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IFB59:Listener Q&A: DCA, Canadian DRIPs, Recent Negative Earnings

 

canadian drips

Welcome to Investing for Beginners podcast this is episode 59. Tonight Andrew and I are going to answer some reader questions, he’s gotten some emails and we wanted to go take a moment and read through those. We’re going to read some stories and we’re also going to answer some questions so I’m going to go ahead and start us off.

The first one I’m going to read is from Anthony the letter starts with:

Andrew,

I just wanted to express my gratitude for what you and Dave are doing with your podcast. One of the things you both preach frequently it’s patience and resisting the fear of missing out. This recently saved me a decent amount of money. There was a stock that I really liked because they were selling in a bargain I mean this stock would look great. I invested once a month in research during the time in between about two weeks before I would normally make a purchase I noticed the price kept going up and going up. I felt like I needed to buy in NOW or else I would lose potential gains it took all of my willpower to just hold off and wait until the month was up before buying in.

I’m sure you can guess what happened next they went back down to its original price the next week then I went down a little further by the time I bought it it was actually spent less than it would have been if I had bought it a month prior this just goes to show how little things like having a little patience can help you in your financial success.

Thank you for your time and hard work you put in your effort is truly helping others towards achieving financial freedom.

Thank You,

Anthony

Dave: well Anthony you’re welcome. Glad you are finding some value in what we’re doing that’s what we’re here for is to try to help you guys.

Andrew: your thoughts that’s perfect that’s we’re going to start the show on the peak and it’s just going to all go downhill from here all right.

Now that we pat ourselves on the back let’s actually help some people.

Here’s two questions from Josh both good questions. so we’ll tackle them one at the time.

Hi Andrew you talked about dollar cost averaging and its importance however how do you distribute across your portfolio all into a single position or spread out across multiple?

How much is too much to put into an individual stock I have five thousand dollars putting a thousand dollars into 5 stocks makes sense. However is there awaiting to placing more dollars into one position versus another? Can you invest too heavily or not enough into a single position while neglecting other positions?

Several questions sort of saying the same thing, love to hear your thoughts.

Thanks Josh

Dave: I guess my thought on what Josh’s question is equal waiting to start would probably a great thing to start with that’s kind of how I do it. But then as you find more information about the companies you can adjust that as you go along and get more comfortable with how you’re investing.

There’s never really going to be a right or wrong answer this is really going to be more depending on what you’re comfortable with and how much volatility each of these particular stocks are going to have and how much you can stomach investing into a company that is air quotes losing money or is going down in price maybe not losing money is the best way but maybe the stock market is punishing the stock and you still think it’s a great position.

Then that’s when your strength of conviction of what you’re doing is going to come into play. So that’s really kind of how I would look at it Andrew what are your thoughts?

Andrew: yeah I agree and you’re kind of alluding to the idea where it’s going to change as time goes on so something that investors are going to have to think about. Especially when you’re first starting out is how much are you planning to dollar-cost average into?

In this example Josh is talking about having $5,000 well if you’re going to put $1,000 in every month does it really make sense to put to divide that 5,000 into five different stocks that might that might make you feel a little bit easier a little bit more peace of mind.

But let’s say you’re doing 5,000 every month well now something it doesn’t make sense whatsoever if you’re looking at really small amounts then you probably want to diversify and to maybe like 10 stocks instead of 5. If you’re only able to put 100 bucks a month in it’s going to take you at that rate would take you 50 months to get up to $5,000 so you’re going to want to prioritize that 5 that original 5,000 and definitely kind of make that into more of a balanced portfolio.

Rather than if the percentages are a little bit different and you’re going to see the profile kind of catch up through dollar cost averaging in like a year or two. That’s kind of how I would look at it look at what kind of a time period is coming up in the future what kind of dollar cost averaging numbers are you anticipating. Is it going to be a significant amount or not and then use that decision to figure out how you’re going to do the diversification and the size positioning and the weighting.

