Questions from the Fam

Hey Fam - as you know, I had some questions that I thought I should address or not yet address here.

First, there was a good point about me not really explaining the whole Warren Buffett thing - fair enough. But I also got a question about P/E ratio - which I did chat about on a previous post but will expand a bit on this one. Finally - how to read stock charts for dummies - well that sounds like a god book idea that I will never write. I might tackle that one in a different post.

Warren Buffett

Mr B is indeed quite old as was mentioned in the question from Issy - and he has actually copped a bit of flak about that - but given he is one of the richest people on the planet, I think he gave zero f*%#s abut that

In addition to being very clever and savvy from a time before he wore pants, he has made his fortune and his reputation through investing - and his style is based on a few fundamental principles.

He invests in companies he can find out about and understand well - he wants to uncover the fundamentals of a business - and fundamental is a term used in this area - looking at the fundamentals is all about the company balance sheet and annual reports etc - their assets, liabilities, sales revenue, etc. This is a little counter to the current view about building companies that lose enormous amounts of money now in order to make money later.

He invests in companies that he believes have a positive future - because he invests to hold those companies for years and possibly decades. This is counter to some of the current views re day trading where you use technical analysis (as opposed to fundamental analysis) to buy and sell stocks within minutes or hours or over a couple of days - including short selling which is when you use a function to make money when a stock drops in price versus when it goes up. Can talk about that in another post. And I mentioned technical analysis - that where you use charting software to determine trends that can be used to indicate a good buying or selling position. Statistically, almost all day traders using technical analysis lose money (newbs).

He invests in companies that don’t tend to have enormous debt, and that put their assets to good use and make good profit from those assets. So when you look at finance reports - where you see P/E, you can also look at ROE or Return on Equity - so company has $1B in assets and $500M in revenue, they have a 50% ROE.

Apple in years ‘18, ‘19, ‘20 ROE 49%, 56% and 73%

Tesla in years ‘18, ‘19, ‘20 ROE -23%, -15% and 5% - and that +ve turnaround for Telsa has ***

Finally, He invests in companies that he feels has good management in place.

THEREFORE, although some feel that the above is a bit old fashioned, I and a whole bunch of people think his strategies are still the way to go for the long haul. He writes a letter to shareholders every year (as part of his role in Berkshire Hathaway, his investment business) and lots of people hang on every word in those letters - to get a sense of what is on his mind and where to from here. You can google the letters - they are all available - from 1965 through to now.

Key takeaway for us - is that we also should try to look for good companies that will continue to be good over the longer term - and we should wherever possible, hold onto those companies for the longer term. Warren B is fundamentally in a different league to me - and he doesn’t try to time the market to get in and out quickly to make money - so we should do the same. That said, with a small % of our money, we can have a few punts AND if we really choose a dog, we need to cut our losses. Hope that all makes sense and sing out if not.

P/E Ratio

As per my comments in “Our Second Investment”, P/E is one of the financial metrics you can use to look at a stock BUT it gets complicated really really quickly because of all the people and computers in the market that don’t follow Mr Buffett’s line of thinking above.

It used to be that you would look at the specific industry and you could compare companies in that area - like miners - and then compare Price (of the stock) over Earnings (the company revenue) so Fortescue FMG (iron ore miner) is at the time of writing 8.5 versus Rio and Newcrest who are 15 - 17 as a P/E. Then you would say - OK - the stock price for FMG appears to be a bit low compared to the others, as a ratio of their revenue - so does that mean FMG is good buying or are there other reasons for the difference. But there are also stacks of these indicators and measures so you can’t just focus on one thing.

AND……………….

I believe Amazon is a ripper stock and I have had it in my super account for years - its P/E is 66! Apple is a corker and PE is 29. We own Microsoft with a current PE of 34.

What about General Motors in God Bless America - PE is 13. Ford is 11. Toyota is 15. So big auto industry appears to have a share price that is around 15 times the companies earnings.

TESLA has crashed from close to 1,000 down to a still ludicrous 710.

And remember from above how I mentioned that the ROE was a bit *** - well if you consider Tesla revenue - they actually pretty well always lose money - however more recently, they appear to have turned a corner - but in a most recent announcement - they indicated they did make extra money selling Bitcoin AND selling the tax credits they get for EV vehicles to other care companies who don’t get the credits - so they are a car company that loses money selling cars and they do financial shenanigans to ‘look’ like things are rosy - and yet their share price is through the roof.

Therefore

1 - you have to be careful with the ratios these days as things are getting weird.

2 - I didn’t jump on Tesla shares (neither did Warren) and I still think they are over priced - BUT the products are pretty special and the impact the company has had on the planet has already been phenomenal as Tesla has forced the other players to follow.

