Where ever you live, you have a bias for that country, for you live there. However around the world there are companies doing similar things that companies in your country are doing. It is good to look outside your borders to see if other companies are undervalued although there are risks for doing so. There are currency risks, taxes, and you need to set up a easy method to follow the companies either on a macro or micro level however there is money to be made outside your borders.

Last month Craig McGee of Ullman Group at Richardson GMP in Toronto looked at companies from around the world using Bloomberg and if you had invested in the top 20 stocks every 3 months, there would be changes but your return would have been 18% as opposed to 6% on a MSCI World Index fund. Another reason to buy quality.

Mr. McGee and Mr. Ullman used the following criteria:

1. market cap above $ 1 billion.
2. comparisons of price to earnings (P/E), price to cash flow (P/CF), price to book (P/B) and price to sales (P/S) ratios.
3. return of invested capital (ROIC) of greater than 5%
4. dividend yield

Company       Country                Mkt Cap     P/E      P/CF     P/B     P/S    ROIC    DivYield

Tongyang Life  South Korea     1.10            6.46     3.87      0.52    0.19     47.35     5.44

Peugeot            France                 11.98          7.59      1.69      0.92    0.20       9.33     0

Frontline          Bermuda              1.30           2.22     1.31      0.89    0.34        9.85     19.21

Meritz Fire Ins   South Korea     1.51            7.92    4.27     0.84    0.26       41.94      3.73

Nissan Motor   Japan                  41.94          7.90    3.50      0.89    0.34          5.36       0

Cosan                 Brazil                    1.87           8.56    1.65      0.97     0.44          6.31      1.31

EDP                      Brazil                  2.73           8.28     3.34      0.89    0.72         9.67     4.14

BKW                   Switzerland        2.40         7.54     3.72       0.84    0.82         9.65      3.66

Hyundai Insur  South Korea      2.50         10.04   7.73       0.72    0.20        42.99     2.40

Lotte Chemical  South Korea    8.63         7.83      3.76      1.16     0.80         12.11       0.88

Mr. McGee did 20 stocks and this chart was printed in Globe and Mail on August 23.

Linking to dividend paying stocks, we all have a bias and that is good. Recognizing it makes you a better investor. Most people start with their home country and then branch out to whatever industry sector you are in, that is normal. This is what you concentrate on and can easily follow so you should know when the cycles are. All stocks around the world go through the economic cycle, the dividends companies continue to pay dividends through the economic cycle. This is when you have the opportunity to buy more or use the dividends to diversify or do something else with the money (it can add to living standards).

There are more questions than answers, till the next time – to raising questions.

 

 

On You Tube you can find many videos – some are entertainment, some are educational and you can learn from them. One of the educational ones is Google Talks – people are invited to talk to the folks that work at google. One of the talks involved Pat Dorsey from Dorsey Asset Management in Chicago. Mr. Dorsey’s company examines moats of companies and tries to buy the ones that have them with the expectation holding these types of companies over the long term will give you a better return. In the Google Talk – he explains what Moats in the investment business are.

If you think about a Moat around a castle – it makes it harder for the opposition to cross and defeat the people inside, not many people can walk on water. Assuming the people inside the castle have enough provisions and assess to drinking water; they should be able to withstand any attacks.

In the investment world – there are some natural advantages companies have and if they have a moat or significant market share they have the ability to rise prices on a regular basis. As you examine moats ask can the company raise prices? If yes then it has a moat.

Mr. Dorsey has identified 4 types of Moats:

1.  Intagible Assets   such as  a)  Premium Brands  – customers are willing to pay extra for the brand, a good example is the automobile company Ferrari.b) Patents – a good example is drug companies. or c) License or Government Regulation – governments create scarcity or exclusivity – great examples are utility companies or oil and gas pipelines; casinos, landfills
2. Switching costs – new software is invented which is better than existing, however in order to use it, the company has to remove the existing and install the new one. What is the cost to removal and switching?.  Other examples are elevator companies once an elevator is in, it is very expensive to change companies and engine replacement parts where they are custom made
3. Network effect  – the idea is interactive one which adds value versus radical network but like a spoke on a wheel can be replaced.
4. Cost Advantage – think how Wal-mart runs it business and the ability to compete against it. In the airline business Ryanair in Europe.