Like Dave said  it’s not going to be perfect balance and especially as you dollar-cost average those percentages are going to be moving all the time so don’t try to get like a perfect 25, 25, 25, 25 weighting all the time or don’t try to get like a 5, 5, 5, 5, 5 all the way across. Just keep things generally reasonable and I mean that’s how I do it and that’s probably how I’d recommend a lot of other people do it.

The second part to that question he says Andrew interesting article so he linked me up this article from a guy named Tomwall Surai. Basically the summary of it is as josh writes the point of reinvesting a dividend in the form of a drip is countered in the article by stating that you the individual may be reinvesting those dividends at over market price better said not at the undervalue price.

The article is certainly written from the perspective of it by my course but interesting point is the stock were three of us in the dividend not sure if this would be a topic or talking point to bring up in the future podcast or email.

Basically what I gathered from that is talking about like the downsides of using drip and using drip for like an individual stock. let’s say you have a business right that’s doing super well take one of the top businesses that we’ve seen and it’s pumping out dividends growing dividends although all those nice things.

The argument is well if it’s if the stock is up really high then that means the dividends you’re reinvesting are essentially buying that stock at really high evaluations. I guess the idea is well wouldn’t it be better to take those dividends and funnel them into like a cheaper stock so you’re getting more of a deal sort of a thing you’re investing with more of a margin of safety.

And you know I see the argument behind that but I’m kind of firmly in the camp of drip and using that A especially when you’re talking about smaller portfolio sizes there’s no transaction fee for using a drip.

Let’s say you have 100 shares and you’re going to reinvest three right they’re not going to charge you a four ninety five transaction fee to get those extra three shares reinvested and bought they’re just going to add them to your share count. Whether that’s whole shares whether that’s partial shares that’s what your broker is going to do and so that really helps especially the smaller your portfolio is.

The second thing is in my opinion like the big the big idea between buying with a margin of safety is you want to do that initially but kind of where there’s a disconnect is I feel like some people just get too cute. Where they want to just pick up that margin of safety and then they want to move on and go to another stock but what we have to remember is that we’re looking at ownership of a business. Let’s say you’re an angel investor or an entrepreneur and you buy five separate businesses and five separate places of the town and you have one of them take off does it does it make sense to have that hot business and sell it so you can buy five more stinkers and then hope one of those takes off.

I mean the whole point of buying what the margin of safety is that the idea is you’re getting that discount to intrinsic value and the market will eventually bring the market price to that in terms of value and you’ll get a nice decent level profit. But you also have to consider that sometimes the businesses will go above and beyond where you initially calculated that intrinsic value. And that’s kind of the nature of kind of the nature of the beast in a way where if the stock price is going up it’s going to be going up for a good reason and that’s usually because the business is doing well.

The way I see it is if you’re going to be reinvesting those dividends why not be able to pick up high  more amounts of shares even though you won’t be able to get as many shares as you would in some other stock that isn’t doing as well or has a better discount to intrinsic value. but you already put the big bulk of your investment in this one stock and now that it’s growing now that it’s winning just let it continue to compound and you know let that hot streak kind of continue and just ride it for as long as you can.

Like Buffett says the ideal holding period is forever so if we can if you buy a stock that’s trading at a discount and it’s cheap and then it becomes like expensive well I mean it doesn’t hurt you that it’s expensive because you’re not buying it now when it’s expensive you bother when it’s cheap. No matter how expensive it gets it’s not hurting you even if like I said even though if you’re getting you’re getting more shares from the dividend you’re still participating in this hot streak you’re still getting more shares even if it’s not as high of a percentage.

but you’re you’re still benefiting enough where I think if you get too cute and try to kind of play with your dividends and find different stocks and in those type of ways. I think it’s just a not worth it be kind of a waste of time and see you could you could feel bad if you look back twenty years later and you you plug into some calculator and you see the difference if you would have reinvested the dividends in this hot stock.

if these stocks are hot these businesses are strong they’re going to have strong competitive moats they’re going to be dominating their industry just keep the gravy train rolling and just be happy you got in when it was low and then let the more expensive shares accumulate you’ll still make plenty of money and I think that’s the way that I like to look at drip.

