A boring stock that can make you 14% return per year

As most of you know, I am a Long Term Investor and like boring stocks that slowly makes money but over a long period of time. This is a bank stock that has been growing their Tangible Book value for about 14% a year consistently and will certainly keep doing that for at least another 5 to 10 years. The bank is run by one of the most intelligent and smart CEO, one can get that Warren Buffett will pay him more salary if that CEO joins Berkshire Hathaway.

The name of that bank is JP Morgan Chase and the CEO is Jamie Dimon. Look at their growth in Tangible Book Value per share including the 2007-08 Financial Crisis.

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Their Earnings have grown from $4.5 billion to $21.8 billion ( almost 5 times ) in 10 years.

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That is one hell of a result to produce for any company let alone banks.

Full Disclosure here: I used to be a JPM share holder and have doubled my money investing in them. But as of this date I do not own any shares in JPM.

Now you may ask, why am I not holding JPM in my portfolio and the reason is this. My full time job is to look for investments and I have all the time to explore difficult investments that I hope get me a better return than 14%. But if you are like most of my friends, who make paltry 2% on their CDs and GICs, there is JPM for you that can easily make 14% or more every year. All you have to do is just buy their shares and never sell it.

 

Interview of Joel Greenblatt by Howard Marks

My first investments began because of one book – “You can be a Stock Market Genius“. Joel Greenblatt, the author, described simple and yet spectacular ways to invest in stocks. Aimed at an somebody who knows finance and accounting, that book was a revelation for me and my first dollars were made just because of the book.

Greenblatt spent about half an hour talking to one of my other favorite investor – Howard Marks. The video is here for you to enjoy and the half an hour you spend is worth so much more, when you make your investment decisions. Enjoy!!!

You can buy an used copy of the book for just 16 cents ( from amazon, please add 4 bucks for shipping). As a true value investor, this is a deal one should not miss.

Thoughts on Stock Tips

Whenever I meet someone who is interested in stocks, the conversation steers towards mentioning of a few company names. Often that someone buys shares of the companies I mention. But when I meet them again later, they complain that they are not seeing any increase in price and that they sold it at a loss. This has been a very repetitive theme. This post tries to explain why it works just for me and not you.

I belong to a breed of investors called as Value Investors. Their goal is to buy something cheaper than what it is worth. To make the theory sound better. Imagine you are going to a grocery store and suddenly see that rice or oreo cookies are priced 50% cheaper than normal. You look for the expiry date and ensure it is all fine. Now what would any sane person do at that point. “Buy as much as one can”. That is exactly what I do when it comes to buying stock in companies – “Find them cheap and accumulate. ”

Now, there is a difference between buying rice and stocks. When you buy 10 kilos of rice, you end up cooking and eating them. But when you buy a stock, your motivation is to sell it at some point in the future.

Please note that there is a breed of people who never sell any shares, they just buy and sit on it. Folks like Warren Buffett belong to that category. But most Value Investors, including me, we end up selling those shares when we feel the price is more than the value of those shares.

Here is the most important thing – “It is impossible to guess WHEN the price of the stock you bought will go higher than the value of that stock.” So what is the solution. The one and only solution is to be patient. Just wait until it reaches that value. This wait can be days, months and even years. I have a bank stock I am sitting on for the past 3 years and it still has a long way to reach its worth.

So if one does not wait patiently, they will end up selling it for less than what it is worth and end up losing money. Now go read the first paragraph again. I hope you understand the problem now. So next time, if you run into me and we are discussing a stock, please note that my plan(e) has a really long run way. Don’t expect A380 size returns when you have a very short run way. In fact, if you try taking off a huge plane on a small run way, there is a 99% chance you will run into an accident.

 

 

 

 

Activist at Bank of New York and Mellon & Building my Circle of Competence

I have been a follower of activist campaigns for many companies and have made money most of the times. Of all, one person I like following is Bill Ackman.  The reason is simple. Whenever he takes an activist position with a company, he creates a detailed analysis on how things can be improved in that particular business with his 100+ long powerpoint slides. His analysis of money center banks was very insightful for me to learn how they pull their levers to make money. I learnt a lot about the Railway industry during his campaign at Canadian Pacific. With Bill, I always learn something new which adds to my circle of competence and get to make some money. So it is always a win-win for me when I follow Bill Ackman.

Mike McGuire of Marcato Capital is a protege of Bill Ackman and he too has a habit of creating a 100+ slide powerpoint whenever he goes activist on a company. Bank of New York Mellon (BNY Mellon) is his new activist position.

BK as it is shortly called as been in my radar for sometime because Berkshire Hathaway has been holding a position for a few years.  Since BK was not in my circle of competence, I had not bought any position. But Mike bought a position and created this 100+ slides explaining the workings of  BK and his detailed explanation on how JP Morgan’s Asset business does it so much better with a better (lower) headcount.

So what happens next? I am not sure. BK can come to senses and do the changes suggested by Mike and if not Mike can go for a proxy fight and eventually it will get better for BK.

After reviewing the slides, my take away beyond the numbers is that – “Today banks and financial institutions are run with less people. Technology plays a major role in reaching customers and the number of people a bank used to have at the front office and back office doesn’t make sense today.”

Thanks to Mike, I understand the industry much better and of course I understand BK better than ever before. I now understand why Warren Buffett bought it and it is interesting to note that lately he has been selling some of the shares.

I may buy some shares of BK in the future but at this point, I am going to watch it from the side lines as I believe most financials are fairly priced.

Final word – Interesting days are ahead of BNY Mellon. And whenever somebody creates a 100+ slideshow about how a business can be improved, jump and read it. Very rarely one gets such an opportunity and when you get it pounce on it.

Link to Marcato’s Website on BNY Mellon.

As I was typing this post, I heard it through the grapevine that Heinz and Kraft are merging. The culprits are the same in any smart deal – 3G, Berkshire Hathaway and possibly Bill Ackman??

Original Stock Ideas

Let me be very truthful. These are not my original stock ideas but of Mario Gabelli. Thanks to him, I have made money on many of my investments. In this annual letter, he talks about a number of investments and the reason why they will help you build your wealth.

I have already invested in a few of them including in Malone’s empire and in the “cereal” empire. Not to mention I am almost up 50% on most of them.

Highly recommend reading his ideas for investments. Please note that all these investments take 3-5 years to double. And if you invest in 5 stocks, 3 will do average, 1 will be a super duper hit and in one you will certainly lose money. That is just the nature of investments. If you beat inflation and get more than 6% return, you are doing better than 99% of your fellow friends, actually 99.99% of your friends.

Some of the ideas in the letter.

  1. Graham Holdings
  2. Ryman Hospitality Properties
  3. Cable & Wireless Communications
  4. Chemtura
  5. Post Holdings
  6. Patterson Cos

Do not miss the section on “What worked in 2014.”

Here is Gabelli’s Annual Letter.

If you are not interested in Individual stocks and interested in Mutual funds, Gabelli is one guy with whom you can trust your money.

His returns are amazing for a Mutual fund. Please see Page 2 of the pdf.