TomB16 investing blog

Our cash is down a bit. We haven't purchased anything recently and cash keeps coming in but our investments are performing so well, the ratio is skewing toward investments without expanding our holdings beyond DRIPs.

I'm extremely comfortable with this situation, for a variety of reasons. If I was younger or wasn't in a position of needing to live off our investments in the near future, I would be fully invested right now.

 

I've stopped trying to get rich quickly. At my age, I can't afford it.

 

Petroleum

My energy sector companies are doing phenomenal, far better than I expected, but that's not what I'm writing about. I will point out, these tremendous performers are a side show for me. They are far from my main holdings. If my petroleum investments were significant, I'd be doing better than I am.

In the mid 1990s, a botanist returned from a tour of a remote area and announced he had found a plant that secreted oil. On testing, it was found to basically be diesel fuel and was a viable direct substitute. It made the headlines for about 5 minutes and then went away forever.

In the early 2000s, it appeared oil from algae was the future. There were quite a few micro to small scale implementations using open ponds, lazy rivers, and an interesting soft plastic tube in which to grow algae. It was like a diesel flavored Mr. Freeze.

Species were selected that would produce a direct diesel substitute at high volume (40% biodiesel by weight) with promise of higher efficiency organisms to be developed.

They had literally developed a process to create huge holding ponds of diesel fuel that could be slurped up and then scrubbed of water and algae. Pump diesel is scrubbed of both water and algae, by the way. An examination of the processing requirements showed a huge energy advantage over crude.

To this day, I believe it's a better fuel source than crude. It has significant advantages. The rather significant disadvantage is the lack of other petro chemicals. As of now, it has gone nowhere and I expect it to go nowhere in the future.

This is a revelation. It's like finding a place that has palletized gold bars and being told it's easier to mine and smelt new gold than to hoist found gold onto a truck.

After some consideration, I have come to the following conclusions:

Petroleum is a highly evolved industry. Boot strapping a new source of energy for internal combustion is going to be an epic hurdle.
I'm a big proponent of green energy. Where I differ from the besandled beard groomers and their man-buns is I see a need for fossil fuels well into the future.

Investors are distancing themselves from fossil fuels. I too believe fossil fuels are on the way out; just not any time soon. The market exodus has left some excellent opportunities in companies that I expect will continue to produce for decades.

What's more, we are seeing companies do less re-investment. Instead, oil indstry companies are opting to distribute earnings as dividends and return of capital. This is the ultimate cashflow model for old, retired dudes like myself.

I can only conclude this is an epic time to own oil. I don't know how long this window of opportunity will remain open but I doubt it will be much longer. The value diminishes with each passing year.

The value won't diminish forever, though. There is a lower floor. Oil is a source of a petrochemical industry that is pretty massive. Oil could continue being necessary for another century but it won't be a primary fuel source for more than two or three more decades.

 

You're always welcome here, WXYZ. My wife made some amazing pumpkin loaf today. Too bad I can't share some with you.

 

As of close Friday, the WBI is at 148.13% and it isn't a peak.

Most years, there is a market contraction near year end. An elevated market does seem to increase the possibility of a larger than typical contraction.

It doesn't contract every year so we could well be holding some cash with no sale at New Years. We'll see.

 

A few "long term stable" stocks that I follow are starting to edge back down while growth stocks appear to be creeping up. I take this as an indicator of a bull mindset.

Most of our holdings are extremely stable, distributing, companies. Generally, they don't do great when the market is booming. In this case, they merely do well. Often, when the market gets scared, these type of stocks go up quickly. I regularly see an upward spike on a small market retraction.

I think the days of moving between bonds and stocks for bear/bull positions is far less prevalent than it was 15 years ago. These days, I believe we are seeing a significant amount of money moving between growth and distributing companies to reflect people's bear/bull position.

 

I'm looking at the Dream Global REIT buy-out. I posted a thread about this company at the beginning of July.

https://www.stockaholics.net/threads/drg-un-to-dream-global-reit.8572/


We owned a tiny number of shares when this company first IPOed in 2011. They were purchased based on nothing more than respect for the Dundee group and wanting to follow this particular issue. Dundee has since been renamed Dream.

Back then, you couldn't open a financial column without reading about the evil of REITs. Real estate was a horrible investment, RE markets were about to crash, and owning REITs would cause your vehicle to get worse fuel economy. The GFC of 2009 was still fresh on everyone's mind. When we bought our first large tranche in late 2013, the stock was distributing at 10.5%.

