The Brass Tacks

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.

Creating Warren Buffet Wealth

Recently I read Warren Buffet Wealth by Robert Miles. I liked this book a lot because the concepts were relatively easy to understand, and I can imagine ways to implement them using the tools at my disposal. Here are some notes from the book.

Buffet Criteria for Selecting a Company to Buy

• At least $50,000,000 in consistent annual earnings
• Little debt
• Good managers in place
• Simple, old-economy business
• Attractive offering price

Stick with what you understand. Look for old-economy products that are needed by families. The average founding year of a Buffet company is 1909.

Determine what the company will earn over the next 10 years and discount that to today's Present Value (PV). There should be demonstrated, consistent earnings: future projections are meaningless.

Buy companies with shares priced at a discount to their intrinsic value. Buy for less than you think it is worth.

Some Buffet definitions:

• Book value = assets minus liabilities
• Intrinsic value = lifetime earnings of the business
• Market value = current asking price

Think like a business owner, not a market trader. Buying an entire company or a piece of a company are almost the same thing, so look for similar criteria. The main difference is that when you own only a share, you benefit from "look-through" earnings (LTE) rather than actual earnings.

LTE is less tangible than actual earnings but ultimately pays off with renewed financial strength of company and increased dividends. When LTE goes up, EPS goes up. Potential look-through earnings (LTE = #shares x EPS)

Buy $1 of assets for $.50 (or even $.40), or $1 of annual earnings (look-through) for $1. Look at the asset worth of a company and its outstanding stock value. Divide stock value into asset value (its "beta").

Other considerations:

• What percentage of price are Earnings per Share (EPS)?
• What is the Return on Equity?
• What are the Profit Margins?
• What percentage of Net Worth is the company's Debt Load?

General Strategies

The minimum holding period of any stock should be at least three years. Ten years is even better. Don't invest unless you can watch market value decline by 50% with equanimity.

Don't lose capital. Given the previous note, I take this to mean "don't sell at a loss."

Make twenty investment decisions over a lifetime.

Ignore the crowd. Don't fall for the obvious, and don't be in a hurry. If it's too good to be true it probably is.

Forget age-based allocation, and don't diversify. Buy a few companies that you understand. Stick to local stocks. Become a satisfied customer of the company first.

Buy a lot of a few, concentrated amounts of stock. Choose companies you know something about that have good financial statements. Have the courage to put 10-40% of net worth in one stock.

Always spend less than income! Track your investment performance with book value, not market value.

Visit the business, talk to management, count how many customers are on the premises, and come up with your own estimate of annual earnings. Read everything you can about the business. Do the research and think about it. (On the other hand, he also says to not get bogged down in too much information, or paralysis by analysis.)

Look for management buying back shares (adds value to existing shares). Look for management that owns stock in its own ventures. Look for CEOs who admit their errors.

Stock splits are meaningless. All they do is increase brokerage sales commissions.

Businesses need a durable competitive advantage. Invest in the right industry. Don't buy if it can be outsourced to Asia.

Work only with people you like, trust, and admire!

Further Reading Recommended in Warren Buffet Wealth

B. Graham and D. Dodd - Security Analysis
B. Graham - The Intelligent Investor
R. Miles - 101 Reasons to Own the World's Greatest Investment

IRS Has $1.2 Billion for People Who Haven't Filed a 2004 Tax Return

The IRS reported today that $1.2 billion in unclaimed refunds awaits 1.3 million people who failed to file a federal income tax return for 2004. 

Here is an estimated state-by-state breakdown of individuals who could file a 2004 return and collect a refund. Are you among them? You have until  April 15, 2008 to file your 2004 return and get your money, plus interest!

Automate PC Maintenance

Here's a great little article for Windows XP Luddites, by technology writer Chris Tull:

Put your PC Maintenance Routine on Autopilot

RRSP Contribution Deadline Approaches

February 29 is the deadline for making a contribution to a Registered Retirement Savings Plan (RRSP) that can be deducted on your 2007 Canadian income tax return. You can use an RRSP to save for retirement, education, or the purchase of a home. Your RRSP Deduction Limit is shown on your Notice of Assessment for 2006, and can also be obtained by logging into CRA's My Account service, or by contacting your income tax preparer.

It's Good to Save Money: Here's Why!

We all know that wasting money on unnecessary things is bad for cash flow, but few stop to consider that there is also a negative effect on net worth.

I had a three year contract with my cell phone provider that recently expired, so I canceled the service, saving an average of $35/month. I hardly ever used the phone and don't miss it at all.