When a company has a great moat or is generating revenues – first it was a combination of luck and skill the moat exist, and Mr. Dorsey and his group try to determine what management does with the moat. Companies grow either organically or by buying another company. If the company buys another does that add to the moat or are they investing outside the moat? The best example of buying outside the moat and losing money or writing off investments is Microsoft which means it can and does happen to the best and brightest companies.

Linking to dividend paying stocks, companies with a moat or high barrier to competition are ideal dividend companies because every year they are profitable. The issue is when companies are profitable there are many trying to attack the moat. The key when you do your homework identify what makes the company different than the competition – why does it make money?

There are more questions than answers, till the next time – to raising questions.

 

 

 

Attila the Hun was once the leader of one of the great empires in the 400’s. In battle, he practiced a scorched earth policy which means to reduced everything in his path to rubble – take all provisions and treasures; burn down the buildings, kill the males and take females as slaves. It leaves much to be desired but has the effect – the next time around in two or three years – people will pay for the army to bypass the town or city. There are many stories about Attila’s his well deserved reputation. There is another side to his successes. In the book Attila the Hun – Barbarian Terror and the Fall of the Roman Empire by Christopher Kelly published by McArthur & Co, Toronto, 2008; Mr. Kelly adds to the Attila’s feat.

For 700 years, the Roman Empire had ruled the world and the Emperors were the most powerful people around the Mediterranean Sea. All lands around the sea were controlled by the Roman Empire with Rome the center of the Western Empire and Constantinople (now called Istanbul ) was the center of the Eastern Empire. Looking at a map of the Sea and try to think what communications would be like between the capitals, if you guessed it was slow you are correct. One of the biggest problems of a large empire is distance. It took time to get information and to send information. This meant the emperor had to rely on the trust of others and if they put in the wrong people (as it happens) the other side would make inroads. For a wealthy empire, one of the ways the Romans kept the peace was to pay tribute to other empires to leave them alone. The Empire had important boundaries and as long as the other empires stayed away from the boundaries  – all was in balance. In that fray you can see – balance, many different balls to juggle and dependence on good people who have ambition of their own and you have to credit the empire for lasting so long.

Enter Attila the Hun, for much of his life he was content to stay outside the boundaries of the Roman empire and attack the non Roman armies, for Attila had been in Rome to live and study Rome’s methods. He learned siege warfare well; he learned Roman diplomacy and he was ambitious and believe it was foretold he would be a world leader. Attila also understood the Empire was slow in responding and often the empire could not defend all of its borders at once. Generals picked their battles and some battles in far off lands were worth less effort. Attila exploited the Romans and if you read his story it terms of military strategies rather than focusing on his scorched earth military policies, you can learn how to tackle large companies. The empire did not fall because of Attila, but without people like Attila and his successes inside the traditional Roman empire lands which showed the rest of the world Rome was not as powerful as everyone thought it was. Attila’s actions  hastened the fall of the Roman empire.

Linking to dividend paying companies, in the above example Attila is a start up company which rises against the monopoly company (Rome). It succeeds as long as Attila is alive, although after Attila dies his empire breaks down with its internal infighting or succession problems. Leadership can come from all walks of life, how long and sustaining they will be are a different questions. Large institutions have lines in the sand or traditionally strong areas of revenue generation; normally if attacked they will tear down the opposition; if that does not happen it is time to look to alternatives.

There are more questions than answers, till the next time – to raising questions.

 

When a seemingly good company losses its gains over the years, the question is could have you have seen this coming? or what were the red flags? According to David Milstead’s column finding the red flags in a firm’s financials published in the Globe and Mail August 20, it is actually harder than it looks to be. Mr. Milstead examined 2 companies which a third company Veritas places companies puts on an an Accounting Watchlist when Veritas has concerns over the financial reporting.

The problem with accounting is although it should be reasonably black and white, in accounting there are many grey areas which companies go into. Veritas is a company which tries to state what public companies are into the grey area.  According to the CEO of Veritas  – When you find accounting issues, it alerts you to a divergence between what the business economics are doing and what the financial statements are telling you. If the business economics improve, then it does not matter the financial statements were managed. If the business operations continue to erode, then you can not play with the numbers any more.

