formigas"). I suppose the direct translation would be "Ant Daddy." I gotta say I like the ring of that.

    We had a good laugh about it, once I came clean and reassured my teacher that we did, in fact, manage to buy a turkey, and will NOT be serving her an aardvark as a tasty Thanksgiving treat.

    Meanwhile, in other news, since it's the end of the month, I'm putting on my green eye shades and looking for the next company to buy with the dividends we've saved up this month. As I've been reviewing the menu of wondrous little corporate morsels on sale in the market today, I couldn't help but notice a surplus of articles concerning the view that stocks will, for a very, very long time, go absolutely nowhere. I see the likes of John Boggle prognosticating on a stagnant future for stock prices for a period of time long enough to warrant adjectives like "secular". Goldman Sachs has produced some impressive research supporting a similar, flatline case. And what is most interesting is the reactions I see to the articles. Disbelief. Anger. Disappointment.

    Why would anyone care? I think we can all agree that nobody - not John Boggle, not Goldman Sachs, certainly not me, has the next clue of what stock prices may or may not do in the future. It's silly to try and guess, but that doesn't stop us.

    But let's assume that the prognostications are, indeed, correct. Stock prices will languish for the next twenty, or make it, thirty years. This would be the best possible news for investors, although my sense is that very few people would agree with me.

    I did a case study. I looked at McDonald's stock and calculated the average stock price performance over the past twenty years - about 11% stock price growth on average. Next, I calculated the average dividend growth over the same time period. That came in at an impressive 14% growth. Next, I imagined a situation where McDonald's stock and dividend continue to grow at the same average rate over the NEXT thirty years from now.

    In my spreadsheet, I assumed that I am going to invest $10,000 into McDonald's stock at today's prices, and that I will reinvest all of my dividends into more shares. If I do that, then assuming the stock prices rises by an average of 11% a year, and the dividends increase by an average of 14% a year, by the end of year 30, my McDonald's investment will be worth $769,460, and will generate income of over $52,000 a year. Here is a shapshot of the result:

    (click to enlarge)nkj

    But now let us assume the same things, except that instead of growing at an average of 11% a year, McDonald's stock price grows at a sluggish 2% a year over the next thirty years. Most investors would despair at the notion of earning 2% price appreciation a year on their favorite stock pick, and if you said, would you rather earn 11% a year, they'd say "absolutely." They'd be bowled over to learn that they'd actually earn $3,443,920 MORE in 30 years if McDonald's stock price languished at 2% growth, rather than vaulting ahead by 11% per year. Look:

    (click to enlarge)sw

    The reason why 2% growth far outperforms 11% growth over the long term is simply because investors can buy more shares of stock with their reinvested dividends if the price stays low. The situation becomes almost magical when you combine rising earnings and dividends with stagnating stock prices. That is, provided the investor does his or her part and continuously reinvests dividends.

    I can't picture a situation where dividends and earnings growth outpace stock price appreciation for thirty years, but I can certainly picture the situation unfurling over one, two, maybe three year periods. And that is precisely what I am looking for when I invest. I want low, and ideally falling, stock prices, combined with rising earnings and dividends - and this chart shows you exactly why this combination is the holy grail of stock investing.

    So this month, I'm going with another investment into Ventas (ticker VTR). The company continues to build healthcare-related buildings that it rents out under low-risk triple net leases. The earnings are growing, the dividend is growing, and the share price is miraculously down 23% this year and falling (thanks in part to a recent spin off of it's nursing care facilities - but trading momentum has continued to push the stock price lower and lower even following the spin off). I'm not greedy, and won't expect it to continue along this trajectory forever, but I can hope that the price will drop further still. If so, I'll be back sniffing around at more shares next month.

    Tags: VTR
    Nov 27 2:58 PM | Link | 3 Comments
  • Revolution! Spectre! Yummy Juice!

    (click to enlarge)Porto

    We recently returned from a short trip up to Porto - the early morning light of which I painted, above. The dark shadow with the eerie red light was the only thing moving in the entire city at the time (an Uber car we had just taken). Nobody seems to be awake in Porto (or Lisbon, for that matter) until about 9:00am.

