Welcome to Investing for Beginners podcast this is episode 75. Tonight Andrew and I are going to answer some listener questions. We got some great questions in the last few weeks and we wanted to take a few minutes to go ahead and answer those on the air for you guys. So Andrew why don’t you go ahead and start us off there big guy.
Andrew: all right sounds good. I’m going to start us off with wasn’t the question but it was a cool comment and it’s great to hear and hopefully some of you guys can relate to where she was where she is now give you some inspiration so this is from Shannon she says:
Hi Andrew, just wanted to say thank you so much for the podcast I was left feeling pretty powerless following my most recent meeting with my financial adviser who handles my retirement account. So I vowed to learn more about investments and that is when I came across your podcast I’ve learned so much and started my own account in addition to my retirement account and I’m having so much fun. I love that it is a constant and endless learning process I am surprised at how many of my female friends are in the same position I am and really know nothing about where their money is going. Anyways I just wanted to say thanks for giving me some power back over my money thanks Shannon
That’s really cool to hear and hopefully other people who might be struggling or feeling hopeless can find the inspiration to try to learn something and get yourself from feeling powerless to feeling excited.
This next question here is from Jake he says
Hi I’ve been listening to your podcast for a few weeks and I’m about halfway through the episodes I’ve heard you talk about buying US companies only but I’m a little unclear if you mean US companies only our companies are they’re traded the US markets.
Gives a good example here he says I’ve been looking at ticker symbol SHI traded on the NYSE the company seems to be a great value based on most of the parameters I have checked but I’m a little hesitant given that it is a Chinese company.
My question is should I keep my scope to US companies only or companies other traded in the US markets any input would be great I really enjoy the content and I’m excited about getting into the market and building some wealth for the future take care Jake.
So when I talk about buying US stocks only I definitely am talking about those which are not in the situation as such I is so a lot of international stocks will trade on the New York Stock Exchange and that can be an option for you.
I personally only invest in US stocks and I’ve talked about that before you can definitely look that up in the archives. Taxes being a big reason and the other big reason is the SEC will not audit any of the financials for companies if they’re from a different country.
Even though they do trade on the NYSE they won’t report the same as US companies will and so those tend to be more stringent and restrictive and better chance that oversight that there’s going to be less errors for the financials. and then and so you’re hopefully getting more accurate picture so for example if you go on SEC.gov which is where you look up annual reports 10k is 10 Q’s quarterly reports.
You’ll see that SHI doesn’t have any 10 KS all they have are these 6 KS and 20 FS which I’m not too sure about those I don’t have any expertise in kind of investing with those.
The other big thing is when you have the reason why I’m so confident and it’s not just because I’m like extremely patriotic right. It’s also because of the fact that the US makes up the majority of the market cap of the world so the US stock market is very huge even though you hear stories about other stock markets and a lot of growth obviously in China and stuff but when you look at just strictly numbers and size perspective if we’re not more than 50 percent I know it’s been changing over time but we’re definitely the world leader in market cap.
And so and we’ve also been burned recently with Enron and Worldcom lot of these accounting scandals and legislation that came up as a follow-up response to these sorts of things.
Being the leader having that much having been burned in the past there’s a huge just a huge kind of emphasis from a political standpoint just from the whole investor climate standpoint a big focus on having accurate financials and making sure that that’s a big priority right.
Investor rights is a big priority certainly in in in the United States and the SEC is kind of a branch of that and so that’s why not to say everything’s perfect but with that big emphasis you tend to feel more comfortable with stocks in the country that is like that.
When you kind of go back to the 80s and 90s there were huge accounting scandals with a lot of these Chinese stocks and you can look it up and then it was just absolutely brutal for a lot of investors.
It could certainly change I know Charlie Munger is a huge advocate of investing in Chinese stocks I’d love to get Dave’s opinion on this as well there’s obviously a lot of potential we can talk about SHI just kind of from a general overview.
But that’s personally where I stand those are some of the risks I see and for all I know things in China that could be just as good now compared to where it was decades ago they’ve obviously had huge GDP growth a lot of Capital flying in those are all things that definitely come into play there’s no right or wrong answer.
But that’s what I mean when I say buying US stocks only even if it trades them in exchange it doesn’t have the same SEC requirements and so I don’t buy those.
