Chris and Clem Meet Up #14
"Chris a young engineer and Clem an "old" hand meet up regularly (every two weeks) for a few beers and a chat - mostly about Chris' retirement savings.
Chris' late Dad was a good friend of Clem's - that's how the two came to know each other.
These regular meetings started purely by chance. Chris just happened to mention that he was living beyond his means and his financial prospects did not look good.
Clem knew exactly what the solution was for Chris and set about giving Chris some sound advice. Clem was not a financial advisor but had spent a lot of time amongst people that were financial experts. He wanted to share his knowledge with Chris.
This is the 14th. article in that series.
The story continues ...
With the pandemic showing no signs of relaxation, the pair had to settle for conversing via Facetime - again. But this meeting, due on the 22nd. got pushed back to Friday the 29th.
"Had your jab yet, old man?" said Chris.
"Cheeky young whipper-snapper" replied Clem. "Yes, I have been jabbed, never felt a thing.
"I'm really impressed with the way 'they' have rolled this thing out. Logistically, it must be a nightmare."
"Oh, I happen to think that the army was the best option. We're just about up to half a million jabs a day. Incredible. And even more incredible, for some people it's still not good enough.
"What is it with people? Do they just like to moan? I'd like to see anybody do this vaccine roll-out any better than it has been."
"OK" said Clem, "enough about Covid, we could talk all night about it, but let's not.
"What are your thoughts on the markets?"
Chris cleared his throat and spluttered: "I'm not a great fan at all just now. The markets do not seem to want to go up. Every day it's down, down, down.
"My shares are well off their peak and show no sign of doing anything other. The US market looks over-priced and the UK market, by comparison, looks under-priced.
"It all looks ass about face. I'm certainly not tempted to buy any more - just yet. I may even take some profits if the situation deteriorates much more. But - there again, all my picks are intended for the long-term. Having said that - I do not want to let a profit run into a loss.
"And long term or not, I do not want to be holding any shares if we are to experience a full-blown Bear market. What do you think Clem?"
"I'm of the same opinion. I'm American and I tend to look at that market closer than I do the UK market. I can't believe it (the Dow Jones) is flying high like it is. That's the market that I think is ready for a fall. And if it does, the UK market will inevitably follow.
"But I'm no financial advisor. And I don't have a crystal ball. Your guess is as good as mine.
"You're right to hang in there - for now. But watch out for any bad news."
"Yeah" said Chris, "we are in uncertain times right now."
Clem asked Chris: "What research have you done since we last spoke?"
"I've expanded my watchlist a little. It's very time-consuming, but playing with numbers is kinda therapeutic for me.
"You know how I crudely select my shares. I look for companies with reasonable P/E ratios and a decent track record over the past 5 years - 10 years would be better but it's hard for me to get information that old.
"Right now, all my research is based on just 5 years of figures. It's still OK but I'd prefer to have 10 years worth.
"As you know, I have a criteria for selecting companies to invest in. And this time of year seems to be a good time to just re-cap what my philosophy is."
"Go ahead" said Clem, "I'm all ears."
"Let's not forget Clem, I'm hooked on this saving for retirement thing all because of you."
"Should I be flattered or what?" replied Clem.
Chris replied: "Well you can be, but just about everything I know and have researched, has been a direct result of what you told me to do. When this pandemic palava is over, and we get back to civilised ways - I think I owe it to you that I buy all the beers.
"Wow!" said Clem - taken aback. "Sounds like I've got a fan club in the making."
"Let me re-cap where I am right now" replied Chris, "and you correct me as I go along.
"When we first started on this "journey" it was by accident. In conversation, I mentioned that I was struggling to make ends meet and you looked at my in-comings and out-goings and saw straight away what my problem was.
"I was spending more than I earned. But more importantly, you noticed that I wasn't tucking any moolah away into a private pension. Sure, I contributed to a works pension but that - you bluntly commented on - would not be enough to support me in later years. Let alone - perform very well.
"Your answer to that was for me to set up a private pension - specifically a Self Invested Personal Pension (SIPP) with a reputable provider. But, of course, still retain the contributions to my works pension scheme.
"I went away that evening back in July - buzzing. I researched and read everything I could get my hands on about SIPPs. Before the end of that week I had opened up an account with one of the leading providers and was so eager to get going my wife Soo also got the bug.
