Category Archives: Random Thoughts

Maintenance

I went through a phase where I was listening to podcasts none stop. I thought that if 1/day made you smarter, then why not go for 5 or 6/day. Well, I realized that my brain can’t absorb that much new information constantly. It takes time for me to digest information and actually learn something, let alone recall what I learned. So, I don’t listen to that many podcasts. Maybe 3-5 per week unless I’m on a flight or long road trip.

Having said all that, I found a particular podcast from Freakonomics around maintenance to be particularly useful. It resonated with me on so many levels.

So many things in our life require boring, mundane maintenance. Our health (both mental and physical), our relationships, our car, our house, and of course our portfolio. Performing required maintenance isn’t sexy. No one is lining up to hear how I go to the gym several times per week, how I spend hours each week just “checking in” on companies in the portfolio, watching me enter my receipts and bills into a budget sheet or watch me brush my teeth twice a day. That’s ok with me. I’ll just keep doing it quietly in the corner by myself.

Neglecting maintenance rarely has immediate impacts. I could probably perform no trades and not check up on any of my companies and you may not even notice a change in performance after a year. After 3 or 5 years, you can bet that there would be implications. My operational background emphasizes continuous improvement, but what’s forgotten regularly is the maintenance required to battle entropy. Entropy is persistent and the fight against it is never ending.

The human brain doesn’t appreciate executing consistent recurring tasks that don’t have immediate benefits. It’s probably why maintenance is underappreciated and not really discussed.

Anyways, that’s enough of me rambling. Listen to the podcast.

In praise of maintenance

 

Thanks,

Dean

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Ego is the Enemy – Book Review

This book really resonated with me and I wish I had read it years ago. The book is divided cleanly into 3 sections (Aspire, Success and Failure). The chapters are short and digestible and do not drag on.

As a microcap investor, our job is not sexy, the outcomes are not consistent and the harder you work doesn’t necessarily translate into better performance. At least, that’s my opinion.

I have this feeling that the more I learn the more I don’t know. The more experience I have as an employee, father, friend, investor, etc. the more I realize that everyone is trying to figure things out to the best of their ability.

As a lifter, I felt stronger when I first pulled 400lb than when I first pulled 500lb. It’s a fascinating dichotomy as you develop as a person with curiosity and a willingness to grow.

Anyways, some of my favorite passages were:

  • What is rare is not raw talent, skill, or even confidence, but humility, diligence, and self-awareness.
  • Let the others slap each other on the back while you’re back in the lab or the gym or pounding the pavement. Plug that hole—that one, right in the middle of your face—that can drain you of your vital life force. Watch what happens. Watch how much better you get.
  • Impressing people is utterly different from being truly impressive.
  • When you are just starting out, we can be sure of a few fundamental realities: 1) You’re not nearly as good or as important as you think you are; 2) You have an attitude that needs to be readjusted; 3) Most of what you think you know or most of what you learned in books or in school is out of date or wrong.
  • There’s no one to perform for. There is just work to be done and lessons to be learned, in all that is around us.
  • The farther you travel down that path of accomplishment, whatever it may be, the more often you meet other successful people who make you feel insignificant. It doesn’t matter how well you’re doing; your ego and their accomplishments make you feel like nothing—just as others make them feel the same way. It’s a cycle that goes on ad infinitum . . . while our brief time on earth—or the small window of opportunity we have here—does not.

I recommend reading this book.

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A Short History of Financial Euphoria – Book Review

Yep… I read a book. I don’t read a ton of books or listen to a ton of podcasts. When I do read, I try to read something that isn’t as well known and not popular in the investing community today.

The book is written shortly after the crash of 1987. It goes through the biggest financial busts in history. All the way back to the Tulip-mania to the South Sea Bubble to the Crash of 1929. I found it almost therapeutic to hear the stories of the previous generations making similar mistakes with a slight twist. Each boom and bust a little different than the last. The commonality is the current generations belief that their version of financial engineering is better than the last. It’s absolutely fascinating how humans can make such similar mistakes and not learn. I can’t help but think of the current Cryptocurrency and Blockchain mania. Some of the characters presenting investment ideas make my skin crawl. And the ones that don’t are bursting at the seam with dissonance. But I digress…

My favourite passage from the book:

Let it be emphasized once more, and especially to anyone inclined to a personally rewarding skepticism in these matters: for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius. Thus impressed, it becomes bemused by the two further influences operating in this world that are greatly seductive of error. The first, as sufficiently noted, is the ease with which any individual, on becoming affluent, attributes his good fortune to his own superior acumen. And there is the companion tendency of the many who live in more modest circumstances to presume an exceptional mental aptitude in those who, however evanescently, are identified with wealth. Only in the financial world is there such an efficient design for concealing what, with the passage of time, will be revealed as self- and general delusion.