Dave: so to throw my two cents in on the question at hand about buying Chinese stocks or just buying US countries only right now I bet I only buy US countries only and I have a pretty simple reason for doing that and my reason is I am not comfortable enough with what goes on outside of the United States to feel like I can make an informed decision.
And like Andrew was saying it’s not because I’m uber patriotic I obviously believe in my country but I don’t know enough about the economic conditions in China other than the 30-second blurb that I get on the world news every once in a while. And to me that’s not enough of an informed decision to know what’s really going on in the country and with the lack of ability to read the financials in a way that I know that I can’t hear and feel comfortable.
That there’s far less risk of error in the accounting that the company does. I just feel like that you’re going to have a better chance of having less risk buying a company based in the United States.
Now that being said there is obviously a growing world economy and to ignore that would be foolhardy and does that mean that I’m going to just dump everything I have in the United States and rush over there and buy everything in China and South Korea and Japan and so on no I’m not going to do that just because of the reasons I stated I’m not comfortable doing that.
However if you have some sort of insight into China let’s say you live there now and you’re a Canadian citizen or an American citizen and you’re living abroad and you have a much better feel for what’s going on over there and the country better than I do then you have a more informed decision about what’s actually going on there then what we hear on the news.
Because as we all know the news is filtered and it’s filtered however you want to skew it it’s a future it’s filtered for us and we don’t always know really what’s going on because there’s always a bias or a viewpoint that they’re trying to use.
And so when you’re looking at SHI for example I’m here looking at it on guru focus as we’re talking about it and the numbers look great they really do and it’s traded on the NYSE and the numbers that you’re looking at are fantastic the growth of everything is out of this world but I don’t know enough about I know nothing about the company.
I certainly wouldn’t recommend anybody just go out and buy it just because you see these pretty numbers on here it would be much better to learn more about what the company does how the business operates how long have they been operating what are they doing what do they make how do they sell what they sell and where is their growth opportunities coming from.
Obviously it’s coming from somewhere but I don’t know where that is and I guess it just so it’s just there’s too many uncertainties for me to be feel comfortable investing in this company I’m not saying you should or shouldn’t I’m just talking about for me personally and that’s why I personally would not invest in this company not because I don’t think the numbers are great they are.
But I don’t know enough about the company and I don’t know enough about what’s going on in China for example to feel comfortable about investing in the company.
And I think shout out to Preston & Stig over at the Investors Podcast they had a great episode with leave it was Richard Duncan and he was talking about some of the stuff was a tariffs and everything.
And you can really go down the rabbit hole and learn some cool things. But a big reason why Trump is being so heavy on these tariffs and so strict on them is because in China they’ve had history of manipulating their currency.
Hitting making the like if you pull up their financial statements I was I was clicking through it’s the 20f actually I guess would be the US equivalent of that’s the 10k US equivalent and so they do have like their consolidated statements on here but you can see their currencies on the RMB.
And so a lot of that has to do with like the trade deficit you also want to factor in the idea that the US dollar if you’re investing in US dollars right now as it stands that’s the world reserve currency so that certainly gives a lot more stability in the sense that the risks the currency risks tend to be lower when you have such a global reach.
And so things like currency manipulations can really affect your investments in China I would argue to a much greater extent than any sort of US stocks. so with the tariffs and everything I mean that’s probably going to kind of lead to a lot of volatility and a lot of these Chinese stocks because these policies are having huge impacts and once that flow the trade deficit the trade deficit will flow or their trade surplus will flow over to how they deal with their currency there could be inflation hyperinflation in a short period of time as they manipulate currency.
Those are factors as well I think you want to keep in mind you can certainly go down the rabbit hole and I think if you’re looking at Chinese stocks definitely check out that episode with Richard Duncan and Preston & Stig those are additional factors that when you’re just investing in US stocks.
You really don’t have to I mean yeah it has an effect on your stocks but it’s not you have the big one the big guy and the small guy so the big guys kind of dictating right now how it goes the currency impact I believe when it comes to that is much less. Has a much less chance of being a huge kind of game changer when it comes to these sorts of investments so I mean I don’t know how that’s something I would kind of consider.
Dave: two excellent points and yeah this great shout out to Preston & Stig because that interview with Richard Duncan was fantastic and he has a website you can go to that you can learn more about it he’s really an expert on China and he knows so much about the country it’s is it’s definitely a rabbit hole you definitely could go down you could spend hours days weeks learning more about that.