3 - Warren Buffett has given away $37 Billion to charities so far and his plan is to give away 99% of his wealth before he passes away. He and Bill & Melinda Gates created givingpledge.org where the rich commit to giving away the majority of their wealth. Pretty cool.

I still owe you more info on what to look at in a stock chart. But that will be for another day.

3rd Buy - Cloud & Rundle

Housekeping

Well done again for the auto payments - everything appears to be ticking along on autopilot so we can rake in the squillions.

What and Why

Microsoft has been a great share for us from a Super fund perspective and although the price has jumped a lot over the years I have been following it, I still think it is a great, long term stock.

Reasoning is that Microsoft still has a cracking good suite of software, including Teams that has come to the fore in Covid times, competing against Zoom etc. It is a superb, one stop shop affair - with every app you could need for general business plus remote collaboration and storage, all wrapped up in a recurring revenue bundle (rundle) under the Office 365 banner. Plus it owns Linkedin so has a hand in business social.

PE - that we discussed last post, is mid to high 30’s which is high’ish but not crazy - and so I think they are one to own - therefore - we do - now.

How we have gone

We have over $3,400 in the portfolio now - so things are going well. The market is getting a bit over heated again so it might fluctuate a bit - but slow and steady wins the race and I am super pleased with our consistent progress.

For our next purchase, I have been thinking about buying a ETF that focuses on Climate Change - called ERTH (ASX) - it looks ok - and has only just listed - but still not sure yet - it makes sense from a high level concept point of view - but not sure how I feel about the ETF versus the underlying share situation - for example, the ETF has telsa as one of its shares - and I don’t know whether that is a great idea from a financial perspective, even though I believe in EV’s. If you guys want to check it out, then google BetaShares Climate Change ETF - and let me know what you think.

Your SVP.

Our Second Investment

Housekeping

I wanted to thank everyone again for getting to this point. We had our initial funds added which was quite a manual process but we have now had a few weeks operating on auto-pilot from a savings point of view. Well done to all.

More about this post

I was thinking we would buy around $1,200 of a stock per month and we will stick to that plan roughly - but given stocks have to purchased in multiples, I will try to aim for around $1,000 with some stocks going over (for example - I am unsure how we ever buy Amazon - given each share is a bit under $4,000).

I also think that for better diversification (eggs in multiple baskets), we will buy 1 International share then an Aussie share - so at the end of the year, we will have a dozen or so stocks, split 50:50 local and international. I probably (think I) know more about the O/S stocks but they do have complications like AUD to USD exchange rates etc - plus lets try to stay a bit balanced.

Check out the photo above - this is the stock we are buying currently - we will end up with 50 or so shares of FMG. This is just a snap off my phone - I track stocks I am keen on via the shares thingy on my iPhone. A couple of things to point out.

First is that you can choose the period of time for the chart - this stock looks a bit poorly at the moment, as it has had a high of $26.40 - and is currently back down to $20. But if you click the 1 year or 2 year time frame, the chart looks pretty incredible because FMG has come up from under $10.

So - i think FMG is a good stock for us to have - and even though the price has dropped a fair bit, I believe it will turn around and start climbing back up again. We may consider this through our share saving program - it is like a principle called dollar cost averaging - which in my head translates to maybe buying more FMG later in the year if the price dropped a lot. For example - we buy 50 shares at $20 and in 6 months time, we still think FMG is great - but for some reason the market drops temporarily and FMG is $15 a share - if we bought another 50 at $15 - then on a dollar cost average basis, we would have actually bought 1the equivalent of 100 shares at $17.50. So - a price drop happens from time to time for many reasons - and it might signal a good time to grab some more (or you are just putting more good money after bad - so we have to make sure it isn’t an emotional decision.)

Another thing to see in the photo is P/E - 9.71 - this is a ratio of Price of the Stock over the Earnings of the Stock - So for FMG, the share price is currently 10 times its earning - on a per share basis.

P/E used to be crucial but it is less so now that to all the young ones in the market who don’t think earnings matter - but given I am very very old (to quote Rebecca), I still think it is a good thing - when you compare stocks in the same industry. FMG is an Aussie Miner - Rio Tinto is too - FMG is 9.71 and Rio is 18, BHP is 32 and Newcrest Gold is 20. So - for no other reason, that makes me have a better look at FMG as it looks like the other ones are over values, or FMG is undervalued (or somewhere in the middle).

*** You know I said I was very old - well that is one reason why I have completely missed out making a million on Tesla shares - I love love love the product - but I couldn’t get my brain around the Price versus Tesla Earnings - Tesla current P/E is 1,023 ……………………………………………….

What and Why

Have spent time above sort of explaining - I wanted a local stock versus O/S and of stock baskets locally, people tend to suggest that having some money in one of our big miners makes sense.