In late 2013, the stock price was down but the company was performing well. The lease ratio was improving. They sold off a few dogs from the original bulk property acquisition. I believed in what they were doing and bought more with no regard for market sentiment.

I worked in fintech for part of my career and had a reasonable idea of how to analyze RE holdings. By tuning out external influence and doing my own analysis, it became clear Dream was a slam dunk. The real risk was DRG's own management.

Now weeks away from the buy-out, it's been an epic run. RE didn't crash, of course. We nearly quadrupled our initial investment with simple buy/hold and buying as heavily as we could with our available cash on the dips. Dips enabled us to pick up quite a bit more stock but our largest single purchase was late 2013. We picked up about as much from DRIPs as subsequent purchases.

I would be happier if the company had not sold. It's a well run REIT that continues to be a top producer. I'd rather own a well run REIT than have the cash but they are divorcing me.

At no point did I sell DRG to balance anything. We bought it because we wanted to own the company. Once we had it, we watched how the company was managed and held tight to our investment.

I would also point out this company has performed far and away better than Tesla. Tesla currently sits at double what we initially paid in 2016. We're happy with Tesla and look forward to many more years owning the company but a well run distributing company will outperform nearly all growth companies. I'm glad that nearly all traders will step over a company like DRG on their journey to find a Cinderella company that will make them rich in a short time.


This takes us to the next phase of the investment life cycle; reinvesting this cash. There are no companies I'm as bullish on as I was on DRG in 2013 but there are two good companies we currently own that we would be happy to expand our ownership of. It will come down to whichever shows the best value. in the next few months.

There is frequently a down cycle at the end of the year. With the WBI at 148%, there is a chance the end of year correction will be larger than normal. So, we could move into next year with a large amount of cash or we could move into next year with a massive amount of cash. At the moment, we see a bright future.

 

In the previous post, I wrote about a successful, highly profitable, investment experience. I'd like to post about an unsuccessful experience and the thought process associated.

We don't have any unsuccessful holdings, at this time. It's been a couple of years. At least, that's my perspective. Perhaps I should reconsider but I will leave judgement this to the reader.

Two years ago, I sold a real estate company (not a REIT). Good company. Profitable. A market I wanted to be in. Lots of positive analysis on the Internet.

When buying, I under-researched the company. I bought a small holding after a few weeks. I read the P&L and a lot of stuff but I didn't dig far into their history. It turned out, an extensive archeological study would not have helped.

Over the 2.5 years I held the company, the market boomed. As well as being an R-E broker, this company held some retail space. As I recall, the retail space this company held was 100% leased for a quarter. I've never heard of that before, or since.

When I sold, the books looked about the same as when I first bought in. They were bragging about the booming R-E sales and leasing they were closing but the books never improved. It became clear, money was leaking somewhere. Internet articles continued to paint the company as a Cinderella story.

I sold at roughly what I paid and we collected the 2.4% yield for a couple of years but I consider the investment a failure. It became a company I did not want to own.

These days, the company is up a tiny bit from where I sold, the dividend hasn't changed, and the books look a tiny bit worse. The company is now operating in a very slow R-E market.

 

Here is a stock I don't consider a failure but I suspect many would. I also don't consider it to be a success. Time will determine the wisdom of this holding.

I will be specific: TSE: SOT-UN

I bought a small, but not tiny, amount of Slate Office REIT about a year ago years ago for $6.15 CAD. At the time, I set it to DRIP. The price had plummeted, likely due to an obvious pending distribution cut/elimination. A new CEO was just coming online (always risky).

It's currently at $5.90. Slate is distributing about 6.5%. My loss has been approximately offset by distributions.

By summer, I turned off the DRIP. I don't want to dig this potential hole any deeper than it is.

I see good and bad happening at this company. I'm cautiously optimistic.

I don't like holding retail R-E. Bricks and mortar retail is dying.

My best guess is this company will recover and do reasonably well. It will never be a star in my portfolio. At the current rate, it will return the initial investment in 9 more years and I will still hold the company. They may bump the distribution in the next 9 years and that will accelerate the ROI. They could also reduce or eliminate the dividend.

Many would consider this position to be a failure but I do not because I'm happy to proceed with this company.