All right so let’s move on to the next question or next yeah next question.
Hi Andrew I’ve just started listening to the podcast and love how you and David use common languages and conversation to discuss things I do did not understand so thanks.
I have a question and it may come up in a future podcast I am only up to episode 23.
The number one question although your advice is not to time the market or wait for an opportunity rather to dollar cost average it seems that all the dividend aristocrats are at Peaks and the value doesn’t seem to be there.
I guess to answer that question I guess my thought is so let’s talk a little bit about how I invest in what I have invested in I have invested in some dividend aristocrats I just recently bought Johnson & Johnson I believe it was back in February and I have also bought some other big bigger market cap stocks and they’re not necessarily dividend aristocrats.
But I’ve bought Wells Fargo and JP Morgan I work for Wells Fargo so I had a fair amount of stock with them when I worked for the company and I’ve also invested in JP Morgan recently so although they’re not dividend aristocrats their banks have been around for a very long time and they pay dividends so they may not fall into the aristocrat realm.
But to me they’re definitely a dividend player that I should be investing in and Andrew and I have different opinions on investing in banks and that’s a whole other conversation.
I guess to kind of get at your question for me I look at several things so dollar cost averaging is a fantastic idea and that’s something Andrew follows absolutely and he’s got his whole basis of his a letter all set up with that and that’s how he does his investing and it’s a fantastic idea and he know he has some thoughts that he’ll chime in about the dividend aristocrat.
This is kind of how I go about it I have the dividend aristocrats that I’ve just recently bought and will buy more of your correct when you’re saying that the opportunity to buy them right now because the value is not there it’s definitely not there and it’s a matter of with those I just wait and I’m they will come down again it’s going to happen I’m not a predictor I can’t tell you that it’s going to happen in two days or five years from now I don’t know when that’s going to happen nobody does nobody can say they can and if they can they’re they’re lyin to ya.
And so my thought is is that I’m going to wait and I’m going to find other opportunities to invest in and I have certainly done that. If you look at my portfolio I have wide-ranging things like Corning and I have bought Fiat Chrysler which was not a dividend payer.
I know shock horror aw but Monish Pabrai one of my mentors bought the company a long time ago and I invested in it as well and it’s done fantastic for me so I’ve bought Microsoft which is definitely not a dividend aristocrat I’ve bought different companies along the way that are not dividend aristocrat so I’ve gone out side of that realm to try to find other values that you can now.
I will admit as the market continues to go up and up and up it is harder and harder to find those values in the parameters that I’m looking for.
Not buying micro caps not buying things outside the United States some of those parameters tend to make it more difficult for me to find things and so because I’m not always doing the dollar cost averaging like Andrew does which is maybe something I should reconsider considering what’s going on with the market right now.
That that would might be a better way to go about doing it but for me when I’m looking for the different aristocrats if that’s going to be one of my main focuses then I would definitely recommend you wait because buying you’re buying high to me is you’re just gambling on it’s going to keep going up and up and up.
And with a dividend aristocrat there’s kind of two ways you can look at it and one of the reasons why I bought it when I did was because it was there was a slight downturn in the market and they came down a little bit they’re still a little bit overpriced but they were came down to a little bit more fair value and so I felt good enough about buying him at that time that as opposed to now or if they’ve gone up 70 percent even in the short time that I’ve bought them so I don’t feel like they’re a good price for me to buy him at but with the strength of the dollar cost averaging.
That’s one of the keys to it as you’re buying it at different prices so as the market moves you’re going to continue to make money and the other aspect to take into account what’s different in aristocrats is you have the awesome ability of the dividends Johnson & Johnson is going to be paying that dividend from now until the end of time and that’s one of the big reasons why you invest in a company is you’re looking for the dividends to help increase your wealth you’re also looking for capital appreciation of the stock and any sort of stock buybacks that they may be doing as well.
You kind of have three areas that are really going to help you with your investment but when we’re talking about just dividends the dividend aristocrats they’re consistent payers and they’re great investments but for me I like to wait until they’re more of a value I guess Andrew what are your thoughts?
Andrew: I hundred percent agree. Like the idea yeah they’re at their peaks I think that’s a generalized statement so while that’s certainly true you could say that about the market as well there are going to be you want to look at evaluations and individual stocks.
