There are number of  videos from Ray Dalio of Bridgewater Associates for he is successful hedge fund and has a 30 minute video about credit and credit cycles. He made money on the downfall of 2008 stock collapse because of his views on credit cycles. His approach to investing and life are 5 aspects:

1. Goals
2. Encountering problems
3. Diagnosis
4. Design
5. Follow through

1. Goals   – be passionate about them

2. Encountering problems – life is about encountering problems which means your life is how do you approach problems which come your way. Mr. Dalio believes all problems are a learning experience.

3. Diagnosis  – what is the root cause of the problem?

4. Design – what are you going to do about it? how are you learning from the problem because there is a very high probability you will see the problem again and need to react.

5. Follow through – if life is full of problems, and we all tend to go through cycles you will encounter problems again and you will be able to both anticipate them and deal with them.

The cycle continues throughout life.

Using the market as an example: in the market the consensus view is the price. In order to be different (this is where you make the greatest money), you maybe wrong. You must be able to or spend time and energy trying to understand alternative points of view because you maybe wrong.

You will be more wrong than right or you will mistakes. The issue is what do you learn from your mistakes. What Bridgewater tries to do is making sense of reality and try to foster independent thinking. What is ambiguous – this leads to discovery. The discovery leads to more learning which leads to mistakes and learning. The danger is not learning and The goal is not to be wrong but more right than wrong. You have to constantly ask what if I am wrong?  Why might something that is improbable be true? If it is then there will be a cause and effect.

Mr. Dalio has a 30 minute video about credit and the economic machine titled How does the economic machine work. Watch it – listen to the fed and make your decisions on what they can and can not do. You may be closer to where Mr. Dalio is thinking.

Linking to dividend paying stocks, investing in yourself and in the markets are similar. If you are constantly learning, you will approach life in a good way and in the end life is about being healthy. In terms of your investment account, the greatest wealth is built over time – when asset prices fall, you buy them for less money and wait till they go up in value to sell. The issue is what are the good buys, should you wait and what should you do; if you do not know ensure you are in dividend paying stocks to earn both income and capital gains until you have a clearer direction.

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

 

 

 

William Green is a journalist and over the years he has been able to interview and reflect on the people he has interviewed. He wrote a book called Lessons from Great Minds of Investing and on the tour, he stopped at Google Talks on Investing for a lecture. He focuses on what attributes the leaders in the investing world have and possibly you can learn from them. He uses 4 categories

1. Willingness to be Lonely
2. The Power of Humility
3. The Ability to take Pain
4. The Key to Happiness

The secret to success is the ability to stack the odds in your favor.

1. Willingness to be Lonely

The great investors love independence and freedom to do what they want to do, they are the mavericks of the industry. They understand even though the papers say the world is going to end, the world is not likely to end soon. To be successful is to find opportunities where most of the crowd (the other players) do not see. This will mean patience for everyone else is seeing something else and you are inverting what the crowd does not see. By exercising patience you jump at the a great opportunity.

2. Power of Humility

Always ask what if I am wrong? why does the crowd not see? maybe you are too far ahead of the crowd – will it catch up to your way of thinking? If you are going against the crowd you have to built in a margin of safety that you can last until the crowd catches up to your way of thinking. You maybe right in the future so try to be less stupid rather than more stupid.

3. The Ability to take Pain

The best investors have lost money on their way to the top; not everything they buy goes up in price. To be a great investor you will go through the cycles and life is a pendulum. You will need to take caution when things go well. When you lose money where do yo get your emotional balance to come back and do it again?

4. Key to Happiness

There is a myth that as soon as you accumulate enough money, you quit the rat race. Great investors have great wealth, why are they still doing investing? The reason is they love doing it and they are constantly learning. Perhaps if all jobs were like that the myth would go away.

Other comments in the Google Talk were:

Investing is asking yourself what if I am wrong? Do I have an overconcentration on what the crowd does not see? The 3 questions to ask is doubt? doubt? and doubt?  Talk to those on the other side – who see something else? what do they see?