Keys for me are:

- I hold a reasonably small amount of SOT based on understanding the risk at the outset.
- I don't need every holding to pay off like a fixed slot machine
- I have no intention of buying dips on this
- The investment is small but I'm confident it will produce gains well below my top holdings.


Perhaps the overarching idea is I decided to invest in this company and nothing has fundamentally changed since buying so I will hold.

 

Long post. Sorry.

Part A:

Keeping some money in bonds is often a good idea. I neither endorse nor disclaim the rule of thumb. It can be effective but it is not the only solution to the problem at hand. There are others.

The rule of thumb is not optimal, although it's a great idea for a lot of people who aren't good at financial planning.

I see the problem as needing cashflow during periods when markets are down. When a market crashes and your stocks lose 50% of their value, selling stock costs you $2 for every $1 you get out. When the market recovers, you've sold off a disproportionately high amount of your portfolio to live, causing a big hit to your portfolio.

The problem is entirely different for people who own growth stocks than for people who own distributing stocks. Distributing stocks can stop paying but it doesn't typically happen. None of our companies stopped distributing or even reduced the distribution during the global financial crisis of 2009. Because of that, we went heavy into distributing stocks in the years between then and now.

Bonds can provide cashflow; so can any fixed income mechanism, like term deposits, defined benefit pensions, etc. There are a lot of solutions to the problem. Some people keep bonds so they can sell during a market crash and buy stock at a discount.

During the working years, I see little to no need for bonds. Perhaps $10K of bonds as an emergency fund would be a nice buffer for most people.

We are fortunate to have a DB pension we could live on so, even now, we have extreme little bonds.
Bonds are a hedge. Insurance. They are not a good investment. For that reason, I own the least reasonable amount.

The way our finances are structured, we can be blase about market volatility. That comfort is the goal so I consider our strategy a success.

Part B.

I'm less pragmatic about ETF bond funds. I do not feel they are a substitute for bonds, nor are they a hedge against market volatility. The only way they score is having "bond" in the name. Also, there are other problems.

Look at the price history of your ETF. Scroll back to 2008/9. Notice the dip? That's because people were selling their bonds in wholesale fashion, to buy stock. Stocks crashed first, bonds dipped shortly after.

What's the point of buying insurance that pays less when you need it than when you don't? You'd literally be better off holding a bit of cash for a shorter term defensive position.

Next, there is the horrible return of bond ETFs. If you check the prospectus, you will see their top holdings with quantities. From there, you can calculate the weighted return of their bonds. If you do, you will notice it is substantially higher than what the ETF pays. Funny that?

Look at the price/volume chart. You will see the price dip inversely to volume. That is the overhead of the market maker. ETFs differ from stocks because shares can be created/destroyed on a whim. This is done by the market maker. The market maker also maintains the price. The market maker does not do this for free and it is overhead that is not accounted for in the MER.

Part C.

Keep in mind, I am not advocating my approach for you. This is just how I do it.

I've looked for bonds/debentures from companies that I feel are strong enough to survive a recession/depression. Also, I much prefer the primary market. I don't want to pay the overhead of the secondary market. I watch for new issues feed specific companies and I buy when I see a piece of the puzzle that I need.

For example, we currently have bonds/debentures maturing in 2022, 2025, 2026. We could use something that matures in 2023 or 2024. I will not buy a dog, just to color in that blank space. At this point, the chance of find a new issue to mature in 2023 or 2024 is almost nil. I may buy something else as a short term solution to that exposure or, more likely, we will just weather it. We can survive with $0 bonds so no big deal. Don't forget, we will have the income from the other bonds during that period. It's getting down to a pretty remote corner case.

Lastly, I keep our bonds to an absolute minimum. It's about 5% of our portfolio and we are retired. To be fair, we are fortunate that we don't need much income. With our business, distributions, and DB pension, we don't need any bonds but I have tried to plan so we can maintain a nice lifestyle during the worst possible conditions.

By the way, our lowest paying bond is 5.5%. For longer terms, I look for a reasonable conversion.


One of our holdings is a series of debentures that pays at 6.25% and converts at a reasonable price. That sounds pretty good but the stock is doing well and distributes at 7% at the current price with a strong chance of a dividend increase in the next couple of years. We've held the stock for quite a while so the yield at our blended cost is pretty amazing. Most of the time, stocks pay better than bonds/debentures.

