In the summer of 2017 I was looking at some Dutch AEX index stock charts. I had done this every once in a while always wondering how investing really worked. For me it still seemed as if the AEX was just a graph, randomly moving up or down day after day. And then, by accident, I stumbled upon an article talking about some guy called... Benjamin Graham. I started reading about "establishing a Margin of Safety," "buying a dollar for 50 cents" and the crazy "Mr. Market". It must have been a pretty basic article but the philosophy behind it stuck with me immediately; Was it really possible to buy a dollar for 50 cents? So that afternoon I started reading everything I could find about this investor, Ben Graham. Having spent my afternoon reading articles on my laptop I ordered "The Intelligent Investor" that evening. But that was not my only purchase. When reading about Graham there was one other name that was mentioned constantly… Warren Buffett. That was someone I had heard of. But what he did wasn't so clear to me, I knew he was the 2nd richest man after Bill Gates and that was about it. So when I learned that he achieved this by following Ben Graham (I now know it is a bit more complicated) I figured I had to learn about Buffett also. So my summer days of July 2017 I spend reading two books, The Intelligent Investor and Buffetts biography, The Snowball.
With this accidental introduction to value investing I started my quest of becoming a value investor myself. After these two books I read The Economists "guide to analyzing companies" (the 1997 edition, which my father still had). I followed it up with Grahams classic "Security Analysis". While this was a "just a bit" more difficult than the other three books, I loved it. But it did took me a few weeks to finish this legendary book (fair enough, I may have skipped a few chapters considering bonds and warrants). By then I sort of understood the basics of classic 'cigar butt' value investing while also having sort of an idea of Buffetts and Mungers philosophy of 'buying great companies at fair prices'. And while I still knew basically nothing about analyzing companies myself I did know that I wanted to learn more, read more, understand more and eventually invest my money in companies with a value investing approach.
All this happened in July-August of 2017, by now the stock market has reached new all-time highs and I have continued reading and learning. In the last eight months I read:
Peter Lynch': One up on Wall Street and Beating the Street
A third of Warren Buffetts shareholder letters (luckily still 2/3 to go!)
Ben Graham: The Intelligent Investor (it's too good to read just once)
Michael Shearn: The Investment Checklist
Carol Loomis: Tap Dancing to Work
Seth Klarman: Margin of Safety
A lot of annual reports (of the most obscure companies)
In these months of self-study I think I now understand the basic principles and philosophy of value investing. But you may wonder why a 20-year-old Dutch undergraduate student studying International Relations wants to learn so much about value investing. To answer this question I'll now give you a quick summary the Dutch college student loan program.
In 2015 the Dutch senate approved a new law regarding Student Loans to college students. This change was seen as necessary because the old law gave all students the so called "basisbeurs". Meaning; The right for every student to receive 104 euro's a month (during their study) as gift (on the condition that you graduate within 10 years) so they could cope financially. As this proved too costly they abandoned this gift for every student and instead established a "leenstelsel". From 2015 onwards you only could loan money from DUO, the organization tasked with loaning student's money. And since I started my study in 2016 I would fall under the new program. And it is this new student loan program that gives me the ability to start value investing. The most important terms and conditions of the program are:
Note: I’ll now give a very short summary of the changes that were made. A lot more is involved, e.g. free public transport, but this summary is sufficient for the point I want to make. If you want to learn more about how the Dutch have organized their 'student loan' system don't hesitate to reach out! ;)
- Each student can loan a maximum amount of 1034,17 euro's a month while studying.
- The interest rate you pay on your loan is linked to the Dutch 5-year government bonds.
- The interest rate you pay on your loan is changed once a year when you're still studying. If you have finished your study your interest is fixed for 5 years.
- You are required to pay your entire loan (with interest) back within 35 years.
- If you aren’t able to pay off your loan within 35 years the remaining debt is let off.
- DUO can only charge you a maximum of 4% of your monthly wage above the minimum wage to repay your loan. (so even if you're making just 2000 euro’s a month they can only force you to repay 0,04*(2000 - minimum wage)
- If you earn less than the minimum wage you don’t have to repay your loan until you exceed that threshold
- The current interest rate on a Dutch study loan is 0,00%! (Highest rate in the past 10 years was a little more than 4% in 2008, it has been steadily declining to zero in 2016 ever since)
- You can always repay parts (or the whole amount) of your loan whenever you want without charge.
As you can tell these are quite wonderful terms our government is providing us. Since I still live with my parents and tuition for Dutch students is only 2000,- euro's a year you can see the opportunity here. When I looked into this for the first time I couldn’t believe the government would offer us such a great deal. So from the start of my study I loaned the maximum amount and put all I didn't needed in a savings account.
