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austinhippie (82.06)

What do you do when you make more from Investing than from your job?

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September 26, 2013 – Comments (6) | RELATED TICKERS: PNRA , REX , MNST

     My husband and I are fortunate to have good friends who live elsewhere around the globe and further, that when we get together with them, we feel as though we have never been apart.  There are many traits of European society that we envy very much but right now I am thinking of their attitude towards personal finance.  Our German friend boasts of his salary as though that is normal, because for him, it is.  Back here, in America, I have passed a certain milestone and feel it necessary to keep it to myself.  I feel like I'm about to burst.  

   I was raised in a lower middle income family and witnessed first hand the fact that there are no divorce loans.  Before I got married I saved a year's salary, so that I had more in cash than my husband had in lingering student debt. A couple years ago I started saving 40 - 50% of what I earn annually.  Here's the milestone - I made 150% more from my investments last year than I made from my job.  Additionally, I went onto a financial website and created two paper tiger portfolios.  One is actually my real portfolio and in the other one, I looked up the dates on which I put money into the market all the way back to 2006 and entered those dollar amounts and dates into the portfolio as though I had purchased shares of SPY at the closing price for that day. Then I made sure to reinvest the dividends.  My actual portfolio beat SPY by more than 1.2% on average and last year I did even better than my average - substantially better.

    It occurs to me that as I have been honing my investing skills, I have begun to concentrate my holdings in companies I understand and that have unique managers.  I like to look for cash balances increasing or other creation of shareholder value via tools like share buybacks at reasonable prices.  Something marked about the CEOs or executive teams of the companies I own shares of, is that in their annual and quarterly reports, their voice is very apparent.  It is clear that they view themselves as investors too.  They are telling me something, not hiding things.  I love the transparancy in the last phone-in shareholder meeting of Panera Bread (PNRA) for instance.  Or the candidness of Stuart Rose of Rex American Resources (REX) admitting that he is in discussions about converting to an MLP.  I love that he, in particular, came from a completely different background of industry than what he morphed the company into in response to the needs of our society - that's investing savvy.

     As I looked at my portfolio before writing this I also noticed a couple of my companies that have grown so steadily over the last several years that their charts look like a ray plotted on a 45+ degree angle, Portfolio Recovery Associates (PRAA) positioned themselves so well through the economic downturn that they are still making loads of money off of that and will for years to come.  Starbucks (SBUX) charts look pretty similar.

     With all the companies that I own shares of, I keep tabs on their valuations.  When they become overvalued, in my book that means a price of over 43 times future earnings, I don't allow myself to regret selling when it makes sense.  The hard part is adjusting to the latest idea of what future earnings are likely to be.  But many of the companies that interest me do not provide guidance.  I admire that, because who can tell a CEO what deal she may be presnted with two months from now that may materially affect her EPS in that quarter.  I view it as more responsible to not give that kind of guidance.  That sets out all sorts of traps.  

     These are just some of the things I am thinking about these days as I hope to continue learning and beating the market.  Lately I have been reading How Will you Measure your Life by Clayton Christensen et al. in tandem with The Outsiders by William Thorndike, Jr.. I tend to read a chapter of one and then a chapter of the other and then just let the ideas sink in for a while and come back to them later.  In addition to reading for insights, I am spending a little time each week listening to the conference calls of the companies I own shares of.  I was really wondering about Monster (MNST) until I listened to the conference call.  The numbers I saw looked like it is a good investment, but the qualitative story told via the conference call solidified my holding of the position.  It was far better told than read in the accompanying quarterly report.  

    I suppose part of the moral of this story is that I am keeping my job because I need something to distract me from my portfolio and because I have beautiful, meaningful work that I love.  The founder of Vanguard, Jack Bogle, wrote a book recently called Enough. I have defined enough for myself as 25x my current salary.  That is my goal.  And now that I am up to between five and six years salary saved, I am starting to feel like I will make it to that big goal.  But beyond that 25x is the potential for Philanthropy.  That will be the next great adventure after my current work - building an endowment to make that beautiful meaningful contribution to society go on into perpetuity.

     I own shares of BIDU,AAPL,PRAA,PNRA,MCC,SBUX,BH,MNST,WPRT and REX.  I would love to hear from you about what you are learning, reading and investing in these days too.

6 Comments – Post Your Own

#1) On September 26, 2013 at 3:54 PM, JohnCLeven (75.92) wrote:

Congrats on the returns and wealth!

I’m 24, and miles from where you are, but hoping to get there someday! My goal is too keep absorbing as much knowledge as I can about investing.

Here's where I am so far:My personal process starts with a list of about 5000 companies, and look for those that have consistently produce well above average returns on capital (say 12%) and equity (say 15%) over the past decade or so. Then I filter out the ones that have very inconsistent growth in earnings and cash flows. Then I filter out any company that I know I can’t understand (ex. Banks, precious metals, most technology) and usually any businesses that have not been around for at least 2 decades. The key 1st step for me is narrowing my “universe” from 5000 or so to 200 or less. Here’s one example of a “narrowed universe” http://caps.fool.com/Blogs/a-fortune-article-from-1988-is/824762

Once a year I go back to the list of 5000 and make any additions/subtractions to the smaller list of about 200. I have an even smaller list of about 80 companies that I’d “really love to own if the price was right”  They are consistent, high ROIC/wide moat stalwarts like KO, NKE, MCD, etc. then I basically just screen those lists every once in a while for the “losers” aka the high quality companies that have had big drops in price. If something looks ridiculous, and jumps off the page, (Like IBM at 13x earnings, or BRK.B at 1.2x BV, or COH or AAP at 12x free cash flow), then I do the REAL research, which is 10k’s and 10q’s, articles, etc.