And understand that there’s some be uncertainty in certain industries and certain companies and so that’s kind of when you want to try to capitalize it’s always just going to come down to valuation. I personally I have my dividend Fortresses so i I’ve talked before I kind of split my portfolio two ways one’s kind of more of a margin of safety focus really trying to get those really deeply discounted stocks and the other ones are the dividend fortresses.
And I’m not buying dividend fortresses every month I’m buying them as they come up as they come up as good values so that’s going to be sometime it’s not like you have to capitalize right away – right like I’ve had dividend fortresses I bought who have been in my opinion have great valuations and great opportunities and they’ve been that way for over a year.
These sorts of things with the stocks they can really kind of cycle up and down you can still find good stocks with good valuations within that dividend aristocrat space even if the whole kind of space is overvalued.
Every stock every industry is different there’s going to be ups and downs you should want to try to get in on those downs and make sure you’re doing it with companies that are still in strong financial positions. Where even if there’s uncertainty which will happen during a period where there’s low valuation that they still have the strength to continue that dividend because that’s another factor – right.
Is that these different aristocrats will have much more pressure than the regular stock to continue increasing their dividend because they have naturally they’ll have a lot of investors who are following that and the dividend aristocrat plan. So you definitely want to make sure you’re getting into those that are conservatively leveraged not over leveraged where something bad happens they can really take a turn for the worst.
But I think you kind of wrapped it up really nicely there’s just wait right I mean there’s with dollar cost averaging the you can find plenty of different individual stocks with great valuations you just have to not disqualify a whole group just because they have these general characteristics.
They’re always be kind of exceptions and those are the ones you want to look for margin of safety emphasis on the safety we really make sure that safety is there if you’re going to be by and low like that.
Dave: yep I agree what one of the thing I wanted to throw on there what we’re talking about this was a great thing to do with if dividend aristocrats are something you’re really interested in investing in is creating a a watch list of all those derivative aristocrats and checking it regularly looking at it once a month for example.
And you can even do just a quick looking at just their p/e ratio or something simple that can give you an idea of whether they’re still overpriced or underpriced or even fair price and just by doing that simple check.
You can go oh the p/e is gone from it was 22 now it’s at 16 and you can see that the price has gone down and then that could give you a an opportunity to check more into the valuation as a company to see if it is if the price is coming down.
And again we’re talking about the price out the value so if the price is coming down and it’s still a great company then obviously that’s a great time to jump in. but that’s one way you can help yourself by waiting is by still being actively involved in the come in the companies in such that you’re paying attention to the what’s going on with them as opposed to just kind of going and let’s see what’s going on with this one or this one or this one because there are there was what 58 or 60 aristocrats is that right?
Andrew: that sounds about definitely at least those who have been paying five years or more.
Dave: okay sure yeah I’ll have to double check on that off to get back to you on that so changes all the time so who knows when people are listening to this anyway yeah good point.
But I guess what I’m getting at is set up a check to set up a watchlist and track it however you’d like but that would be a way that you can stay involved with them so you’re kind of on top of them so when an opportunity does arise you can invest in those companies.
All right so moving on to the next one number two regarding dividend payments. Say I buy a one stock for $80 and then pay a dividend of $3.00 is that $3.00 four times per year per stock and also I think you have touched on it and it’s called a DRIP this dividend money can be put back into the stock is there a transaction fee here or should I just hold the money in my TFSA tax-free savings account and wait until I can buy another stock.
I’m in Canada FYI and use quest trade to buy / sell it’s for 95 per trade and I opened a TFSA.
Andrew I’m kind of what you touch on that one because you’re the DRIP King and be more about TFSA than I do.
Andrew: I love that can I just get like a t-shirt and wear that around the DRIP King did yeah the DRIP King yeah I think we should nobody will know I’m talking about – it’s even better.
This is a touchy thing and you can go back in the archives look at the episodes we talked about the Canadian stuff depending on which stock you’re buying there may be a DRIP or there may not be I’ve never heard of a DRIP where there’s going to be a fee so if you’re paying a fee that definitely shouldn’t happen. I know a lot of Canadian investors have used Questrade I think we’ve recommended that in the past and so depending on what stock you’re buying they may or may not be able to drip and that’s just kind of something that you’re going to have to investigate on your own and try to find out.