If you can avoid the drastic downtowns and have reasonable returns you will do well.

In the world of hedge funds – much of the time is spent trying to be prepared for when something significant happens and then you know what to do with the event. If you learnt from your mistakes you will say I am doing this because ….

Linking to dividend paying stocks, as a small investor, you are not taking the risks and leverage the hedge funds take. The reality is if you avoid losing money and have reasonable returns over the years you wealth will increase. Much of hedge funds is inverting the crowds, trying to see what they are not seeing and building a large position to take advantage of the mismatch. If you stick to well established companies who have consistently raised the dividends, it may not be headline news but it will build your wealth over time.

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

 

 

 

 

 

 

A number of years ago, Warren Buffett was before an audience of high school students in Omaha, Nebraska to offer advice and do a question and answer session. The video is on You Tube and similar to many talks – the best insights come from the question and answer session.

In his opening remarks: he offered the students: his company focuses on 3 things when hiring – integrity, intelligence and energy. It is generally accepted the candidates will have the last two, the harder one is integrity, but it is a habit and everyone has the ability to constantly do. If you have it you will be able to like yourself and use your individual remarkable talent.

The second advice is as you go through life try to build up savings and avoid credit cards or use them sparingly. As an owner of company that issues credit cards, Mr. Buffett says it is a great business. If you are on the other side, if you ever get behind given the high interest rates, it is very tough to get ahead. Not impossible but your life will have fewer choices. It is better to wait till you can buy without credit.

In terms of investing:

Mr. Buffett prefers company’s that have built in moats around their businesses. This means there is a predictability of sustainability of competitive advantage. In other words, if you project into the future and ask why does this company have an advantage over the competition for the next 10 to 15 years? Mr.Buffett gave the example of chocolate bars: what is the number one selling chocolate bar for the past year? 10 years? do you think it will change?  Chewing gum has the same predictability.

If you can not determine what should be the competitive advantage in 10 years, try to directly avoid the industry.

To do the above you need discipline and you have the ability to wait until you get the price that you have determine you are willing to pay. If you can wait a couple of years, then you wait. In the meantime you build up a cash ready position.

When you buy, you swing for the fences or buy as much as possible and then wait till the market and your stock prices go up prices because of the nature of the company’s advantages.

Mr. Buffett prefers things that he understands or knows what I know and knows what I do not know. It is also called a circle of competence. It does not mean you are not interested in others things, but you know what you are good at and rely on others for what you are not good at. Note Mr. Buffett has a partner, he does not work alone.

Mr. Buffett believes in feedback – every time you buy something you write down why you are buying it? and review it every 6 months. You bought the stock to pay you consistent dividends? have they?

Remember when you buy a stock you are buying a piece of the business and similar to buying any business or assets, you need to determine if you are getting a good price. Be willing to walk away, until you do get your price.

Linking to dividend paying companies, one of the keys to Mr. Buffett’s success is he has been a large buyer when markets go down. He has the advantage of owning an insurance company which generates cash. When markets go down, Mr. Buffett can increase his holdings in companies because he has done his research which has lead to reasons the stocks expectations to go up in price. The companies are leaders in their industries? the company’s products are best, so no matter the economy it is worth buying? if there is a definite competitive advantage then the shares are expected to increase as the market goes through one of its cycles. It other words, be a big buyer of quality companies when markets go down and wait, a good piece of advice is while you wait collect the dividend.

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

 

 

 

When you are doing your homework the idea is to narrow down the list of investments and then choose among the best. In a recent column in the Globe and Mail, Jean-Didier LaPointe from StockPointer was looking from the S&P 500 companies for those companies with high economic performance, positive growth and trading below their historical multiples.

Started with the S&P 500 companies with the following criteria:

An economic performance index or EPI (return on capital divided by cost of capital) above 1.5. The rule of thumb is an EPI of 1.0 means the ability to create wealth; the higher the ratio the better it is for investors.

A return on capital (R/C) of 10% or higher

A positive net operating profit after tax (NOPAT) growth over 1 year and 2 years.

