Chris and Clem Meet Up #6
The last time the pair met, Clem discovered that Chris was living way beyond his means and gave him a stern talking to.
He didn't want to hear about any plans that Chris had regarding his portfolio until he got his household budget sorted out.
Quite simply, Chris was living beyond his means. But the good news was that his earnings were good and stable, so all he had to do was cut down on his expenditure here and there.
As far as any investment guidance Clem gave to Chris was that he needed to find a good book about Warren Buffett and study it. Clem wanted to see some proper share analysis done by Chris and not just buying on hunches.
To add to his workload, Chris was applying for a new job, hundreds of miles away, which would mean that he and his family would have to re-locate.
The two of them met, as usual, down at the Golden Lion at 8 o'clock on the Friday - two weeks after their previous meet.
"Hi Chris" shouted Clem. "Looks like I'm always here before you. What're you having?"
"Hello, Clem, I'll just have the usual. Boring I know, but I'm a creature of habit."
"How's the last two weeks been for you?" asked Chris.
"Oh, you know, when you get to my age, every day's the same. I still read a lot. I get out every day - love my exercise. Got one those Fitbit thingies. Keeps me young."
"How about you?"
"Chris replied, yeah, good. A very busy couple of weeks."
The two of them sat themselves down and started their conversations.
"Before I report back to you on my research stuff, I just gotta tell you about the job I applied for." Chris said in a rush.
"Can't wait" Clem replied interestingly. "How did your interview go?"
"Well," said Chris "It was only a telephone interview, but it went well. Very well. I have a face-to-face interview next week - on Monday in fact"
"I think I sort of impressed them. And I was a little impressed by them. They almost offered me the job there and then - or at least that's what I sensed. But they have to follow their PR guidelines and invite me down to be shown around their complex and other formalities."
"If I were successful, and if I were to accept anything - they explained all about salary and benefits - they want the position filled in three months, that is, by the end of the year."
"But the big attractions are the terms. The salary will be more than I'm getting right now, but not by much more. But the benefits are unbelievable. A much better company pension, BUPA, more holidays, all the usual stuff but what caught my eye was that they were offering me a company car, and a very nice one at that. Oh, and I nearly forgot, a very generous re-location package."
"Clem, if I were offered that job, all my money worries would be gone - at a stroke. One of the big problems I have right now is my car payments and all the expense that goes with it. I'd probably save the best part of £500 a month - just by getting rid of the car."
"I'm now seriously thinking - but not counting my chickens."
"I'm really pleased for you, Chris. And you have a very difficult decision to make. Make sure it's the right one." Clem said in a sort of disappointing voice" and remember, it's not just about you, you've got Soo and wee Charlie to think about as well."
"By the time we meet up next, I will have had that second interview and probably decided which way I'm going to go."
Clem said: "Yep, it sounds like you will have all your budget problems sorted for you. And with a better company pension to add to your DIY pension. I bet you'll be able to retire early when the time comes. A great position to be in."
"But let's assume, for the moment, that either you don't get offered the job or that, for whatever reason, you turn it down, have you taken action on your budget to iron out those problems?"
"I sure have" replied Chris.
"Just take a look at my bottom line for this month - big improvement, eh?"
"And there is more to save when my car insurance is up for renewal next month."
"OK" said Chris, "it's still in negative territory but it is heading in the right direction.
"There are some things that just can't be reduced immediately. Like my car insurance which is up for renewal next month."
"But, that may turn out to be a red herring if I take the new job."
"Yes, I get it" replied Clem, "you have made a big effort and I know there's more to come. Now, let's look at your progress on the investing front?"
"Ah!" gasped Chris, "all good intentions and a little progress but not as much as I had hoped for. This past few weeks have been a little hectic - to say the least."
"But, I have made a start and set a goal to do something EVERY day in my quest to learn all about the Warren Buffett way of valueing companies."
"I'm pleased to hear that" replied Clem " but what have you achieved this past two weeks?"
"I'm all ears!"