To answer the first part of the question it’s if it says it’s a dividend of $3 that’s going to be just $3 for the whole year so most companies will do that in in quarterly and installments so you’ll have four.
I have a stock I own Disney and they do it every they do it by bi annually so they do it twice a year but the majority and some actually do it monthly too but the majority do it quarterly so when you see that dividend when you see that yield percentage when you’re going on the financial website that’s going to be how much you’re getting paid throughout a whole year.
Dave: all right perfect awesome DRIP king is answered so we got that one done. All right moving on to question number three weed stocks:
Your opinion I know it goes against value investing as the ratios are through the roof and companies are overvalued. But this is a rare time as a previously illegal substance is entering the free market comparable to Prohibition and potentially a once-in-a-lifetime moment.
I can’t think of any other currently illegal substances that will become legal and widely used. I do understand that the US is the biggest potential market and if a democratic government were to be elected with the chances of federal legalization push weed stocks even higher. Prediction is for a 200 plus billion dollar industry what happens when Coca-Cola and Big Pharma invests in pot?
So here’s my thoughts on pot or weed so without going into all the illegality legalities the political situation let’s just talk about investing in the companies right now. so I came across a great article from Jae Jun who runs Old-School Value if you guys did not check that out you need to go check it out it’s awesome he’s a great writer he’s been around for a while and he really knows his stuff very conservative great value investor he’s very good writer and I learned a lot from him I read his readers articles every single week couldn’t couldn’t recommend him more.
So he had a great little article recently about this very topic and all the things that Thomas is mentioning here are right on the money yes there is a huge potential yes there’s a very good chance that this is going to become a legal product here in the United States. When again I can’t predict that but there’s a very good chance that state by state by state approves it there’s a very good chance that it will become a legal substance here in the United States.
That being said when you’re looking at for example there is a stock out there that Jae June was talking about it’s called weed WEED think that was a ticker symbol and right now their revenues have gone from 30 million to 60 million in the last year which that’s awesome but right now the stock is selling for currently at fifty three dollars a share which is almost.
That makes the market cap of this company twelve billion dollars which is huge and when you’re talking about a twelve billion dollar market cap versus 53 versus sixty million dollars in sales that’s not we’re not talking about earnings we’re not talking about but we’re talking about sales we’re not talking about the money that we as shareholders get at the end of the day after they pay all their expenses and their rents and their employee I mean everything that goes into that we’re just talking about the sales.
So you’re paying 200 times for the sales of the company and that is the huge and the volatility of these stocks right now is just massive.
For example TILRAY which is another company there another popular weed stop like that’s gone all over the place and I saw the other day that it dropped from two hundred ten dollars to a hundred dollars in a day I mean if you have the stomach to go for it knock yourself out but I guess for my from my conservative value investing these are my principles this is what I invest in.
I would be wary about getting involved in those companies at this point in time is there a great opportunity, of course, there is there’s a great opportunity in Bitcoin absolutely was there a great was there a great opportunity in tulips back in the day absolutely but you have you have to remember whenever you’re investing in a company we’re not talking about the ticker we’re investing in a company.
Whenever you’re investing in a company you’re only as rich as when you can sell it so when you’re getting in on the rush to get in the beginning and everything is going through the roof and going sky-high you’re only as riches when you can sell it.
And so I actually got that cool from Jeff Bezos so richest man in the world somebody was asking him how it felt to be the richest man in the world he said I’m only his rich as when I saw the stock so that’s made it but it is but it’s I mean it’s it sad.
I read recently that Warren Buffett pays himself a hundred thousand dollars a year second richest man in the world that’s only pays himself so that’s not a lot of money I mean it’s a lot of money but it’s comparison to the tens of billions of dollars the guy’s worth to pay himself a hundred thousand dollars and he understands that he’s only as rich as when he sells the stock.
And so for every buy there has to be a seller on the other end that’s the way the stock market works and so when you get invested in Weed or Tilray. Yes it’s exciting to get in on the beginning of it but you don’t know where it’s going to go and we it could be out of business there could be four other people that could come in and scoop them all up and outpace all of them so when there’s such a beginning of an industry like this you just don’t know where it’s going to go.