    I should say that we make almost constant attempts to get into conversations with Portuguese people every chance we get - if for no other reason than to improve our still developing language ability. On this trip, we took an Uber from a train station to our hotel, and the driver informed us that he had just graduated from medical school in Portugal (where there is a keen shortage of doctors, I might add), but could not find a job anywhere doing anything (let alone practicing medicine). Hence, he was making ends meet by working as an Uber driver, and planning to leave the country for England as soon as he could, hoping to find better opportunities abroad.

    This is not an isolated story. In fact, I find that I am frequently speaking with Portuguese nationals - waiters, people walking their dogs, other parents - who are interested in leaving this country to find economic opportunities that, they feel, simply do not exist in Portugal. Some complain they are depressed, and to some, there is almost a ring of despair in their voices.

    It is not a universal story. There are energetic, almost hyper-kinetic, Portuguese people we know who are feverishly putting together or expanding businesses at a stunning rate. The foreigners I meet who come to Portugal are, in general, scooping up Portuguese assets and launching businesses (mostly businesses geared towards expats) at a remarkable rate. But overall, there don't seem to be many people in the middle - by which I mean stable, long-term stakeholders in the Portuguese economy and way of life. There is a huge turnover taking place.

    I see the turnover manifested in the real estate market, for a certainty. The majority of apartments for sale in Lisbon are going to be purchased by Chinese, French, English and African buyers - not Portuguese buyers. They come in, the cranes go up, and the old buildings are either knocked down or restored to a very high standard and marketed as condos overseas to more Chinese, French, English and African buyers.

    I'm also seeing evidence of the turnover in the Portuguese equities markets. For example, I've started to study the company Sumol & Compal, SA (which trades on the Portuguese NYSE Euronext exchange under the ticker symbol SUCO). This company makes juices, beans, and other packaged vegetable products that are sold ubiquitously throughout Portugal and several other countries besides (chiefly Africa, from what I can tell). The products are excellent, high quality and reasonably priced, with a lot of brand cache. The dividend yield on the stock is 36% - which is temporarily inflated because the company is now distributing excess capital from it's reserves. I noticed that the company's quarterly earnings most recently came in at around 100m Euros, whereas the market cap for the entire company is about 100m Euros as well. The bargain light started flashing as I read the annual reports, which doesn't ever mean that I will necessarily buy, but does mean that I will dig further.

    As I started my digging, I was interested to learn that practically all of the stock in this company is owned by one entity - Refrigor, SA. Refrigor is a dark horse - I can't find much of anything written about who they are, who owns them, and what else they own besides Sumol & Compal. Refrigor doesn't even have a web page as far as I can see. I looked up their address on Google Maps, hit the "street view" button and pulled up an image of a nondescript building with no windows, surrounded by surveillance cameras, located off to the side of the Compal headquarters (in an ominous plot thickener, Google seems to have blurred out half of Compal sign!!!) As a completely unrelated disclaimer, I should say that I just saw the new James Bond movie, Spectre. I can't help letting my imagination wander into the notion that Spectre is real, and operates under cover name "Refrigor".

    The reason for my suspicion is not only based on the mysterious fog that obfuscates from public view the true nature and identity of Refrigor, but rather, the history of Compal. At one time, a huge portion of SUCO was owned by the largest bank in Portugal - Caixa Geral do Depositos. No longer. The bank sold out of it's entire stake for 19m Euros very recently, and all of the shares were purchased by Refrigor which then, as far as I can tell, promptly put into high gear a program by which SUCO would (and did, and seems to continue to) distribute it's excess cash reserves to shareholders. Refrigor probably paid for over 25% of it's entire stock purchase from Caixa simply with special dividends from it's target.

    How? Because Caixa seems to have sold it's shares for a price that was, at the time, not much higher than the value of cash sitting in SUCO's bank accounts. Why? Why would any investor sell a company with 1 Euro of free cash sitting in it's bank accounts for anything less than 1 Euro? The answer: the market price for SUCO at the time was less than it's cash value, and because Refrigor already owned a controlling voting block of SUCO. When a controlling shareholder wants a minority shareholder out of the picture, they have ways of making that happen (did I mention I recently saw the movie Spectre?). Perhaps Caixa simply needed the money. Perhaps a lot things. The bottom line is that Refrigor appears to have succeeded in squeezing Caixa out, and to have bought virtually complete control and perhaps as much as 87% of the ownership in SUCO at a downright silly price. I might not ever touch shares of SUCO, but if anyone knows how I can buy shares of Refrigor, let me know. My only question: do I get to wear a special ring with a black octopus etched on the front?

