Episode: QAV 409 David Waldron
Tony Kynaston [00:06]: Where are you based, David?
David Waldron [00:08]: I’m in Southcentral Pennsylvania outside of that state Capital of Harrisburg.
Tony Kynaston [00:13] Oh, wow. Okay.
David Waldron [00:14]: About, three hours from New York city.
Tony Kynaston [00:16]: And where is that?
David Waldron [00:18]: Hours from Philadelphia. I’m sorry?
Tony Kynaston [00:21]: Pittsburgh down that way.
David Waldron [00:22]: Yes. Pittsburgh is about three hours West.
Tony Kynaston [00:25]: Right, okay.
David Waldron: [00:25]: Philadelphia is about two hours east.
Tony Kynaston: [00:28]: So you’re right in Manhattan. I’ve been to Pittsburgh, it’s a nice city.
David Waldron [00:33]: Oh, it’s a great city.
Tony Kynaston: [00:33]: Yes.
David Waldron [00:35]: By the vernaculars, up and down the mountains.
Tony Kynaston [00:37]: I did. Yes.
David Waldron [00:38]: A lot of fun right?
Tony Kynaston [00:40]: I find the great museums there as well.
David Waldron [00:42]: Yes, absolutely.
Cameron Reilly [00:43]: And have you been having a snowpocalypse there like they’re getting in Texas?
David Waldron [00:48]: We’ve probably had more snow here than we normally have this winter, outside where the Valley where it’s kind of one inch or less kind of area, but we’ve had
some pretty big storms this winter.
Cameron Reilly [01:00]: Yes, well.
David Waldron [01:01]: You just never know anymore what you’re going to get with.
Cameron Reilly [01:03]: Yes.
David Waldron [01:05]: It’s predictable, just like investing right?
Cameron Reilly [01:10]: Well, investing is pretty predictable, isn’t it?
David Waldron [01:14]: I should say just like stock trading, it’s unpredictable.
Cameron Reilly [01:17]: Yes. Well, it’s.
Tony Kynaston [01:20]: Not predictable in the long-term, it’s predictable.
David Waldron [01:22]: Exactly. There you go, perfect.
Cameron Reilly [01:25]: Let’s get into it. Obviously, for people tuning in, we’re talking today, welcome back to QAV by the way, episode, I think this is 409, our guest today coming to us as you’ve just heard from Pennsylvania, David Waldron; author of Build Wealth With Common Stocks. Welcome to the show, David.
David Waldron [01:46]: Thank you. Cameron and Tony. It’s great to be here. Thanks for having me.
Cameron Reilly [01:50]: Why don’t you start by telling us a little bit about your investing journey. When did you start and how did it develop?
David Waldron [02:00]: I started, I would guess at 23 years ago, 1998 working in my field, my former career, which I retired from was in Post-Secondary Career Education. I read campus as a campus president and of course, in the states, we call them the 401k, but the retirement plan and it was kind of thrown at us and it’s up to you to work the mutual funds and eventually the ETFs to figure out how to make something of it, and that’s where I started getting involved in investing and at that time, mostly mutual funds and I had a lot of hits and misses. I eventually started investing in stocks maybe after the.com crash of 2000 and did all the wrong things; Macro investing, Top-down Investing, put together my own Debt Index as a biotechnology fund, and this trend and that trend, probably paid my tuition in stock losses as I call it. But eventually, I started reading the quarterly reports that you get from mutual funds or when they were popular back then from investors in the state, such as Marty Whitman and Charles Royce from the Royce funds, William Brown from Tweedy Browne Global Value, pretty popular
fund, and these guys were talking about in their quarterly reports, very entertaining presentation on value investing, which kind of struck me for the first time. They talked about Warren Buffett and Charlie Munger and Ben Graham, and it just caught my attention. So, it was one of those things that I just naturally absorbed the information, whereas I think a lot of the other investing information was kind of like whether it made sense to me or not, I just tried it. So even though I was paying too much for the mutual funds in the form of fees, I learned a lot from the quarterly reports and eventually started applying it.
And I guess around reading books, I read all the books, Graham and Buffett and Peter Lynch and all those guys and eventually about 12 years ago, it started clicking for me. I got out of buying and selling stocks on dues and that kind of crazy stuff and started applying value investing 100% and before I knew it, I was beating the market, not that I was trying to, but as I measured, it’s like, wow, this is actually working, nothing I invented everything was learned. And then I started writing about it in some publications, like Seeking Alpha and Talk. Mark is kind of sharing my experiences with the public, I just felt that was an obligation and then that led to the book, which just came out last month. So, it’s just my experience in value investing and that it really does work if you buy into it, you believe in it and you stick with it, It’s definitely a very powerful investment paradigm.
Tony Kynaston [04:42]: But David
David Waldron [04:46]: [inaudible 04:46] to acquire so.
Tony Kynaston [04:48]: Value investing, it’s meant to be dead, isn’t it?
David Waldron [04:51]: Of course, but it’s never dead.
David Waldron [04:56]: It’s just overtaken by short-term growth stories, right?
Tony Kynaston [04:58]: Yes, exactly.
David Waldron [04:59]: Or beautiful short term growth stories.
