My Investment Philosophy

In the last post I wrote out my notes after reading Robert Miles' book Warren Buffet Wealth. One of the recommendations in the book is that you come up with your own investment philosophy. Rather than blindly following the Buffet principles, you should adapt them to your own situation, taking into account the kind of investor you are.

Warren Buffet wealth comes from investments that produce cash flow, which for him–as the outright owner of a business–means business profits that flow right into his pocket. Smaller shareholders are advised to consider Earnings per Share to be a form of "look-through" earnings that will reward them in the long term with appreciating stock prices.

Buffet doesn't seem to be that concerned with dividends, perhaps because of the potential for double taxation in the United States. In Canada where I live double taxation of dividends isn't much of an issue, due to the Dividend Tax Credit mechanism in the tax system. Here then is a difference between me and Mr. Buffet: I believe that dividends are more important as an investment goal. EPS should of course be used to evaluate the strength and prospects of a company, but beyond that, a company should pay good dividends to compensate me for taking a risk on their stock.

I intend to invest for cash flow, looking for solid Canadian companies with good dividend yields. Dividends should compensate for risk by exceeding GIC rates. If a stock is generating good dividends for me, I won't sell it unless something better comes along.

My strategy is to estimate future dividend yields and EPS with the tools available at RBC Action Direct, then figure out what price I would pay today for those future earnings. I set up an Excel spreadsheet that calculates Present Value based on future estimates. I plunk the numbers into the spreadsheet and use it to compare PV between different companies, and to see how much I will pay for the company's assets.

It's hard to find the perfect investment according to Buffet criteria, so I enter positions a little at a time, expect the worse, and always keep some cash in reserve.