A positive economic value added growth over 1 year and 2 years

Positive free cash flow to capital. The ratio gives a sense of how well the company uses the invested capital to generate free cash flow. A positive number is good, above 5% excellent

A dividend growth rate of 5% or higher 1, 2,3, and 4 years

In using the above criteria 17 companies of the 500 meant the criteria.

Company                  EPI      R/C    NOPAT     EVA Growth     FCF/   Dividend   Anuual Div Growth

1 Yr  2Yr      1Yr     2Yr          Cap      Yield          1YR   2YR    4YR

%      %    %           %        %             %            %               %      %          %

Home Depot           2.8        24.9  60   110        63     110           16.3         2.1           20.8   22.0   23.0

Marriott Intl           2.7       24.8   60   120        85   155             18.3         1.7           23.5    21.6   25.0

Starbucks                2.6        22.2   40  110         30     88           12.4         1.4            24.6    23.9  24.1

Robert Half Intl     2.6        29.0   70  200        58  186            16.1         2.3             10.5    11.1     9.7

Sherwin Williams  2.5       21.6    80   110        71   102           17.2          1.2           23.8     19.9  18.9

Southwest Air         2.3       20.3   330  500       322 500          11.8          1.0           27.5     34.4  92.8

Hormel Foods         2.3        17.8    80   130        62    86            8.1         1.5             17.9     20.6   18.0

Lockheed Martin    2.2        15.3   100   150       61   135            7.3         2.7            10.6     12.0    14.5

UPS                             2.1        17.2   100     90      92    97            7.4         2.9            7.9       8.2      8.5

Apt Invest & Mgmt 1.9       12.8    30    150       34   204          4.1          2.8           14.6      12.3    20.4

Tractor Supply         1.9       18.4   30      80        12     45            4.0        1.2            23.5      23.6     31.6

Scripps Network Interactive; Public Storage; Lowe’s Companies; VF Corp and Target Corp were the other 6 on the list.

Linking to dividend paying stocks, every year it is easier to use whatever criteria you have to find the best companies. In this case they have high economic performance continuing with positive growth and because they are trading less their historical valuation multiples it is possible for the stocks to go higher. If you buy quality over time and continue to buy as the dividends are reinvested your wealth will increase. With the stock price go up and down, yes – however if you believe the company will continue to be a leader in its field then over the long term you will have fewer worries. The important aspect is narrow the field to quality stocks in this case the criteria started with 500 and ended with 17 or 3.4% of the total. After narrowing the field down you will have a choice for example in home renovations – is Home Depot better than Lowe’s given they are both good choices?  but it is choice of quality and that is a good place to be making decisions from.

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

 

 

 

 

 

 

David Milstead of the Globe and Mail recently wrote a column which was called How to separate wealth creators from wealth destroyers. As long term buyers, you want your wealth to grow rather than slowly erode and that is why this column was wrote. Often times the easy metrics are used because they are easy to do. However, Mr. Milstead was reviewing information about companies that have the best return on capital, versus their capital cost. His question was which companies have the worst return on capital versus their capital cost? If you know which ones are the worst, then you can avoid them, unless there is really really good reason. Maybe they are a mining company and the commodity price is low, but if you took a 5 year average it might be better picture If you avoid the worst, then you can be better on the markets. Any company that is losing money is not earning more than its cost of capital.

The other strategy is to find out which companies have a really low capital cost that allows them flexibility and even if they just do relatively normal and they will do well. Those companies have a built in advantage. Remember companies make money through its investments or its return on invested capital needs to be greater than their cost of capital.

To create a high economic performance – divide the companies’ return on capital by their cost of capital. or Return on capital equals net operating profit after tax (NOPAT).

The cost of capital is cost of debt plus equity. The debt is the interest rates the company pays plus an assumed cost of the equity a company issues. The result is called Weighted Average Cost of Capital or WACC. Companies do not disclose the number so analysts have to determine it which means sometimes is more art than science.