Of our mining type companies, I reckon Gold might be a bit high in price and I aint a fan of coal. I don’t like BHP as I don’t like their international activities/behaviour and Rio Tinto tend to blow up indigenous artefacts, amongst other things.

Fortescue - I like them - not perfect to be sure but I do like them. I like Iron Ore - prices will be up and down but I like the product. I like Andrew Forrest, their Founder - who appears to be a cracker of a bloke who has (with his wife) committed to giving away the majority of wealth during his lifetime, has a net zero climate target in place, is looking at green steel, and has a very capable CEO - Elizabeth Gaines.

So, let’s see how they over the few years - lots of negotiations with China - will be interesting.

How we have gone

We are still hovering around break even with our Apple shares - the market has been moving around a bit - BUT we do collectively have over 2 grand in our account - so that is something to celebrate.

Your SVP.

Our First Investment

Housekeping

I think I will do a end of month post that shares what we bought, why we bought it and also how things are going for the month. Then I might do some mid-month posts that have other info or things on my mind, but I believe I will commit to the end of month update and hopefully have time and focus to do a middle of the month post too. 

(and why the photo for this post – well I, sadly, will admit that I was looking forward to reading Mr Buffett’s annual letter – and hopefully after a few months, you will know who he is and why he is a pretty awesome nonagenarian)

Month end Pre-amble

I may be able to beat the general market – but I may not. So, we do this for a year and we can see how it pans out. Either way, the main focus is on saving so that will be a tick no matter what, however we may change direction after 6-12 months. One school of thought says we should have money in a simple basket of shares that track the overall market – like on the news at night, they refer to the Dow Jones index or the Nasdaq in the States – which look at the overall general market performance and the tech market respectively. In Australia, the news item will show how the all ordinaries index (the Aussie dow – sort of) or the ASX 200 (top 200 Aussie companies) is performing. It would be easy to buy the index or some sort of basket of shares that track that number – like a ETF or Exchange Traded Fund. 

The above is a very very very sensible approach because to do otherwise, you would blow some of your savings in fees to someone who picks the stocks and manages things for you. And there is a strong argument that for your money, you often get a poorer result when all the fees and costs etc are taken into account.

I humbly believe that I am better than almost everyone else (born blonde with blue eyes – just sayin’) and I won’t be charging fees – but this stuff, in all seriousness, is very hard to get right so let’s see. If after 12 months, we realise we haven’t done much better than the broader market – then we will have still succeeded but if we do get beaten by average and boring, then we have learnt a lot that can be put into practice via a low cost super fund and we will all have saved a bit of money and had a giggle along the way, pretty well entirely at my expense.

So, for the next 12 months, as a test of this approach, we will be buying around $1,200 worth of stock a month – and given we don’t want to own more than around 10% in any one stock, that means we buy one stock per month – well that’s what I have chosen for us.

What and Why

We are now all proud owners of Apple stock. That way, we can all feel that little bit better about buying Apple gear and paying for Apple subscriptions. And we hope to continue making money as Apple continues to be more valuable. 

Why did we do that? Well, first of all, Apple stock dipped a bit the last few days so it looked like good buying right now – but in a broader sense, I still think that even though Apple has increased in share value a ridiculous amount over the last couple of years, they are still in a healthy and well placed position to keep making more money and locking in more customers. They have been able to pivot from a hardware manufacturer that gets X dollars very time they sell Y phones to a company that has excellent vertical integration (they make the chips and then the phones the chips go in and they own the stores you buy them from etc) BUT more importantly, they have developed a growing subscription based revenue stream so if phone sales drop a bit, it doesn’t knock them around as much. Subscription grew from iCloud storage to Music to TV to Fitness – which a guru I follow refers to as a RUNDLE – which is a recurring revenue bundle. Rundles are good – and Apple should be good for us.

How we have gone

We have immediately lost money. We have about $1 less than when we started. I trust you are loving it so far. I am. 

Trust me.

Your SVP.

Welcome

Welcome and Why.

This is in some respects how it all started.

Isabella started with this book - which I purchased too, read and would recommend to anyone, no matter their age. That book led me to subscribing to Scott’s private newsletter for investing (now closed) which then led me to taking a very serious look at Rebecca and my personal super account.

I realised that I hadn’t really put the attention into our super account and I hadn’t really understood the power of compounding interest.

So, I have been pushing the super account pretty hard and have genuinely made up significant ground. Turns Out - I appear to be ok at stock picking.

I therefore wanted to help the fam out with a savings plan, an investment plan and a lot of education with fun along the way. Plus I want to learn about this more myself so I can get better at this, pull the pin from work sooner, buy an off-road caravan sooner and enjoy retirement while all of our extremities still work.

Am working on our first purchase - maybe a miner in the coal industry? Happy for comments and suggestions below and thanks in advance for your trust and faith.

SVP.