Tony Kynaston [05:01]: Your story sounds exactly like my story, similar sort of thing, similar sort of period as well, similar sort of coming to Jesus’ moment with Warren Buffett and his writings and Charlie Munger’s writings, but Yes, very similar. So, I guess the question is what attracts people like us to value investing, overgrowth investing if there’s money to be made in growth, why wouldn’t you buy growth stocks?
David Waldron [05:26] Well, I guess from my experience you have to fail at growth investing and then succeed at value investing to come to that conclusion. But I think a lot of people are either succeeding at growth investing or think they are and I’ve heard you say Tony, and it’s said many times before is that, all investing is value investing ultimately, everybody is trying to buy something that’s going to go up in price that’s value and price. But I think to me, the tenants of value are not just value, it’s also about discipline, it’s also about patience, it’s also about long-term versus short-term. To me there’s a lot of ancillary things that go with value investing that makes it so powerful.
Tony Kynaston [06:07]: Yes. I agree. For me, growth investing tends to be about the story because you just can’t make a decision based on the numbers whereas value investing is more scientific, it’s based on the numbers. And I think you make a good point that people get drawn to growth investing until it stops. It’s like I remember a property developer telling me that the last development property developers do is the one that fails and then they get out of the business and same with growth investing. Right?
David Waldron [06:38]: That’s right.
Tony Kynaston [06:38]: Yes.
David Waldron [06:40]: Yes, they would say when condos are being built left to right, you know it’s the end of the real estate world.
Tony Kynaston [06:47]: Yes, that’s right. Don’t buy a condo, Yes exactly. Speaking of the sort of scientific approach, do you use a checklist at all when you’re deciding to buy a stock?
David Waldron [06:57]: Yes, I have a checklist, not as extensive as yours Tony, yours is a very impressive one, I may add. I basically follow five strategies, which of course I have a lot of checklists within each strategy, but define the value proposition of the company, quantify the shareholder yields, measure the returns on management, weigh the valuation multiples, and then also assess the downside risk. And once I’ve done all five and all the checklists within that then I determined whether in my view, the stock of that company is a bull situation right now, a neutral situation or a bear situation, and then make investment decisions based on that.
Tony Kynaston [07:42]: What kind of metrics do you use to do that? Like particularly on the, how do you value management? Are you using a return on investment for example, or something else?
David Waldron [07:51]: Yes. Manage would look at a return on equity, return on invested capital are two of my favorites. Return on equity of course and I’ve heard Cameron talked about this on your podcast is there’s caveats with all these formulas, return on equity, you got to be careful with stock buybacks, inflating return and equity and things like that. But I think overall return on equity does give you a good picture if you’re looking at over long-term of what management is doing.
Return on invested capital is probably number one from Benjamin Graham and I agree with that. I like to read the 10Ks; the annual reports of the companies, I like to listen in on conference calls. When I look at a conference call, I’m thinking of the analysts and a lot of investors listening to the content, they want to hear the numbers and where are they going to go next year with the company? And what I’m doing is I’m listening to the context; did they sound like they really believe? I’m listening for the EQ; the Emotional Quotient of the executives to see if they really sound like they believe in what they’re promoting and predicting and forecasting.
Tony Kynaston [09:05]: So, do you somehow factor that into a checklist? Do you score management based on their EQ for example?
David Waldron [09:11]: Good question. It’s probably something that’s hard to put in a checklist, but it’s something I certainly have on the checklist, drop onto a conference call, listen to not what they’re saying, but how they’re saying it and why they’re saying it. But I would say going back to your original question return on equity, return on invested capital are my two big return on management numbers. I also look at previous growth in revenue and earnings. I stay more into factual numbers as opposed to predictable kind of things, trying to predict things I should say.
Tony Kynaston [09:45]: Yes, that’s hard, isn’t it? Getting back to the management side of things, I find that fascinating that you’re factoring in that kind of soft side I’ll call it, your context as you call it. Who would you say, in your investing universe would be the best manager or a good manager that we could look at as a prototype?
David Waldron [10:08]: Well, the ones that score high on my quote unquote checklists would be Tim Cook at Apple.
Tony Kynaston [10:13]: Okay.
David Waldron [10:13]: For example, I think here’s a situation where a lot of investors, this investor included, sold Apple after Steve Jobs passed away. I figured how can a company get better than Steve jobs? Then realizing that Tim Cook was handpicked by Steve Jobs, I could’ve done better research there and Steve Jobs actually groomed Tim Cook to eventually be a successor, probably not as soon as he wanted it to be and Tim Cook, it’s incredible, he’s done more for that company than Steve jobs did as far as outcomes, so when I look at Tim Cook, I think of a very powerful manager. I think a lot of people say that about Jeff Bezos of Amazon, just strong managers, but at the same time, I also agree with Warren Buffett, CEOs come and go, don’t buy and sell stocks based on the CEO, because they’re going to come and go. Look for companies that have an enduring quality of management and those are the companies that you want to invest in and stick with.
Tony Kynaston [11:20]: Yes. He has spoken a lot about that hasn’t he? About the company has to be good enough to be run by an idiot because one day it will be. He’s famous saying about that. Yes.