Linking to dividend paying companies, one of the great advantages of companies which consistently making profits is the ability to raise capital by issuing debt or shares at low cost. If things are normal in the marketplace they will continue to do well. If you buy a company which has a high cost of capital they have to make an even higher cost of return to be make money, which is a risk. It can be well worth it but if one thing goes wrong, then with the high cost of capital, you will likely lose money. The strategy is then to find companies will a low cost of capital and make the most of those investments it is making.

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

The Inquisition was used by the Catholic Church (the dominant religion of the Europe) for 300 years and the subject was to ensure all of Europe was 100% believer in the Catholic Church so their minds and souls would go to heaven. If you were not a 100% believer you would be accused of being a heretic and likely found guilty unless you confessed. Over the years, what may have been a reasonable thing because an increasingly hard to justify for how do you know what the person is thinking because you are concerned about their thoughts. Are the thoughts daily? are the thoughts once a year? What is a good result? The book The Inquisition of the Middle Ages – its Organization and Operations by Henry Charles Lea published by Eyre & Spottiswoode, London, UK, 1963 focuses on how the Inquisition worked.

The Inquisition started because there was more than one method to look at the life of Christ. Peter and others helped institutionalized the church and the dominate religion was set as Catholic Church and over the years the Popes decided they made a monopoly on people’s beliefs. As an institution some subjects are left out, some subjects were changed to reflect the organization. There were and are many reasons why people may act according the universal values of being a Catholic, but could question the organization. The inquisition wanted no questions to be raised, you were supposed to accept on faith the interpretations of the Catholic Church or face the punishment.

In the book, Mr. Lea focuses on the organization and operations and given the task of a success is so loosely defined, many different methods were tried. One good thing about an institution is they all like to have policies and procedures and paperwork or documentation about the Inquisition is easily to be found in the church’s records. It also means someone had to approve what was going on and since the Inquisition reported directly to the Pope – it was his responsibility. Popes typically serve 10 years and some saw the threat of heresy as more important than others. In the beginning the leaders of the Inquisition wrestled with the policies and procedures and what punishments were to be given out? No one ever figured out how to determine if they worked or was the idea just to put a fear of the organization in the eyes of the faithful, for that it did. If you watch a movie such as the Hunchback of Notre Dame it is easy to see in the background.  Think about the secret police – trying to get neighbors to watch neighbor and report anything that was not perfect. In all communities there are people who do not like others, who want to change their relationship, who want to get ahead of the line. If you read the book from the aspect of do the policies and procedures make common sense? you may find yourself looking for something more. The fact that the Inquisition lasted 300 years meant the Church and the local population gave support to the process or for the upper leadership the Inquisition was a valued part of the church.

Linking to dividend paying stocks, all companies have policies and procedures and they are there for good reasons or were in the start. In most organizations there were be some policies and procedures which tend to exclude something. an example is “We will serve high income individuals ” (which means we have a threshold of income needed for our services) or we do not serve low income people. If the company can gather the clients, there is a select high competitive marketplace for it and many companies are successful doing it. The policies and procedures to control the mind to believe in one form of religion so their souls will go to heaven are much harder to do because no had the ability to control beliefs and who knows where souls go? Do souls go to hell for a lifetime of wrong decision making or making one bad one? who knows – we still do not. As you studied the companies you invest in: a question to ask is what do the policies and procedures not allow the company to do or should not be doing?

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

In the Middle Ages, Catholic was the dominant religion in Europe. Being the dominant religion, the leaders of the Church had a desire to stomp out any other religion for in their eyes and minds – anyone not 100% Catholic or a believer in the true faith was a heretic. On a normal day it is hard to look into someone’s mind and consider their soul if they were not a true believer. The solution to this problem was to devise an organization which reported to the Pope called the Inquisition and similar to all large organizations, there were policies and procedures for the Inquisitors to go into a community to find out if the faithful were true believers. the Inquisitor could also here confessions and give punishment for those with the wrong thoughts. The book The Inquisition of the Middle Ages – its Organization and Operations by Henry Charles Lea published by Eyre & Spottiswoode, London, UK, 1963 focuses on how the Inquisition worked.

