InvestorsFriend Inc. Newsletter October 21, 2007
Build it Like Buffett
Warren Buffett is one of the top two or three richest people in the world and is worth about $55 billion. Unlike most billionaires Buffett never started an operating business. He never invented anything. He has only ever ran investment holding companies and invested money.
In fact Buffett’s story may leave you with few excuses for not eventually ending up with at least ten million yourself (if you want to, that is).
Buffett, unlike many corporate executives did not amass his fortune through earning a huge salary or through being given stock options.
Buffett has never earned a salary anywhere close to $1 million per year. His salary as Chief Executive Officer of the holding company, Berkshire Hathaway is a modest $100,000 per year, unchanged in about 40 years. He did however make a fairly large income through fees charged on a hedge fund he ran for about 15 years and this in combination with frugality and an early start to investing provided the few million in seed money that he then turned into billions. As impossible as it may sound, Buffett amassed an incredible fortune mostly through saving and investing. He made high returns averaging over 20% per year over about 60 years. It’s important to note that he made billions with an annual return that really does not sound all that extraordinary. From 1965 through 2006 his average compounded gain in the book value of his Berkshire Hathaway shares was “only” 21.4% per year.
The fact is that an amazing fortune can be accumulated by starting with a relatively small amount of money and compounding it at 20% for say 50 years. (And of course impressive sums can also be accumulated even in 10 or 20 years). $100,000 at 20% compounds to $619,000 in 10 years, $3.8 million in 20 years and a staggering $910 million in 50 years.
Of course not everyone is at a stage in life where they can afford to let money compound without spending it for 10 or 20 years, let alone 50 years. But in that case you may have a child or grandchild who does have the 50 years available.
It’s also a fact that compounding money at an average rate of 20% for a long period of time is very difficult but it is not outside of the realm of possibility.
If you want to accumulate millions through investing then it seems to me that there is no better example to follow than that of Warren Buffett.
He has written a fair amount about how to invest successfully and tons of books have been written about his methods.
Really, it is almost foolhardy for any serious investor not to closely study Warren Buffett and his methods.
This Web Site provides investment education and stock picks which are consistent with what I have learned by studying the example of Warren Buffett.
Ya Gotta Shop Around…
I’m not usually that big a fan of shopping around. After all, time is valuable. Also I am not a person who thinks that business is generally ripping consumers off. I believe that competitive markets are usually capable of delivering a good deal to customers.
However, at this time when many Canadian prices need to be lowered drastically to match U.S. prices, it is now especially important for Canadians in particular to shop around.
An interesting story that has surfaced regarding the higher prices in Canada is that it may not be the retailer that is scooping the higher profits. Brand name suppliers are said to be charging much higher prices to supply retailers in Canada compared to what they charge U.S. retailers. If so, consumers need to pressure retailers to provide the U.S. prices and the retailers can in turn pressure their suppliers. The ultimate pressure is for consumers to simply shop in the U.S. especially by mail-order.
Another reason that it is important to shop around is that many businesses have moved away from a one-price-fits-all approach. Increasingly businesses want to charge very high prices to customers who are not cost conscious. Meanwhile they are also willing to charge bare minimum prices to attract the most cost conscious customers. Maybe you are an affluent consumer and you just are not that cost conscious. But, if you keep your eyes open and shop around a little you may be able to get the best in quality and service and still get a discount.
Are we Leaving Our Debts to Future Generations?
Many people seem to think that we are leaving huge debts to our children and grandchildren. They point out that it is unfair that future generations be saddled with repaying national debts and for the costs of providing social security to the baby boomers.
But let’s think about this.
The United States and Canada may have debts but they certainly do not have a negative net worth. Those debts have helped to pay for the huge installed base of highways, government buildings and other government projects like Hydro dams. There is nothing wrong with leaving someone a mortgage as long as you are also leaving a house that is worth lots more than the mortgage.
Along with inheriting the national debt and other government obligations, the next generation will collectively inherit (from the government or from their parents) the entire stock of infrastructure and buildings in the country. Even after helping to pay for the boomers’ retirement and health care I think the next generation is getting a very good deal.
Another asset that the next generation automatically inherits is the sum total of all recorded human knowledge and ingenuity. They will not have to re-invent, the wheel, the ability to write, existing agricultural advancements, the sequence of the human genome or even the remote control. They will automatically inherit a truly staggering amount of inventions and knowledge. The value of this inherited information far exceeds the value of all the physical assets that they will inherit and absolutely dwarfs the value of the debts and obligations that they will inherit.
I think it is very hard to mount a credible argument that future generations are getting a raw deal. Sure, you can point to a few areas where they inherit some debt, obligations, or a less than pristine environment. But on balance the vast majority of children born in the developed world are getting one heck of a good deal. There has surely never been a better time to be born than today. Nor has there ever been a better time to be alive in all of history. And I am sure that the years to come will be even better. (And especially so if you can amass a fortune through investing by then!)