I have only been at this investing thing for 10 or 11 years, but I can count some minor and major bubbles in my short experience.

  • US real estate
  • Hard Commodity “Supercycle”
  • Emerging Markets
  • Precious Medals due to USD weakness and something about a fiat currency or gold standard or Chinese buying or something
  • Rare Earth Elements – some of these turned out to be good investments
  • Platform companies
  • Anything Saas
  • Crypto things
  • Canadian Real Estate, particularly Toronto and Vancouver – TBD I guess

The takeaway is to avoid getting swept up in these bubbles. It’s simply amazing how much wealth you can generate if your winners compound at 20% for several years and your losers only cost you 10-15%. The net return over 20-30 years (as long as you start with a decent slug of capital) is enough to finance a modest retirement.

The book is relatively short and quite easy to read. I would recommend it to anyone interested a quick history lesson on our previous mistakes. I think it is a good book for someone who has just gotten interested in growing their capital and is willing to learn from others.

 

Dean

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Life After Renting for 1.5 years

I feel bad sometimes for not posting more on the Petty Cash. The site has brought a ton of connections and ideas to me and sometimes I forget that. I heard somewhere that the key to any successful relationship is low expectations, I think that applies to anyone still following the site. Expect (next to) nothing and be happy when anything happens.

I want to take some dedicated mental energy and share how the transition from owning a home to renting has been. To be fair, I don’t know if owning is better than renting I just know it works for me. This won’t be me convincing you to rent or buy, but just me putting some thoughts, feelings and experiences out there. For my family owning vs. renting really came down to the math.

I know there are many home owners out there who are waiting for a crash and want to time the market. As well, there are many people who don’t own currently that feel the societal pressure to own a home.

First, the former is just a stupid idea. To think you can actually time when the market is going to crash (and presumably jump back in after the crash) is asinine. Your ability to time the market is likely no better than anyone else’s.

The latter is tough to quantify. Generally we have been taught as Canadians that anyone successful owns a home and learn to associate renting as someone who “is starting out” or “doesn’t get it”. People said congrats when I told them that I was approved for a mortgage. In fact, many people brag on how much they are approved for. When I tell people that I sold my house to rent I get this puzzled look. Most immediate dismiss anything that comes out of my mouth after that. “How can he know anything about investing (or anything else for that matter) if he isn’t even smart enough to buy a house.”  That’s what I imagine others are thinking of my decision. It takes more courage than you realize to act upon something that makes sense for your family when you know you will be scrutinized by your peers, friends, co-workers, etc.

For me and my family it came down to math. Simply removing emotion and letting actual facts make the decision.

Owning – pros and cons

Pros

  • capital appreciation in the house
    • one should note that unless you are able to pick the right house, capital appreciation expectations should be limited to annual inflation rate as housing costs make up a large portion of the annual inflation rate
  • likely inflation protection vs. holding cash in a bank account
  • stability (for the term) in mortgage payments
  • ability to pay off mortgage faster and get a guaranteed after tax way to build your net worth
  • Stability for the family – I can pretty much know where I will live for the foreseeable future
  • can borrow against the house (via HELOC) for anything I want
  • Tax free capital appreciation for your primary residence in Canada
  • It’s easier to fit in

Cons

  • Property tax goes up pretty much every year
  • Can be expensive
    • You buy a new(er) house and have big payments
      • Something to note is that many have had bad experiences with new homes still not being built with high quailty
    • Or you buy an older/fixer-upper and have to spend time/money maintaining it
  • Reduced mobility
    • it takes a lot of time and money to move (especially if you have a family)
  • Your Time required
    • cutting the lawn, painting, shovelling snow, raking leaves, etc

Renting – pros and cons

Pros

  • the biggest one for me is time
    • none of my time is dedicated to maintaining the house: no yard work, no snow shovelling, etc
  • usually you can lock in your expenses for a minimum of a year (likely longer)
  • no surprise breakdowns/repairs that you have to pay for
  • most people who rent have high mobility
    • they are able to pick yup and move quicker
    • that means less “things” which for me led to less mental clutter and more time/energy to focus on the things I truly value
  • If you have capital built in your house, you now have better access to it

Cons

  • You can have very little notice on when your house/condo/apartment can be sold and you have to move
  • You have to make rent payments as long as you rent
    • eventually when you own you stop making mortgage payments
    • I mean that’s the dream right?
    • You get to live in your house for free at some point
  • You could have a bad landlord
  • You aren’t able to “make it mine” by painting the rooms whatever color you want or knocking down a wall or renovating the kitchen

For us it was a matter of taking the capital that was tied up in the house and investing it in the public markets to (hopefully) get a higher return than if the capital was left in the house. This of course requires a ton of time.

