Chris and Clem Meet Up #8
Clem has been tutoring Chris, a 33 years-old young, family oriented engineer.
Clem was a generation or three older than Chris and they met via Chris' Dad, who had known Clem for many years.
Then, one evening down at the
Golden Lion, their favourite watering hole, they got talking and Clem
decided to give Chris some friendly and timely advice.
Friendly because they knew each other and timely because Chris was on the verge of sinking into a downward spiral of living beyond his means.
Clem got 'wind' of the potential dire condition Chris could have fallen into and offered some friendly advice. This advice was to get himself straight with his household finances and to make sure he was salting enough money away for his retirement.
Until the two of them got talking, Chris was guilty of both sins - falling into debt and not saving for his retirement.
Clem put Chris on the 'straight and narrow' and has turned out to be the 'perfect' student.
In an effort to improve matters, Chris applied for, and was short-listed for a better-paid, new position - albeit, 300 miles away.
The story continues ...
"Hi Clem" said Chris quietly, "How are you this week?"
"For an old 'un, I'm doing just fine." replied Clem, "any news on the job front?"
"Yes," Chris replied.
"If I wasn't confused before, well I am now."
"What do yer mean?" said Clem
"I've been offered that job down South, and I'm getting real nervous about the whole carry-on Clem."
"I got a phone call three days ago and confirmation by eMail that I was their preferred candidate for the job. Sounds great doesn't it? Then why don't I feel great?"
"Awe, come on Chris. It's just the excitement of the situation" said Clem
"No it isn't" retorted Chris "It's three days since I got the word and the intitial rush of enthusiasm hasn't wore off because there was never any there in the first place."
"I don't think I've thought this whole thing through properly. I think I might have got myself tangled up in a whole lot of confusion: firstly about the money - it could be a lot more than I'm on now - if not directly, then indirectly. And secondly, the whole idea of change somehow rankles with me."
"I'm flattered that they want my services, but it's not a big thing for me, it's a massive thing."
"I've talked this over with Soo - more than once. I think I'm beginning to get on her nerves. I'm not frightened of change, it's not that. I guess it's the fear of the unknown. They say: opportunity only knocks once, but I'd like to know - who "they" are?"
"To be honest Clem, I really like it where I am. I like where I live. I like where I work. I am near friends and relatives. I don't really want the up-heaval. What I do want is to get on the right side of my finances and make sure I provide well for our future."
"I fully understand where you are coming from" said old Clem, "why don't you talk to your boss?"
"For once, I'm ahead of you!" remarked Chris. "I thought long and hard about whether to talk to him or not. But I get on really well with my boss and he's a fair bloke to work for. I was brutally honest with him - I told him everything. In return, he was honest with me"
"He fully understood and was sympathetic. He asked me to be patient. But not for long. He told me that in the New Year (only two months away) there will be a vacancy as a senior project engineer as a long-serving engineer was in poor health and wanted to take early retirement."
"He explained to me all the conditions of this 'promotion' - stuff like salary, benefits, car allowance. Goddammit, the deal would not be too far short of what this new offer was proposing."
"Now can you see why I'm all confused. I have a big decision to make. And I have to make it by the end of the month. That gives me one week to decide."
"Whichever offer I opt for, it'll be a huge increase in my finances. I had already found cheaper car insurance that would save me an extra £30 a month. But now, I am in the envious position of not worrying about car insurance at all."
"Both jobs are offering a compnay car, or a car allowance. The job down South is offering a better salary but not by much. Both jobs are offering very similar benefit packages in terms of sickness and health benefits."
"Do you know what? All things considered, I might just stay put. I've worked out how much better off I would be be getting the promotion in the New Year - on the car alone I would be saving over £500 a month."
"The increase in salary would be another £400+ a month (about double that if I accepted the job down South). I would be about £900+ a month better off - and that would be the worst case scenario. O.K. I'd pay a little bit more tax."