    Now, I can draw a few conclusions, despite the lack of public information on this chain of events surrounding SUCO (and despite my 1st grade level command of Portuguese language and accounting rules). First, SUCO is a profitable company with excellent products and brand loyalty. The stock might be radioactive, but I love the Algarvean Orange Juice. Second, SUCO is deeply undervalued based on traditional valuation methods. Third, SUCO's undervaluation does not imply for one second public shareholders will reap any rewards - the company is entirely controlled by an unknown entity that could strip SUCO down bare, feed off the assets for it's own account, and dump the desiccated shell back onto the market, flooding the market with shares and driving the price down from penny-stock status to sub-penny-stock status, booking an enormous profit along the way. Someone will get rich on this, and it might not be the shareholders.

    There is, in short, nothing but risk and mystery surrounding this stock, which makes it uninvestable as far as I am concerned. But VERY INTERESTING to study nevertheless! And who can say that I won't dredge up enough public information on this stock to allay my concerns that if I buy the stock, black, unmarked helicopters will not swoop down into the olive grove outside our apartment in the middle of the night, unloading men with AK-47s and night vision goggles who will put a bag over my head and carry me off to the middle of nowhere for rounds of interrogation. And you ask why I write under an assumed name? No, there is more than one reason why I typically invest in exciting propositions such as shares of Con Ed or Coke, as opposed to companies that are controlled by anonymous international organizations that operate out of buildings devoid of windows and a bit too heavy on building security. I'm not risk-averse, I'm just prudent.

    The moral of this story is unfolding in real time, and I have no words to offer along those lines. But what I will say is that if nothing else, the little bit of this story that I can discern is emblematic of the turnover that this country seems to be experiencing. It's almost an ownership revolution. Savvy, energetic, motivated people who know what they are doing are going to become very wealthy at the expense of long-term owners who didn't appreciate the value of what they own, got tired, got outmaneuvered, sold at the darkest hour, and walked away with pennies on the Euro. In revolutions, the old way of doing things (and those who do them) get burned to the ground. At some point, you start to see political pushback - the recent dissolution of the Portuguese government this week may be an early example of that pushback. But the country needs new money to come in, this is universally known and understood, and that makes it essentially one, big forced seller. Refrigor appears to understand how to make that work for it's advantage. They are not alone by any means. But it's the young graduate from medical school driving an Uber who is paying the price.

    Tags: Macro
    Nov 12 4:38 AM | Link | 8 Comments

    As detailed in my previous posting, I have been nervously eyeing Navios Maritime Partners (Ticker NMM) for some time, particularly as the yield crept up into stratospheric "this is too good to be true" levels. As always, "too good to be true" means "it is not true" or "it is not good" or more likely, BOTH AT THE SAME TIME!

    NMM, in a stunning, shocking move, reversed earlier assurances to shareholders to maintain the dividend at least through 2016 abruptly cut the dividend yesterday. The stock sold off in a hurry, and I joined right into the selling. I am fine with dividend cuts in some cases, but rarely am I okay when a company looses credibility. I need to know that I can absolutely count on promises that are made, and assume that the financials are 100% flawless in their accuracy. But business is business, and conditions change, and companies like Navios need to be flexible - even at the expense of getting some egg on their faces. That's the only reason I haven't sold all of my shares, but I no longer have strong conviction in this stock, and have cut back accordingly.

    It has been a disasterous month from an income growth perspective. TAL, NMM and TGH (which I just added to my portfolio) all slashed dividends and all suffered explosive drawdowns in the share prices. The shipping industry is sick and getting worse, and while bargains may abound, let's just say I have lost my sea legs for the time being.

    I reinvested into MMM, EMR, PG, KO, PEP, JNJ and VAL, exchanging what was once a 24% yield for a yield more along the lines of 3%. Some days, running investments is about as much fun as hitting your head against the wall, but part of doing this type of work is getting knocked to the mat, getting up the next day, and going back to work. Day after day. I'm already looking into where I will invest our dividends at the end of the month.

    Tags: NMM
    Nov 04 8:47 AM | Link | 6 Comments
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