Earlier in this month of September Hanjin Shipping Co filed for bankruptcy. Hanjin was the 7th largest sea container shipping firm and the largest company in South Korea in controlled about 8% of the trans Pacific trade volume for North America. Think about your household or favorite electronics store – do you see South Korean goods in it? One of the largest accounts is LG (Life’s Good) who sent between 15 and 20% of their goods through Hanjin. What is important to know is retailers similar to everyone else try to have close to just in time inventories and know that the months between September and December have higher sales than other months. If the items are is transit being held up by bankruptcy courts, the items are not in the store and will not be sold. LG similar to other companies around the world ship using more than one firm and another South Korean shipper Hyundai Merchant Marine says it will add more vessels – but that takes time – a couple of weeks.

In the world of shipping, many of the ports are run by a few companies and the container ship company which pays the fee to the port company. The stuff that is inside the container the owner pays the shipping company and you can see what happens when a company can not pay their fees. A couple of days after filing for court protection, the ports blocked more than half of the container ships from docking to unload. If they do not unload they do not get paid and someone will need to sort it out. Sorting it out takes time.

Linking to dividend paying companies, all companies in the world are dependent on somebody or something. It used to be companies were vertically integrated or doing everything themselves but most companies contract something out because it is cheaper and it is very hard to be excellent in all areas needed. It is far easier to take a piece that the company lives and breathes and do that well. The supply chain works till it does not and ideally the supply chain is not dependent on one company for the most critical aspect of the business. When you investigate your companies – you will want to know about supply chains and what could be a weak link in the chain.

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

Warren Buffett has produced a number of papers which we sends to his shareholders and because his success has been great, various people have read and studied his writings. One of those people is Jeremy Miller who wrote Warren Buffett’s Ground Rules published by Harper Business, NY, 2016. One of the methods to promote the book is to do a lecture tour and Google Talks had him as a speaker. Mr. Miller found 3 things not to do:

1. Stay away from short term predictions
2. Try not to listen to the wisdom of the talking heads
3. Do not play someone’s else game

The 3 things to do are:

1. think long term in years allowing compounding to help you
2. Establish you own viewpoint – each of us has specialized skills in looking at the markets, accent yours.
3. Play your own game – why did you buy the stock? if the price goes down would you add more? if it goes up that is good.

The rules are simple, how you do it is the complex aspect.

Mr. Buffett typically favors a 15% rate of return as a risk factor. He has a wide variety of stocks he is looking at, not necessarily buying but looking at. When the stocks meet his price,he nibbles and then buys bigger allocations. The reason you need to have a variety of stocks you are looking at is as the markets go up and down (and they will) you can buy good quality stocks at lower prices and see them go back up. The trick is therefore to know which are the good quality stocks and why they are good quality stocks then you will know when to begin to buy, based on your plans and follow through with your decisions and live with them for a few quarters.

Linking to dividend paying stocks, if you are a small investor and expect to hold stocks for a long period of time, getting the perfect price is not that important. What is important is the company will be in business and making profits for a number of years. One method to do that is start with dividend companies and make your list. The companies and industries that are easy for you to follow and as they reach the price you think is good, buy and hold. The reason you want profitable companies is they will continue to pay a dividend and in a bullish cycle the multiple on your stock will be higher than other stocks. If the market declines, the dividend continues and you can buy more. As the cycle changes profitable stocks will rise faster, then the rest of the market catches up to go through another cycle.

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

 

 

There is great information to be found and some of it is on You Tube – today will be some takeaways from Aswath Damodaran who teaches Business Valuation. If you have not seen the You Tube they are worth the time to watch and learn.

Mr. Damodaran gave a talk to Google Talks on 4 Lessons To Take Away on Valuation

1. Valuation is a Simple

Similar to all things, as long as you start with the fundamentals, it can be simple. Valuation is not accounting.

Accountants look backwards to what has been done. They are necessary for that, the numbers they end up with is used for analysis and accounting works best for mature companies.

Valuation is forward looking – what could happen in the future? Which means it deals with unknowns.

A Balance Sheet works best for companies with tangible assets. The problem for young companies is Goodwill – the difference between what a company is worth and what it paid for on the asset side. On the liability side Shareholders Equity only increases if you have bought a company. If the growth is organic, then low shareholders equity.

Most of the tools for valuing companies are based on mature companies for  the estimates are relatively easy to make and involve less risk. Mr. Damodaran and a partner have a tool  on iTunes called You Value – plug in the numbers and you have a valuation.

Evaluation Balance Sheet

Assets in Place – what are they?                                           /            Debt

Growth Assets – expectations for the future                  /               Equity

Key question to ask – what are you buying when you buy this company.

Growth companies finance themselves through equity as it is tough to payback a loan based on the good ideas of the people in the company. Mature companies generate cash and do either equity or debt – whatever is more advantageous at the time.

2. Do not mistake modeling for Valuation

Valuation is about the cash flows:

1. What is the cash flow from existing operations?
2. What is the value created by growth?
3. How risky is the cash flow?
4. When will the company become mature? ideally it is going to be in business in the future. All companies go through the cycle.

