10 advices to save a lot of time and a lot of money when you begin

I know that many ideas here have been written in the past. But it's a post that I plan to submit to Robin for his new book. You can follow Robin on Facebook via this link.

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The hardest thing for new investors is to know where to invest.

What's a good company? What's a good CEO?

Both are very important, but, for beginners, they're both hard to evaluate.

We can't know these things instinctly. That's why most people follow the first person they can: A journalist on TV, on a website, on the radio, a workmate or a neighbour. And there's no warranty of quality.

Your duty as an individual investor is to seek autonomy as soon as possible. I know it sucks, because we like to make as little efforts as possible to get what we want. It's gonna take years, but my advice is to read about the stock market like you would read about another topic of interest: Rock and roll, movies, hockey, football, etc. You won't be good if you're not passionate about it. Nobody gets good at anything if they're not passionated about it.

If you don't get the autonomy I'm talking about, you'll be manipulated in a way or another. You'll read people trying to pump their penny stocks, which can be done easily if a moderate audience swallow everything they say. Or you'll buy the big names that analysts sponsored by big companies will try to sell you. These big names may not be bad picks, but they may not be great picks either.

You won't get that autonomy easily, so, if you find some people that look honest, stick with them for a while. There's not that many of these people in the investment world.

To help you a little, I have "5 never-invest rules" and "5 essential to invest rules".

Let's begin with the "5 never-invest rules": 

1- Never invest money on a stock where there's a lot of controversy;
2- Never invest money on a penny stock;
3- Never invest money in an industry which is declining;
4- Never invest money on natural resources; 
5- Never invest money on a company that carries too much debt (for instance, 50% of their market cap or more);


And here's my "5 essential to invest rules":

1- Search stocks with a beta lower than 1 (lower than the market) (precision: many people seem to think that this metric is useless but I believe in it)
2- An historical return on equity (ROE) over than 15, and, ideally, higher than 20;
3- A forward PE between 15 and 25 (of course, if you pay 25 times next year's earnings, the growth has to be exceptional and the historical PE of the stock must have always been high);
4- Annual EPS growth of at least 10% over the last 5 years;
5- A high predictability of earnings.

If you apply the "5 never invest rules" and the "5 essential to invest rules", I think that your chances of getting a great selection of stocks are high.  I can't imagine someone going bankrupt while applying these 10 rules on a 15-20 stocks portfolio. 

Amazon

I'm completely mystified by Amazon. The stock just reached the 2000$ mark, which means that it has doubled over the last year (about 980$ a year ago). And we're talking about a stock with a market cap of about 1 trillion dollars.

Oh yes, my droogies. Amazon is the second biggest market cap in the world, just after Apple (which had a 40% return over the last year... not bad either). That's completely crazy.

What is funny about Amazon is that it's PE multiple has contracted instead of expansed over that period, which is the exact opposite of what should have happened.

OK, Amazon is a case apart because of it's stratospheric valuation. It's just less stratospheric this year than it was last year. It means that the company has made a great job of improving it's earnings.

And there are still people investing on the Venture, with penny stocks, thinking that's where you can the most easily double your money.

I'm not that a fan of Amazon, but I'd put money on it anytime before I'd put money on any penny stock.

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Remember the famous last words of Bernard Mooney: "I have one regret: it's having overlooked exceptional companies because of their price". That sentence can be applied to Amazon, but probably to many other examples that we all have in mind. 

Toronto

My great friend Robin isn’t aware about it because we simply didn’t talk to each other for the last months...

But I thought that I could go for a weekend in Toronto this fall. I’ve never been downtown Toronto and I’ll soon be 40, so, why not while I’m still alive?

If I go there, I want to drink beers with you. Yes you, the unknown person reading my brilliant posts while you take a crap. It could be something else than beer. We could even smoke a joint after mid-october because it’s gonna be legal then.

Or sing in some karaoke bar. We could sing Bohemian Rhapsody and I’ll let you the honor of singing the « Gallileo Figaro » part. It could be completely sick.

