Chris and Clem Meet Up #13

"Chris and Clem Meet Up
- Friday Night 8th. January 2021"

"Chris and Clem's Story So Far ..."

Chris and Clem meet up every other Friday night down at their favourite watering hole - the Golden Lion. But on this occasion they have had to conduct their 'meeting' online using Facetime. 

Clem had already given lots of advice to Chris about his personal finances but he really put Chris straight with regards to him saving for his retirement. 

"You may have a half-decent company pension" said Clem "but that alone, even together with your miserly state pension, will not be enough by the time you retire."

"You need to open up a Self Invested Personal Pension and invest wisely.  I'll show you how."

"I've heard about those" said Chris, "but Clem, I don't know the first thing about investing money."

"No matter" interrupted Clem, "I do.  And I'll guide you every step of the way."

That conversation was way back in July/August last year - stay tuned to this series of articles to find out how Chris learned "the ropes" and how you can do the same.

This is the 13th. article in that series.

The story continues ...

"More Secrets Chris Learned
About Warren Buffett"

 "Good Evening Chris" said Clem excitedly "and a very happy New Year to you."

"Happy New Year Clem" replied Chris. "Is it going to be good, bad, indifferent, or what?"

"Who knows the answer to that?" retorted Clem.  "Even our hero, Warren Buffett can't answer that one."

"Anyways, without further ado, spill the beans on what you've learned about the great man over the festive season."

Chris replied: "The last time we met Clem, I gave you my understanding of what Warren Buffett describes as "sick" businesses.  Also known as: Commodity type businesses.  The type that Warren does not buy.

"This time, I'm going to give you my version of "healthy" businesses. Also known as: Consumer Monopoly type businesses.  The type of businesses that Warren does buy.

"Warren Buffett is a Value Investor.  He learned that from his mentor Benjamin Graham.  He didn't agree with everything that Graham taught him, so he modified a few things.  'Things' that have made him a very rich man. 

"Similarly, Warren wasn't the first to talk about Consumer Monopoly and Commodity type businesses.  That was Lawrence Bloomberg back in 1938.  But it certainly gave Buffett a lot to think about.

"And think about it he did.

"He likened Consumer Monopoly businesses to that of a toll bridge.  Some of which are operational to this day.  Modern versions, of course.  The Humber Bridge is one example.

"If you want to cross the Humber at the shortest point without having to drive miles out of your way, then you have no option but to "pay the ferryman."  Pay the toll or take the long, scenic route - there is a choice!

"For 'healthy' businesses, this means that if you want to buy a product that has quality and uniqueness, then you have no alternative but to buy from that one company that provides it.

"Brand names are intangible assets but can turn out to be more valuable than a company's tangible assets.  When analysts are doing their research - it's hard to put a value on an intangible asset.  Fortuntately, us mere mortals do not have to even try.  There is another method.

"Probably the best examples of businesses that have a Consumer Monopoly are pharmaceutical companies.  They spend enormous amounts of money on research and development (R & D) but are rewarded when they discover a block-buster drug - and that drug gets approval.

"Pharma companies then obtain patents for their approved products so that no one else can sell them.

"Unfortunately for them, patents on drugs eventually expire, but large companies like Glaxo Smith Kline (GSK), always have a pipeline of drugs in their arsenal.

"I'll mention GSK again later on.

"If you'd have asked me a month ago: 'OK, you need to invest in a consumer monopoly type business and not a commodity type business, I would have probably said: but how do you determine which is which?'

"And I would have answered that question with: 'I don't know. But Warren does. I'll go and find out.

"And that's what I have done.

"However, even if you sort out the 'healthy' companies from the 'sick' companies, which of those 'healthy' companies should you include in your portfolio?  Certainly not all of them.  You have to be choosy. So which ones pass muster?

"That would be a great question and one that I'll try to answer right now."

"Gee, Chris.  I do believe you're enjoying all this stuff." snarled Clem.

