The 12 days of Chrismas, part 2

On the second day of Christmas, my true love gave to me, a red suit to get raped!

What did you do for Halloween?

I went to some party with a friend of mine. It was a party full of French people in Montreal. And my friend wanted to dress like the guy in Clockwork Orange with some of his friends. I asked myself how I could complete the line-up without having to buy some costume for 100$.

I thought about the movie and, obviously, the rape scene came to mind. I remembered I had a red suit which was perfect for the role of the girl who gets raped in the movie.

So, I dressed like that. And when people came to me during the night, asking how I was dressed, I told them: "I'm the girl who gets raped in Clockwork Orange".

Their reaction was either fascinated, either offended. But mostly fascinated.

The 12 days of Christmas, part 1

On the first day of Christmas, my true love gave to me, a blog post full of fluo pee!

I've been pretty quiet lately. Why?

Because my computer at home is dying. The other day, it took 2 days to start. I realized that it was time for an appropriate investment. Because when essential goods have reached their obsolescence point, it's not an expense to buy something new. It's an investment. 

So, to celebrate the arrival of my new Dell computer, bought during the black friday, I'll write 12 Christmas posts about other things than investment. You may find them stupid and useless, but come on: it's Christmas. Let's forget money and stock market for a few days. 

To initiate this sequence, I'll write a few words about my Crohn's disease. For a few months now, I've been taking pills at breakfast. These pills aren't very funny to digest because I often have a nausea which goes from slight to medium. In other words, I feel like a pregnant woman. My appetite is altered too. I now dislike things I liked before like milk chocolate, apple juice and yogurt. And I'm more tired than before. I feel like I have chemotherapy for something way less dangerous than a cancer. But I listened to "Schindler's List" last weekend. I guess some jews had a more difficult time than me back in the days of the glorious 3rd Reich. 

Anyway, the funny part is that my piss is now fluorescent at least once a day. Yeah. It's a beautiful fluo yellow. Get Crohn's like me, get a brand new piss colour!

Holiday gifts, from a consumer's perspective

I often write from an investor’s perspective. Today, it’s gonna be from a consumer perspective. Because Christimas is coming and I believe that more people should know about which stores and companies have the biggest profit margins on what you're buying.

The indicator (net margin) is not perfect, but it’s nonetheless intersting:

Reitmans (RW&CO, Penningtons, Retimans, etc) : -1%

Costco : 2%

Walmart : 2,6%

Best Buy : 3,5%

Amazon : 4%

Canadian Tire : 5,5%

TJX/Winners : 10%

Apple : 20%

Booking.com: 30%

Microsoft : 32%

As you can see, low margins don’t always imply low costs for consumers. For instance, Reitmans doesn’t offer low cost apparel. I go there sometimes (RW&CO), and you can easily find some skirts at 100$. Despite these high prices, Reitmans doesn’t make money. That company is going right to a pitfall.

On the other hand, the relatively high margins at TJX/Winners (10%) may indicate that it’s not the place to go for apparel. Well, I go there sometimes and I think you should go there too for quality at a reasonable price.

In conclusion, net profit margins are your friend as an investor, but not necessarily as a consumer. 

 

Apple is now expensive

Being able to tell if a stock is cheap or expensive is something very difficult. It will take you years before getting there. And even after many years, you'll still be unable to be sure about your impression. You'll mostly get to a point of approximate comfort or discomfort with a stock. That's the best you can aim, in my opinion...

An example of an expensive stock is Apple (AAPL). The current PE is 22 and the FWD PE is 18. You've surely seen scarier valuation than that...

But historically, Apple's PE is way lower than that. See for yourself:

2009: 21
2010: 18
2011: 15
2012: 12
2013: 14
2014: 17
2015: 11
2016: 14
2017: 18
2018: 13
2019: 22

Last time the PE was this high was 2009. Let's add that, in 2009, Apple was a much smaller company. And the Iphone/Ipod was the new revolution (there's no revolution in sight these days).

Analysts expect 10% annual growth for the next 5 years. I think it's reasonable but I don't think we could expect much more for such a giga-cap.

Apple is still a great great great company. I wouldn't tell anybody to sell an entire position. But at the current level, I think a reduction would be appropriate for someone owning a big position.

But, do what you want. I don't care. What matters to me is my own portfolio. Fuck you.

Ce que les meilleurs achètent

Here's another chronique about ce que les meilleurs achètent. 

 I'm not more excited about these investors than I was before, but, once in a while, we find something interesting among their stocks. And, in general, we can see if these investors think that the market is expensive or not (lots of buy, or no buy at all). Small clues to help us make our way through this merciless market.  

