Chris and Clem Meet Up #9
It's been a fairy tale story so far for Chris and his family.
Not that long ago, three and a bit months, Chris was on the verge of going seriously into debt. He was already in debt, but like most people, he buried his head in the sand.
It wasn't until he got talking to an old friend of his Dad's that he woke up to the fact that he should do something about it.
That old friend of his Dad's, has now turned out to be a good friend of his. He goes by the name of Clem but is actually the author of this website - is real name is Allison Hardy. A guy who has had a very interesting life story.
But that's the subject for somewhere else, this article carries on from the one two weeks' ago. Chris had been offered a lucrative job "down South" and his current employee offered to near match it.
That left Chris with a life changing decision to make. Move away - or stay put.
The story continues ...
"Well Chris" said Clem, "Have you?"
"And a very good evening to you too, Clem" said Chris. "Have I what?"
"Awe, come on Chris, you know we're all eager to know what your decision is about where you are going to ply your trade.
"Are you moving away or are you going to stick around and annoy us into perpetuity?"
"You have such a way with words Clem" said Chris, "O.K. I'll put you out of your misery.
"As you know Clem, it wasn't an easy decision for me, and, I don't want to flatter you in any way - but a large part of my decision was YOU."
"Now you've really got my attention. What the heck do I have to do with your decision?" replied an astonished Clem.
"Well, because you are more than a good friend. In the time that I've known you - must be getting on for 10 years or more - you have always had good things to say. Never a bad word about me, or anybody else for that matter.
"No wonder my Dad spoke highly of you."
"Oh, for heaven's sake, pass me a hand-kerchief. Enough of this hero worshipping, what decision have you come to?" insisted Clem.
"I think you know full well what it is" answered Chris, "when it came down to it, you know: pros and cons, plusses and minusses, bonus mallus, etc. I just couldn't leave 'home.' Friends, Family, and all the rest."
"Is that final then? Have you informed all concerned?" said Clem (pleasantly delighted).
"Yes - everybody. It's a done deal" exclaimed Chris.
"I can't pretend to be anything but pleased for you" said old Clem. "I kinda knew you would want to stay put, and the selfish side of me hoped that you would."
"I guess I should congratulate you on your promotion at work. When does that start?"
"Clem, I was surprised at the company's response. It goes into effect immediately. It appears that the guy whose shoes I will be trying to fill has to retire sooner rather than later, and my boss wants me to shadow him for a few months. The guy will work his three months notice and his last days here will take him up to April - or maybe sooner."
"Well done Chris," Clem butted in, "it's no fluke. You've worked hard to get where you are. Your Dad would have been so proud of you."
"Before you ask Clem, I've not stood idly by with regards to my finances.
"Everything seems to be slotting into place. I've got the promotion that I wanted (one way or another), the Christmas Bonus will nicely take care of all my Xmas spending, getting rid of the car is a huge saving for me, our credit card debt will be done with by end of February, my increase in salary will allow me to contribute even more to my SIPP.
"Yes, everything in the garden is coming up roses." stated Chris.
"My personal finances are going to be more than O.K."
"What a turn-around" Clem said quietly. "You just need those last few pieces of the jigsaw puzzle that will allow you to make investment decisions like Warren Buffett. It'll take time. But you are more than capable."
"Why don't you tell me what new gems you have learned about Buffettology since we last met up."
"Well, for starters, take a look at the spreadsheet that I have done and I intend to keep up-to-date. It's very simple. Money going into my SIPP and investments made.
"I've also added a column to keep trace of my portfolio valuation. It's a rough guide, I haven't gone to the detail of dealing expenses etc. it is more to give a broad idea of where my SIPP is heading.
"It's going to take me a long time to get familiar with Buffettology. But I will keep plugging away at it. I find it all incredible stuff.
"I know us lay people are never going to be a Warren Buffett, but I'd like to think that we can at least understand what he does and make informed decisions on what we uncover.