"So much so that she mentioned it to her parents and they kicked it off for us with a ten grand gift. At the time, I could only afford to contribute £200 a month to the pot. But as soon as I got my finances sorted, and got a promotion at work, my monthly contribution is up to £500 a month with further increases soon. I get my promotion at work and my salary from April will be a nice uplift on what I'm on right now.
"Since I started my SIPP, I have been lucky with my purchases and the valuation of my fund was recently around the £35K mark. Not bad for half a years' work.
"Clem - you advised me from the very beginning to invest for the long term. Not to treat my SIPP as a vehicle for gambling (as so many others do).
"Your words were indeed wise. In fact, you went further, you advised me to study Warren Buffett - the richest investor ever to walk the planet.
"As of now - I have probably read four books about him and his methods. Once I got started I couldn't stop. What a genius he is. But ...
"I wouldn't want his life. Yes, he's mega rich - $90 Billion and still counting. But I will be happy with a fraction of a fraction of that.
"I'll now give you my summary of what I've learned so far ..
"Chris' Own Share Selection Criteria"
"Warren Buffett, ever since he was a small boy has demonstrated his entrepreneurial abilities.
"He was always fascinated by numbers.
"He inevitably moved into a career to do with money and learned from the best in his era whilst at University.
"In fact, he was that good, he agreed and dis-agreed with his mentors. A mind of his own you might say
"His chief mentor way back then, was Benjamin Graham who introduced Buffett to a principle known as 'Value Investing'
"That was around 70 years ago and Warren Buffett has since made history. What he does is complex - far too complicated for us to comment on (let alone understand it).
"But, the books written about him - most by his ex-daughter-in-law, have explained his methods in plain English so that the rest of us can comprehend it all.
"A lot of the detail has already been explained in our Friday night meetings but here is a (very) broad synopsis of how I use his methods - albeit with my own slant on things. That is to say, I'm hard-working, but I'm no genius. I have to break things down into workable pieces. A little bit like putting a jig-saw together.
"Warren Buffett too likes to invest for the long term. He's a 'buy and hold' kinda guy. But that doesn't mean he never sells his investments. But he's made most of his vast fortune by BUYING at the right price.
"He is known to have spent weeks, sometimes months, researching his investments. Compare that to me - I spend a considerble time on research but it aint weeks or months.
"You see - Mr. Buffett has distilled a lot of his research principles into easy-to-understand steps. If you want more detail than what I am going to give you now, then I suggest you take a look back at previous logs of our Friday night gatherings.
"What I'm going to give you right now, is the summary. OK? Here goes...
"Of all the stocks in existence, Warren does not invest in something he doesn't understand, nor does he invest in young companies, or small companies. I have defined what my criteria is for what companies to look for.
"I dont consider any company with a market capitalisation of less than £1 Billion. I also eliminate any company that hasn't been trading publicly for 10 years or more. I may relax my company size to around £500 Million if the company is exceptional.
"So no 'penny' stocks for me. I want to be an investor, not a speculator.
"Secondly, Warren Buffett has defined two types of company: one, which he calls 'sick' companies or commodity type businesses and two, he calls 'healthy' companies or consumer monopoly type businesses.
"Wow! I thought to myself, how many people would have worked that one out? He has effectively cut out about a half of all companies. He regards them as 'sick.'
"And by that he means they are inconsistent. Making profits in the good years and losses when times get tough. He reckons too that they are expensive businesses to run - their machinery craps out all too often and they run relatively large debt. Think Automobile manufacturers and Mining Companies.
"The 'healthy' companies that he likes on the other hand, make profits in good times and bad. Their machinery doesn't wear out too quickly, and they don't carry large debt. Think Unilever and Supermarkets.
"But Mr. Buffett's really clever reseach looks for companies with low Price to Earnings ratios and consistent earnings growth over the years - preferably 10 years but 5 is good to go with.
"I have crudely taken his findings and simplified them to make my research easy for the ordinary man. That's us then.
"Show me how you have simplified Buffett's reseach" asked Clem
"OK" Chris replied "you may not agree with what I've done but it seems to work for me.
"I have taken Warren's criteria and concentrated just on a company's earnings. I know Warren looks at everything, earnings, dividends, profits, debt, and, and, and ...
"But I do not have his expertise - nor will I ever have."