Dave: I agree with you a hundred percent and I think the great thing about drips for me is that it’s easy money you don’t have to work for it. It’s passive it’s the company is paying you to invest in the company.

And I think one of the things that people sometimes get bogged down with is they’re in a hurry are our societies in a hurry we’re a fast food generation we want everything fast now done. and what Andrew and I are talking about this process that we’re looking at it’s slow and it takes time to do it and it’s not going to happen overnight and if you’re in a rush to try to get out and get out the hot new stock all the time that’s just going to eat into what you’re trying to do.

what we’re trying to do here is we’re trying to find businesses great businesses not stocks great businesses that will make money and when they make money they pay us in a form of a dividend and the share price increasing.

And I just want to share a quick story that’s been kind of going around a little bit recently Jeff Bezos was talking to Warren Buffett a little bit ago and he was to kind of paraphrase the quote he was asking Buffett why he has such a great simple investment philosophy why aren’t more people following his advice. And Buffett’s response to that was because people are in a hurry to make money they’re not they don’t have the patience to do what I do.

And that’s really to me what drips are all about it’s all about patience because as Andrew was saying with the compounding effect that is so massively huge and we can’t understate how strong a process that is and if you just stick to the plan and go with what you’re doing you will be wealthy it will happen.

Just the power of compounding is so immense it’s one of the strongest forces out there and I just can’t encourage you enough to buy dividend stocks that drip and drip and drip and drip and I know dripping is boring but hey it’s going to make you a lot of money in the long run so that’s really kind of my thoughts.

Andrew: yeah I love it as a great quote Buffett has such a way of saying that so bluntly and being so honest but having so much truth behind those statements I loved it.

Dave: yeah exactly. Right next question up.

Hey Andrew let me first say I love the e letter and love the podcast also. I am from Canada so things are a little different up here I just had a question regarding drip.

I automatically set up my stocks and accounts to drip but I’ve been seeing dividend payments showing up on my accounts. So I emailed Quest Trade and asked them about this they told me that they can only repurchase company stocks if my holdings equal enough to buy one stock at the current price is that right?

In that case I would need say 50 holding of a particular stock before the drip was applied that doesn’t seem right to me I’m wondering if you have any information for me?

Also I realize you’re a busy guy and appreciate any response thank you so much.

Leah

Andrew: okay so I think she meant to say Holdings of a particular stock not stomach probably that’s probably a mobile auto correct. But so it’s funny we’re having to answer this after just going on a huge rant about how drips so much better than not using drip.

However this is a big problem for Canadian discount brokers I reached out to Braden. Braden we have had on the podcast twice now he was on episode 2 and on the more recent one about international and Canadian stuff he did the interview we did on the FANG stocks Facebook Amazon Netflix Google.

If you’re kind of looking for he’s kind of like our resident Canada expert so I reached out to him about this question and I wanted to ask him about  what his opinion was and kind of how come how Canadians can solve it.

So Brandon said:

Of course as a Canadian investor I remember how Leah is feeling right now with the moment of disappointment when I realized that all Canadian discount brokerages don’t drip partial shares the distribution from the holding has to be enough to yield another full share.

So he says his approach is to take all cash dividends he receives into a pool money that adds a nice boost to his next contribution or rebalance. he says he’s grown to appreciate the concept of receiving cold hard cash in his portfolio every month or quarter depending on the distribution frequency of a giving holding. this is why he suspects some Canadian REITs have been doing 20 to 1 stock splits to reduce the share price enough for monthly distributions to drip for shareholders.

At the end of the day partial share drips would be ideal but Leah is still benefiting from the beauty of compound interest on her next contribution.