David Waldron [11:30]: Absolutely. That’s a great one. One of my favorites.
Tony Kynaston [11:34]: Yes. Although I mean, there’s certainly evidence for and against that. I remember reading Good to Great by James Collins 30 years ago.
David Waldron [11:42]: One of my favorite books.
Tony Kynaston [11:42]: And then I think it was about 20 years ago, someone came along and looked at those companies that were in good to great and I think all but one had been bankrupted in the intervening period so, sometimes things don’t last forever.
David Waldron [11:59]: It works both ways.
Tony Kynaston [12:00]: Yes, it does. Yes. Okay. So, you’ve been investing for a long time. Tell us about what kind of returns are you getting in the market?
David Waldron [12:09]: Well, actually when I disclosed publicly is more of the average return per holding versus the S and P 500 or the American index. But I do have to get that question from you, Tony, so I’m prepared for it so I did my crunchy today. So, at the close of yesterday’s market, I first started investigating in common stocks based on what I tell about the book, the auto portfolio in June of 2009. So, what I did is I took all 17 holdings the day of the purchase, what I pay for are just for splits and dividends cost basis, also looked at on the same day if I spent using a thousand-dollar benchmarks. So, let’s say we put a thousand dollars into the stock on that day, and also put a thousand dollars into the index on the same day and I did that for all 17 stocks based on all the 17 different entry points and the portfolio has returned an annualized average of 17.21% versus 9.2% for the market. So almost twice, not as high as your close to 20% and I think your very detailed checklist, I think gets you that extra two points, congratulations but I’m very happy with my results as well.
Tony Kynaston [13:27]: Absolutely. Yes. I think once you’re getting, so that double market, Yes, some years you’ll be above that, some years will be below it, but I think relatively it’s a good space to be in, that’s great so we’re all done. So, you’ve got a portfolio. Are you saying, or you’re suggesting that you’ve held those 17 stocks since that 2009 time? Or have you?
David Waldron [13:48]: Yes, I’ve actually had the 17. I actually had 20, that was three that I did sell, so I did not include that here but one of them I sold above. One was even, one was a little below, so I’m not sure what it made a big difference. So that was Becton Dickinson, IBM and ExxonMobil are three stocks I sold during that time, but that’s it. I haven’t sold a stock in over four years.
Tony Kynaston [14:12]: That’s great. Well, what caused you to sell those stocks? Do you have a checklist for selling as well?
David Waldron [14:20]: Not probably a big one I should have, but Becton Dickinson, probably one of my regrets on a sale I think that’s one of those where I was on a conference call and just was not impressed at all and the numbers on my sheets were not looking good either.
So, I got out thinking I was ahead of the curve, but one thing that Becton Dickinson has gone for is predictable revenue and that’s tiered as four years later, that predictable revenue is still working for him.
Tony Kynaston [14:50]: Yes.
David Waldron [14:50]: So, stock has actually done better since I’ve sold it, but that’s okay, lesson learned. ExxonMobil, actually I wrote an article about this and I said, I better practice what I preach and my article was called, Energy Stock Prices go up and down with energy prices, not the quality of the company.
Tony Kynaston [15:09]: Yes.
David Waldron [15:09]: I’ve learned that a lot. If you want to own energy stocks in my book, just buy an Energy ETF and you get the same result.
Tony Kynaston [15:15] Okay.
David Waldron [15:15]: And then the other stock was IBM. I just got tired of the flat-lining and on their other quarterly reports even though I tend not to buy or sell on quarterly reports, it just got to the point where I didn’t see any more hope for the company, I decided to get out.
Tony Kynaston [15:36]: Right.
David Waldron [15:36]: That’s it. That’s the last one I sold them, had to be four years ago.
Tony Kynaston [15:39]: Yes. It’s interesting, isn’t it? You’re doing well through that strategy, I’m doing well through that strategy, and yet I often feel like I’m the only person that’s using that kind of strategy and now that there’s you as well. Why do you think that more people aren’t embracing a long-term approach to A) Do it themselves and B) Take a more technical or value approach to investing?
David Waldron [16:09]: My top of my heads on that is Wall Street, as I call it Wall Street, to me as any professional investing anywhere in the world, I just call it Wall Street in the book, is very good at propagandizing the investment paradigm towards fees, as opposed to performance. Now, of course, nobody out there invests based on I want to pay fees so let me invest. That’s like somebody saying, I want to smoke a cigarette because I want to get cancer. But I think the propaganda between the talking heads and all the articles of which I was part of too as a writer or article writer on seeking out from talk markets, after a while, people start buying into the notion of, hey it’s the quarterly report that matters, it’s the CEO that matters, it’s the trends that matter, where the product is trending towards and that’s what people are buying and selling on. And when you get caught up in that trap, it becomes a short-term game by accident almost then on purpose in my view.
Tony Kynaston [17:16]: Yes, look I tend to agree with you. I think Wall Street and Macquarie Street in Australia or Collin Street in Melbourne, often treats investors like prey, it’s how can we squeeze some more funds on the management from these people rather than what’s in the best interest of these people and that’s where the government struggle here is to try and set up a series of codes and laws that can govern the wealth management industry when they should be acting for the best interest of their clients, but they’re really acting for the best interest of their companies and that’s the dilemma, isn’t it?