Let's begin with Giverny Capital from Montréal. I still like them. They don't do a lot of stupid things. Usually, they're pretty rational and their picks are interesting :

First, they started a new position with Progressive (PGR), an insurance company. It’s an interesting name that I’ve known via some old Sequoia investment letters. A long time ago, Progressive was a very big position for Sequoia (15% in 2006 and I think it was even bigger before that year).

PGR represents 2% of the american portfolio for Giverny. It's a significant new position. I don't like financial and insurance companies anymore, but that's one of the few names I'd be tempted to own, one day or another. But don't take my word as an advice and take a look by yourself.

LKQ is entirely sold. It was a big position for Giverny not so long ago so I guess they gave up on it. Mohawk is also almost completely sold (97% of the position was sold). It’s weird, given the fact that the stock is currently really cheap and Giverny boys have been fans of the stock for years.

Apart from Giverny, what did the others do?

Buffett did nothing significant other than reducing his Wells Fargo stake by 8%.

David Rolfe (the guy who owns almost all the stocks I like) was very active. He reduced almost all his positions but increased his Alphabet stake by 33% and his Electronic Arts stake by 55% and, finally, Alcon by 45%. He started new positions with NVIDIA and CDW. 

Chuck Akre did almost nothing significant except than starting a position in Brookfield Asset Management and adding a lot of shares to his minor Alarm.Com position.  

That good old Bill Ackman increased his Berkshire stake by 14%.

Many investors were very active. I don't understand this hyperactivity. Probably they don't understand it too, because as we all know, most of them improvise.  

And you, unknown investors, did you do something special during the last quarter?

Best managers in the world

Most great businesses have high net profit margins.

For instance, some interesting companies have 20-25% net profit margins. And an exceptional business like Visa has 50% net profit margins.

Imagine that you have a business and when you sell one unit of your merchandise, you get a 50% profit. Wouldn’t it be great? You’ll get profitability much quicker with that type of business than with a business like Ross Stores for which net profit margins are around 10%.

At the bottom of the scale, just before churches and non-profit organizations, you’ll find Costco with 2% net profit margins. And even with these ultra low margins, Costco still makes money. And every shop is always full.

As an investor, Costco doesn’t grow enough for me. It’s valuation is also very high. Nonetheless, their ROE is around 20 which is incredible for such a low margin business.

I think that it’s the business I respect the most, from an investor perspective. Not my favorite business model, but probably the best managers in the world. Who I am to say that? Well, getting such small profits (mostly membership) and building such an empire where everybody goes is, to me, the incarnation of skill and intelligence.

Waiting for the next correction

Currently, the stock market (S&P500) is more or less at it's all-time high. 

I'm preparing for the next drop. Actually, I'm looking for a drop of the market of 15% or more. Then, I'll buy stocks. I may even use margin, for the first time of my life.

Because since 2008, I've only bought regular stocks. Never bought anything else. Never shorted a stock. Never used margin. Nothing else than stocks, sometimes bad stocks, sometimes good stocks.

So, here's what I'm planning to do at the next correction:

I'll probably use margin for the first time of my life. For those who don't know what a margin is, here's my novice view on it:

When you open a margin account, you can buy stocks with money you don't have, if you put a specific amount. For instance, I could put 5000$ and use a margin of 5000$ (ratio 1:1). I could go as far as 30% personal funds and 70% margin, but I wouldn't start too agressively.

With a margin, you pay interest on a debt you have to reimburse over time. But with the money borrowed, you can buy stocks and make a profit. However, as much the returns can be very interesting, a negative performance is also amplified and you could also experience a margin call, which is a kind of mini-apocalypse for a portfolio. It means that, if the value of your stocks drop a lot, the institution that offered you the margin may sell stocks without your authorization. 

Some people recommend to NEVER EVER use margin. Some other people believe that it's the only way to get great returns over time and to achieve some financial independance. I believe that the truth is somewhere in the middle. But five things are sure for me:

1- Never use margins if you're a novice investor. Use it only if you have good knowledges about stocks and investment.

2- Never use margins if you're insecure about the stock market or if you'll have trouble to sleep after using it.

3- Never use margins for other things than great quality businesses. 

4- Never use too much leverage. I plan to get a margin equivalent to 10% maximum of my portfolio. I'll start that way and I'll see over time if I expand it. Mistakes will be less harmful if I start slowly. 

5- The best way to use a margin (that's what I'm planning to do) is after a severe market correction. Because stocks will be cheaper and your return will benefit from the rebund of the market. Obvisouly, we never know how long or how big a correction will be, but after a 15-20% drop of the market, it may be a good moment and that's what I'll be looking for. 

For instance, Berkshire Hathaway would be a great candidate for a stock bought with leverage. You won't get a stellar performance with BRK, but the 8-10% annual return may be amplified by the use of leverage. At the opposite, If you use leverage with weed stocks, you're a stupid gambler and you expose yourself to very big losses. 

Any opinion on margin/leverage?

Some people use it?