Warren Buffett Speaks by Janet Lowe

Looking at which categories I.ve been posting to lately, it seems like I.ve been standing around the watercooler for too long: lots of watercooler posts and few posts on writing the book or on books and plays that I should be reading. Damnation! But here I recall some good advice from one of my professors. What he said was that it is good to read outside of your field of study. Was it Keith Bradley? Or no, now I remember. It was wisdom that Bradley imparted on his student Leslie Shumka who in turn imparted it on me. It.s good advice because it.s true. Read too much and too long into your own field and you grow stagnant. With the same data, you.ll come to the same conclusions. You grow stagnant. Better to read outside your area of comfort. Become like the long forgotten Renaissance Man. We laugh at him today as a ‘jack of all trades, master of none’, but remember, the world had been fairly static until then, and then, well, all of a sudden, things just took off.

Well, man cannot live on writing alone. Especially when writing is costing the author!–domain renewals, hosted WordPress fees, commissioning artwork for the cover illustration, the opportunity cost of writing instead of working, and so on. So it.s good to read books on investing. Which brings us to Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor by Janet Lowe. This is a small hardback from the library that caught my eye. For a long time, I.ve wanted to learn more about the Oracle of Omaha. Why? Well, he.s made a lot of money. But a lot of people have who don.t interest me. Unlike all those hedge fund guys, Buffett seems to be one of the ‘good guys’. A straight shooter. He.s also not based out of Wall Street but has kept his office in the midwest. He lives in the same house he.s had since the late 50s. And also, everyone has an opinion of him. In my education as an investor, it.s time I formed my own. Hey, maybe I will be able to make some money as well! Because writing this blog sure isn.t doing anything for the pocketbook!

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The book is divided into sections about investing, work, family, life, and work. Lowe subdivides the sections or chapters into headings where she quotes two or three times to illustrate his point of view on a given subject. It.s a nice sort of book you can read at the end of a day and still get something out of it. I don.t know about you, but sometimes I.m pretty brain dead by the end of the day.

He.s got a folksy sort of wisdom that is easy to forget in the fast paced world. For example, under the ‘Be Honest’ heading in the chapter on life, he says:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you.ll do things differently.

It always surprises me the amount of confidence successful go-getters have. Gates, Ellison, Jobs, and Shatner (don.t know how I associated him with the others) were also like this:

I.ve never had any self-doubt. I.ve never been discouraged. I always knew I was going to be rich. I don.t think I ever doubted it for a minute.

Sign me up! Here.s another one that left an impression on me. The message is simple. Surround yourself with people you look up to:

I choose to work with every single person that I work with. That ends up being the most important factor. I don.t interact with people I don.t like or admire. That.s the key. It.s like marrying.

But there.s no point in just reading. Reading should be a prelude for action. Now, in my non-registered investment portfolio, 10% is dedicated to small cap Canadian stocks (generally stocks with a market cap of a couple hundred million up to 1.5 billion). I had been holding it in an exchange traded fund (ETF), iShares ticker XCS.to. It has fees of over half a percent a year. Considering that the real return of stocks (ie after inflation) is four or five percent a year, the fee represents over ten percent of my real return! Over many years it adds up–compounding works for you (as Einstein said it.s one of the wonders of the world) and it also works against you! I.ve thought about ditching the ETF in favour of a small basket of individual holdings. For one reason or another, instead of doing it, I had been thinking about it. Successful people, I.m learning, Just Do It. It usually works out well, unless, of course, you are Tiger Woods, in which case, it is better not to do it and not even to think about it!

Okay, so the stocks Buffett likes are ones that have a moat around them. It.s hard for competitors to take away their market. He.s into railways right now for this reason. He also has a litmus test: buy a stock if you are confident that–if you couldn.t trade it or even see it.s day to day value for ten years–you.d be confident it would have done well. Other things: he like consumer staples and discretionary stocks. He.s always got a Cherry Coke and a Dairy Queen ice cream in hand because he owns them! I imagine soon we.ll have images of him feasting on Kraft Dinner with some Heinz Ketchup (which Berkshire Hathaway has recently bought). So, I sold XCS.to. The nice thing about XCS.to was that it was well diversified, holding over 200 little flailing stocks, some of which would disappear and others which would explode in value. I decided on 20 holdings for my Buffett clone portfolio. Here.s what I bought:

K-Bro Linen (provides linen to hospitals and foodservice, not many publicly traded competitors)

Western One Rentals (in my former career rented tons of equipment from them at a great cost, why not buy it? Plus the stock has just collapsed with the pullback of oil into the $40/barrel. Perhaps good entry point)

Clearwater Seafood (they have the license to harvest a lot of crab, shrimp, scallops off Canada.s coast and it seems everyone is eating more seafood these days)

Capstone Infrastructure (governments increasingly turning to private sector for energy solutions. Should be recession resistant industry with growth opportunity)

Boston Pizza Income Fund (I.ve ate here for years, might as well own it)

Liquor Stores (recession proof, outlets mainly in Alberta and BC. Actually, with conditions in Alberta, we will shortly see how recession proof it really is!)

High Liner Foods (most of their sales are actually to restaurants and institutions. Rising fish consumption should help out this stock. Too bad they gave up their fishing vessels in the 90s)

Student Transportation (one would think a school bus company responsible for ferrying kids to school would be recession proof)

Premium Brand Holdings (an interesting consumer staple stock: they.ve cornered the sliced meats and sandwich corner of the market, owning Freybe.s and Grimm.s among twenty or so other brand names)

Morneau Shepell (sort of an analytics type company that advises other companies on how to manage pensions, health care benefits, and so on. You.d think reading the news on unfunded pension obligations there is a need for these guys)

Intertape Polymer (they make packaging materials. With more and more stuff getting shipped all over the world, there is demand for what they do)

Northwest Company (they own shopping centres and grocery stores in remote locations)

Descartes Systems Group (named after the French philosophe who calculated ways to make bus routes more effective. They are a logistics company which streamlines international shipping and receiving. I wanted at least one information technology stock in the portfolio)

Chemtrade Logistics (they just sell chemicals all over the world, been watching it for a long time)

Great Canadian Gaming (defensive moat around this industry because it.s hard to get licenses!)

AG Growth International (they sell wheat silos around the world. It seems like a sleepy stock that will do just fine in the long run)

New Flyer Industries (they make BC Transit buses and buses for a lot of other cities too)

AGT Food and Ingredients (worldwide supplier of pulses, ie beans and things. They will benefit from the shift away from wheat and people looking to eat a staple that is environmentally friendly to produce)

Innergex (renewable energy sources, mostly hydro. Should be recession resistant)

Boyd Industries (everyone needs to replace windshields or fix the fender bender at some point)

Mostly consumer staples and industrials. Notice anything?–yes you got it: no financials! Here.s what Buffett had to say about banks:

It has always been a fantasy of mine that a boatload of 25 brokers would be shipwrecked and struggle to an island from which there could be no rescue. Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder assign 20 of their number to produce food, clothing, shelter, etc., while setting 5 to trading options endlessly on the future output of the 20?

Hahaha that is pretty good! But consider this. 5 out of 25 is just 20%. He.s thinking of the US. In Canada, financials today account for 35% of the TSX Composite!!! OMG run to the hills! Sure, we need banks and brokers. Lending, allocating capital to where it.s required, etc., is all good. But when over 1/3 of the market is tasked with moving money around, it.s got to make you wonder: is it necessary for  the financials to be so big? How I think of it is this: a biological metaphor. If finance is like an arm or a hand (it.s moving around money so that.s one way of thinking about it) it works when it.s in proportion to the rest of the body. When the arm is five times longer than it should be, it just gets in the way! Think of all those roid monkeys out there. They change their anatomy so that things are no longer in proportion. And they will pay the price. Maybe not today. But certainly down the road: the heart just can.t take it.

Okay, so when I started the new portfolio, some of the stocks weren.t cheap. Buffett is a value investor. K-Bro Linen was actually frighteningly expensive. But I reckoned that I held them in XCS.to anyway, so it was good to make the change. Actually, it feels good to have done something. Having done it, it feels like it was the right thing to do. We.ll see in ten years. In the meanwhile, I.ll be fixing my car at Boyd (actually, bicycle, I lied!), eating out at Boston Pizza, renting from Western One, eating High Liner at home, using Innergex hydro…you get the idea! From now on it.s just money in the pocket baby!

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