The only obligation for you is to write me a short email (masterpenetrator@hotmail.com). If nobody is interested, I’ll probably stay home and watch some shit on Netflix.

Conviction of the moment part III - Edwards Lifesciences (EW)

Have you ever visited a facebook page about vegans? Fuck, these people are crazy. An  impressive number of beautiful girls are on these pages, but many of them have big tatoos and don’t seem open at all to another way of seeing things. That’s like some kind of fucking religion. And not a beautiful religion. A religion where you have to seek and kill the enemy. 

I understand that there’s a lot of bad things around the industry of meat. Animals are sometimes badly treaten. Have you seen that they kill male baby chicken by millions? It’s true. Such irrespect for animal life. But most of us don’t know about that, so we continue to eat chicken, meat and all that stuff made of late animals which have been treated like merchandise. Do you really feel that humanity deserves respect after that?

OK for the preaching. But, you see, I’m somewhere in between the crazy vegan religion and the crazy meat industry. I really like these hamburgers! Actually, the fact that bugs me the most with veganism is that they don’t even fucking drink milk and eat cheese. Come on. That’s like trying to live in another dimension, putting that much restrictions on your alimentation. OK for the meat part, but the eggs, the cheese, the milk, I think that it’s way too far.

Anyway, there will be a little more and more of these vegan disciples year after year. But there’s gonna be even more and more old and fat people who need a new heart or some intervention to their heart. Because hamburgers eaters will always surpass pumpkin seeds eaters.

That’s where Edwards Lifesciences enters (products for heart diseases). In my opinion, it’s a great company that deserves your attention. It’s expensive though, but the moat is wide and the numbers are great.

Forward PE : 26

Average PE last 5 years : 30

Annual sales growth last 5 years : 12%

Annual EPS growth last 5 years : 21%

Average ROE last 5 years : 26

Current ROE : 26

Earnings growth next year (estimated) : 12%

Debt : Close to zero

Cash position + receivables: About 7% of the market cap

Earnings predictability according to Value Line : 95%

Dividend and payout : 0%

Conviction of the moment part II: Ulta Beauty (ULTA)

Boys don’t care too much about their appearance. We may as well wear the same underwear for 3 days, if there wouldn’t be a woman around us, we wouldn’t give a shit. We would wear socks in our sandals. We would wear shirts that don’t match with our pants. We would be happy that way. But women try to bring us in their field of superficiality and appearances and we abdicate. 

Those fucking women are obsessed with beauty. That’s why they buy make-up and all that crazy stuff that costs a lot of cash and bring nothing concrete other than seduction and sex. Us, investors, put all our blood in our brains. Nothing is left for our dick. So we don’t care about that seduction game.

But, eventually, we grow old and we become alone. And then, alone with our hard-earned money, we’re seduced by pretty girls full of make-up but without any money. That’s where fortune and appearances meet. Fortune seeks beauty and beauty seeks fortune. That’s how it’s always been and how it always will be, whatever how many centuries will pass.

That’s why I believe in Ulta Beauty (ULTA), a chain of make-up stuff for women that’s been growing like fuck in the recent years.

Forward PE : 18

Average PE last 5 years : 37

Annual sales growth last 5 years : 22%

Annual EPS growth last 5 years : 29%

Average ROE last 5 years : 27

Current ROE : 37

Earnings growth next year (estimated) : 17%

Debt : Zero

Cash position + receivables:  About 4% of the market cap

Earnings predictability according to Value Line : 95%

Dividend and payout : 0%

Of course, there’s always Amazon. But in these shops, you can try the make-up that interests you. Also, you can ask questions to sellers. You could use the service of a professional make-up chick. You can see the tendencies. OK, the moat isn’t Grand Canyon’s size, but there’s a little moat at least and girls love to be with girls and put perfume and other shit on themselves and compare themselves with other chicks and blablabla. Also, contrary to Michael Kors or specific brands, that kind of shop won’t fade away with fads. The only real threat is Amazon, but Amazon is a threat for everything, or almost. I don’t spend a lot of my spare time thinking about Amazon.

Conviction of the moment part 1: Cognizant Technology (CTSH)

Are you able to be faithful to your portfolio over a long period of time?