If I find something I might actually buy, then I start with my checklist http://caps.fool.com/Blogs/do-you-have-an-investing/852439 which is designed to stop me from doing any number of stupid things investors typically do wrong, I hold 5-10 positions, ideally, and don’t really diversify. I might buy 2 or 3 new positions per year. Though I've only been doing this for 3 years, so I don't have much of a track record lol.

As far as reading, I’m reading all of Nassim Nicholas Taleb’s book’s right now. He’s an expert in randomness and black swan events. I also recommend the Art of Value Investing by Tilson. Check out my blog about Poor Charlie’s almanac as well if you want another reading rec.

Long BRK.B, MCD, IBM, COH, AAP, and LUK

Good post! Thanks!

P.S. when you have enough money, find a job you would do for free, and take it!

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#2) On September 27, 2013 at 6:44 AM, austinhippie (82.06) wrote:

Thanks.  I started out in a similar way as you, sorting through all of the stocks.  Nowdays I consider a lot of other types of investments too, like preferreds, MLPs, etc., but right now I am just in stocks.  I too keep a very small number of core holdings that I get to know very well.  Thanks for sharing your reading and your thoughts.  It's cool to see your energy and your approach!

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#3) On September 27, 2013 at 7:33 AM, BillyH813 (93.09) wrote:

AH,

Really enjoyed your post and reading about your approach, but I'm most impressed by the humility that comes through in your writing.  I've read a lot of Bogle's work on index investing but will put Enough on my reading list.

Similar to John, I'm 27 and about to hit a major milestone with my portfolio that I've been steadily working towards for a couple years.  I started actively investing in 2009 so in some ways I got lucky putting a lot of capital in after the crash and riding the wave up.

My approach to investing is less technical than both of you guys, but I too buy (almost) entirely companies I can understand and relate to.  I subscribe to a lot of the ideas / principles MF talks about in their Rule Breakers work (I'm a subscriber to that newsletter/service) - look for companies with frame-breaking ideas, big moats, companies that are leveraging network effects (I don't own MNST, but good example), etc.  I've also been influenced by my grandfather (who was a Bogle disciple) to take mostly a buy and hold approach and prefer dividend aristocrat type stocks.  My Roth IRA (which I try to max out the contribution to every year) is full of blue chips and then I have a 401(k) invested medium aggressively and a "slush fund" for me to invest in slightly riskier stocks or make short term buys.

About a year ago I also pulled a bunch of people from my company (consulting firm in DC) together and formed an investor's club.  We get dinner roughly once a month (5-8 people) and everybody brings 2 investments they are bullish on and 2 bearish.  Or two buys and two sells.  You get the idea.  We liked the dinners so much that we started up a mock portfolio contest via MarketWatch to compete with each other.

Long SBUX, WFM, MDT, PEP, UL, UTC, DOW, DD, AAPL, AMZN, GE, VZ, WFC, FRCOY (this is the company that owns Uniqlo - worth some research if you've never heard of them)

Fascinated by EBAY and have bought and sold a couple of times.  Just got out of LULU after a decent gain.  Would like to own UA/NKE at cheaper prices.  Haven't been a believer in LNKD for awhile but starting to come around.

Reading "The Happiness Project" and next behind that is the Heath Brothers' "Decisive."  Got Isaacson's Jobs bio on audiobook going in the car as well.

Definitely inspired by your post!

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#4) On September 30, 2013 at 10:37 PM, austinhippie (82.06) wrote:

     Your group sounds really fun Billy.  I wish I had something like that here but my husband is just an indexer, so it wouldn't really be for the both of us.  

    Sometimes my exploration of companies and stocks is very lonely. It is really awesome to get to hear from you about your path.    I guess it can also be good to come from a very different background, into another industry. Because if you are trained in an industry, much of what you do everyday is automatic habitual behavior, rather than original thought behavior. So I guess sometimes it 's okay to explore a new industry without a lot of training, as you are more likely to think of a new way to do something, which could be disruptive and lucrative. 

     Right now I am thinking of selling off a little off the top of some of my winners because I want to add to my BH and REX shares, but I hesitate to sell my winners to heavily as I still see a long run ahead of them.  

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#5) On October 01, 2013 at 10:31 PM, austinhippie (82.06) wrote:

Well I trimmed a little BIDU and bought a little BH today. I feel more comfortable now as I get ready to sleep that my portfolio is better off than it was this morning (even if BIDU did rise by another dollar after I sold some shares). You've gotta be able to sleep at night, right?

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#6) On October 15, 2013 at 4:29 PM, BillyH813 (93.09) wrote:

Finding myself with a little extra time today and doing some new stock research.

If you've never read any of 20punches' pitches, I would check him out as a CAPS player:

http://caps.fool.com/player/20punches.aspx

Was brought to his page by has Q4 2013 pick of IBM (I company I follow closely) but love his pitches on COH, MCD, etc.

Also interested in ISRG Q3 earnings coming out this Thursday after the market closes.

 

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