David Waldron: [17:48]: That’s right Tony, because if you believe the statistics that say less than a minority of professional investors actually consistently outperform their benchmark, obviously if they leveraged their business based on that performance, they wouldn’t last very long. So, what they do have to do with, they have to spin other things in order to create the fees and I’m a skeptic when it comes to that, but that’s how I see it.
Tony Kynaston [18:14]: Look, I agree with you, but it begs the question. If as individuals we’re doing this and I’ll speak for myself, I kind of stumbled into it and then saw it as a great way to set up an independent life, but why haven’t the professionals been taught how to do this and why aren’t they doing this? Why are they always tending to at least perform the index, if not underperforming index, why haven’t they cottoned on to a style of investing? I don’t get that.
David Waldron [18:43]: Buy and hold value, but also it doesn’t make money.
Tony Kynaston [18:49]: Buy and hold value, but also more value approach rather than a growth approach or a story approach.
David Waldron [18:54]: For some reason they’re convinced value is dead. As you said before.
Tony Kynaston [18:58]: Yes.
David Waldron [18:58]: Constantly, that’s not a new story; that story has been going on for years. It just comes out every once in a while, I think the Wall Street Journal of our polls their value investing is dead article out and shakes the dust off. It does a little editing to update it and reprints it. It’s just a belief system, I guess and I guess it really goes down to taking responsibility. I think we just have to take responsibility and know that anything we buy in life, whether it’s a car or a house or whatever; we’re always placing value on it, so why are we not doing that when we’re investing?
Tony Kynaston [19:30]: Yes right.
David Waldron [19:31]: So it’s a different way of investing.
Tony Kynaston [19:33]: When it comes down to us, it doesn’t as end users to apply that sort of discipline and we’re not taught to, I don’t know about American schools or colleges, but we’re not taught to do that with our finances. We’re not taught how to invest well, talk to what to camp for certain things like short-term quarterly earnings or whatever, or the fees that the being paid. It’s almost liked the debt gets stacked against the individual from the start and it’s probably stacked there by people who profit from that, which is the people who should be teaching people how to invest properly, and doing it themselves by the way.
David Waldron [20:06]: Yes. Good historical example in my former career as an executive, one of my roles was to host financial analysts and hedge fund managers at a campus in Boston, Massachusetts for them to kick the tires as they call it. So these, analysts and some are pretty well-known superstars now, not because they visited me, but for other reasons, and they focused on the now, what are you guys doing right now?
Tony Kynaston [20:37]: Yes.
David Waldron [20:37]: What are you going to deliver tomorrow? And what are you going to deliver next month? And I kind of followed some of them and we hosted, we had big annual events with Southside analysts had breakfast forum, big bread, all my people had to do these presentations for them and one thing I noticed back then, I think I, I’m not sure I was really aware of it then, but when I started looking back, when I really got into value investing, I realized the short-term mentality of what they’re doing. What are you guys going to deliver next month? Next quarter is next year, it doesn’t matter to our clients. Our clients want to know what you’re going to do now.
Tony Kynaston [21:08]: It’s not what have you done, it’s what have you done for me lately.
David Waldron [21:10]: It’s the machine.
Tony Kynaston [21:11]: And that’s bringing an operational business mentality to an investing situation, which really should be looking at the long term, not the short term.
David Waldron [21:21]: And by the way, these are great people. These are great group of people. I had no issues with them personally, but the short-term thinking is how they’re trained and they’re just doing their jobs.
Tony Kynaston [21:30]: It’s kind of ironic that kind of capitalism leads us to that situation and we’re investing in capitalism, but it’s the worst way to invest in capitalism. So it’s kind of ironic.
David Waldron [21:40]: I never heard of it put that way. That’s brilliant.
Tony Kynaston [21:42]: But I get it and I guess also too, Wall Street, and Inverted Commerce make this money by churn. So, they love the fact that markets will move from value to growth because that means you’ve sold some of your portfolios or all of your portfolio, and that gives them a fee.
David Waldron [21:56]: It’s the fees.
Tony Kynaston [22:00]: Yes. Anyway, enough of that sort of philosophizing about what’s wrong, we’re both doing well, so we should focus on that instead. You talk in your book about ETFs and how you hedge your portfolio. Could you expand on that, please?
David Waldron [22:16]: Yes. At one time, I had ETFs as from a passive standpoint mutual funds, I guess you could say too and what I’ve kind of transitioned to when I really started getting confident about investing in common stocks is hedging is important. I’m not a short seller, I’ve never shortened a stock in my life, I never will, It’s just not for me. I have a tongue twister to be short, sellers are left short until they lose their shirts. So, for me, how can I hedge it? We’re not going to short a stock on the other side, how can it hedge it to me? The best approach would be taken ETF either of your benchmarks. So, my particular portfolio has benchmarked the S and P 500 so I wanted to do a direct hedge obviously, an S and P 500 index, like VU from Vanguard, would work. I kind of take more of a contrarian approach to that.