I can’t. 

I own 5 stocks which I owned 5 years ago.

I own 7 stocks which I owned one year ago, in a portfolio of 22 stocks.

There’s constantly something more interesting in sight. You own Mohawk Industries? Yes, it’s a good company, but it’s cyclical, the ROE is OK but not great and earnings haven’t been that good lately. 

Why keeping it while there’s another great company which is not cyclical, doesn’t have debt, has a lot of cash and has better ROE and growth? Plus, it’s selling for 14 times next year’s earnings.

That’s how I think. You may own good businesses, sometimes, a greater business crosses your path and you’re not in love anymore. That’s how it should work, for everything in our lives.

One of my biggest convictions of the moment is Cognizant Technology (CTSH). A company that helps smaller companies to transit to E-business. They operate in various sectors (healthcare, products and resources, communications and medias).

Among all my holdings, it’s probably the best combination price/potential. Here’s some numbers :

Forward PE : 14

Average PE last 5 years : 23

Annual sales growth last 5 years : 15%

Annual EPS growth last 5 years : 16%

Average ROE last 5 years : 19

Current ROE : 20

Earnings growth next year (estimated) : 13%

Debt : Close to 0

Cash position + receivables: About 25% of the market cap

Earnings predictability according to Value Line : 100%

Dividend and payout : 1% and 18% (they keep most of their cash, but we get a little something).

There’s obviously some challenges, otherwise the stock would be selling for a PE around 23 like it’s been the case for the last 5 years. Many employees are located overseas (in India mostly), and probably that the commercial war has some impact here. Plus, even though the last results were good, they seem to have worried some investors about a slowing growth. Well, to me, a 13% growth (which could be smaller but Value Line qualifies this company as 100% predictable) with a lot of cash on hand and no debt doesn’t worry me. Very few businesses are in a similar position.  

Feel free to add some negative points in the comment section. I can’t see too much of them for now.

Ce que les meilleurs achètent

Here's a shitload of information about your favorite investors, because quarterly information is out today about almost everybody worth of interest.

Berkshire Hathaway:

Apple: 24% of the fund (added 5% to his position last quarter) what a fucking bold move.

US Bancorp: 2,6% of the fund (added 11% last quarter)

Philipps 66: 2% of the fund (reduced by 24%). 

There's a lot of other transactions, but I don't think it's relevant to talk about small positions. 

Lou Simpson:

Liberty Broadband: 10,7% of the fund (added 161% to his position)

Bill Ackman:

Lowes: 12,7% of the fund (new position). I like Lowes, but Ackman stinks so I'd sell everything if I had some stock. Watch him do his usual fucking bullshit. 

United Technologies: 9,8% of the fund (added 134% to his position)

Automatic Data Processing:  9,8% (reduced by 47%)

Chuck Akre:

KKR: 3,1% (added 108% to his position)

Lee Ainslie:

A fucking shitload of transactions for Ainslie last quarter. I can't write everything, so here's his top 6 and the related transactions: 

Facebook: 5,6% (reduced by 20%)

Google: 5,3% (reduced by 11%)

Microsoft: 5% (added 3%)

Disney: 4,5% (new buy)

Dollar Tree: 4,2% (added 2244%)

Mohawk Industries: 3,7% (added 41%)

I like to follow closely Giverny Capital. Sometimes, they seem to copy exactly the stock picking of Sequoia Fund, but sometimes, they bring something new and interesting.

During the last quarter, the guys at Giverny increased slightly most of their stakes. Actually, in the top 10 below, only Heico was a bit decreased. They bought a few shares more of each other stock.  So, here’s the top 10 of the fund with the percentage of each stock.  Remember that Dollarama, MTY Food Group and Constellation Software were the only 3 canadian stocks of Giverny during the last years. They represented about 20% of the fund, so, US stocks below should be reduced by about 20% to see their exact percentage of the fund. 