And to include something like this as a major part of your investment strategy I think would be very risky. I personally would not do it its too great a risk for me and just like with market timers or the people that believe in the efficient market theory. They equate high risk with high returns it’s not the way it works and we’ve Andrew and I’ve talked about this many times and there’s zillions studies out there that show that that is not the way to wealth with the stock market.
Yes you can hit a big if you get in and we tour tilray and they happen to become the next Amazon yeah that could be huge it could be awesome. But for me I don’t I’m not comfortable investing in something like that that’s going to have $100 price swing when it’s only a 200 our stock. If you’re talking about two thousand dollar stock one hundred bucks is nothing but to lose half of its value and one day if you have the stomach to handle that by all means go for it but I guess that’s just not me and I would be very leery about getting involved with these.
Andrew: yeah like picture back in the 90s remember those Nokia phones where you could play snake on them yes like imagine if back then if you would have been able to tell somebody back then hey did that 10 20 years from now everybody’s going to have a phone in their pocket it’s going to be this major industry we’re going to have more computing power in a cell phone then we’ve ever seen people would buy up Nokia stock.
But how would that have gone right how could anyone with predict even if you knew the industry was going to be that great how could anybody predict that it would be Apple and Samsung who are the ones really benefitting from this major huge technological revolution we’ve seen with cell phones.
You just I don’t know how you can accurately predict that when when an industry is so young.
Dave: well I mean you did tag on that think of what happened to blackberry right exactly remember those there was this yeah it was the business phone and now look at him just dead the gone we could do this without probably every industry mm-hmm.
Andrew: yep all right so I guess I’ll move on to the next one shout-out to Thomas Davidson Parker I guess you could add that his last name if you wanted he’s Australian living in Canada 31 year old planning for the future great question great set of questions there hopefully we answered them.
Moving on to the next one this one’s pretty long I’m going to try to summarize it as best I can he says
hi Andrew big thanks for what you and Dave are doing for the investment community you guys gave me the information and enough courage to invest in the stock market I would like to get your thoughts in the recent situation I’ve run into here’s the story.
He talks about this company called the auto Canada they are the biggest car dealership owner in Canada and they own multiple I’m sorry a couple dealerships in the USA so ticker symbols ACQ.TO and so he talked about how he used the VTI using the annual reports i had some really great numbers valuations so in my head and bought the stock and then since the purchase the stock had gone down and then quarter two results came out and the stock dropped roughly thirty five percent in two days.
He said his first thoughts were to sell the stock to cut his losses just in one day lost the twenty five percent usually advocate on second thought he figurations sell maybe even invest more because selling in the midst of a selling frenzy would be the worst possible thing to do as this drop brought the price even better evaluations.
They list some of the valuations here he says I haven’t owned the stock nearly long enough owned for less than six months to let it reach its potential other value investors advocate holding in stock for a minimum of one or even two years before selling is you can’t evaluate if a stock was truly a wrong investment or just an error in your purchase timing before this one or two year time frame is up.
Says I know my questions a little long I’d love to get your thoughts on this thanks in advance for your time Glen from Montreal Canada.
I guess we have the benefit of hindsight right so I can kind of look back to when that stock dropped and see what’s gone on since then and so it’s actually just continued on this downward trend and it’s looking even worse today trading at about the 12 to 13 dollar mark.
We’ve talked before about this idea of you definitely want to buy stocks for the long term and understand that if a stock that you like that has strong financials and strong business fundamentals actually goes down in price then that’s a good thing because either a you can pick up more shares. B if you’re having if you got a DRIP going you’re getting a bigger drip essentially you’re able to buy reinvest and buy more shares as that prices down so we I don’t know with exact episode we cover that in but it’s definitely a great discussion to have.
Now when it comes to this particular stock auto Canada ticker symbol ACQ.TO I’ll just kind of give some of my thoughts on it.
Obviously I wouldn’t buy it just solely because it’s not a US stock, however, a couple of notes I saw was the market cap for this is really small so the market cap is 350 to 352 million I generally try the buy stock so they’re two billion in market cap or greater it kind of goes to what we’re talking about with the last question with this idea of like the risks of buying into a young industry.
When you have a stock even or maybe even especially if it’s a leader like you mentioned there Canada’s leading dealership. That could indicate a smaller market and with these smaller markets, there are a lot more risks.