"Yes, I am" answered Chris, "and it's all your fault.  You got me into this and now I can't put it down.  I'm not obsessed.  But, being an engineer, I like to get to know things in detail.  As they say: 'the devil's in the detail.'

"OK" said Clem, "give me some examples of a 'sick' business and some examples of a 'healthy' type of business."

"Alright," replied Chris, "I actually gtting quite good at differentiating these compnaies. First up - commodity type businesses.

"Airlines - e.g. Easyjet
Construction - e.g. CRH
Gas and Oil Companies - e.g. BP
Paper manufacturers - e.g. Mondi
Car makers - e.g.Ford, Jaguar-Land-Rover

"And now examples of 'healthy' type businesses:

"Food producers - e.g. Unilever
Pharmaceuticals - e.g. GSK
Specialised financials - e.g. Hargreaves Lansdown
Telecoms - e.g. BT Group
Media - e.g. ITV

"There's no point in me rambling on about 'sick' companies, I'm never going to invest in them."

"Ah," Clem butted in "but don't they too increase in value?"

"Aye" replied Chris, "I'm surprised that you asked me that question - and I know that you know the answer - are you trying to be a smart ass?

"Nope" Clem came back "just winding you up a bit.  Making sure you tell the complete story."

"Fair do's" replied Chris "I'll continue - hopefully without any more interruptions.

"The whole point in saving for your retirement is to think 'long term.'  And if you want to follow our mentor Warren Buffett that means buying into consumer monopoly type businesses - as I keep repeating myself. 

"Investing in commodity type businesses is not for the long term.  Sure, they may make good profits in the 'feast' years but when it comes to the 'famine' their earnings tend to be erratic.

"Consumer monopoly type businesses, or at least the ones I will be selecting, will show earnings increases year after year - with very few exceptions.  If they don't, they don't qualify, and they don't make it onto my list.

"I found another Warren quote, let me give it to you right now, I just think it kinda sums up what long term investing is all about.  Here it is:

"Your goal as an investor should be simply to purchase, at a rational price,
a part interest in an easily understood business whose earnings are
virtually certain to be materially higher, five, ten, and twenty years from now. 
Over time, you will find only a few companies that meet those standards -
so when you see one that qualifies, you should buy a meaningful amount of stock"

An excerpt  from the 1996  Berkshire Hathaway company report.

"Does that just about say it in a nutshell - or what?

"As you know Clem, I've started doing a lot of research using the P/E Ratio as my method for screening companies. 

"Of course, my research covers a lot more than just finding companies with below average P/Es but such companies prompt me to look deeper.  I want to see earnings for the past ten years and if that's not possible, then five years. But not fewer than five.

"Then I want to look at analysts' estimates for future earnings. 

"I like the idea of 'assuming' that if a good, solid consumer monopoly business has made good earnings, year in, year out, it is reasonable to assume that they will do so in the future.

"With that in mind, when I come across such a company that meets the required criteria, I consult analysts' estimates but I also plot a graph showing company earnings - allowing for future years.

"I have included three such graphs below.

"Chris' Own Share Selection Criteria"

"Clem" exclaimed Chris, "You'll be very pleased to hear that I haven't bought any new shares since we last spoke."

"Oh, I don't know" replied Clem sarcastically, "the luck you've been having of late you could stick a pin in the FT and make a profit."

"I've come to expect that kind of comment" said Chris, "I thought you agreed with a lot of what I was now doing."

"Take no notice of my comments." said Clem almost appologetically "It's not personal. I like pulling your leg.  So, OK then, no purchases, but what about more research?"

"Yep, I've done a fair bit of that" stuttered Chris.  "My Watchlist has grown.  In fact, I've had to exclude a lot what I was going to add on account of their P/Es being too big for my liking. e.g. around 20 or higher.  I'll keep an eye out for such companies though when their results are due next.

"For example:  Morrisons have just announced that sales increased 9.3% over the Christmas and New Year period, and full year figures (due 11th. March) are looking good.  Online sales have more than tripled in the last quarter.  Fuel sales continue to be a problem but the tie-up with Amazon is working well.