"First things first," said Chris, "I realise the folly of the shares I have bought until now. Lloyds Banking Group are showing a £150 loss, BT Group a small profit, and ITV a small profit."
"All three of them, a total mistake. Maybe not a big one, but bought on the basis of no research whatsoever. I'll have to live with that. The only good thing is that I am a commited long term investor. Maybe not a "forever" investor, but certainly not a gambler."
"Please to hear it" said Clem, "but once again, what have you found out this week?"
"OK, OK, I am getting to it. You asked me to get hold of some information about how Warren Buffett trades so I bought three books - all by the same authors - Mary Buffett (who used to be Warren's daughter-in-law) and Richard Clark (a dedicated Buffettologist).
"Those three books are:
"I have read the first one, and will read the second one this week, followed by the third. Then I will read each of them again - but this next time around, I will take notes and really take-in all the words of wisdom that are between each and every page."
"OK," said Clem. "But what have you learned so far?"
"The big take-away from the book: Buffettology, was that Warren Buffett classifies companies into two categories:
1. Commodity type businesses
2. Consumer Monopoly type businesses
"He worked out somewhere along the way that Consumer Monopoly type businesses were the more profitable type of businesses. His findings were that Commodity type businesses had to replace expensive plant more often than Consumer Monopoly type businesses had to, which gave them a massive head start in the earnings game."
"Furthermore, the Commodity type bussiness had to replace large, expensive plant whereas the Consumer Monopoly type business had much cheaper plant to replace and much less often."
"This disparity went straight to the bottom line."
"Warren's philosophy being that he would not even consider Commodity type businesses, and therefore eliminating a large proportion of companies. Besides, he reckoned he didn't understand that type of business anyway."
"Brilliant" said Clem, "But what else did you glean from reading that first book?"
"Well, after reading that revelation about the two types of companies, I kinda kept thinking to myself I could set up a spreadsheet of all the medium to large cap shares and monitor them. A lot will be eliminated as a result of being Commodity type businesses, but the rest would be scrutinised."
"So I set up the following spreadsheet. It is nowhere close to being finished, as I am thinking of other fields to add. But I've made a start. Take a look, and tell me what you think?"
"I have constructed the spreadsheet in order of market cap. Unfortunately, this will change as prices fluctuate.
"The list is confined to just the FTSE-100 companies but I intend to include all companies with a market cap of half a Billion UK pounds.
"I have added columns for "Yield," "P/E", and EPS ("Earnings Per Share").
"My intention is to add further columns that will show five years, and maybe ten years, earnings.
"I am still studying Buffett's techniques so I can't comment much more because I don't know. I'm still a novice, but I'm beginning to understand what Buffett does when evaluating companies."
"My biggest challenge right now is knowing how to categorise companies. Are they Commodity type businesses or Consumer Monopoly type businesses?"
"And, even if they are the latter, should I discard them if their earnings are negative?"
"There are such a lot of unanswered questions. I'm gonna need your help Clem."
"I can see that you have put some time into this. You really do have a great attitude. I'm sure that your employers think that you are an asset to them. Your prospective new employer will probably think the same." replied Clem.
"Yes, I'll help you wherever I can" Clem added.
"For now, I suggest you carry on what you are doing. You have a lot on your plate right now. Let all that settle and progress from there. You have made a good start, except for the shares that you bought, but there is a long, long way to go."
Clem suggested that they next meet up in another two weeks.
"Let's re-convene in two weeks Chris. That would be the 9th. October. You will have had your face-to-face interview by then and maybe you will be somewhat wiser."
"Don't forget to keep chipping away at your income/expenditure, you are still living beyond your means. You need to whittle it down a wee bit more."
""Yep," said Chris, "I am aware. It's on my mind. What an eye-opener that was. I had no idea we were over-spending like that. I owe you big time Clem."
"No worries" Clem said, "in fact, the next time we meet I'll have something to reveal to you. I'll leave it until then. Take care, and look after that lovely family of yours."