So, my primary, even though I have used the benchmark in the past, I’ve also used, tips, to which inflation practice carries because the number one threat to stocks is inflation of course but by now my primary hedge is Vanguard, FTSE all world, XUS, so all international stocks outside of the United States in my particular situation. And I find even though a lot of times, Tony, as you know, sometimes international stocks and Australian stocks, international stocks, American stocks go up and down together, but sometimes they don’t and we got to be prepared, to have some kind of hedge it to me, that’s the easiest simplest way for a do-it-yourself investor to hedge is through ETFs.
Tony Kynaston [23:50]: So, when you say hedge, what do you mean by that? Because typically in my mind a hedge means I’m buying airlines and I’m buying oil and, you know they both, one goes up and one goes down, if your price rises, the airline stock goes down because their major cost is fuel and vice versa. So, is that what you’re doing or are you doing something else?
David Waldron [24:10]: Yes, it’s a hedge maybe from a broader standpoint and that’s definitely an excellent hedge within that industry. From a broader standpoint, if I have a basket of stocks on the S and P 500 or all in the ACX, what can I hedge that against that’s contrary to that overall, on a broad market standpoint, that if this market goes down for the next three months or four months or five months or six months, it takes everybody with it, what might be on the other side that might be going up to kind of keep the portfolio stable? So, I’m looking at it more from a broader standpoint.
Tony Kynaston [24:42]: Is that a 50/50 hedge, or how do you rate that?
David Waldron [24:47]: No, the hedge would be more like 25-30%, much less. I don’t go 50/50, even though as I got older, I might consider that.
Tony Kynaston: [24:58]: So, don’t you find that even though you’re smoothing out the volatility, you might be reducing your overall returns because one’s going up and the other one’s going down, so the average is kind of flat-lining?
David Waldron [25:12]: That’s possible. The VU has been an okay return., it’s positive for me,
but nothing fantastic. But again, that’s the investment I make saying, this is the one that it’s there if I need it. So, if I’m diversifying in any way, that’s my diversification. I believe in a basket that should be concentrated of stocks, but if I’m going to do any diversification, it’s going to be with the ETF hedges.
Tony Kynaston [25:42]: Okay. So, you spoke before about inflation and in your book, you spoke about the hidden cost of inflation. Could you talk a bit about that and whether you’re hedging against that or taking into account in your portfolio construction please?
David Waldron [25:55]: Yes. I might take a look at it again with the interest rates apparently rising, we’ll see what happens with that but I have hedged my portfolio with the tips, tuition inflation-protected securities, which by design, whether it always works out the way or not is another question, but by design are designed to go up and when inflation rises. So that’s a good hedge against stocks, which tend to have trouble with inflation. So, I think tips of this inflation, if eventually with this whole bond thing that’s been going on for the past 30 years, if bonds come back and everybody gets back into bond yields again, obviously tips are going to make sense to hedge stock portfolios in my book.
Tony Kynaston [26:41]: We probably do have something like tips in Australia, but could you just explain what that product is?
David Waldron [26:49]: Well, the one I’ve invested in is the Vanguard tips, Tuition Inflation-Protected Securities is a basket of government securities that, and I tend to go on the short term, as opposed to intermediate long-term tips. And, again I really can’t get into detail of it as far as an understanding but I do know from studying the prospectuses and that quarter reports and such from Vanguard, that it’s an excellent hedge against rising inflation and rising interest rates.
Tony Kynaston [27:24]: So, it’s basically a Vanguard package product, which is some kind of fund?
David Waldron [27:29]: They’re all government securities.
Tony Kynaston [27:30]: It’s all government securities. Okay.
David Waldron [27:32]: Yes. [cross-talking 27:32].
Tony Kynaston [27:32]: Again, in terms of hedging your portfolio, how much weight do you put into that kind of product?
David Waldron [27:40]: Again, it wouldn’t be more than 10 to 25%.
Tony Kynaston: [27:43]: Okay.
David Waldron [27:44]: Yes. My portfolio is majority common stocks, common shares however, I have other things outside of the portfolio that might be cash and things like that within the portfolio itself, and that’s the way I look at it as a separate independent basket. There might be some ETFs in there at any given time just to hedge potential downturns.
Tony Kynaston [28:08]: And the hedging side of things is that because you’re now in a situation where you’re living off the income from the portfolio. So, you want to make sure you don’t suffer periods of volatility.
David Waldron [28:21]: Correct, but I am an author, I am still working as an author, so that’s my income, so for me personally, I still see, even though I may look like I’m a past retirement, I’m still looking forward to having my portfolio grow. So, when I do actually retire, it will be there for us.
Tony Kynaston [28:44]: Sorry, I didn’t mean to.
David Waldron [28:47]: I’m self-deprecating Tony, no worries.
Tony Kynaston [28:49]: What you’re describing is kind of what people would do if they were in full retirement mode now, trying to make sure that they got a certain level of income every year, rather than being in growth mode, where over the long-term you can suffer periods of volatility because you’re going to get an increased income longer term.
David Waldron [29:10]: Absolutely what you make me think of too, what I’m trying to avoid with my approach, which is also your approach, Warren Buffett’s approach that the best approach I think is avoid getting to that high dividend deal trap that a lot of retirees are in right now. Now I talk about in the book or the chasing yield and I don’t know about you, I see it as a very dangerous escapade.