"Another decider could be the Christmas Bonus we get each year, that's usually around £1000 depending on the profits of the company. And there's the annual salary increase next April which is generally around 4% or 5%"
"With just the savings on the car, I could afford to put another £500 into my SIPP each month. "
"I've been impressed with what I've read about Warren Buffett so far. I've got a lot more to learn but it is slowly sinking in."
"Clem - by the time we next meet up, I will have made my decision. There are advantages and disadvantages of both options. But a choice I have to make. I'm lucky really - it's a win/win situation."
Clem, with a wry smile added: "I'm pretty confident which option you'll take - prove me right"
"D'you know what Clem? Even before I make my choice of job, I've decided to up my SIPP contribution to £500 a month - that's only an extra £300 and when I actually get settled in to my new position I'll up my contributions again."
"Knowing what I think I'll know by reading all about our hero Warren I will want as big a pension pot as possible."
"Alright!" replied Clem, "now let's hear about what you've learned this past couple of weeks from your study of Warren's techniques."
"Sure" said Chris, "as you know I was reading a book called Buffettology, which I consumed, not fully understanding everything in there, but a second reading with some note-taking will probably rectify that.
"This last week I've been reading 'The New Buffettology" another book co-authored by Mary Buffett and David Clarke - themselves both confirmed Buffettologists. I am now getting so 'into this' that I want to be a part of this 'Buffettology Club.'
"I am beginning to see where Warren is coming from in his thinking. For example: you may have heard that horrible expression - "playing the stock market" - not many people last long at that game. It's for the 'professionals' and definitely not for amateurs.
"Everybody wants to think short term. And that's their downfall. The key is the difference between the words 'investing' and 'speculating'
"Everybody likes to go for the 'Thrill of the Kill" - very few people, especially newbies, have the patience to "invest." Most people, especially newbies, lose money.
"Investing is a very worn-out phrase. Not many people understand what it means.
"Here's what I discovered about Warren and his opinion about the punters who 'play the stock market.' Warren Buffett started off with $105,000 and has turned that sum into more than $90 Billion (and still counting). And he has grown that sum of money not by 'playing the stock market' but by playing the people and the institutions who play the stock market.
"Wow, Chris. Profound words indeed" said Clem.
"Yes, I know. But they are not my words Clem, they are the words of Mary Buffett and David Clark who co-authored the book I am reading (The New Buffettology).
"In the book, the pair go on to explain that Warren is a contrarian investor alright, but not in the sense that we might understand is contrarian. He possesses another trait that escapes most people - patience.
"Warren is not interested in 'the flavour of the day' - the type of company shares that speculators, which include institutions, gobble up on any good news and dump at the first sign of bad news.
"He just doesn't have any truck with short-termism. He identifies a company (more on that later) and has extraordinary patience to wait for the right time to buy. He loves to buy when it's all doom and gloom.
"I can only imagine how much moolah he made from the Corona pandemic. He would have had Billions ready to invest and he would have filled his boots at the right time. My hunch is that he would have made Billions in the space of a couple of months.
"I bet I'm not wrong.
"Anyways, back to the real world. I mentioned last time we spoke that he has found out that there are two kinds of company in the market place. One, which he calls: 'Commodity type businesses' and the second which he has dubbed: 'Consumer Monopoly type businesses.'
"The former he shies away from, the latter type of business possess what he has termed as having a 'durable competitive advantage.'
"However, in his favoured group of companies, it's not enough for the company to have a competitive advantage - it must be 'durable.'
"And by 'durable' he means: can the company keep their monopoly going? And by 'competitive advantage' he means those companies that have a brand name product, have little competition, have a monopoly (e.g. Coca-Cola), have a great potential for long-term growth.
"I like the way he describes each group of company. Instead of calling them 'Commodity based businesses' and 'Consumer Monoply businesses' he uses simple everyday terminology and calls them 'sick' companies and 'healthy' companies respectively.
"Genius, I thought. So obvious, but yet so perceptive.