I mean that makes a lot of sense and like we said earlier it’s not going to be ideal but I think that’s the best alternative if you’re using a Canadian discount broker.

Definitely check out what Brandon is doing with his podcast at Stratosphereinvesting.com thanks Braden for giving us that info and that’s something to consider if you have a discount broker that’s not letting you drip full shares.

I know I haven’t heard of that happening with any of the US brokers but unfortunately, that’s something with Canada and I’m not sure about other places in the world so just keep that in mind for everybody else.

Next question comes from Adam he says:

Hi, Andrew, I’m quite new to investing so first off I want to say thanks for the podcast YouTube videos and writing it’s made that just seen everything a lot more palatable. I’m interested that I’m interested in purchasing your VTI spreadsheet but I wanted to ask if there are any updates or changes made to the spreadsheet if the updated version will be made available to pre-existing customers.

Your recent podcasts about the new GAAP for marketable securities as well as what I’ve been hearing about AT&T’s most recently quarterly report being messy do the accounting changes have me wondering if there would be a shift down the road and how companies are evaluated using your metrics.

Thanks again for everything,

Adam

I will say first off I do update the VTI spreadsheet pretty often and any time I ever do an update on there I’m always sending that I was a free email for anybody who’s already purchased a spreadsheet so those updates happen automatically and for free.

In the past I’ve done updates like having formatting or if there’s like a my new detail for example I think I had a case where if there were two years of negative earnings it would it would kind of mess with the growth numbers on one of the calculations of growth. So this kind of little minor math stuff that where you see like a special case that might screw up the calculations so I’ve had to do stuff like that I see one that I’m going to have to update on the next update so anticipating that happening sometime May or June.

And in addition to some of those other updates I will be updating based on the new GAAP rules I’m going to add I haven’t fully decided to what scope this is going to be but the most likely thing is it’s just going to calculate an adjusted P/E.

We talked in in one of the old episodes about the unrealized gains for marketable securities and how they were going to affect net earnings so the p/e that I’m going to use to calculate the Value Trap Indicator is going to be different from the p/e that everybody else is using again this is only relevant for those few financial industry stocks that have a lot of marketable securities in their portfolio.

Companies like Berkshire Hathaway that Buffett has and a few others the majority of stocks in the stock market aren’t going to be affected by this but I will have an adjustment for earnings and so it probably will add a row so people who are filling out the VTI they’re going to have to add one more metric that’s going to adjust the net earnings and make sure that a more accurate picture of earnings is being calculated by the Value Trap Indicator.

But that’s going to keep everything else pretty much the same it’s it shouldn’t change hardly anything for most companies and for the ones it does it’s going to change it for the better because then the calculations based on what their true earnings are not what the earnings are based on this weird new accounting rule.

As far as the whole AT&T; thing with their quarterly report being messy. What happened there was certain industries are changing the way that they’re reporting revenue I understand like hearing all these accounting changes can be quite discouraging especially if you’re first starting out.

But I’ll just say I’ve been investing since 2013 2012 actually I’ve never heard of one accounting change like this for GAAP let alone like two so this is definitely like a weird year for a county and I think some of it has to do with some of the new tax laws and all that kind of stuff.

So basically they’re trying to standardize the way that they’re reporting revenue and make it more transparent and more consistent across industries. What might change is like the timing or the exact numbers behind what year has what revenue numbers. But as far as like the total revenue numbers go it shouldn’t make a difference.

If it does then it’s just actually reporting a more accurate number and that shouldn’t affect investors either if anything it should be better because it’s giving us a better picture of what what’s actually going on in the business.

That doesn’t again that doesn’t change any of the metrics I have to calculate we’re always going to want to know what a company is bringing in as far as their revenue in their sales and then you always want to know how much of those sales that they’re going to have to pay out and expenses to run the business and then you always want to know how much their profits are.