You also have to consider ALL the expenses with home ownership. Property tax, utilities, sewer, additional fees from the city to upgrade streets, appliances, anything that breaks down.

Once we ran the numbers and realized that it makes sense for the family, we executed in pretty short order. It was actually quite therapeutic to downgrade the size of our living space. We got rid of a ton of things that we didn’t need. Without being forced to move, we likely would have kept many of those things.

Post Move Feels

Positive

  1. The largest thing that I noticed since we moved was how much extra time I have to do things I really want to do. I have been surprised with how much I’m into fitness. I spend a decent amount of time in the gym and wouldn’t be able to do that without sacrificing something else if I had a house to maintain. I also get more family time which is really appreciated in Edmonton’s short summer. Investing performance has improved as I spend more time understanding each business I purchase.
  2. Probably more important that the time is the reduction in mental clutter. I don’t worry about remembering to do or organize something related to the house.
  3. Going against the grain by renting has given me courage to challenge other societal norms. If I didn’t try renting then I wouldn’t have the courage to challenge other traditional beliefs.

Negatives

  1. We have less geographical security. Once in awhile you hear a horror story about someone renting and having to move with very short notice. This has crept into my thoughts a few times. We like to keep as nimble as possible so we are able to react to surprises.
  2. Even after almost 2 years, I still have friends and family think that I’m “wrong”. It’s funny how many people have it ingrained that you just own a home.

Not sure if it’s positive or negative, but many people want me to look stupid. Since they are so emotionally attached to rising house prices, they feel that anyone who doesn’t own a home is a bet against their fundamental beliefs and values. It’s hardened me as a person. In my 20s I would seek acceptance from people, in my 30s I really don’t care what others think of me.

Concluding Thoughts

The only thing I would encourage the reader of this article to do is to ask yourself what is right for you. Not what is easy. But what makes the most sense for you as a person. It wasn’t always easy and yes there is always times of doubt, but in the end renting has been a worthwhile endeavour.

If anyone has a similar experience, please share it.

Thanks,

Dean

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Evolution of a “Value Investor”

This post will not involve in depth company analysis, instead I wanted to catalog some things that have changed with my philosophy when it comes to picking stocks to invest in.  Recently, some good news was released on one of my top holdings that clearly displays my change.

I started purchasing Pivot Technology Solutions (PTG.v) in the summer of 2014.  The idea behind the investment was a cheap company with decent ROIC (though admittedly low margin), capable management and a large overhang in the capital structure.  There was a large amount of preferred shares outstanding that I felt were preventing the company from being properly valued by the market. The common shares are illiquid and well under $1, making it something that many institutions would ignore. Given who owned the common and preferred shares, it would make sense to do some sort of conversion of the preferred to common to clean up the capital structure. Management had mentioned several times that they had intended to do so.

I continued to purchase shares throughout the fall of 2014 as the company executed on operational promises to investors. There was still mention of some sort of conversion in the future. I was happy with management running the business and the focus on operations. I figured the conversion eventually happened whether organically or being forced by some sort of activist once the value of the business was made apparent.

At the beginning of March 2015, the company announced some good news:

  • company officially initiated a process to convert the preferred shares to common shares
  • announced a normal course issuer bid to repurchase. though many company’s announce this and don’t follow through
  • initiated a quarterly dividend starting in Q3 2015, annual yield at today’s price is around 10%

Old vs. New

The previous version of myself would have simply sold the shares on the good news and likely plowed the winnings into something that was “cheap” (likely one of my losers). I would put money into something the market doesn’t understand and likely a dinky little company that abuses the share price and struggles to execute. I would expand the numbers of company’s I own, which has two effects on the portfolio.

  1. Another company for me to keep tabs on, therefore increasing the demand on my time to maintain an understanding of yet another business with yet another management team.
  2. Increasing the number of company’s in the portfolio reduces the effect that the winners have on the portfolio as a whole.

