Despite having a lot of other important things on my plate, including some meetings to finalize some vital legal paperwork that needs to be completed, I have spent the past few days immersed in the back alleys of the investment world, studying little known companies with names that almost no one would recognize.
Some of the most interesting things can be found here – banks with senior preferred stocks that are convertible into the common, offering the same upside potential but a dividend twice as rich as the shares everyone else is buying; tiny firms with very good balance sheets and income statements that no one seems to give the time of day due to the small size; limited partnership units that have much richer returns but are avoided due to complex tax considerations.
The result? My portfolios, both including the KRIP and outside, are now dominated by names everyone recognizes. They include things like Pepsi and General Mills, Sysco and Royal Dutch Shell. There is Berkshire Hathaway and Microsoft. It runs the gamut. If it’s huge, has little debt, billions of dollars in cash reserves, a dominant market position, and at any time offered 3x the Treasury yield on current earnings with the upside potential for growth, I probably wrote a check for it in the past four years.
My holdings look like they were put together by an extremely conservative, depression-era bank trust fund agent who has sterling silver hair, wears dark navy suits with white, crisp shirts, and speaks about the importance of dividend income and sticking to fundamentals. There is not a single name on the list that would cause me to lose sleep, even if we saw another 1929-1933 period when stocks declined, peak-to-trough, by more than 80%. If these businesses fail, the global economy has imploded in a catastrophe so great that it will be written about in the history books. Were that to happen; too bad. That’s life.
At 30 years old, the valuations have led me to a place where I am, for the first time, sitting on a collection of assets that don’t require me to be “smart”. I could stop buying and selling everything I own, precisely at this moment, and a name a parakeet the portfolio manager. Working for crackers, and doing nothing, the aggregate net earnings, dividends, and share prices should be demonstrably higher, despite the volatility, decade after decade.
I’m not sure how long the situation will last. I have no intention of selling the assets I hold now – how can you replace a business bought at less than 10x forward earnings with a 10% expected growth rate and double-digit returns on capital, while enjoying a huge competitive advantage and shoving cash dividend yields in excess of the Treasury yields in your pocket as you wait, patiently? Oh, and while holding it in a way that you won’t owe taxes for a few decades! But there is always new money coming in from various sources, including the dividends churned out by these blue chips themselves. Once I can’t get the intrinsic value I demand, I’ll be ducking down the more aggressive side streets and back ways once more, but only with the new cash added from my other income sources and the dividends that pile up from the blue chip stocks themselves.
It’s a funny thing. I couldn’t be happier. I waited for 15 years to get some of the prices I got and … they came. These are the types of enterprises that I don’t have to think about selling when some intrinsic value target is hit because intrinsic value is growing over time.
But now … now there are some odd areas that look good. Investors have begun to get desperate for yield and drive up some blue chip stocks to levels that are no longer appealing. I have had to hold off, or stop buying, some shares for this reason. In other cases, I was never able to get a position built. (Unfortunately, I am still waiting on Brown Forman. People can be stupid on valuation sometimes. There isn’t a single share anywhere in my portfolios. It isn’t even close to fair value. If my estimates are right, it’s at least 30% too expensive for those who want to earn a fair rate of return. If I turned out to be conservative, there is no harm done. But I don’t think I am. I have come to the conclusion that the investors must be dipping into the merchandise. Otherwise, their folly can’t be excused.)
If it keeps up, I’ll be back to the 3,000+ page listing collections, browsing through tiny restaurant chains with a dozen locations or unit trusts that are trading for less than the present value of their reserves. There is always something intelligent to do.