95% of you research should be on the cash flow; 5% on which discount rate to use.

To answer the above questions regarding cash flows, you have to determine a story for the company. The narrative of the story will tell you what the company is and what the company is not – then the numbers reflect the storyline.

Rule: whatever number you come up with – the offer for the company should be less.

Analyst Reports are an important part of the sales business, however they must be read with a grain of salt. For sometimes they are meant to justify the client rather than justify the price offered. Mr. Damodaran calls buzz words Weapons of Mass Distraction – control; synery; brand name; strategic considerations; China or BRIC.

Remember:

1. If it does not affect the cash flow or alter risk, it can not affect the value.
2. For an asset to have value the Expected Cash Flows have to be positive sometime before the life of the asset
3. Assets that generate cash flow early in their life will be worth more than assets that generate cash flow later – they have to financed.

How to value Growth Companies?

Mr. Damodaran uses a program called Crystal Ball which attaches to his excel sheets. The program allows for a distribution model or you can say there is a 90% probability the results will fall with the parameter, 10% chance they will not. Remember the only time you have perfect information is looking back, you are trying to look forward.

3. Much of what passes as Evaluation is a Pricing Model

In his talk, Mr. Damodaran uses the example of house price listing. How does the number come up? The agent typically looks for comparable past sales, adjusts the price for special features and comes up with a number. That is the pricing model.

Price is based on supply and demand or mood and momentum

Valuation is based on cash flow, growth and risk.

In his talk, Mr. Damodaran discusses why price and value can diverge. It is often what the market is paying for. It used to website visits were worth something; at the present time it is the number of members ($100). Take the number of members x 100 equals the price of company. The problem is the market is fickle and one day will say – how do you make money from the members? what percentage do that? what would could that normally grow to?  The price might be different.

4. Do not mistake luck for skill

In the investment world, when you make money all is forgiven. There is no smart money there is stupid money and less stupid money.

Buying a company at the right price is good; buying it at the wrong price no matter how good the buzz words are the result will be losses in the future. Similar to all negotiations, they only work if you are willing to walk away from the table if you do not get your price.

Linking to dividend paying stocks, these tend to be the mature companies and the existing models work terrifically for them. The issue might be what price are you paying for the valuation when a tool such as You Value is in the marketplace. There is fewer reasons to discuss the estimates and how they are made. For growth companies there is need to focus on the story which allows you to focus on what the assumptions are made about cash flow, growth and risk.

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

 

 

 

 

 

 

We are all exposed to a variety of information all the time and some of it is interesting because we had not thought out it. One method to think about assumptions is from Aswarth Damodaran  who teaches Business Valuations at the Stern School of New York University. Mr. Damodaran has posted a number of his talks on You Tube and If you like buying  new companies reading Mr. Damodaran’s blog will save you money. Much of valuation of newer companies is based on assumptions and for each assumption there needs to be the Impossible, the Possible and the Plausible. This will save you money because when you read someone’s analysis you can see what that will mean in the future. It is safe to say many research reports are nearer impossible than the plausible. Besides the numbers, you can relate the story the person tells about the company to the numbers. The story means what business is the company in or what is it not in.

A fiction book titled the Columbus Affair by Steve Barry published by Ballantine Books, NY 2013 asks the question what religion was Christopher Columbus? Most of the history books do not tell us and most of us never asked, because it turns out Columbus never really told anyone and Columbus was not likely his real name. In the book the Columbus Affair, the assumption is Columbus was Jewish. At the time of his life the Spanish Inquisition was in full force. A brief background is Spain was run by those with a Muslim religion or the Moors. The Christians and Muslims fought wars and the Christians took control of Spain under King Ferdinand  and Queen Isabella. They decided anyone who remained in Spain had to be Christian or Catholic nation, the choice was to convert or die or leave. The conversion process is known as the Spanish Inquisition – in US terms think of the McCarthy hearings are you a communist or not? It was understandable that people converted at least in public. In the year 1492, Spain was not a rich country and the theory is some or most of the financing came from the formerly Jewish people because they were looking for lands that were not under Christian control. Eventually Spain brought back Mexican and Peru gold and silver to become the richest country in the world.

When Columbus went on his journey in 1492, there was no priest however there was a a rabbi. Why? no one really knows. Columbus wanted Jamaica for 150 years, why Jamaica?  except there are wonderful hints that Columbus had a past and did not want it to be known, but he was likely Jewish. The book is a exciting thrill ride, but is it impossible, possible or plausible?

Linking to dividend paying stocks, the results you receive had better be plausible or error on the side of caution. There are many challenges to a wide variety of companies and as an investor you have to decide whether they are impossible, possible or plausible. We have seen industries grow where many had not thought they would but with barriers to entry and the reason why the companies you own bring in cash, the answer tends to be clearer. We go through our days reading and absorbing information on all types of subjects – deciding whether it is impossible, possible or plausible will make your decisions easier.

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

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.