So it was this incentive of an accumulating pile of cash I had in my savings account that started me to become serious about investing. And of course at first I hesitated to start investing with money that in essence is still borrowed. So many value investors, Warren Buffett leading the charge, argue against using loaned money to buy stocks. With Buffett even addressing the matter in his shareholder letter last February. So why would I, claiming to have learned so much from all those highly intelligent people, decide to not follow an advice from Warren Buffett? The only reason I can give is that I don’t see this as an ordinary loan because of the way it is structured. Even if I totally blow it with my investments and would lose all money I invested in this way the consequences would be limited. In fact, this would only imply that for the next 35 years I would pay a “fine” of maximum 4% of my income above the minimum wage to DUO to repay my loan.
So when looking at this story with a value investing approach you could say that my Margin of Safety here is very big. I have complete information regarding my downside (the 4% ‘fine’ for 35 years on my income if I were to lose all the money loaned). And I know that the upside is quite unique; Invest the money you don't need for your study and try to beat the interest rates of 5-year Dutch government bonds. I also know that I have spent ample time the last 3/4th year learning the basics of value investing. So I concluded last Christmas that I would follow through with my plans simply because the risk/reward is sufficient for me. As Buffett himself stated in his annual letter to shareholders in 1993: ‘we define risk, using dictionary terms, as ‘the possibility of loss or injury’. In my view using a prudent value investing approach to invest my student loan money has a high probability of ‘not completely failing” (read: not losing a majority of the money). And even if it results in complete failure I know my downside is strictly limited to no more than the 4% ‘fine for 35 years”. To me the possibility of material loss or injury isn’t present. And the probability of that this maximum loss or injury will be incurred is small enough that I’m willing to indeed take that chance.
Thus, coming back to my introduction, it was my student loan that made me look into investing seriously in July of 2017 and it was then that I, by accident, discovered value investing. And in these last 8 months I think, on average, I spend some 20-25 hours a week reading and learning about value investing. And it is in the last 2-3 months that I really felt that this could work out for me. So I made the decision to indeed start investing my student loan money in companies I think are grossly undervalued.
So this was quite a long introduction (longer than I imagined when I started writing), but why post this on Seeking Alpha?
Most of the articles I read here are from people who have been investing for a long(er) time than me. Seldom, I see articles of beginning investors who are seriously trying to improve their skill but also know they still have a long way to go. I regard myself as a someone within this category. Therefore, I wanted to write articles and blogs here to show other beginning investors how my value investing journey is going and how I am improving myself (or not of course). See it as a sort of a logbook that will be definitely of value for me (writing down your thoughts and reflecting on them later is always valuable in my view). But beside this exercise being of importance for me I hope some of you will like my articles for one of the following reasons:
1. They help other starting (value) investors give insight in how you may proceed to become a better value investor yourself. Note: I think the many mistakes I make and will make will be of more value to you than the things I may do right.
2. You may like the companies I’ll write articles about and start researching them yourself.
3. You may not like/disagree with my articles, research or conclusions. Note: This is the reason I read a lot on SA because those articles always have value to me since they require me to form an opinion about why I disagree with an article/conclusion/research. This thought process helps me to form opinions about companies in different way than I would when I fully agree with an article.
So for now I plan to divide my writings into two parts:
1.Blogs about Books I read, insights I have about investing and approaches I use for valuing companies.
2. Articles about the companies I have analyzed and researched.
These articles on companies will always be written with the aim of investing in them, now or in the future. So when researching (and thus writing about) a company I always do this with the intention of possibly investing in it. I’ll not write articles about companies when I know beforehand that I’ll never invest in them.
Coming to the end of my introduction blog I want to just say one more, very important thing. Keep in mind that if you read an article of me in which I research a company that this research is done by a true beginner. It says enough that by this time last year I had never heard about Benjamin Graham, Charles Munger or Walter Schloss. So even if, against all odds, there is someone who thinks that he should follow me in buying stock because of my article keep the following sentence in mind:
By this time last year I had never heard about Benjamin Graham, Charles Munger or Walter Schloss.
Of course I would be delighted if some of my investment articles turn out to be profitable for me, and possibly some readers but that is not my main goal. My main goal is to improve my skills and knowledge in investing and writing about investing so that I may become a truly experienced value investor in the future who isn’t forced to pay the 4% DUO ‘fine’ for the next 35 years of his life. And in doing this I look forward to your reactions, comments or messages about my work or investing in general, since I know for sure that will be of great significance to me.