The first case was Avigilon – it sells security cameras and it reported its gross profit margin fell from 58% to 50%. The reason the margin fell was the company lower the prices on its cameras in an effort to sell more of them or capture a greater market share. On itself the lowering of prices may not be a bad thing, however when the CEO leaves, the people change in the department as well as changing auditors – they all tend to be a red flags, because it asks the questions why the changes?

Avigilon sells cameras to distributors who sells them to the public. Inventory turnover and accounts receivable need to be carefully watched. The company says it is trying to get into the entry-level market in order to grow which leads to other concerns. do they have the capabilities to go into the entry-level market? how much of the market would they need to capture? how will the competition respond? and the list begins to build.

The other company Mr. Milstead  wrote about was CGI group who came under watch through an acquisition in Europe called Logica. The European company was bigger than CGI and the issue was purchase price allocation. The concern is reporting income twice and the test is to focus on the cash. When contracts are renewed at what margin are they reported at – CGI or Logica? over the past couple of years it turns out to be CGI and the company is no longer on the accounting watch list and the stock is doing well.

Veritas and you should watch the alignment between the earnings that is reported and the cash flow which is generated. Remember cash flow pays bills.

Linking to dividend paying stocks, most of the time you do not have to worry whether the companies are not making profits because they have been consistent over time. However economies and commodity cycles do happen; if you know what the company does and how it makes money, then you will have fewer concerns unless the world’s economies all decline together. Fortunately that does not happen often and when it did the best performing companies on the rebound were profit making companies.

There are more questions than answers, till the next time – to raising questions.

 

 

 

 

 

As the election draws closer, to be held in November, because this is a different election it is good to look at different perspectives of the country. One perspective is from David Reynolds and his book Slow Road to Brownsville published by Greystone Books, Vancouver, 2014. Mr. Reynolds started his journey in Swan River Manitoba and drove south to end up in Brownsville, Texas. His travels were on a route  83 which is one of the few non interstate highways that have existed for hundreds of years. Going across the country by vehicle there are two ways to go – the interstate which will get you there faster, but there fewer things to see. Or you can go the old highways where the towns and cities built up which means there was a reason why they are where they are. Mr. Reynolds chose to go the second method which involves lots of stopping to see and talking to people along the way. Similar to most countries in the world, people begin their lives along the river and lakes and then explore the rest of the country. In the US most people came to the coasts, started on the east coast, and then explored the rest of the country. This tends to mean the established routes were east-west and than is why route 83 going north-south is an exception.

What did Mr. Reynolds learn?  First no matter where you go, people are interesting and the myths we tend to hold as youngster are not always based on fact.

One of the myths of being a youngster in England was playing Cowboys and Indians and watching the TV shows about Cowboys and Indians. The reality is many Indian tribes were farmers, not many were hunter-gatherers. It is tragically ironic that many Indian tribes that were displaced by the Indian Removal Act were replaced by settlers who came to farm on their 160 acre grants.

If you think about cowboys, most cowboys did not fight the Indians, the US military did. After the civil war, over 25% of the cowboys in Texas were black; another healthy number were Hispanics for they taught the Americans how to ride horses and herd cattle. Prior to the Spanish bringing horses to Mexico, there was none. The classic dress of the cowboy is Mexican cowboy.

South of Pierre, South Dakota one of the biggest contributor to the economy is beef. The cattle which graze on the land, the animals which go to the feedlots in South Kansas and the cattle drives which built cities such as Abilene, Texas and Dodge City, Kansas.

In Texas and the Dakotas – oil is a important element of the economy.

40% of the goods imported into the US through Mexico and points south go through Laredo, Texas. In addition a large proportion of imports from China come via the Mexican port of Lazaro Cardenas. How it can be economical means political wish thinking and reality are different. Texans of Mexican descent or Tejanos make up 4 million people in Texas. Texas was part of the Mexico until 1836, in 1845 the independent country joined the US as the 28th state. Some Tejanos died at the Alamo fighting for Texas.

