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I inherited a modest sum when I was in my early twenties, bought an apartment, invested what was left over, and then proceeded to work for 20 years as an attorney at law firms in New York City and Washington, DC. I saved aggressively because I thought I could get fired at any time, and invested... More
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  • Bargain Hunting At The Mercado

    (click to enlarge)Evening

    There is a lovely park near our home in Barrio Alto, here in Lisbon. From it, you can look out over the city and across the valley to Castillo Sao Jorge. Lots of people gather in this park at night to enjoy the cool breeze off the ocean, to listen to music, and to drink gin and tonics. It's becoming one of our favorite destinations at the end of the day.

    (click to enlarge)Bird

    Another nice place to walk at night is the park in Principe Real, not too far from our apartment. There is an assortment of beautiful trees there, including rubber trees, palm trees, pine trees. But most interesting of all are the parrots. I counted at least eight green parrots flying from one tree to the next squeaking and squawking and generally just making a huge racket. There seemed to be around five of them in the tree in the above photo.

    When we return home, I enjoy taking a few moments to read about financial markets, and noticed that the Dow Jones had dropped 500 points while we were strolling around watching parrots. I didn't bother to read the headlines explaining the reason for the fall, because I don't have to. I've read the same headlines countless times before. They always contain the word "jitters." "The market is down 5% on geopolitical jitters." Or maybe it might be economic jitters. Or earnings jitters. Sometimes, there are some more detailed articles written by technical analysis people - meaning, people who look at charts and think they can see patterns that will predict the future. It's all totally useless information if you follow my investment approach.

    I have a very simple investment strategy. I own about 100 different companies and funds, and a rental property. I collect the dividends and rent, I spend less than I earn and I reinvest the savings. That's the entire business model. I do this regardless of stock prices, and I do it typically once a month, but sometimes more. I have literally no clue at this point what my portfolio's net worth is. Last time I checked was two years ago, I think. I don't even remember. The reason I don't bother looking is that this information also is entirely useless to me. Whether the companies I own pay dividends has literally nothing to do with the company's stock price. And I sell assets maybe twice a year but sometimes less often than that. Knowing what I COULD sell a stock for is useless information to me, because it's not something I do. If you asked me, I'd say that the best thing about living exclusively off dividends, rents and interest (as opposed to capital gains) is that you can pry the sell button off your keyboard, rendering share prices irrelevant for the rest of your entire life.

    So what do I actually do when I'm sitting in front of this computer doing financial stuff? I watch corporate earnings like a hawk, and read practically every bit of shareholder correspondence from any company I own, and many other companies besides. This has little impact on my investment choices, though. I do it to train myself to think like a better business person. The payoff from this activity is probably nothing I'll even see for at least 20 years.

    When I'm reinvesting dividends, I often look to see how much of my portfolio income is attributable to any given company. The five or six smallest positions are the ones I typically want to build up, so I'll pick whichever one of those seems the cheapest. Sometimes, when there is a particularly severe price drop in something I own, it gets my attention and I'll start trying to figure out if the stock is extremely cheap. If so, I might focus on doing that instead of rounding out my portfolio income sources. So truth be told, prices aren't totally irrelevant to me, since I've made a career out of reinvesting in cheap and reviled companies. If I ever retire, I'll just stick my savings into an index fund like Vanguard's total stock and bond market index fund (ticker VBINX). And if that day ever comes, then literally, stock prices will constitute completely useless information and I'll never even bother looking at the stock market again.

    As it happens, I enjoy looking at prices for things I want to buy because like those little old ladies at the mercado, I'm constantly there looking for a deal, poking at the fruits with my umbrella, comparing prices for these oranges over here to those oranges over there, buying little baggies of marcona almonds for a smidgen of money and, with a twinkle in my eye, dropping them into my bottomless little wheeled shopping cart. It's fun, is what it is. When the oranges go on sale, I practically go nuts in ways that make wild-eyed little old ladies with umbrellas at the mercado at closing time (when everything goes on sale) look positively civil by comparison. I love owning great businesses, oh ho ho, but nothing like owning great businesses at rock bottom prices.