"I don't think Morrisons is ever going to be a high-flier.  But it's my choice in the food retailing  sector.  The yield is an acceptable 4% or near enough.

"Let me show you my earnings 'predictions' for three companies on my Watchlist.

"Here is a graph of Hargreaves Lansdown showing both past, and projected earnings. 

"These are on my Watchlist.  I like the company and I like even more the potential it has to grow even bigger.

"Market cap. is just under £7 Billion.  But it is the earnings multiple that is holding me back for now.  That is around 25 which is too much for me.

"One to keep a eye on.  Their interim results are due out end of January and you can bet I'll be on the look-out for them.

"My Watchlist has grown, and will continue to do so.

"I'll go into more detail on all of these (and ones I haven't yet discovered) in the future, but for now, here is my Watchlist:

  • British American Tobacco
  • Imperial Brands
  • GSK
  • Hargreaves Lansdown
  • Polypipe
  • Morgan Sindall
  • 4Imprint Group
  • Volex
  • MoneySupermarket
  • Bunzl
  • Hilton Food
  • Telecom Plus
  • Qinetiq
  • Savills
  • Cranswick
  • Tate and Lyle

"Remember - I only research high cap companies.  Theabsolute minimum market cap I use as part of my criteria is £500m  but I prefer £1 Billion and higher.

"Right now, I like the look of MoneySupermarket (trading on a P/E of under 15) and Morgan Sindall (P/E under 10). The remainder look too expensive (but may get more expensive).

"The two future earnings graphs are shown below.  Only time will tell if these future earnings 'estimates' are correct, but I'm willing to bet that they will not be too far off the mark. 

"Morgan Sindall look particularly good.  Currently trading on an earnings multiple of under 10, and the shares are in an upward trend at the time of writing this.

"Their final results are due on 25th. February and if on target, all things being equal, I would expect the shares to respond favourably.

"Another very promising company that I have high hopes for is MoneySupermarket.

"Capitalised at around £1.5 Billion, and trading with a P/E under 15.

"It operates in a specialised niche, and with their final results due out third week of February, this could be another share that breaks out from its current trading price.

"Some of the companies on my Watchlist - border on a commodity type business - so further research is required for those.

"Warren Buffett is prepared to wait months, or even years for his chosen companies to fall into his buying range.  Effectively, he's waiting for some major market correction - similar to the one we had early last year due to the Covid pandemic.

"He is, as we keep hinting, a very patient man.  He can afford to be.

"We, as minows, are restricted by the amount of cash that we have available.  But I would not be frightened to sell under-performing companies in an effort to raise funds if need be.

"For example, I really want GSK in my portfolio, but they are a high-priced stock and to add just 1,000 shares would cost my SIPP at the current price, around £14K.  That a lot of dosh for a portfolio of my size.  But I'm in it for the long term and GSK would be one of my core holding.

"I'd like to get them at around the £12.80 mark.  I'll stay patient and wait for a bad day in the market.

"Take a look at my portfolio as it stands right now.

"The star performer is obviously ITV but all the others aren't doing too shabby either.  That's over seven grand profit.  Not bad for a beginner, eh?

"Well done" said Clem, "I'll take my hat off to you.  You've got balls.  Not many no-nothings would have done what you did.  Credit when it's due."

"Well thanks Clem" replied Chris with a snigger. "It really is beginner's luck, helped of course, by a rising market.  Just imagine what I could have done had I got in April/May last year?

"Chris Nags Away At Clem To Reveal His Past"

"And now it's time for me to have another dig at you to reveal your chequered past." said Chris.  "Those were my Dad's words not mine.  He told me, when I was just a young lad, that you had a very 'interesting' start to your working life"

"Yes" replied Clem "I promised to give you tid-bits on my illustrious past.

"Like I said to you before, when I was around fifteen years old, I had to go out and bring home the bacon.  My Mum and siblings depended on it.