The Information Economy
Increasingly I have come to realize that it is information and knowledge that a developed economy values most. Food, clothing, shelter and other physical goods are very important. But once those basic needs are met, it is information that we value most. Consider that celebrities and sports heroes are some of the most highly paid people in the world, yet what they produce is really information and not a tangible thing. Consider too that the worker who produces a physical product is paid a pittance compared to the chief executive Officer who drives the company through the spoken and written word. Information and knowledge truly is king. It has been so since the dawn of civilization and it always will be so.
Even when it comes to physical products, it seems that information plays a huge role. People will pay huge premiums to get the right brand. In many cases people buy prestige brands because of the “information” that this conveys to themselves and others. For example, perhaps buying a Lexus says to others, “I am a successful somebody, not an ordinary nobody”.
Investors should look to information companies for the highest returns. Consider the incremental cost to produce another unit of an information product (music or file CD or electronic file, software, electronic book or manual, access to electronic data and advice). The incremental cost is often close to zero and that leads to huge profit potential. But not every information company will be a profit winner. Each company has to be looked at on its merits.
Testimonials
Over the years we have received some extremely gratifying comments from the users of this Site. Here are a few of them:
You are the most reasonable human being I see around in this business. Thanks and may God bless you. K.S. October 20, 2007
I have really enjoyed and appreciate your effort in giving subscribers like me your excellent stock research for virtually no cost (compared to the actual profits we get from your research). K., October 11, 2007
I read and absorb all the information from your website each and every day, even on vacation, my wife used to think I was obsessed, but now she understands, we paid for our entire vacation to St. Maarten including lots of shopping with plenty left over to renovate our kitchen and then some. Tony Sept. 22, 2007
I love your work, high quality and focused on the important items. It’s some of the best research I read, and generally in fewer pages which is always a good thing! P.B. Sept 14, 2007
I love your site and I have made money following your advice and research. Keep up the good work. B.A. August 26, 2007
This site is very good value for the money and I have recommended it to several others keep up the good work. J.R. Aug 22, 2007
I was really quite taken aback by the most recent (free) newsletter of May 27/07 about planning to be rich what an insightful piece you have written there thanks for that. D.H., May 31, 2007
Sometimes I wonder if visitors to this Site will think I have made these up. But I think anyone who spends more than a few minutes on the Site can immediately see that you can always count on this Site for honesty. We won’t ever win on every stock pick, but we will always be 100% honest.
Performance
Realistic or “grown-up” stock investors know that very attractive returns can be made in stocks over a period of years. But they also know that not every year will be a winner.
For InvestorsFriend this is a bit of a mixed year. Our three Strong Buys selected at the start of the year are up an average of 16.3% each and that easily beats the market.
Our average Buy (or higher) rated stock is up 5.3% while our model portfolio is up 2.5% and my personal portfolio up 4%. The model portfolio would have been up 6.2% if not for the impact of the higher Canadian dollar on its U.S. investments. These figures are somewhat behind the market performance this year.
But since the start of 2003 my personal return is 177% and the model portfolio return is 179%. And the Strong Buys are at 277%. More realistically the return from investing in all the Buy or higher rated stocked at the start of each year would have been 218% since the start of 2003.
Canadian Inflation Rate
Most of the time I don’t worry about trying to guess whether the economy is headed into a recession or not. In any economy there are always at least some good stocks to be found.
But right now, I believe that Canada’s economy may be rapidly changing from growth mode to slow mode. And it’s happening so fast that the economic statistics are not yet reflecting it.
Consider the Canadian Inflation numbers released on Friday October 19.
Canadian overall inflation in the past 12 months has been 2.5% and the core rate (excluding certain volatile items) has been 2.0% In the one month of September the inflation rate was 0.2% but the core rate was 0.4%.
Looking at different provinces, Ontario’s inflation in the past year was 2.3% and Alberta’s was 4.6%. But for the one month of September the inflation in both provinces was just
0.1%.
I believe that the statistics are lagging reality. I believe prices are now dropping for two reasons. The biggest reason is that the high Canadian dollar has dropped the cost of U.S. imports by about 20% this year to date. Many retailers are just starting to pass along those savings. Wal-Mart and Zellers announced price cuts this week. The other reason that Canadian prices should start to drop is that the economy is slowing. It’s no longer as much of a sellers market.
Within the next few months we should see big price drops passed through to consumers on all items sourced from the U.S. I believe that this has the potential to push year over year inflation into negative numbers very shortly.
Price cuts will be good for consumers. But meanwhile many Canadian manufactures and tourist operators are going to be badly hurt. Even some retailers like car dealers could be hurt. Retailers who sell imported products should do very well.
You can check out the Canadian Inflation Statistics yourself at Statistics Canada.
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END
Shawn Allen, President
InvestorsFriend Inc.
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