Those things are always going to be true and no matter what they do with the accounting and the whole the whole reason for accounting the whole goal of account is for businesses to be able to share that information of how they’re running that business and let us understand that.

Don’t take that too hard don’t get discouraged if you’re going to if you’re new to this if you’re new to the whole accounting thing just understand those simple concepts will always be there and I don’t anticipate much change at all as far as how it affects how Wall Street view stocks certainly not for the revenue stuff. The earnings might change some things and make some of those stocks that are in the financial industry move more with the market as market goes down their earnings will go down and it’s going to be like a feedback loop.

But other than that just we’re going to try to always get accurate representations of what’s really going on with the business as time goes on. I think adjusting for the earnings so that it’s on the old way of calculating rather than this new way is going to help with that and I think just considering revenue as revenue like it’s always been is also a good a good way to move forward.

Dave: all right so the last email we got we’re going to read through here and Andrew and I will talk a little bit about it:

Hi Andrew,

Like most of your listeners I’m due to the investing world I’m finding your podcast with Dave incredibly valuable and enjoy listening to keep up the good work.

Like your other listeners I have a few questions you have answered one question our previous email thanks I wasn’t sure I’d get a reply. I’ve been poring through the recommended books looking at listening to different opinions and receiving emails from other investors.

With a little education is becoming clear that there is a lot of misinformation and speculation out there. There are a number of sources pumping up the likes of Tesla etc. now that I’m able to better understand the financials I’m not touching businesses like these with a large poll.

They are failing a basics thanks for the education I can now ask the correct questions I’m still playing with the VTI and I’ve made a few mistakes mostly using the incorrect figures seems not each company uses the same terminology to describe the same thing believe you mentioned that in one of your podcasts.

However the VTI seems to highlight that quickly as the VTI score looks way off.

I have two questions question one David yourself of mentioned you had never purchased a company based just on the VTI score it’s an indicator that highlights one should investigate a company further. I have found a few companies with a low VTI score based on one year data. So I went digging reading up on what the company does who are the competitors etc.

I have also backed texted the financials for the previous five years I found the VTI to be good for all years bar one in one year they had negative earnings.

Based on the philosophy I’m now following I would have sold that company if I had owned it. My question is if the VTI shows a strong sell and the previous five year holding period is this justification for moving on or should I still consider the company based on the justification for the result?

Question number two. Seems like you have a large international following I’m from Australia and at this stage I’m only looking to purchase Australian stocks, branch out as my confidence grows is there any way to pull the collective efforts of your listeners from around the world?

Let’s say I run a VTI on a company a and I find out that it has or has not got married I could post that information on a site filtered by country other like-minded listeners could then see those results and review themselves. Listeners could point out mistakes add comments etc.

Thanks for all your efforts thus far and keep up the great work which is taught as a subject at school which this was wish this was taught as a subject of school.

Like Dave I am beginning to teach my kids the seventh wonder of the world.

Regards John H

Andrew: all right I love this question I love all the questions we got today there a lot of thought but I know man you can tell people really are starting to understand the stuff for teaching so I would say it depends.

I agree with the idea that if a company has negative earnings I’m going to sell that right away that’s 100 percent what I do and that’s one of those where I’m completely black on white black and white about it if it happens done period no other no other thoughts or explanations.

However when we’re talking about what you’re talking about here John talking about if they had negative earnings in the previous five years. I don’t like to see that I obviously would like to see a very smooth operating history and a lot of times I tend to ignore stocks that have recent negative earnings.

But it’s not one of those hard and fast black and white rules for me if other things in the business are showing me that things are great if there was a case where that was like a one-time event some of those type of things then that’s where I would probably make an exception and obviously the VTI scores alright well that’s a good thing they’re out on that zone.

The only thing I would say is that depending on what year that the company had negative earnings that’s going to skew the growth so let’s say a company and negative earnings in 2015 if you try to calculate what the growth was from 2015 to 2016 you’re going to get you can’t calculate it because you can’t calculate growth from a negative number it’s just trust me to try to do the math it’s not possible.

