Chris and Clem Meet Up #12
Chris and Clem have become good mates.
Chris is a 33 years-old engineer,with a good career and a young family - wife and small son. His wife, at this time does not work.
Chris' Dad used to work with Clem in the past and that's how they got to know one another. One evening in the Golden Lion, their favourite haunt, they got talking about finances - or in Chris' case - the lack of them.
Clem sat down with Chris and scrutinised everything that he was doing with his household budget. It turned out the Chris, and his wife, all with good intentions did have a budget but were directing the finances in the wrong directtion.
Chris thought his only way out was to take a job down south that paid a lot more. Clem talked Chris around to making his current budget workable and instead of Chris accepting a higher-paid job away from home - he accepted a promotion where he was already employed.
Chris was elated. At the time all this was going going on, Clem noticed that Chris ought to be saving for his retirement. He contributed to the company pension scheme but Clem explained to Chris that this would never be enough and he should open a Self Invested Personal Pension.
On Clem's advice he did this.
It turns out that Clem, although not a past stock broker, was quite a trader in his day and he felt that he could pass a great deal on to Chris.
This episode is the twelth in a series of Clem giving Chris good advice.
"Chrissss" Clem shouted out across a crowded bar and waving his hand. "I'm over here. How're doing on this beautiful and fresh December evening?"
"Just wonderful" replied Chris as they got nearer to each other. "By heck, it's busy, busy in here tonight. What's the ocassion?"
"Nothing special, I just think folk are trying to get as much whallop down their necks before prohibition kicks in again."
"Very funny," said Chris, "even I know you're not old enough to remember those days."
"No" replied Clem, "But my pappy and grand-pappy told me all about it."
"You must tell me the stories some time" Chris said rather interestingly.
"Yes, said Clem, "I know you're champing at the bit for me to reveal some of my 'sordid' past."
"I just know you've got a few tales to tell and I'm interested. Especially about how you learned all your Stock Trading secrets."
"Maybe later" Clem gave in, "but first, I want to know what further gems you have uncovered about our hero - the great Warren Buffett."
"Well" said Chris, "I thought I'd delve a little bit deeper into why Warren Buffett only prefers one type of share. I must admit to it being an eye-opener in the sense that it narrows down his research (and now mine). Approximately half of the companies listed - he is just not interested in.
"And the type of companies he is NOT one bit interested in are what he politely names as: Commodity type business. Except he doesn't call them that, he refers to them as "sick" businesses.
"He has this natural dislike for this kind of company for one perfectly logical reason. The industries that they are in are price-competitive. Furthermore, they operate with low margins and carry high (sometimes very high) long-term debt.
"He names these type of businesses and you will never see him putting his money into such ventures. I've read enough now about these kind of companies to be be convinced of what Warren Buffett does - for the long term - is absolutely correct.
"You wouldn't bet against him, would you?"
"Of course, Commodity type business will sometimes do well. In boom times, they will probably do very well. But it will be short-lived. When times get tough, as they often do, they have to tighten their belts and being in such price-competitive businesses, the competition for business is fierce.
"I'll list a few of these Commodity type businesses - do you agree with me (or should I say: with Warren) that for long-term investors - they are a bad investment. Here's my short list of the ones I can think of:
"I'm sure I could remember more but you understand what I'm trying to get across. Right?
"All companies that operate in these industries are, in my own words, on a hiding to nothing.
"Let me try to explain it in my simple layman's terms:
"All these industries have competitors. But the difference with Commodity type companies is that they are in a price competitive market. They are all chasing the same customer with a similar low-margin product.
"In good times, all of them will sell their goods, demand often outstrips supply, but when times get tough, they have to lower their prices in order to compete. Their margins are already low - they may even sell products at a loss - just to keep their employees going and the money rolling in.
"Another factor is that these companies often have to replace machinery. It wears out. And heavy machinery is not cheap. An aeroplane is not cheap to replace. A blast furnace in the steel mill is not cheap.
"These type of company do not make enough earnings during the good times in order to pay for such machinery, so they end up having to ask shareholders for the money. This means that they are continously in a long-term debt situation. Typically, debt that can take 20 years or so to pay off.
"And yet another burden they have to carry is that most of them employ "organised" labour. They have to be a member of the Union. And if the company is doing well, the Union fights for better wages and conditions. Consequently, any monies earned by the company get swalllowed up in increased wage demands.
"Warren Buffett spotted this phenomena years ago. He must have said to himself: 'Why should I invest in a company whose earnings are erratic, at best, and loss-making most years, at worst. There are other companies out there that make steady earnings year-in, year-out. I should invest my money in these companies.'
"And, as they say, the rest is history."
"I reckon Warren makes more than a good case for not investing in his "sick" companies. For the time we meet up next, I'll make a good case for the type of companies that Warren DOES invest in."
"Well done Chris" interjected Clem, "You certainly have a very good understanding. I'll look forward to hearing your case for the defence - so to speak - the next time we meet up.
"Of course, having this knowledge will be only half the story. To be successful at trading, you still have to do your share of due dligience.
"Of course" nodded Chris, "I can cope with that. In fact, I'm beginning to enjoy it!"
"Hey, Clem" snorted Chris, "You'll be really pleased to see my latest portfolio"
"Will I?" snarled Clem back. "Why would that please me? The market has risen well over the past month or so, you just happen to on the 'bandwagon'. Anybody, even a monkey, can make money in that kind of market. "
"Yes, I'll agree to a point" said Chris, "but my last few choices have been done with a fair bit of research. Countryside Properties, for example, I haven't seen anybody mention them yet they have risen over 60p since I spotted them."