Bonds aren't a great investment. They are insurance. You buy what you need to sleep well and then do your best to maximize the rest of your nest egg.

Again, there is a lot of philosophy in this post.

You come across as someone who will do very well to break away from the pack and do your own thinking. I encourage you to consider: your situation, the problem you're trying to solve, other possible solutions, and the cost of bonds.

 

Ok, so I've indicated we have just under but around 5% bonds/debentures and we sleep great. Is that ridiculous?

Consider how many bonds you'd need if you had a core of REITs that distribute at 7+%. Still need so many bonds?
DRG is our best performing REIT. SOT, which I've also mentioned here, is our worst performing REIT, by far, at roughly break even. Those are the extremes.

Mostly, they double in value every 5~6 years and generate tremendous cashflow. We let them drip most of the time but, at some point, we will take the cash instead of DRIPing. At another point, we will have to look at selling down the core but that will be many years down the road, though.

We have a high ratio of REITs but I've been actively looking for growth companies, lately. It's tough to keep a portfolio balanced and I don't try that hard. I'd rather have a good investment than fill a quota. We are recently retired and I'm looking to add volatility. I never thought I'd be in this position.

Again, I'm not advocating a REIT ETF. Also, most REITs aren't very good. You have to shop for value and you need to be comfortable with them.

For what it's worth, I've found Graham's value formula to work very well with REITs.

 

This is a response to shaw520 but it's part of my back-story so seems more relevant in this thread.

Late 2014, I read Michael Lewis' book, "Flash Boys". Great read.

Flash Boys does a great job of explaining front running, dark pools, and some other things that I wasn't up to speed on. The book left me with an impression that dark pools are unregulated places for front runners to feast on unsuspecting investors.

The more time goes by, the more I think dark pools are more fair than primary exchanges where front runners have command of the matching engine.

Anyway, the first time a limit buy order hit below any recorded price, it was a revelation.

How would you like to have a stock sell at $10.40 when the day range is $10.50~10.60? I'll bet the person who had that happen blew their top when their market order sold well outside of any published range.

Since then, I try to look for opportunities that allow me to buy below market. It invariably happens in after hour trading and it is always with low volume stock.

If someone places a market sell order for a stock with extreme low trading volume and you have a long term limit buy order in place, there is an extremely low (but not zero) chance you could get a ridiculous discount on the stock. It's a bit of a lottery and it can only be done when you have a bit of cash laying around to cover the transaction.

Last year, I picked up an extreme low volume penny stock with a long term limit order. It hit way below the lowest registered trade price in the last 5 years. It's an energy stock. It had a return of capital at the end of 2018 that almost covered the purchase price. After that, quarterly distributions paid more than the rest of the cost. It's a venture energy stock so it will never be at the core of my portfolio but I have all of the investment back and still hold the stock.

It isn't possible to buy huge volumes of stock this way. This isn't a way to get rich. It's a way to arbitrage very small transactions. Mostly, it's just a way to have fun with small transactions.

 

I have different negative feelings about REIT ETFs. lol!

But, back to bonds...

Good bonds go up in a recession. Governments cut interest rates causing decent yielding bonds to sell at a premium. It's the opposite reaction of ETF bond funds.

Here's another idea:

If you are a decent investor, and you sound very much to be, there is a threshold where you would be better off to take a hit on selling your stock during the occasional down market than to take the hit of having 50% of your net worth in bonds through good markets.

The numbers swing on ideas and opinions but it might be something worthy of a bit of thought.

WXYZ keeps his money in the market through thick and thin. Consider WXYZ taking a 50% hit during a financial crisis. Now, consider the financial hit WXYZ would already have taken if he had been carrying 50% bonds this whole time. He is an older gentleman so the rule of thumb would have him carry a lot more than 50% bonds by now. There can be no doubt, he is way ahead.

WXYZ is fortunate to not need his portfolio. I'm not so fortunate. While I don't need mine, I soon will and I didn't save money and live a life of austerity to die with a big roll of money in the bank. This is why I keep some bonds but I limit it to what I need to have a reasonable life and no more. The point is, there is a lot of wisdom in WXYZ's approach. As far as im concerned, he is the last word in alphabets.

 

WBI currently 149.84.

Investing, right now, is like shooting fish in a barrel. There isn't a lot of sport in it. This is not normal. Enjoy it while you can.