"There's at least one big difference - we are in the U.K. Warren and his market are in the U.S. I know that the principle is the same and finding companies that have a durable competitive advantage is just the same over here as it is over there."
"Do not let that bother you, Chris" interjected Clem, "It is all similar. How much further did you dig over the last few weeks?"
"Good question. At, first I couldn't get my head around the terms 'Economic Moat' and 'Durable Competitive Advantage.' I'm an engineer - remember?
"Then I found a few pages on your website that made it clearer for me.
"But I still didn't get it. The book I'm reading must have been looking into my mind. It broke it all down quite nicely for a dumb-bell like me. It talked about companies having a competitive advantage but not necessarily a 'durable' one.
"Ah, the penny was beginning to drop. It rammed home the point that companies could well have a competitive advantage but that may only be temporary. Short-lived competitive advantages were not what Warren Buffet was looking for.
"He was looking for those companies that had a "sustained" advantage. He chose his words wisely. He looked for those companies that would still have that competitive advantage 10, 20 years, and maybe more into the future. That's what he means by "durable."
"So that narrowed his choice down even further.
"He has already eliminated Commodity type businesses from his thinking, he has now eliminated companies that may well have a competitive advantage but not a very sustainable one.
"Buffettologists now have it all mapped out - just the small matter of selecting a company that fits the criteria and waiting for the right price.
"Ah, but those are two big unknowns" Clem jumped in.
"Yes" said Chris "I'm coming to that.
"Indentifying a company with a durable competitive advantage is the clever bit. I've not got to that stage just yet. And, even if I had identified such a company, or companies, finding them is one thing, getting them at the right price is another.
"The 'right price', according to Warren Buffett, has to be at, or below a certain price."
"So what you're saying to me, Chris, is that you've narrowed the choice down to a type of company, but you haven't yet found the means of identifying such a company AND even if you do, you have to wait until it sells for a certain price or lower?" interrupted Clem.
"Yep" replied Chris "that's just about it. Warren Buffett calls it: 'Buying a dollar for 50 cents.'
"I call it a lot of hard work and even more patience waiting for a share price to reach a level that it might not ever reach."
"Oh ye of little faith." burst in Clem. "Why do you think Warren is the richest investor the world has ever known, who rarely loses money. All the speculators in the world do lose money. Their idea of success is to be right more times than they are wrong."
"Clem, you didn't let me finish my spiel." spurted out Chris.
"OK then, carry on" Clem whispered.
"Warren knows the markets are repetitive. They go from Bull phase to Bear phase and back again. Booms and recessions. Panics. Wars. Nothing is identical but the pattern is the same. Warren knows that sooner or later, markets will react and over-react.
"He knows that even the best of company shares will get over-bought and over-sold. He calls this market short-sightedness. It stems from all the short term attitudes of private investors and institutions. That zest for short term gains.
"When markets over-react at the end of a bear market - Warren Buffett is there with his coffers of Billions of dollars just waiting to buy his dollars for 50 cents.
"Is there such a situation right now with the Covid pandemic?"
"I wish I could answer that" replied Clem.
"There certainly was back in February/March this year, will Buffettologists get a second bite of the cherry over the next six months? Time will tell.
"I must admit, I like the idea of buying dollars for 50 cents, or in our case, buying Pounds for 50 pence.
"Warren Buffett knows that cycles repeat themselves and he is willing to wait for them to come around. I bet he made an absolute fortune when the Corona virus first reared its ugly head.
"I'd put money on him doing it again within the next 12 months."
"OK, OK" snapped Clem "I mis-timed it too. So we know that Warren has bags of patience when it comes to waiting for the right price to present itself. That leaves just one priece of the jigsaw missing - how does Warren pick the right company?"
"That's a great question Clem" remarked Chris. "Unfortunately, I don't have a great answer. I'll go back to the drawing board and try to find out more. Once we know how Warren finds these companies we are off to the races - so to speak!"
"Clem, I'll tell you what I have 'discovered' for my own amusement"
"Oh, tell me more" said Clem genuinely excited.