And so kind of a general rule I definitely try to get over 2 billion in market cap sometimes I’ll dip my toes in between the 1 billion the 2 million dollar market cap but it’s kind of for the reason the same types of reasons where you don’t know how things are going to play out somebody could come in from a different industry and kind of completely disrupt that industry by making acquisitions and using their big kind of capital to really move things around shake things around.
With the weed industry, you can think about like Coca-Cola making a drink and completely just demolishing a lot of the competitors there that can happen through a lot of different industries. And I think with dealerships in particular if you think about the legal at least in the United States and I’m sure in Canada it’s similar.
But like there’s a lot of politics when it comes to being the dealership if you try to sell more than like three or four cars private party either saying you got to get a dealer license and at least in the states they have dealers that are based on location and so you’ll have a dealer that’s this is a West Gate of Raleigh or something. So I’m sorry I like Toyota of West Gate or Toyota of Raleigh or Toyota of Los Angeles whatever that is so there’s a lot of kind of blue tape that’s involved and it’s a lot different than your regular kind of business to consumer industry.
The size kind of makes me leery of this particular stock you can certainly maybe if you’re a Canadian player and you understand the Canadian market is a much different size in the US market maybe you can lower those restrictions on market cap and kind of try to try to make those kinds of rules for yourself.
But that’s just how I see I’m weary of that and then just weary of the risks of kind of the dealership space in general and then the last red flag I saw was um Glenn here said that the debt-to-equity went from a 2.21 to now like a two point seven. Two point two ones already pretty high it’s definitely getting up there but with great evaluations a nice VTI it’s not like an automatic disqualifier like that tech way of like four would be but when you see when you when you’re talking about a metric that’s already kind of on its upper limit and then it just continues to skyrocket from there.
I think that’s something that really makes me consider okay I understand the valuations are fantastic but is this company really in that direction where I’m feeling like it has financial strength and the strong balance sheet to be able to weather whatever difficulties that others face. So I know in this question he talked about some of the core there to difficulties some impairments expenses based on acquisition.
Those are things to keep in mind and maybe try to run the numbers on some of the sounds like there were extra special expenses that along in this company’s core there too so maybe evaluating those and getting a true numbers perspective on how that will ultimately affect profits and the bottom line.
These are just kind of some of the thoughts I have as I think about a stock in this kind of situation but I don’t want to make it sound so bare swear I think you should automatically sell obviously there’s a lot of credence to the idea where if you’re a value investor and you have conviction in a pick just because the market hates it doesn’t mean you should automatically sell it but I do just from a kind of a cursory just like a general outlook here general view.
That increasing that equity is concerning the small size is concerning to me and these are just all factors I would try to add to an evaluation and analysis of a stock in addition to some of the great evaluations that it has.
Dave: so I wanted to to touch on Glenn’s question briefly so I guess my thoughts were when to sell the stock well that says that’s a very tough question to answer. and I guess Andrew made some fantastic points and I think one of the things that I would like to throw out there is that yes a lot of value investors do recommend holding a stock for a minimum of one to two years Warren Buffett talks all the time about don’t invest in a company for five minutes that you wouldn’t hold for five years. and he also talks about buying a company in having the stock market turn off for ten years would you still be happy with that ten years from now with the performance of business not the performance of the price of the stock we’re talking about the performance of the business.
And I guess the question I would ask I’m coming into this a little bit blind because I don’t know much about the company other than what Glenn provided here for me. I guess the question I would ask is before you invested in the company was the stock trading and an all-time high was the price of the company at an all-time high.
That would be something that would give me pause before I’d invest and if it came back to more normal levels and reverted back to the mean because of the bad news that happened that he recommended then that would be something that I would keep in mind.
Does the company pay a dividend if it still pays a dividend then you still have some hope of making some money back yes you’re going to have to wait a while to get all that back. And I guess the other part of it too is six months is not a really long time to hold a company and if you really believe in the conviction of your investment and you really think the basis of why you invested in the company to begin with is still there even with some of the changes going on.
Eventually the stock market will recognize those things so if for example the company is profitable and they’re making good business decisions it sounds like they had some poor management and it sounds like that has been changed and if those people that have made those changes are pointing in the company in the right direction.
Then at this point if you’ve lost thirty five percent of the company or more you have two choices you can sell out of it and just accept the loss or you can hold on for another smaller period of time and decide at that point what you want to do.