    I've asked myself why I am like this. My best guess is because whenever I buy more shares, my portfolio income grows. Yesterday, I bought some shares of Navios Partners, and grew my income by a couple hundred dollars a year for the rest of my life. Sometimes, I get raises for literally doing nothing at all. Today, for example, Altria raised their dividend, which gave me another raise of about $250 a year for life. Whatever is happening with the Dow Jones today or this week has precisely no bearing on how wealthy I feel or don't feel. As far as I'm concerned, I'm wealthier today than I was at the beginning of the week to the tune of $450 a year, every year for the rest of my life (although I expect that amount will increase as Navios and Altria raise dividends over the coming few decades). So much the better if share prices for Altria and Navios drop even HARDER. Now I'll have $450 I can use to buy even more shares at even better prices!

    Sadly, I don't know that I will have too much left to invest at the end of this month. I've got some move-related checks to write, and then I sort of, kind of, invested our savings earlier this week. No matter. I will be back at the mercado with my umbrella soon enough, looking for overlooked produce getting sold at give-away prices. Until then, I might have to just content myself with oranges and sardines rather than shares of blue chip stocks.

    Aug 21 5:32 PM | Link | 7 Comments
  • Baby Birds

    My son has been finding baby birds that have fallen out of their nests. He likes to move them to safety when he finds them - luring them into a bush with bread crumbs, and just spending some time observing them to make sure cats don't show up. They're sickly looking, forgotten, forlorn little creatures, and I'm very pleased at how our son takes time to try and protect them.

    In my case, I have also been looking for sickly, forgotten, forlorn little stocks to buy, and have been especially intrigued by what I see happening in the energy and shipping industries. Today, I couldn't help notice that one company I own is now trading with a yield of 20%. It's a well run firm that's managed to adapt to changing market conditions, hold it's dividend steady (and even increased it a bit), purchase distressed assets to add to the fleet, and position itself to weather a sharp downturn by cutting the debt down to about 3 times EBITDA - quite low by industry standards. The biggest dilemma the company faces is that much of it's debt will mature in 2018, and it's tough to predict what the shipping market will look like then. I would guess the CEO is looking to refi some of that debt now at historic low rates of interest, but I don't know that for sure.

    The position I hold in this one business already accounts for nearly 4% of our total portfolio income - which is way too much, I feel. That said, I have a soft spot in my heart for sickly, beady-eyed, plucked over little birds that have fallen out of their nest when said birds are offering to pay me a steady 20% a year (or at least, a chance at a steady 20%). I violated my rule on "don't earn more than 3% from any one income source" and bought $1,000 worth of shares today with some extra cash I had lying around. And I did it before the end of the month. That's two broken rules.

    I felt somewhat ashamed after hitting the buy button, but nevertheless giddy to imagine that my annual income has increased by $200 a year for the rest of my life. I suppose other investors would be livid at the stunning losses on the stock they already own - I have no idea what our paper losses on this position might be. Don't need to. I don't plan on selling, but I do plan on collecting dividends on this position. And I decided to spend some of that $200 of future dividends today, this time at the mercado in Campo de Orique. It's a lovely indoor eating space filled with about 20 or so different vendors offering everything from garlic shrimp to gourmet hamburgers. Nobody seems to be here at 12:00, which is when we stopped in for lunch, but by 12:45 the place was packed.

    (click to enlarge)mercado

    Aug 20 3:35 PM | Link | Comment!
  • Mr. M, Leveraged Speculation, And Irresponsible Dog Owners

    I've made a couple of friends in Lisbon so far, one of whom is the broker who found us this remarkable apartment we live in. I will call him "M" to preserve his privacy. M is a bundle of energy. Contrary to every single facet of Portuguese life that I have ever experienced, M is in a hurry. And for this, he gets results. Things got done yesterday, not tomorrow. He carries multiple cell phones, carries on two conversations at once, drives like a maniac, and barks out orders to lawyers and waiters like a drill sergeant. It's actually a bit much, to be honest, and so last time I went out with him, I picked a restaurant that is located in a stone basement below street level. Zero cell phone reception. He still bossed the waitress around - but that's nothing I can engineer around.