The new version of me took a few days to reflect and reassess. I reviewed the business, the management team and what I see as the market’s expectation going forward. I have concluded that shares are still cheap, and I have recently increased my position.

Why would I sell a cheap company that is growing and shouldn’t need to dilute shareholders in the future?

Dean

Disclosure: The author is long PTG.v

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What’s Dean been up to? (Part 2)

So it seems there is a debate that has started over Weight Watchers as a potential investment. Take a look at the Corner of BRK&FFH. I personally know little about the company, but did spend some time learning the market while researching Nutrisystem (NTRI). What I can do is share my weight loss story over the last 10 or so months to give potential investors and analysts some real world context to current state. I would never want to be on the other side of the trade with Geoff Gannon so take my points (get it) with a grain of salt. I will not do quantitative research on any company in this post, so those of you looking for investment advice ->skip this post.

I should mention that I am doing this because I have often started researching companies by trying to understand what end users (and potential end users) see as the company’s value proposition. Since I don’t have a background in finance and possess an average level of intelligence, I can be viewed “joe six pack”. This is (free) boots on the ground research in real time.

My Journey

For myself, you could really break my journey down into 2 parts. Don’t worry I won’t share any shirtless photos. Even with a lot less fat, I’m pasty white and my tan lines are horrible.

It started when I was looking at some vacation photos of myself and my family in California. I was kind of grossed out with my appearance. This led me to finally do something about it.

The first part is a quick weight drop. About 25 lbs in 4-5 months. This involved a ton of cardio and calorie counting. Once I reached this goal I spent about 15 minutes there before getting bored and moving into the second part. I will also focus on why I chose the route I did and why I think a few of the other options wouldn’t work for me (and potentially for others as well).

The second is actually going beyond just dropping weight and working towards a goal with a personal trainer. This stage involves weight lifting and becoming extremely careful about what I eat. I am currently 1/3 to 1/2 through this stage. The target at the end of stage 2 is to be in great shape, have a healthy relationship with food and be a little easier on the eyes.

I will focus my attention on stage 1 as that is where using resources like Weight Watchers, NutriSystem, Jenny Craig, various apps and gadgets, a couple of different pyramid schemes and fad diets are targeting people. They all want you to drop weight fast without major changes in your habits or how you think about food. I want to be crystal clear that I think none of these are sustainable ways to lose weight and keep it off. But most people are so concerned with just loosing the weight that they can’t think of how they will keep it off. To be fair I used to be one of those people. I have put on and lost 20 lbs at least twice before this endeavor. It’s only after this recent bout with weight loss do I feel I can keep it off. And it’s because I am not tied to any fad, corporation, scheme, or gadget to make it stick.

How I accomplished the first stage…

I counted…EVERYTHING. I use myfitnesspal. It’s free and I found it very easy. I set custom goals. I can track anything I eat and any exercise I do. Though I never used it, there is an online community. There are some annoying ads on the screen, but I grew up with annoying adds on the screen.

I just set some simple goals and counted all calories consumed and all calories burned. And it worked like a charm. I got a membership at the gym and did nothing but the elliptical trainer. I would go 3-4 times a week during lunch or after work and listen to pod-casts while I exercised. If I wanted a beer or a cheeseburger, I would just go the gym at lunch and offset it.

Why I chose myfitnesspal and not something else…

Jenny Craig – it’s for ladies in my mind. So that’s it. Plus it’s stupid expensive. My mom is on Jenny Craig and the meals suck. I know because she gives me them once in awhile.

NutriSystem – I don’t even know if I could get it in Canada. This could actually work for me as I hate to cook. But I also hate frozen dinners.

Fad diets – they suck and they only work while you are on the diet. You literally do something, drop some weight, but have no idea how to keep it off. It’s so ridiculous.

Weight Watchers – points are stupid. All it is really doing is calorie control, but for people who don’t want to change what they eat. There is like zero sustainability in that. Most people eat garbage, eating less garbage is not the answer. Their online is essentially myfitnesspal app and a community. I can google any recipe for free to tell me it’s content. I didn’t see the value proposition. 

There are 2 things that I think we underestimate after the Great Recession. 

  1. It’s cool to be cheap. Doing things for free is now cooler than overpaying a corporation to bundle them up for you. Maybe it’s me, but people brag about how much money they save or how much they get for free. I don’t remember that happening 7-10 years ago.
  2. Communities can be found in any place. Facebook, Twitter, etc have given people the motivation they need and the support system they desire to commit to things. My suspicion is that personal meetings worked before the internet. Once you have to move your products online, you will see your value proposition deteriorate in the eyes of the consumer.