"On my iPhone I have downloaded the Yahoo Finance app. Just search in your App Store for 'Yahoo Finance.' It's free for the basic version but they do have a very cost effective Premium version. Check it out.
"It's a clever little information provider. I can't believe it's free.
I can program into it all my favourite shares, but what I have done is I've downloaded the FTSE 250 constituents. All of them and a few more besides."
"Wow!" exclaimed Clem. "How long did that take you?"
"Not long. But I think worthwhile." said Chris.
"You may think this rather simplistic but I'm going to use this app as a kind of a crude (very crude) way of picking out attractive looking shares for further study.
"What the heck are you talking about?" asked Clem.
"Patience my friend. Patience. All will be revealed.
"I've discovered on my iPhone in the Yahoo Finance app a way to identify 'possible' under-valued shares.
"It's still early days yet, I'm kinda playing around with this but - take a look at the two companies I have come across that I think may well fit the bill."
"First up - Imperial Brands. Do they conform to Warren Buffett's criteria. The word 'Brands' in their name is a partial give-away. They are what Warren calls a company with competitive advantage, and they have been around for a long time - so I guess you could say they also have a durable advantage. That, for me is the first box ticked.
"Secondly, they are currently trading on a P/E of around 13.5
"Thridly, they are trading at, or near their 12 month low and almost at a 10 year low.
"Fourthly, the Dividend Yield is a toppy 11.3%
"Looking even further into the tobacco sector, British American Tobacco is another company that is trading on similar levels. Their P/E is even lower at just under 9. And on a Yield of around 8.5%
"A glance to the left shows the front screen for Imperial Brands in Yahoo's freely available app.
"You can observe that the Market Capitalisation is £11.54 Billion and its P/E around 13.5
"You can also observe that the share is trading at a year low of 1,219p
"The number of shares traded is around 1.4 million which is a little under its average daily number. So nothing special there, but sometimes you may see a volume spike which could be a buying (or a selling) signal.
"As I mentioned earlier, this is a very crude way of searching but it's a start. And it should prompt you to dig a little deeper.
"I now know that I will put these two companies on my watchlist, do more research, and if positive, begin to look for an entry point."
"Here's another company that I dug out. Legal and General.
"Does this company conform to Warrren Buffett's criteria of being a durable competitive company?
"I think so. And it's been around for years. And if it can keep away any predators, will be around for a lot longer to come.
"It is trading on a P/E of around 9.5, is capitalized at £11.6 Billion, and yields around 9%.
"Warren Buffett likes insurance companies. As well as Legal and General I picked out Aviva which is trading on a P/E of 5, is capitalised at almost £11 Billion and yields a lowly 2%.
"I was going to include RSA Sun Alliance but only this past week they have been the subject of a takeover bid from a Canadian company, which resulted in the share price shooting up over £2
"Wouldn't they have been a good buy for my SIPP?"
"Good heavens, Chris" said Clem scratching his head. "You have been a busy bee. I congratulate you on 'stumbling' upon something so simple. I think the Yahoo app is an excellent little tool.
"Of course, you're gonna need to do a lot more research but it looks like a very good tool for a quick look. I like the graphs that it produces and how you can vary the time axis.
"Very useful indeed. Haven't you done well?"
"I've tried quite a few things whenever I find the time. What I'd like to do next is make a list of all 'qualifying' companies from the Yahoo app and put them on my watchlist. I've already spotted some companies that pass the P/E criteria but unfortunately are commodity type businesses. And I want to follow Warren Buffett's principles as close as possible" said Chris.
"And of course, I will continue to read up on all things Warren Buffett."
"Now then Chris" Clem said in a loud voice, "let's meet up again in two weeks' time - that'll be the 20th. November."
Chris replied, "I'll see you then. Take care old man."
"Don't be cheeky" you young whipper-snapper.
"I don't mean to be cheeky - I'm just excited with my lot and can't wait to get stuck into everything in a bigger way." Chris said apologetically.
"Oh, to be young again" gasped Clem.
"You remind me so much of your Dad"