Linking to dividend paying stocks, while it is easy to read, getting out on the old highways which tell stories about the founding of the country and the economy of the area. Many areas were settled for one reason – some own land and was trying to sell lots; there were natural resources located; the transportation sectors intersected; the government gave free land; there was a reason. How the area sustains itself after all these years is a different story. Understanding the reasons of how sustainability continues is what makes a dividend stock different from other stocks. How does the company continue to generate a cash flow? what are the margins it keeps? In the drive through Highway 83, one can see how the economy and the people changed – some for the better, some not so good; but changes happened. How does sustainability continue?

There are more questions than answers, till the next time – to raising questions.

 

 

The larger a fund is the more visible it is because they can affect markets. Institutional funds are required to disclose their holdings to the SEC 45 days after the quarter. As a smaller investor you can see what they were doing or trying to do – sometimes the institutions have done well, sometimes they have not or most of the time they are similar to all investors. Large institutions can make a wide variety of investments under the theme of what they believe will happen in the future. The biggest individual investor is George Soros who runs the Soros Fund Management LLC for the past year he made investments in gold. As reported by Rachelle Younglai in the article Soros cashed in his Barrick stake, the Soros Fund had bought gold shares, SPDR Gold Trust, gold futures and other investments. Last quarter the fund sold some of its investments including Barrick Gold shares at 3 times what he paid.

As a smaller investor, it is impractical to duplicate what institutions can do, because you would not be buying enough shares to reward yourself, however it is possible to try to understand what themes the institutions are doing. Then picking one company or investment in that area. In the terms of Barrick Gold – they paid down some of their debt as well as the price of gold has risen and the stock went up from $7 to $ 21. This was a classic case of buy low and sell higher. Barrick has some of the best low cost gold mines in the world located in Nevada; it also owns some great mines in Chile which are expensive to get to operations but once operating will deliver great results. The company had a lot of debt which was caused by buying non gold companies at their highs and similar to individuals with a lot of debt, it presents problems. Unlike individuals the company had numerous properties to sell or not to concentrate on. When the price of gold rose, its profits rose from existing gold mines and it was easier to sell some assets to pay down debt.

Linking to dividend paying companies when commodity prices fall, it is a great opportunity to use some of your dividends to buy the best companies in the field. Eventually prices rise, and you will have bought low and sell high but often you need patience, foresight and ability to take a very calculated risk. Your dividends allow you to do this for similar to institutional money, you have money coming into your account on a regular basis and you can do something with the money. Your homework is to find the best company with the best assets to minimize risk and maximum reward and then buy.

There are more questions than answers, till the next time – to raising questions.

We know that index funds which mirror the index of the stock market can grow your money. The reason is all indexes change over time – some every 6 months the indexes drop the losing companies and replace them with companies do better. That simple strategy overtime means the stock market index will go up, but not necessarily in a straight line. The knowledge of how index funds work means the biggest funds in the world are now index funds and that is a good thing. Ben Steverman writing for Bloomberg News spent sometime with the managers of the Vangard funds to see how they ae managed? Index funds are called passive funds, but are they?

In the example of Vangard Group, the fund manager is Gerry O’Reilly who is responsible for the management of $800 billion in assets. Money flows in (which is a good thing) and when mergers and acquisitions happen they need to be accommodated. To earn extra money things such as lending shares to short sellers are done and smart trading. As you would expect much of the trading is done with the help of technology and risk software, the tough decisions are made by portfolio managers. What do you do with illiquid stocks? what to do with new classes of stock? Mergers and Acquisitions can be and are structured for the best method to the client not necessarily for the investors which means there are multiple methods they are done. The good news is good people and a team of people are needed to run the funds effectively. To keep the basis points similar to the index, takes decisions by people.

Linking to dividend paying stocks, similar to index funds over the long term they should grow as long as they continue to be profitable and can pay their dividends. It takes people to decide which company is better and why the companies should remain profitable? The stock market only has perfect information about what has happen, no one knows what will happen however most profitable companies have lots of parts to them but they must continue to endure through changes in the economy and changes in people’s lives. The fund managers seemingly have greater access to knowledge, you need to keep your investments as simple as possible. How does the company make sales? what are the margins? what are the profitable items? who is the competition? how does it not make money?