Tony Kynaston [29:32]: It is, and it’s plenty of broken roads [inaudible 29:34] with high yield shares and even schemes in Australia, whichever haven’t worked that well for people and in fact, the big one after the GFC was the banking stocks in Australia, which started to pay out up to 98% of their income in as dividends and retirees folded into them. And then they went through their downturn because you can’t run a business if you’re investing 10% back into the company and those people got caught there. And then just on a day or so ago, I was reading Warren Buffett’s annual letter to the Berkshire Hathaway shareholders and he called out people who were chasing yield into lower grade bonds and reminded people of how that didn’t do well back in the eighties.
David Waldron [30:12]: That’s right.
Tony Kynaston [30:14]: Yes. But it’s interesting where we find ourselves in, where if you are a retiree, you’re left with very little option to gain some kind of income and [inaudible 30:25] are paying nothing, bank deposits are paying nothing is, you really have to take on the risk of owning a share and getting their sort of an index fund and getting the average year from the market as the best alternative.
David Waldron [30:38]: Yes, absolutely. As controversial as it is, I’m a believer in a yield on cost and then I try to remind my readers that, you know what, do not buy a great stock at a great price because it’s yielding 1.1%, because 10 years from now, if you do the yield based on what you paid for the stock 10 years ago, it might be yielding a 10, 12, 15%.
Tony Kynaston [31:00]: Exactly. Yes, that’s really good.
David Waldron [31:02]: That’s the kind of high yield stocks I like.
Tony Kynaston [31:03]: Yes, I agree. Well, we spoke about one just recently, an investment bank in Australia called Macquarie Bank just recently, wrote to its shareholders, offered them a high yield hybrid. So, I don’t know if they have those in the States, but it’s a corporate bond, which can be converted back into shares at 10 years’ time. Although all the conversion metrics stacked in favor of the banks, they decided when it happens and whether you get cash or shares and all that kind of stuff, but the high yielding note that they are marketing was about three-quarters of 1% higher than the yield on the stock and the stocks are great investments. They expect in 10 years’ time to receive multiples of yield if you invested in the stock rather than in the bond.
David Waldron [31:50]: Yes. And one of the things I learned from Warren Buffett is make sure when you’re investing in stocks that you look at how the stock is yielding for the shareholder compared to the 10-year treasury or in Australia, the 10-year Australian bond and that could really be a telling story of whether the stock is better than owning a bond right now, or whether the stock is worse than owning a bond right now.
Tony Kynaston [32:16]: And when you say yield, you’re talking about the earnings yield there rather than the dividend yields here?
David Waldron [32:21]: Yes, earnings I also look at free cash flow yield.
Tony Kynaston [32:24]: Yes, okay.
David Waldron [32:25]: Those types of yields and it compared to the ten-year treasury.
Tony Kynaston [32:27]: Yep.
David Waldron [32:28]: To see if the stock is significantly outperforming the treasury, if not, then why not just own the treasury, right?
Tony Kynaston [32:33]: Yes, exactly. Yes. [cross-talking 32:34] a pretty low bar these days when treasuries are yielding less than 1%, If your company can’t earn more than 1%, it should be probably bought by somebody else who can make it run better.
David Waldron [32:50]: Yes. Most of those formulas are when the yields were more like 3%, 4%.
Tony Kynaston [32:56]: Yes, exactly.
David Waldron [32:57]: Stock yielding 6, 8% on the cashflow side, not the dividend side.
Tony Kynaston [33:01]: Yes.
David Waldron [33:02]: Then you say, okay, now we’ve got something that’s worth owning over at treasury.
Tony Kynaston [33:04]: Cam monopolize conversation here. Do you have any questions for our interview guest?
Cameron Reilly [33:11]: Yes. I’ve got a few. I was just going to point out as a side note that I enjoyed seeing that the title of your first chapter is Get Rich Slow, which was also the title of our very first episode back in 2019. So as soon as I saw that, I thought, okay, we’re on the same page as this guy. I noticed in the book, in your model portfolio, you included Microsoft then and earlier you talked about owning Apple. That surprised me both of those because they are stocks that I think would struggle to get through Tony’s checklist and it also saddened me to see how much Microsoft share prices had grown and since you added them to the model portfolio, because as our listeners know, I used to work there and I left there with a large sum of shares, and I sold them in 2004. And if I just held onto them, who knows, but anyway so I think you’re in the book, you mentioned that your process for choosing Microsoft for the model portfolio was a little bit different than you used for some of the other subs. Can you talk us through how that ended up in there?
David Waldron [34:24]: Yes. Microsoft, I think I put it back in 2011, and at the time the CEO was under a lot of pressure.
Cameron Reilly [34:35]: Steve Ballmer?
David Waldron [34:37]: Steve Ballmer was the CEO, and he was under a lot of pressure from wall street and analysts and investors. And your neighbor would say, why would you invest in Microsoft with him running the company? And I was like, you know what, go back to Warren Buffett, we were talking just about what Tony, he said you never know CEOs come and go and I figured, my common sense is, I think it was a common-sense investment.