    To hear M speak of it, the Lisbon real estate market is in something like a feeding frenzy. Much of this is due to mainland Chinese investors fleeing the sinking ship of the Chinese capital market, securing Portuguese visas in exchange for purchasing Portuguese real estate. M is closing deals all over the place, so it seems, but I guess he really is doing enough to enable him to finally scraped together enough cash to purchase his own property. His first property in Lisbon. He is turning it into a vacation rental.

    Now, M is Portuguese but worked in America for years before returning to Portugal. He settled in the Algarve, but relocated to Lisbon many months ago to participate in the great real estate boom. For personal reasons involving an estate and some debts of one of his parents, he came to Lisbon with virtually no capital to his name. But M has been around long enough to know that ultimately, if you do it correctly, your money will pay you more than anyone else ever will. The key is, you need to have the money to begin with, which M did not.

    As we were eating in the basement surrounded by 2 meter thick stone walls, I shared with M what I see as the secret ingredient behind the success of almost every single wealthy client I ever had when I was practicing law (other than those who simply inherited it). (1) Use someone else's money (2) get someone else to pay it back for you; and (3) hire someone else to do all the work. This is the golden trident. Buying real estate, renting it out and hiring someone to do the cleaning and key drop offs is more or less a perfect business model to accomplish all the core aspects of the golden trident, which M understood perfectly from an intuitive standpoint. However, the visual aid gave him something important to work with, a back of the napkin simple business model that can, frankly, be replicated to an almost arbitrary degree.

    Which lead me to a question: when something good can be replicated an infinite number of times, it will end horribly. The only uncertainty is when it will end horribly, and how much more horrible than you imagined will it end? Accordingly, it becomes imperative to know when it is time to stop. I put the question to M and he figured that as long as he can rent his space out for 100% more than the interest rate on his bank loan, he's safe and can replicate the game of ring around the rosy like Agent Smith copying himself ad infinitum in the Matrix trilogy. I just had to ask, why 100%? Why not 50% or 200%? Unsurprisingly, M has no clue, and quite honestly neither do I.

    We all come up with these interesting little arbitrary rules. I mean, I own a mortgage on a rental property, and my thinking is that since I borrowed at 3.5%, and can take a tax deduction that renders my effective borrowing rate closer to 2.3%. Since inflation clocks in at around 2.3%, in my worldview, I feel like I got the bank's money for free. My intuition is that getting free money is a good business model. But the problem is that free money is one of those "too good to be true" things. When something is too good to be true it can only mean it either isn't good, it isn't true, or both. I'm just not smart enough to know which, or when the truth will finally erupt like an unstoppable volcano, taking me and who knows how many others with it.

    But then there is a third, gravity-defying possibility that "too good to be true" actually means that it really IS too good and it really IS true. I guess the only hope when you live at the base of Mt. Vesuvius is that if the truth is sufficiently inconvenient for a sufficiently large number of people (or a small number of sufficiently important people), the truth will actually NEVER erupt. It will simply be readjusted, reclassified, reconfigured, and then fall away. The rational among you will dismiss this third possibility as pure idiocy - my only defense is that complete blithering idiots and sages are virtual twins in ALL things besides hindsight.

    Which brings me back to M. When you start out with nothing to lose, any arbitrary rule is complete genius, compared to the alternative of just waiting for your employer to cut you checks for a fraction of what your time and efforts are actually worth. I congratulate M for recognizing his self worth and doing something to capitalize on it. For my part, I never really used the golden trident approach to any meaningful degree. I started out with a modest inheritance, hit a few huge investment homeruns out of pure dumb luck, scored some jobs I wasn't qualified for but got anyway because of my law school grades, saved most of my earnings and... most importantly by far... bought stock of companies at times when experts gave the ticker symbols looks that they'd typically reserve for fresh dog droppings smeared on the bottom of their Brooks Brothers' alligator wingtips. So you see, my business model is more of a dog-droppings scraper approach than a golden trident approach. And yet what's interesting is that it's brought me to Lisbon, just as M rode into Lisbon on his golden trident. And it's landed me (quite fittingly) in a medieval section of town where dog droppings frequently line the street.


    Aug 19 6:13 PM | Link | Comment!
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