"So here is what I do. I choose a consumer monopoly type company. How I do this has been explained thoroughly in previous meetings. And then I choose a company with a lowish P/E ratio (say under 25). Not all consumer monopolies will have this low a P/E - and some companies will even make losses. Those ones are not even considered - not even if they are a red hot tip in next week's Investors Chronicle.
"I stick to my criteria.
"Then I narrow my choices down even further by finding out which companies have increased earnings year-in, year-out over a 5 year period, but better still - a 10 year period.
"And then ...
"I take the view: if the company has made good, and increasing earnings year-in, year-out, then it is reasonable to assume that they will continue to do so.
"Does that seem reasonable?"
"I'd say yes to that" chimed in Clem.
"Yeah, I thought so. Then I had my doubts - it can't be this easy. So - I'm in experimental mode right now. Time will tell if my 'crude' system works or not. My guess is that it will work because I emulate Warren Buffett and exercise a little patience. I will only buy if the price is right.
"I will not pay silly P/E prices. If I have to wait months, or even years, the companies on my watch list will be closely monitored. Not all shares rise (and fall) in synch.
"You asked me Clem what research I'd done. Now you're going to get an answer to that.
"As you already know, I like Glaxo Smith Kline (GSK) both for what they do and as an investment. At the moment, they are still too pricey, but they are getting close to my entry point.
"I also like Imperial Brands, British American Tobacco and Hargreaves Lansdown.
"My complete watch list right now (I'm always looking for others) are listed below, and in no particular order.
"I am showing a really good profit on the companies I have bought so far, if I can get some of the under-mentioned companies at the right price - I think I will do well. The key is: at the right price.
"I've even attached a few graphs with my earnings projections super-imposed. The graphs are hand-drawn but I'm working on getting them done by computer when I can fathom out how to do it.
"Here's the list:
British American Tobacco
Tate and Lyle
Hilton Food Group
"I'll continue to find others. In fact, not all of the above will become buys. Some will, some won't.
"Just below, I can show you typical research that I've done.
Telecom Plus - I've watched this company grow from humble beginnings to a Billion Pound company.
Tremendous achievement and the man behind its success was Charles Wigoder.
At the present time, their shares are far too expensive but they are on my watchlist because when the time is right - whenever that may be - they will be a screaming buy.
I have only pencilled in 5 years worth of earnings but assumed that they will make consistent earnings growth well into the future. I'm confident that this company will eventually become a FTSE-100 constituent.
The current P/E is just over 25 - far too expensive but one to keep an eye on. A typical 'forever' stock.
Hilton Food Group - another one of my favourites.
Capitalised under £1 Billion and trading on a P/E just over 20.
Nowhere near a buy - yet. But I will watch this one very closely.
The shares are trading at just over 1000p - still way too high. Any severe market downtown and they will be worth picking up. I'm looking for a price as low as 700p.
Bunzl - another large company (£8 Bn) with consistent earnings growth.
The P/E is just over 20 which is way too high. But it's on my watch list for a reason.
Another strong buy but only when the market experiences its next large down-turn.
"There you go Clem. How did I do" said Chris with a smug grin.
"Boy done well. Really well." replied Clem. "I can see that you like playing with graphs and numbers - let's hope you can turn that gift into hard cash over the coming decades. I have a feeling that you will do very well."
"Thanks Clem." replied Chris, "coming from you, I really appreciate those words.
"I'd just like to finish with a comment. Was the research that I've done easy? Could anybody do it? OK, it's not a fully proven technique, only time will tell. But I can't see it not working.
"Why? Because the profits made will be dependent on the low prices paid. For example, I wouldn't be interested in buying Telecom Plus at current levels, but if the price were to pull back under 1000p - I could be tempted
"And it's the same with all the companies on my watchlist. How many buys are there on that list? Answer: none. Some will fall off the list - of that I can be sure. But most will not and at some point in the future, will be available at the right price.
"Stay tuned to this series of articles and witness the progress.
"If you want your SIPP to grow at 10%+ compounded every year - buying top quality shares at the right price is the way to do it.
"Warren Buffett does and now you can do it. I defy ayone to say that they haven't got the time to do simple research like that shown here.
"Let's meet up again in 2 weeks' time" said Clem.
"That'll be the 12th. February" 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 soon, instead of this behind a screen palava"
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