Common sense told me this is a great company Yes, people are not going to do a PC is dead, but I also knew that they were getting involved at other things such as the cloud and they were just a quality company that maybe due to leadership or whatever it was, and it turned out to be true, but that wasn’t, I wasn’t predicting that, but I expected something would happen and a $25 a share and all the valuation metrics at the time, to me, it was a no brainer. And if I had the moment back, I would have bought thousands of shares. And right now, I’d be having this podcast from an Island in the South Pacific.
Cameron Reilly [35:44]: So back then, when you did your calculations, you ran your process of it, you determined that it was undervalued?
David Waldron [35:53]: Yes, I did.
Cameron Reilly [35:56]: Interesting.
David Waldron [35:57]: At $25 a share around the time, I think just announced adjusted, it might be more like $22 a share after dividends it splits, but I’m sure they split. But Yes, I determined it was my valuation metrics said it was undervalued by the market and the reason why is because the CEO and the PC is dead. And my bet, I hate to use the word bet would invest in, but I had to say to myself, I knew that CEO is going to change and I don’t think Bill Gates is going to let the company go anywhere but up, that was my thought.
Tony Kynaston [36:28]: Only enough David and Cam, when I was living in Toronto in 2013, Microsoft came up on my screens as well and I didn’t do any investing in North America when I was living there, I stayed investing in Australia. But when people would ask me what I would recommend, I would say Microsoft and it’s done well since then, too, but has the same response as you did, David, what Microsoft forget about its dead.
Cameron Reilly [36:52]: Has Berkshire ever added Microsoft to its portfolio?
Tony Kynaston [36:57]: I don’t think so. It’s certainly its biggest holding now is Apple, but I don’t think it holds Microsoft. Yes. I wonder if that was stopped from doing that because of Bill Gates being on the board, I don’t know.
David Waldron [37:08]: Yes. They’re like good friends. Maybe like that could be a caveat for not owning it.
Tony Kynaston [37:13]: Yes.
Cameron Reilly [37:15]: I wanted to, if I could, David just read it. I’ve been plugging your book in our club newsletter for the last month or so taking just quotes from it that I enjoyed. I thought I’d just read a couple of these out for our audience mostly and maybe you can provide some commentary on them after I read them out. This first one is about people who try and play the trends you wrote “From purely an investment standpoint.
There were just a few market timers in each event who got in with a lucky twist of fate or the rare, intuitive sense of market conditions profited and got out, those are the ones who dominate the financial news feeds and sponsored content, giving a false appearance of the bullishness or bearishness in the market fad among the masses of well-intentioned investors.
The sobering truth reminds us the moneymaking headliners represent a tiny percentage of the active participants, too many players in the fad lose money and echoing the typical casino gambler share only the rare winning bets. Just another reminder that market fads make money for a lucky few at the zero-sum expense of the silent investor majority that loses out from the desperate hope to make a lifetime of capital gains in a single market cycle. The list of household names who’ve made fortunes beating the market by owning investments with utility over extended periods is lengthy. Yet. I am unable to name a celebrity investor off the top of my head who adds wealth year in and out on fast money market timing, fads prices, what you pay value is what you get” So talking a bit about survivor bias there, I think which we mentioned from time to time on our show.
David Waldron [39:02]: Well, I think that quote and I appreciate you reading was really based on my observations. Some people do have the intuitive sense, I’ve witnessed a few people, I’m not going to name them, I wouldn’t name them in the book either that just seem to have an intuitive sense to time the market, but there’s such a small minority of the population and so that is good for them. But the negative of it is, forget when you say the 20/80 rule now it’s the 2 and 98 rule. So, you have 2% that have this they’re wired DNA wise to do this and the other 98% say, wow, I could do that too, and the truth is no, you can’t. And they try it and they fail and unfortunately, as long as those people exist, the 2% we’ll call them, they’re going to get people’s
attention because fast money is palatable for a lot of people. And I have to say this Cameron as far as the full disclosure, I saw that get rich slow for the first time yesterday, slowly your pocket gets rich slowly first time yesterday. When I named the chapter, the first line is informed investor. An informed investor has a far greater chance of getting rich, slow than getting rich fast, but getting rich slowly is better than not at all, had a little back and forth my editor, so you guys will scroll my editor on this one. She says, it’s not slow, it’s slowly, it’s get rich slowly and I answered her as well. I understand that grammatically, but we don’t say get rich fastly, we say, give her a slow. So, I compromise whether we have slowed in the title is slowly in the lights. I just had to throw it in there.
Cameron Reilly [40:48]: Well, I was listening to.
Tony Kynaston [40:50]: Sorry. Good point. You’re back though, David, about those 2% who are hardwired to ride the trends, the other thing which I think is lost in that kind of analogy too, is it those 2% tend to be 100% focused on the market all the time. They’re networking their butts off, they’re in the middle of things, they’re probably living and working on Wall Street or something similar. They’re not like you and I who are sitting at home and we have lives outside of that, and we’re investing is just to facilitate those lives that. It’s very hard to go from zero to a hundred with the MBA at 2% without devoting your whole life to it too.
David Waldron [41:31]: Absolutely. Yes. I hundred percent agree.