Berkshire hathaway : 18,5%

Carmax : 10,5%

Bank of the Ozarks : 7,5%

Ametek : 6,8%

Visa : 5,9%

Union Pacific : 5%

Markel : 4,6%

Alphabet : 4,5%

Disney : 4%

Heico : 3,6%

Big movement :

LKQ : reduced by 59% after being a top 5 position in the past (now 1,6% of the portfolio);

Credit Acceptance Corp : reduced by 98%, before the recent surge of the stock (the guys at Giverny were lately quoted as saying : « Oops ») (now 0,05% of the portfolio);

Fastenal : Sold entirely;

Facebook : New buy (2,7% of the portfolio) ;

Littelfuss : Almost a new buy (from 0,04% to 2,7% of the portfolio).

I don’t understand why they keep  0,04% positions with some stocks. They would probably answer that they follow better the stocks they hold, even if it’s a very small position, but come on, what’s the use of a 0,04% position even if you manage 100 billion of dollars? That’s ridiculous. If you don’t believe in a stock, don’t buy it. If you believe in it, buy at least a 2% position. Don’t lose your time with something that doesn’t make a difference. 

You want to know the 2 secret ingredients of Giverny for a portfolio? Growth and predictability. In that top 10, most of the stocks are growing a bit more than the market and are highly predictable. That’s how you can emulate them and some other great investors such as Chuck Akre.  And me. 

A few words on Jason Donville

Once in a while, I write "Jason Donville" on Google and I look for a sign of life.

Because I still think about him and many of his picks, such as Concordia Healthcare, Delphi Energy, Cipher Pharma, Patient Home Monitoring, CRH Medical, Badger Daylighting. And time has shown us that these stocks couldn't perform with a little broadcasted pushing. I often ask myself how the Donville Kent fund would have performed if Jason didn't appear on TV up until 2015.

Today, I've found something bad about Donville Kent. Here's the link about a possible fraud.

Shit, that's sad. I don't think he's officially guilty but it raises some questions.

The kings of buyback

Many people seem to put a lot of emphasis on growth when buying stocks. I agree with them: growth is very important. But, to me, the management is more important than growth, because it usually assures more viability in the long run. That's why I've never bought ultra-growth companies like Amazon or Shopify. Charts can show I've been wrong because I could have doubled my portfolio over the last year if I had sold everything and just bought these two stocks. But I would have been much more anxious because they don't fit with my "well-managed stocks model".

When you begin, you don't have a clue on what makes a well-managed company. The answer is variable depending on the context. But, usually, if the debt level is low/medium, the executives buy back stock and the ROE is over 15 (ideally over 20), the chances that this company may be well managed are good. And a well-managed company may not surge overnight, but at least, it retains it's value, which is something you learn to appreciate over time.

Among these indicators of a well-managed stock, buybacks are usually great because they make you a bigger owner of the stock. For instance, if you own 10% of a company and the company buys back 50% of it's float, you're now the owner of 22,2% of the company. And you didn't do anything. Obviously, some times are better than others for a buyback. For instance, if the historical PE ratio of the shares has been around 15 and the company buys back it's stock at a PE of 25, you may be worried. But, for those who don't want to ask themselves too much questions, let's remember the fact that buybacks are usually good.

And here's some very great stocks in a buyback perspective. You can see the percentage of the float they bought back over the last 3 years:

Discover financial: 21%

O'Reilly Automotive: 19%

Apple: 15%

Dollarama: 14%

Carmax: 13%

Disney: 12%

Canadian Pacific: 11%

Credit Acceptance Corp: 10%

Home Depot: 10%

Buying back 10% of a multi-billion dollars company over a 3 years period is incredible. You have to be very disciplined and, mostly, dispose of a lot of money. So, there's two clues there: First, these companies make a lot of money, second, their managers want to offer you a bonified performance. 

  

...Then, you understand why Disney sell their fucking Magic Kingdom tickets for 115$ US. They want to screw costumers at the benefit of shareholders. 

So, I'm probably wrong VS the rest of the market, but I'll always be more amazed by a company that buys 10% of it's shares over a short period of time than about a company that grows it's sales by 20% over the same period. In a way, growth may be just an effect of fashion while buybacks are a great effort.