The Inquisition lasted over 300 years, which means both the Church hierarchy and those that followed the religion were supporters of the method. In some ways, the job of the Inquisitor was similar to that of a criminal attorney – trying to determine the innocence or guilty of those that come before him (the Catholic Church only employed male priests). At the time the Catholic Church had the resources of the Country (the police) on its side Unlike a court, the defendant had no one to help them, for if a person helped someone that was accused, the inquisitor would see that person as guilty and go through the process with him. There may had been good reasons to go after the other religions, the Catholic Church had set the rules and those are the lessons to be taught. They had decided what was important and what was left out of the teachings and about the person of Jesus. Even today, over 2,000 years after Christ, we still know very little about Jesus and we live in a more connected world than ever before. You can imagine what it was like in the Middle Ages with 90% of the population not being able to read and write and most people living in rural villages. The Inquisitors come into town in a large coach surrounded by guards, through the grapevine most know they are in town and maybe why?

The Inquisitors were trained in asking questions that went along this line:

I: Do you believe in the one God, the Father, and the Son, and the Holy Ghost?

A: I believe      (good answer)

I: Do you believe the bread and wine in the mass performed by the priests to be changed into the body and blood of Christ by divine virtue?

A: Ought I not to believe this?      (problem answer)

I: I did not ask you if you ought to believe, but do you believe?

A: I believe whatever you and other good doctors order me believe.

The Inquisitor was looking for the simple answer, never the complex. 99% of the time their training and education was much greater than the general public and they were suppose to report back results. The questioning could take hours and if the answers took longer, confinement in jails for a month or torture were regularly used. In the end, a sentence was given – sometimes to wear a X on your shirt or coat; sometimes it was jail and for a few burning at the stake.

Linking into dividend paying stocks, the Inquisition started off as reasonably good policy for similar to the Catholic Church there are trademarks which must be protected. Many people copy others it is not necessarily a bad thing to go after them. It can hurt profit margins but it is understandable if your company has a great idea, your competition will likely have something similar to it in the near future in order to stay competitive. The danger of the Inquisition was it was after a undefinable end – the minds of its people and their souls afterwards. Since no one knew what was the end result, all kinds of methods were developed over the years and there was remarkably few checks and balances at the senior level. The Inquisitors reported directly to the Pope, which Priest is going to challenge the Pope? Very few. As you research the companies you invest in, who says NO or this is wrong or I do not support and will not give my vote to it?

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

 

 

In the Middle Ages people were generally loyal to their community, state and faith for very good reasons. Their community is where they lived and since the average person never left their farming community they were loyal to where they lived. The loyalty to state because if the state went to war or had to be defended, young and old males were swept into the military. The loyalty to their faith for there often only one religious institution in the community and they taught when you died your soul will live on, if you followed the one true church. At the time most of the population could not read or write, which meant there was not a lot of discussions about the meaning of the words or alternatives. Also the majority of people were known as serfs and if the Lord of the Manor went to church you were expected to attend.  However if another religion came along and it seemed to make common sense then it might be practiced. The Catholic Church wanted a monopoly on faith in Middle Ages Europe – be catholic or you might as well be dead (at least to the church). Similar to every large institution some practices are better than others and considering the average person’s connection to the church was the local priest – some are better than others. In the drive to be the one true faith, the notion of heresy or being a heretic came forth. If you did not believe 100% of the time, if you questioned the basics of the religion, you must be punished.

The Inquisition took time to implement, it lasted for over 300 years and for many years the public was invited to the hearings (think about an outdoor court room) The hearings were  after the questioning and detention and sometimes there was torture for people to remember more details. The book The Inquisition of the Middle Ages – its Organization and Operations by Henry Charles Lea published by Eyre & Spottiswoode, London, UK, 1963 focuses on how the Inquisition works. On You Tube you can find videos about the Inquisition for the Catholic Church believed it was saving souls through the Inquisition and the Church was great record keepers. In addition you might want to view the movie In the Name of the Rose with Sean Connery to get a sense of what was going on. In the Vatican there is a great amount of information written down, for the leaders were saving souls.