Whether or not you should invest in the company more I guess I would be hesitant to do that when it has such a big drop and you’ve had some bigger changes and some other aspects like the Andrew was talking about with the debt to equity being a touch on the high side and I guess with a debt to equity one thing that I would look at when I would be investigating this company is seeing if that is the norm for the auto industry.
That’s one of the things that I don’t know enough about so when I would be investing investigating I’m sorry investigating the company I would look at if their debt to equity was 2.2 one and then I look at other companies in the same industry that are all rough running at roughly the same that equity ratios then okay well maybe that’s a norm for the company and it wouldn’t be something that would be so alarming as they were a tech company or if they were selling jeans or something.
I understand when you buy cars you have to buy them and then they sit in a lot before they sell and there’s a debt that you have to pay back for those.
That’s why I asked that question so those are a lot of the things that kind of going through my head as we’re thinking about this and talking about this.
I guess the just sum it all up is I would give it a little more time before you make that decision about whether you want to invest if you’ve owned the company for about six months then at this point it’s not going to kill you to hang on to it for another six more months and decide at that point if this is really something that it’s just not going to turn around that it looks like all the fundamentals that I was looking at have gotten worse then that would be a decision at that time that you’d want to making cut your losses and move on.
And that’s one of the things that being an investor is the hardest thing to do but you have to at some point you have to cut the losses and move on so I guess I would give it another six months and reevaluate that at that time and then if it still doesn’t look like it’s getting better or if all the other fundamentals are looking great and it’s just as bad news that’s made it fall this much then you really at that time I guess that’s my thought.
Andrew: yeah didn’t really touch on the fact that there was a sum of the numbers that Glenn was talking about are trailing twelve months versus numbers that you’ll find on the annual report so you kind of have to be wary when you’re using trailing twelve months because that’s going to use quarterly reports and we’ve talked before how we love to use annual reports and the ten K’s.
And so another benefit of waiting the extra six months like you said Dave is that you get another annual report to really see what the true shakeout was of this because when you’re looking at the quarterly stuff yeah quarter two results came out and that’s going to kill the trailing 12 months figures you have to think too what if they just happen to have a really weak quarter four last year well those trailing 12 months will reflect that but if they were cover and have a strong quarter for this year well then let’s say 2018 won’t be as bad of a year as it seems right now as you’re evaluating that in the middle of the year with the trailing 12 months.
I don’t know I think that’s something to keep in mind to the fluctuating characteristics of these quarters these business fiscal year quarters and how we really prefer to use annual reports.
And those again are not audited so they could have another adjustment happen with the annual report last little thing before we sign out that episode I was talking about in the archives we had one that kind of went into this more in-depth it’s episode 48 when the falling stock indicates a failing business and that would be an additional another factor to think about that we didn’t even talk about today.
Just kind of looking at how the business financials are looking throughout the years rather than just single focus laser focusing in on one year or in this case a trailing 12 months.
All stuff to keep in mind obviously the idea of analyzing the stock and kind of dealing with some of the fallout is not a simple thing but even getting to this part or this point where you’re understanding what the financials are telling you and then you’re now like a half a step away from.
I mean because really in this email Glenn kind of laid out perfectly what’s going on why the stock went down and he was able to understand it all right he was not like the average kind of blind investor who might see a ticker symbol and just freaked out.
Instead you got this like Research Analyst kind of approach to it that I think a lot of people can have if they get into individual stocks and understanding the financials and the valuations definitely helps you to do that.
So now kudos to you could go one way or the other obviously you could go many different ways with a stock like this. Try not to kill yourself over it because in a diversified portfolio it should only make up five percent of your total investment capital but good to have some thoughts I think I think you’re like halfway three-quarters of the way there and those are some of the additional thoughts that we thought we could add to that.
Dave: all right folks will that is going to wrap up our discussion today I hope you enjoyed and or and I taking a few moments to answer some questions there were fantastic questions and they’re just getting better and better all the time.
The amount of data and research that you guys are doing is just awesome I I’m just so impressed as always.
So thank you again for taking the time to write to us we do appreciate it and we enjoy learning more about you guys and learning more about what your struggles are and how we can help you.
Without any further ado you guys go out there and invest with a margin of safety emphasis on the safety have a great week and I’ll talk to you next week.
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