So keep that in mind that some of the growth is going to be off and make sure that when you’re evaluating the other merits of the business that you’re doing so not thinking about that particular growth measure.

And for the second part I really think that’s a fantastic idea trying to think if there’s a way we can kind of see how much and like how much interest there would be in something like that because like you said I know there’s a lot of followers from Canada I have some from the UK India Australia. I don’t know Dave you have any ideas?

Dave: Facebook page?

Andrew: yeah okay just have them post on the Facebook page and

Dave: we could we could create a Facebook page that listeners could go and it could be kind of a forum kind of thing where people could talk about different companies back and forth and kind of get an idea of like what John is talking about. if he’s found a great company he throws it out there for other people to kind of in essence pick apart and that’s one of the things when you think about investing Charlie Munger always talks about inverting took taking an idea and turning it upside down to try to see all angles of the of the investment and this could be something that people could use to help each other with that.

Because a lot of times this is scary to do this and if you have other people that you can talk to that can kind of help guide you through things you can always choose to not follow their advice if you think somebody’s crazy obviously you don’t have to follow it.

But it could also be a great resource to help people learn more.

Andrew: all right I love I love the idea I’m going to make a private Facebook group and I’ll send out the link so only if you if your vti spreadsheet client well we’ll get a secret kind of Facebook group going and we that way we can put all the VTI spreadsheets up you guys can upload those share them comment on them use them and it could be like you say a cool way to pull the collective efforts I really like that idea.

These are all fantastic questions before we wrap up and call it a night speaking of social media Dave I know I talk crap to you last time we recorded. I’m coming to you with my hat in my hand after running the Twitter poll I said based on our debate the back story was we did an episode would you sell based on negative earnings and we did a company called Corning.

I said I would sell and negative earnings no matter what Dave said it depends and he said in the case of Corning that looked like it was like a one-off type deal. I ran a poll on Twitter and I said would you sell just because the stock has negative earnings for the year and I put the options as yes always or it depends on the stock.

And it was a hundred percent for every single person voted that it would depend on the stock that’s how. Looks like I’m completely alone on this though in John’s email he said he’d be on that philosophy and the email from last week did too so looks like we got some emailers that don’t like to jump on Twitter and support right

But that’s alright I’ll concede this this this first debate okay Dave one Andrew zero.

Dave: well thank you I humbly accept your apology.

Andrew: okay no no no no.

Dave: I like the fact that you’re sticking to your guns and you’re doing what you believe is the right thing to do and I admire that and I just have a different opinion so that’s like value investors we all have little tweaks in how we look at things and go along and do stuff and it doesn’t mean that one of us was right or wrong although appears that I am right in this case.

but I agree with Andrea I think you know having a having a philosophy and stickin to it that’s that’s how you get where you want to go.

Andrew: I love it brings a tear to my eye cuz it it shows that you know everybody’s listening to me but also go on there it’s like watching growth right it Bryce it’s really cool.

Dave: yep I totally agree our kids are growing up.

Andrew: I’ve got one of those already I don’t need any more trust me

Dave: yeah well I got I got one at home and a whole lot of work so yeah.

Alright folks will that is going to wrap up our session of our Q&A; tonight we had a lot of fun talking about all these questions and reading all the readers comments.

Thank you very much for taking the time out of your busy days to write to us and we hope you found some value in our answers and we certainly find a lot of value in your questions and like Andrew said I love the questions you guys are so intelligent and you guys are asking such great questions it’s so awesome.

I remember when I was beginning I was not asking these good questions so I’m really impressed and thank you for taking the time to reach out to us and we have any other questions please feel free to reach out to us we will help you in any way that we can.

So without any further ado go out there and invest with a margin of safety emphasis on the safety and have a great week and we will talk to you guys next week.

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