Companies often talk about the “stickiness” of customers. How likely they can retain customers over the long term. The missing link in how people keep the weight off and how each company drives stickiness is one and the same. All companies want recurring revenue forever. So the real trick is to keep consumers buying the product so they can keep the weight off. The two do not need to be mutually exclusive. In fact I believe a company that had embodied the following would succeed.

“We believe that everyone on the planet is capable of living a healthly lifestyle through the combination of diet and exercise. We have several tools to help get you there (calorie counting app, online community, nutritionist information, etc.). Our goal is for you to one day maintain a healthy weight and attitude towards food without help from our organization.

That’s what is lacking…education. Some companies may say some derivative of this, but I have yet to find one that believes it. I have met personal trainers and nutritionists who believe it. The demographic of the first world will be more than enough to offset potential lost success stories and to drive new customers in.

Although as an investor, companies have an obligation to shareholders to earn a decent return. So I am sympathetic to corporations.

Once I lost the weight I asked a few personal trainers and people who live actively what they do. And I just copied it. The system they use works, why reinvent it. Sure I made some tweaks for me, but nothing major. And yes all of them maintain their health on their own. Some are more sophisticated than others, but not one does anything elaborate.

What’s next?

I have now gotten surgical with my diet. I have only one “cheat meal” a week, and have specific goals as to what % of my diet is carbs, protein and fat. I also put thought into what I am eating when. I have hired a personal trainer to keep me motivated and to do the things I wasn’t able to find online. The reason I chose my personal trainer is that when he asked me what my goal was I said “to still go to the gym on a regular basis in 6 months.” so I asked him what he thinks I should aim for. He said “to build functional muscle and to get to the point in the future where I don’t need a personal trainer.” He gets it. It had nothing to do with the gym I go to, but his personality. By Christmas I will actually be a few pounds heavier (on purpose) and won’t be afraid of the beach or the swimming pool.

Thanks in advance to my readers for sticking around through the lack of posts and “post drift” into dieting. There are a few posts that I have started relating to investing. So stay tuned.

Dean

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What’s Dean been doing??

Once again I have strayed from blogging. Here (for like the 3rd time) is an attempt to rekindle my romance with Petty Cash. The ideas and feedback from readers has more than paid for the time it takes me to write a post, so I should continue to post regularly.

The Market

I don’t have any insight on the market. But it is tough to find anything meaningful to buy. As always I remain cautious, especially on residential real estate in Canada. Deny, deny, deny seems to be the theme. I don’t know if we get a “soft landing”, but things are eerie to say the least. What is the most perplexing, is that as Canadians we are quite certain that a real estate bubble won’t happen to us. I think it’s because we are so polite. I mean it’s like we believe that some sort of greater power will prevent horrible things from happening to nice people. We seem to think that “bad” things only happen to “bad” people. I think even an orangutan would learn not to do something if he seen a friend of his get hurt from doing it. I really shouldn’t say anything as I have made enough mistakes to fill a (near) million dollar house in Vancouver.

As well there seems to be renewed vigor for stocks again. Though my portfolio often goes in the opposite of the market, I remain skeptical of a liquidity fueled stock market that is now priced at greater than 18 times earnings. I have been hearing “pro-forma” and “adjusted” more than ever and analysts have been reaching up to 18-24 months into the future to justify valuation. Not a market call, but I doubt you can see anywhere near 10% returns over the next 10 years.

2013 Performance

Umm. Well, fine. I guess. I have done better than the market and made up much of the losses I had relative to the market when I questioned if I should be running my own portfolio. Having said that, I could do a 180 in no time flat. I constantly reassess holdings and position sizes. Currently north of 35% cash.

New Position

As per Chip’s suggestion in a previous post (see comments), I researched and added HWO.to to the portfolio.

The company is really cheap (less than 3.o ev/ebitda) and pays a monthly dividend. Management admitted that growth is limited and elected to pay a monthly dividend. A large shareholder is looking to liquidate, so we could see a depressed share price for awhile yet. 65% of revenue is from Papua New Guinea. The 3 rigs there are now under contract for a few years, so earnings and cash flow should be pretty certain.

Other Position Changes

I have been adding to OML.v and I have a few other positions that haven’t been blogged about. I think I will do a post with a quick thesis/summary on all unmentioned positions in the near future. I want to emphasize how many of my ideas are robbed/borrowed from others.

Thanks for reading,

Dean

Disclosure: long HWO.to

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