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.

 

 

My 2014 Investment Performance

2014 was a good year. We made a Total return of 16.38% for the year. Not too bad, comparing that the S&P made about 13.69%.

For the past four years the value of 100 dollars has risen to 176.94 giving an annualized yield of 15.33%.

S&P returned 15.55% for the four years.

I am a long term investor so our goal is always to find good and cheap securities and build wealth.

Despite we beating the S&P in 2014, the 2015 story is very interesting as Oil and Gas prices have gone down to record low. This can affect my 2015 performance but in long term it should be good as I have gobbled up some nice investments during this downturn.

I was asked to given an example of how my investment style works.  I have tried to explain to people that I do not trade and do not indulge in any fancy mechanisms. I have found a better example in recent times to explain my style – “I am planting seeds today and hopefully in 3-5 years these seeds will grow up to wonderful plants and trees and I will enjoy the benefits of the seeds I have planted.”

Reach out to me if you have any questions.

Summary of my returns over the years:

For Year 2011 –  3.65%

For Year 2012 – 12.32%

For Year 2013 – 30.60%

For Year 2014 – 16.38%

The Lawyers advised me to add this disclaimer – “This is not an investment advice nor solicitation for any investment. If you do investments based on my ideas and lose money, I cannot be held responsible.”

 

Significantly Overvalued

This is the news I am hearing on all fronts about stocks. But do I really worry about it. NO!!!!

Look at this chart from gurufocus that shows you the history of GNP to Valuation over decades.

One thing I will have to agree is that stocks in certain sectors are priced higher than it used to be. So I am not finding any bargains today except in the Oil and Gas sector.

There are still a lot of banks and community financial institutions that still sell at 2009-10 depressed prices. There is a good chance one will make money there if they read the annual reports. I own a couple of community banks that are no-brainer holdings. I am looking for more :)

In all other sectors, I find majority of the stocks to be overpriced. So this brings a question for most of us. Should I invest now or not do anything?

Given how much a GIC/CDs are making in North America, it is unwise to keep that money idle. The biggest difficulty is finding the right kind of investment. If you need that money in the next couple of years, I highly recommend finding an institution where they guarantee your principle.

If you have a run way of 3-5 years and are not ready to invest on your own, stick to mutual funds that are value investing oriented and especially the ones that have shown results over long term.

If you are ready to invest on your own and can understand accounting ( the language of business), then start looking at the sectors and companies that are down, especially in the Energy Industry and in Financial Institutions. You can find gems in this market.

Personal note:

We just received statements from our portfolios and would be soon publishing my investment return FY 2014. Please note that they are not audited and serves as no guide to your investment philosophy.