The Inquisition started small – it went after those who were preaching a different version of the established Catholic Church. In Spain, after the Christians beat the Moors (Muslim) the King declared the country as a catholic country and issued rules against all religions that was not catholic. For some – rather than being killed they converted but were generally not really accepted. In terms of the Jewish population, Spain had limited the professions Jews could be employed at; after the forced conversion all professions were open to them. In Spain, it was at first easy to find those that were not 100% believers in the Catholic faith, but you can imagine over time it became harder to find people – for non 100% believers would practice in secret. As time went on, various Popes would see heresy as a bigger problem and issue orders to the bishops to pump up the volume to find more heretics in their area. The Inquisitor would come into town with guards (law enforcement) to round up those who secret thoughts and opinions were not in keeping with the 100% rule. Now days we have freedom of religion and thought so we do not worry as much.

Linking to dividend paying stocks, in some ways larger companies operate like the Catholic Church of the Middle Ages. When you question something about an established company, they are often not open to discussion except on a very limited basis. Typically nothing happens to you but the people are dedicated to their company and believe they are doing the right thing. While many companies particularly in the retail industry would love to control your thoughts so you will buy their items. the reality is they still do not. When you buy shares in the company, you are buying an ownership and you want the company to continue what it is doing – making profits and sending you money. In terms of ownership, you have an addition access to someone, the more shares you own the higher the person in the organization. How does your company deal with the competition? some companies do not like them and forbid people to deal with them including industry groups. Who is the enemy? and what does the company do about them? Answering those questions will tend you to consider if you wish to be a long term shareholder.

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

 

 

If you are interested in how the Marines are governed and work, then the book by Tom Clancy and Tony Zinni called Battle Ready published by G.P. Putnam’s Sons, NY 2004 is worth reading. In the book examines the career of US Marine Tony Zinni  from the Vietnam War in the 1960’s to 2000 and the Gulf War to mediation of the world’s problems. There are many great stories and leadership lessons in the book.

One fact which could be used to strengthen the country is after the first World War when the soldiers were discharged from duty they received citizenship papers if they were not already citizens. Mr. Zinni’s father received his.

A couple of stories from Vietnam is when Mr. Zinni was in Vietnam he was exposed to many fire fights, eventually he would be add to judge from the pop and flash of the guns  what was being shot and how far away they were. If you know that information you can prepare yourself and defend yourself. It is skill that likely should be taught before the recruits arrived in battle.

In the build up of troops – people were promoted to leadership at all levels – many should not have been and their actions were not productive. At the higher levels, what type of war and what the results need to be can easily be questioned. In retrospective, even though the US lost the war, the spread of communism stopped, perhaps that was a victory.

In the leadership of Marines and other organizations – future leaders are posted to various parts of the world to see how they perform. The postings typically run 2 years or so. Most of the time is spent drafting plans or strategies of what needs to be done and how it is going to get done. Plans are great but the only thing that makes them workable is the relationships between people to get them done. If the leadership has gone to the field to see what those that actually do and their needs, then when it comes time to implement people will take the extra steps (sometimes creatively to get it done). If they have not, then the plans will gather dust. The higher the post, the more the results depends on relationships and if the person has built and kept them up. If the person has built and kept them up, phone calls matter. When they have not, the letter of the law and self interest matters most.

Linking to dividend paying stocks, models are wonderful but it is the people that matter. Relationships that people build through the years, if management has a single focus and its people do not count, then do not expect too much from them. If the people believe they count, they will be more productive and creative. Mr. Zinni says values and leadership matter and if they matter, the people who follow will see and respond to it. Live words like integrity, ethics, honor and people will see them; do not live them but say them and no one will care except for your flunkies. Live the words and be honest to those closer the bottom and they will respond like wise. In the companies which you own stock in, how is the leadership or is the monopoly so good the leadership does not matter?

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