There are more questions than answers, till the next time – to raising questions.

 

If you think about the city of Rome very high on the list of images will be  Vatican City and St. Peter’s Square. Have you ever thought of who designed the buildings and square? If you have not, then reading Basilica by Rita.A. Scotti published by  Penguin Books, NY, 2006 will help you. The story starts in 1447 when Nicolas V returned the center of the Catholic church from France to Rome and wanted a building to both be a showcase for people around the world and be to the glory of God. The last major work was the columns around the square was finished in 1667 or more than 150 years from the start of construction. In between were wars, popes coming and going the average time of pope was 10 years – some less, some more. There were popes interested in power, popes interested in money, popes that were caretakers and popes that were doers. Many years ago, the best way to become a pope was to grease the palms of those who voted, now days it is different.

Being in Italy – the construction of the St. Peter’s Square attracted and used some of the world’s best known sculpture and painters, partly because at the time most of the population did not read and works of art communicated the message to the populace. Another reason is the artists of Bramante, Sangallo, Raphael, Michelangelo, and Bernini were extra special in their visions and ability and at times the wealthy could employ them. The church and the senior cardinals had money to be spent on art, if desired. To learn  about St. Peter’s Square is learn about the Renaissance and Baroque periods of art.

An interesting part of the gold in St. Peter’s is after Columbus discovered the new world for Europeans and Spain became the wealthiest country in the world, gold and silver  from Mexican and Peru ended up in St. Peter’s as the rulers of Spain were catholic and paid tribute to the building. St. Peter’s was created by man for the glory of religion and even if you are not catholic – to see the building and the art work is a thing of glory as you consider when most of the building was built when engineering was in its infancy.

Linking to dividend paying stocks, if you use the expression of Rome was not built in a day, then you understand it took time to build the buildings, to decorate them, to do the square so when a person arrives at St. Peter’s his/her eyes are focused on the reason for the structures. It takes time to build an investment portfolio and with time, life happens and the world history changes at a regular pace. If you focus on why you are building your portfolio and it tends not to be rich overnight although you would take it. It takes time for compound interest to work, it takes time for the street to apply the multiple of your companies that you want them to; it takes time to be consistent about earning profits year over year. It takes time for you to look great.

There are more questions than answers, till the next time – to raising questions.

 

 

One of the most popular singers is Kenny Rodgers and when your popularity lasts decades there will be a book. The book about Kenny Rodgers is called Luck or Something Like It by Kenny Rodgers published by HarperCollins, NY, 2012. Once is a while it is good to read autobiography’s because they tell you about the character of the person. Even if all you know is the person’s talent, in this case Kenny Rodgers loves singing and prefers songs with stories. The most famous song we associate with him is the Gambler, but in his collection are many top selling songs. Although Kenny loves singing and is good at it, that is not enough, he has needed people who believe in him through managers, producers, and other musicians. He was fortunate to have many relationships last in the years. It is also about attitude:

His advice to anyone considering music as a career – do not do it for the money. Most people who set out just to make money do not last long enough to see the money. They get discouraged and quit. Longevity is based on your ability to accept rejection and keep trying. Most people can not do that. Those who do survive do so because they feel music is their calling. These people are hard to discourage.

In terms of audiences for comedy, as a musician much of your career is travelling or doing shows in another city in another evening. For a concert, there is often warm up acts before the main act starts. In terms of comedy, people will clap to be nice but they will not laugh to be nice. Trying and failing at comedy is a process worse than death.

For a fan, Kenny’s books about how the system works in terms of which songs does he sing and how did they come to his attention. For a successful singer, many songs come but few are chosen so they have to mean something and come at the right time. The songs that come are “shopped around” to various artists who may like them. When they are used and song they feel natural and sincere.

Linking to dividend paying stocks, when you are investing in these types of companies, these are the ones that have already made it and can count on tours every year, depending on how well the singer is will depend on the size of the location. There are many variables which will influence the company, but you want to know whatever products they have will continue to have a ready market and the company can sell it good margins for itself and you. You are not looking for the rising star, but the star which has staying power.

There are more questions than answers, till the next time – to raising questions.