Eliminating an unnecessary expense does the same thing to your bottom line that increasing income does–there is more cash available–but with one major difference: reducing expenses doesn't take any time. To increase income you generally have to work longer hours. Cutting expenses produces the same results with no effort. So, in essence, when I slashed my cell phone bill I created $35/month of “passive income” for myself.

Passive income is income that doesn't use up time to produce. Interest, dividends and royalty payments are examples of passive income. Passive income is generally produced when you invest in an asset such as a stock, mutual fund, Guaranteed Investment Certificate (GIC), or real estate.

If I “created” $35/month of passive income, what is the equivalent amount of an asset that would pay me that much money? Well, where I live at this time a typical GIC rate is 4%. $35/month = $420/year. How much would I need in a GIC to produce $420 at 4%? $10,500! I therefore conclude that, in essence, I have increased my net worth by $10,500 with one measly phone call. Astounding!

What other expenses can I cut? I think tomorrow I'll pack a lunch to work!

Income Tax Book Store Online

We have a book store online featuring American and Canadian tax books that we use for reference in our income tax preparation. Visit the new Howland Tax Services Book Store today!

Losing Weight for Geeks and Nerds

When my weight reached 199 lbs I had to do something–I couldn't let it get to 200! I may not be a true nerd (my wife thinks I am), but I found that The Hacker's Diet has helped me to lose 26 lbs since I started on it last October.

When I graduated from university I weighed 155 lbs. Since then extra pounds have steadily accumulated, despite my trying all the fad diets out there (low-fat, low-carb, high-protein, you name it!). I couldn't stay on any of them, but I find The Hacker's Diet easy to stay on because I can eat anything I want, as long as I count the calories. Breakfast this morning was a fried egg, two slices of Canadian back bacon, and a toasted whole-wheat English muffin with butter, peanut butter, and jam. Yum! Total calories: 370.

The Hacker's Diet is a calorie counting diet, and the author (John Walker) provides useful computer tools to help out with what is usually a tedious chore. I think Hacker's is quite similar to Weight Watchers, which at its core is also a calorie counting diet with tools (the "point" system, social support, etc.).

The Hacker's Diet proposes that to lose weight all you have to do is eat fewer calories than you burn, however, the body has a certain resistance to weight loss, and it needs to be kick-started into fat-burning mode with a deficit of at least 500 calories/day, which should lead to weight loss of roughly one pound/week.

How do you know how many calories you are eating? You have to weigh and measure your food, and read the labels. It sounds hard but is actually quite easy to do once you get into the swing of it. I eat a lot at Subway now because they tell me how many calories are in their subs. How do you know how many calories to eat in a day? You start by reading a chart, choosing a caloric amount based on your current weight, and then refining that amount based on the results of the diet.

On The Hacker's Diet you weigh yourself everyday and record it, but don't worry too much about daily fluctuations. Instead you calculate the 20-day moving average of your weight and plot it on a graph, using the result to gauge how the diet is going. You don't have to do this by hand. An online program is provided that will calculate and graph the 20-day moving average for you.

Here's a look at my January chart. The red line is the moving average, and the little white diamonds are recorded weights. As you can see, I bottomed out at 178 lbs for a week or so. According to The Hacker's Diet this is normal as the body needs to pause once in a while to readjust itself. My goal weight is 169 pounds. I'm currently at 173 and hope to get there soon.

The Hacker's Diet notes that when you first start to reduce calories, it will feel awful for three days, then get better as the body shifts into fat-burning mode. That's exactly what happened to me.

It's important to exercise while losing weight so you don't lose muscle instead of fat. The Hacker's Diet provides a simple daily exercise regimen based on the Royal Canadian Air Force fitness program.

I encourage anyone who wants to lose weight to read The Hacker's Diet and try it out, but I must warn you of a potential downside: if you lose weight, you might have to buy new clothes!

Related Websites

The Hacker's Diet
How to Lose Weight and Hair Through Stress and Poor Nutrition

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Beacon Hill Brass Presents Free Concert

The Beacon Hill Brass joins forces with the Emily Carr String Quartet and special guests to perform the "Concert Music for Strings and Brass" of Canadian composer and trombonist Ian McDougall. This free concert is sponsored by a grant from the Canadian Music Centre, as part of their New Music in New Places program, and takes place in the Unitarian Church's beautiful recital hall.

Saturday, February 2, 2008
Time:	8:00pm - 10:00pm
Location:	First Unitarian Church of Victoria
Street:	5575 West Saanich Road
City/Town:	Victoria, BC

Here's a Google Map to the location.

German Brass on YouTube

Awesome!