"And the more I read about Warren Buffett, the more informed I become."
"OK, OK," Clem said, "I guess you do deserve some credit. Let's take a look at your portfolio and see how it has fared. And , I'll be most interested in the ones you are currently looking at researching."
Chris replied: "OK. Here's my up-to-date portfolio."
"As you can see Clem, there is quite a decent profit in there for only trading 3 or 4 months. A lot of it is obviously down to the market's recovery, but I've started doing some in-depth research now and my watchlist is growing each week.
"And no, I don't want a very large watchlist, so I'll be very choosy. If a share ticks all the boxes on my criteria - it gets on the watchlist. If not - I'll just keep looking.
"Take for example, BT Group, I bought them back in September at 99p. They are 135p now and have been as high as 140p. They should benefit enormously from the new 5G network. They are trading at a huge discount to net assets yet the P/E ratio is under 9. Incredible. When are these shares finally going to get the re-rating that they deserve?
"I'm also happy with ITV. They are currently 107p against my purchase price of 60p also back in September. They have suffered badly during 2020 a lot of which was due to a heavy reduction in advertising. They currently trade on a P/E of around 14 but any future earnings increase would drop this considerably. My short-term target price for ITV is 150p but, barring any massive market falls, I'm in them for the long term.
"William Morrison have disappointed. But then, so has the whole retail sector. I'll keep the faith with these and I believe them to be one of the better choices in the sector.
"All the other holdings are "hold" for now.
"As for additions to my watchlist which, right now stands at just two companies: Glaxo Smith Kline (GSK) and Hargreveaves Landsdown (HL.)
"I also like the look of British Amercian Tobacco (BATS) and Imperial Brands (IMB). As both of these are in the same sector, I would probably slightly favour Imperial Brands.
"I have looked hard, but as yet, am still to find others, but my research has really only just begun."
"All sounds good Chris" said Clem, "I look forward to knowing what else you may uncover."
"What are your thoughts on the UK market right now Chris? I mean, Wall Street keeps hitting new highs, yet the Square Mile seems to be missing the boat. Would you say Wall Street is over-priced, or is London under-priced?
"It's an interesting conundrum - don't you think?" asked Clem.
"Hmm, I haven't dwelt on that too much" said Chris, "but it is food for thought."
"Time will tell. If it turns out to be that London is cheap we are in for a roller coaster in 2021. Personally, I think the market, even here, in the UK, has had a good run. Call it a Santa Claus rally or whatever - I am cautious for the early part of 2021" replied Chris.
"In fact, I've thought more than once to maybe taking a little profit. I think that if there is a pull-back, it'll be quick and painful - as in a few hundred points off FTSE."
"What if there is a 'no-deal' Brexit? How will tht affect the markets. What if there is another pandemic? 2021 looks as if it could be quite interesting.
"We'll just have to wait and see. Won't we?"
"Right Clem" said Chris jokingly, "the last time we met up I tried to push you for some stories about yourself.
"I know you have many a tale to tell - my Dad said it many times."
Clem pounced back: "Look Chris, I grew up in the US, as you know, we weren't exactly piss-pot poor, but we weren't well-off either. We got by - just.
"Jobs were really hard to find in those bleak days. You took what was going and said your thanks.
"I was only a kid when my Dad went off to war. I barely knew him. He never came back. Since I was thirteen-fourteen years of age, I just had to go out and earn something. My Mum, brothers and sisters depended on it."
"Hey," said Chris almost with a tear in his eye, "I never realised things were that bad. I feel terrible for pushing you on this. You should have said."
"No, it's OK" said Clem, "It's a long time ago now, and your Dad was right, I did used to tell a few of my stories. In fact, it's because of my very first job as a bell-boy, that I got involved in the Stock Trading world. Trust me when I say: 'I was taught by the best.'
"But before I started trading stocks, I was just a young lad. But by the time I was seventeen, this one gent seemed to take a shine to me. It's not a story for now, but I'll tell you more the next time we meet up.
"In fact, I will have one or two surprises for you."
"Can't wait" said Chris.
Chris said with a sigh: "The next time we meet up Clem, will be on the other side. Let's hope 2021 is better in every way. 2020 has been a shocker.
"So many people have lost their livelihoods - not to mention loved ones. I believe people need to recognise what's going on and retrain themselves.
"Everybody knows what's trending - selling online. Surely that situation is screaming for people to get off their butt and do something. It's not expensive to get involved either.
"We can talk that one to death - right now it's time to wish you and yours a happy Christmas and for sure, a great New Year."
"And very much the same to you and your young family Chris." replied Clem.
"Shall we meet up in the New Year on 8th January. Two weeks from now would be New Year's Day so we'll give that a miss. I'll see you back here on Friday January 8th" said Clem
"Alright, the 8th. it is. Have a good 'un Clem and do take care with all this virus lurking. You must be due your jab any time soon?"
"Yep, I'm just waiting to hear. I would feel more confident if the Prime Minister and all his cronies - from all sides - had given the British public more confidence by actually taking the vaccine themselves first.
"But, Hey-ho, that's just the way I think" muttered Clem.
"Oh, I nearly forgot - here's a little something for you and the missus to enjoy the festive season." Said Chris
"Aye, you're a good lad - are you sure you can afford it?" replied Clem sarcastically.
"They both left with a giggle."
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