"All I could get back in those days, was a job as a bell boy.  The pay was abysmal, but the tips were well worth staying for.

"The job was tedious but the 'entertainment' was hilarious.  Bell boy?  It was more like 'what the butler saw.'

"I could tell you some tales."

"I thought that's what you were going to do" laughed Chris.

Clem replied to that with: "Well, do you know what?  I've been asked many times to reveal my exploits as a bell boy that I have decided to put it all down in print.  I've already made notes - d'you know what?  I think I'll turn those notes into a book."

"Whoah" said Chris, "I don't want to be responsible for you burning the midnight oil."

"No - I've got a better idea." Clem jumped in.  "Remember me telling you about that toff who took a shine to me at the hotel I worked at?"

"Yeah," said Chris, "He's the guy that taught you all about the markets, right?"

"Yes, that's right.  But what I didn't tell you is that not only was he dirt rich, but he was a real stock market stud of his time.  Because of his comings and goings at the hotel, I'll keep his name out of this - I'll call him 'Bill' from now on. But of course that wasn't his real name.

"What was really special about Bill, was that he was also a student of Benjamin Graham at the Columbia Business School - the same place Warren Buffett got his early education in trading.

"Over the years, Bill taught me more about investing than most college grads would have learned.  Yes, it was a privilege to have known Bill.  He was not only rich and knowledgeable, he was a really nice fella.  And generous.  It was mainly through his tips (and those of others) that enabled me to make what was for me - a small fortune.

"I saved every penny of those tips and invested the dosh into companies that Bill recommended and others that I chose myself. 

"In fact, everything that Bill taught me I jotted down in a little notebook.  I didn't miss a thing.  When I got much more confident, I devised my own methods of investing.  In fact, I used to get pestered for advice and information.  I lost my notebook once and some opportunist actually copied everything and went on to write a book - which became a best-seller.

"Did that pee me off, or what?" 

"Clem, why don't you publish it all again for yourself only this time put a different slant on it." said Chris, getting excited. "Roughly on the lines of our discussions here on Friday evenings.  I reckon it would do well."

"D'you know what?" said Clem, "I might just do that.  Watch this space."

"So that'll be two books to write then?" muttered Clem.

"One about my escapades as a bell boy - more like 'what the bell-boy saw' type of thing. And one about investing.

"I don't know when I'll get around to doing either of them but it's a good idea right enough"

Chris asked: "But why don't you just tell me some of the stuff when we meet up.  I'd find your tales about being a bell boy absolutely fascinating."

"OK" said Clem "I'll have a think and the next time we meet up I'll give you a little taster.  Would that make you happy?"

"Can't wait" replied Chris. "But can't you just give me a little tale now to whet my appetite?"

"You're a persistent little so and so" replied Clem.  "Prepare to be shocked ..."

"But you'll have to wait - this is neither the time nor the place to reveal such lewdness.

"My ventures as a Bellboy - I think I'll turn my notes into a book - I could see you were dead silent when I was going to tell you one of my tales.  Except they aren't tales.  Everything I reveal about that job would be perfectly true.  I don't embellish my stories.  I tell it how it is."

"If that's the case" interrupted Chris, "are you then going to reveal to us what Bill taught you?"

"Yes" I will, replied Clem "I'll dig out my old notes.  They are somewhere in the house.  He might not have been as good as Warren Buffett, but he went to the same college and was taught by the same man."

"I think" said Chris "I'm in for a real treat.  I can't wait to hear."

"What an interesting life you've had" Chris chuckled.

"Chris and Clem's Next Meet Up"

 "Let's meet up again in 2 weeks' time" said Clem.

"That'll be the 22nd. January" Chris checked on his iPhone.  "as ever, I'll look forward to that.  Let's hope we can get back to our favourite watering hole instead of this behind a screen palava"

Disclaimer:  Any individual shares discussed on this website are NOT recommendations.  They may, however, be the actual portfolio of the writer.

This website is not authorised to give financial advice of any kind.

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