"Now it's beginning to get clearer and clearer to me. Invest in 'healthy' companies and leave well alone the 'sick' companies.
"He goes further with his description of the 'sick' type of company. He states that they are in a price-competitive industry that sell commodity type products or services. Which very roughly means that all their competitors are trying to beat them on price.
"Conversely, the 'healthy' type of company sell a brand name product or service that it can sell at a price that may have zero competition, that is, a monopoly.
"I thought to myself - surely it's not that easy? Well, yes it is. Easy to understand that is. Easy to identify? Now that's another matter.
"OMG Chris, you sound like a speaker on circuit. You seem to have grasped the basics very well indeed." said Clem.
"No, not really. I still haven't got to the bit that idendifies these 'healthy' companies and the 'sick' ones to avoid. But, I know Rome wasn't built in a day. I've given your website more than a good coat of looking over, and you do a good job of explaining most things."
"Yeah," replied Clem, "But I don't think I'll ever grasp all that Warren has in his head. Nobody will."
"Copy that - as the Yanks would say. LOL"
"Chris, you've mentioned 'sick' and 'healthy' companies - can you give me a few examples of each - just give me an idea of what each type of industry belongs to each group" asked Clem.
"O.K." replied Chris, "But it's not as clear cut as that. Although I will give you my best understanding of them so far.
"Examples of 'sick' industires are:
"Examples of 'healthy' industries are:
"Healthy companies are those with brand loyalty - they sell products that people have just got to have. Products that they can't live without.
"Also, I suspect that in both type of industry - sick and healthy - there will be exceptions.
"I need to accelerate my reading. Now that this job divergence is sort of done with, I think I can concentrate more.
"The one thing I want to do, and I know it isn't going to happen overnight, is to get some pennies into my Pension Pot so that when an opportunity does come along, I have the funds available to take advantage."
"Ah!" Clem butted in, "I was going to quiz you on that. What is the status of your SIPP right now?"
"I only started my SIPP in August. I started putting in my monthly contributions of £200 back in August and my Mom and Soo's Mum and Dad cotributed 5 Grand each which means that I have contributed £10,600 in total thus far.
"I have made purchases (excluding dealing fees, and SIPP fees) of 1000 BT shares @ 99p, 5,000 ITV shares @ 60p, and 2 x 5,000 Llyods Bank shares @ 28p and 26p. The total cost of purchases being £8,670 (again, excluding costs).
"I will construct a spreadsheet for all future transactions otherwise it will end up being a great muddle.
"Starting next month (November) I will increase my SIPP contributions to £500 a month. I've done my sums and with savings on my car alone, I can easily afford to do this. And, come the New Year, when I either accept the new job or take promotion where I am now, I will be able to increase my SIPP payments even more.
"I reckon to £700 a month. But that's not all, next April I will get a rise, and will be able to increase my contributions still further. I'll make it into a round £1,000 a month.
"And here's the icing on the cake. I didn't realise it, but I had some endowment policies from way back when. They are nothing to do with my mortgage, that is a repayment mortgage. The policy is about 10 years' old and probably worth around £15,000. I will "cash" that in and put that into my SIPP as well.
"My thinking being that I can grow my SIPP faster than the insurance company can grow my endowment. So - come the New Year, or before, I should be in good shape to do some serious Buffettology stuff.
Clem was getting a tad worn out by now but had this to say: "Chris, you are a remarkable young man. You are only in your early thirties and you already have more than most folk have at retirement age. You are destined for great things.
"You now need to really read up on Warren Buffett and put his methods into practice. It will not be easy, there is a lot to learn. But you seem to be up for it.
"By the time you are 40 you'll have 100 Grand Plus in your SIPP. What a future to look forward to. Go for it."
"Now then Chris" Clem said in a loud voice, "let's meet up again in two weeks' time - that'll be the 6th. November. Expect some fireworks!"
"Very funny," Chris replied, "see you then. Take care."