Cameron Reilly [41:35]: And I appreciated that I think it was in the last pages of your book, you remind everyone that health and happiness are the most important things not money and to put your health and happiness first.
David Waldron [41:47]: Yes. My beautiful wife of 29 years now is a type one diabetic with end stage kidney disease on home dialysis, I’m her caregiver. So, I’m very in tune with health being much more important than money. All the money in the world, can’t get your kidney unless you get a kidney.
Tony Kynaston [42:13]: I’m sorry to hear that, I wish her well.
Cameron Reilly [42:15]: Yes.
David Waldron [42:17]: Oh Yes, she’s doing great. She’s in the medical books as one of the best patients ever in the history of kidney disease. She went 30 years. When she first got diagnosed, they gave her five to eight years for dialysis, she went almost 30 years before she had to do dialysis.
Cameron Reilly [42:35]: Wow.
David Waldron [42:36]: She’s a great patient and a great person but I appreciate that.
Cameron Reilly [42:39]: Yes. Well, in terms of similar titles to things, we had an episode come out a while back called Diworsification, which I thought Tony had made up and then I was watching Charlie Munger’s speech last week and he said he calls a diworsification, I was like, there you go, Munger is stealing Tony stuff again, it’s scandalous at his age, 97 still stealing Tony stuff and not giving attribution. Let me read another quote here. Part of your investing wisdom, “Despite the inevitable volatility, I have no idea and forever dismiss expert predictions on market trends, stock prices and interest rate movements as no more dependable than the entertaining Ouija board remained steadfast in buying and holding the stocks of quality companies to outperform the roller coaster movements of the market over time. On the contrary trading stocks and currencies on speculation in the quest for fast money is fleeting and the house wins most of those wages anyhow” I just thought that was nicely put.
David Waldron [43:57]: Thank you.
Tony Kynaston [43:58]: Let’s talk about Bitcoin before we wrap up. Tony sent me an email today saying we had to get someone on to talk about Bitcoin and I wasn’t sure if he was pulling my leg, he said, no, I’m serious, we should probably do it. Do you have any thoughts on investing in Bitcoin David? Because I have a lot of friends who are telling me get in on bitcoin, it’s going to be worth $500,000 a coin.
David Waldron [44:25]: Well Cameron, I received an email yesterday saying that I’ve been granted 1.9378754, bitcoins. I guess you’ve rounded up that’s two bitcoins’ coins, a hundred thousand dollars.
Cameron Reilly [44:39]: You just have to say [cross-talking 44:41] professionals to somebody in Kenya?
David Waldron [44:43]: Oh Yes. Very professional looking email what I do is hit the little square box in order to claim my free 1.937543 bitcoins and to me.
Cameron Reilly [44:55]: Such a specific number.
David Waldron [44:55]: That was how I feel about bitcoins. I deleted the email immediately.
Cameron Reilly [45:03]: What was Warren’s quote we used recently? Rat poison squared?
David Waldron [45:08]: Yes. Again, some of the two percenters are making a killing a bitcoin, but we’ll see how long that lasts.
Cameron Reilly [45:17]: Yes.
Tony Kynaston [45:19]: Yes, feels like a trend.
Cameron Reilly [45:20]: And what about the GME story from your country in the last few weeks? Have you been paying much attention to that?
David Waldron [45:28]: I’ve read about it of course, like everybody else, I find it fascinating that, I’m a fan of a proponent of retail investing. So, on one hand it was great to see retail investors kicking the professional investors, but for a change. But the way it was handled by Robin Hood of course that’s controversial and then you look at Robin who was supposed to be the, Robin Hood Markets in America, I don’t know if you’re familiar with in Australia, I guess for the story, maybe you are, but they’re supposedly the favorite of millennials and the favorite stock broker for the young crowd today and maybe they just reminded us that they’re also controlled by the professionals, whether willing or not, they might not have a choice. I’m not knocking Robin hood. I’m just saying that it kind of exposed what goes on behind the scenes and Tony probably have a better idea of what goes behind the scenes that I do as far as how stocks are traded on the back end, but It’s crazy.
Tony Kynaston [46:36]: Do you think the retailer really kicked the wall straight with that one?
David Waldron [46:40]: The retail investors?
Tony Kynaston [46:43]: Yes.
David Waldron [46:44]: Well, maybe on the front page of the news, they did. I think a lot of them were probably made aware of it and got out in time or whatever.
Tony Kynaston [46:54]: Hope so.
David Waldron [46:56]: But it made for a good news story, I guess. Good headline.
Tony Kynaston [46:58]: The only headline I’ve read of someone who made millions out of the GME saga was a person who’s now facing charges for pumping and dumping it. So Yes.
David Waldron [47:09]: Yes. Pumping it up and is not good. So Yes, we don’t want to be promoting that.
Tony Kynaston [47:12]: Yes.
Cameron Reilly [47:13]: Well, maybe we’ll just wrap up with your definition of value investing from the book, which I thought was nicely put “Buy and hold the common shares of US exchange traded dividend paying well-managed financially sound businesses that produce easy to understand products or services have enduring competitive advantages from wide economic moats, enjoy steady free cashflow and are trading at a discount to the investors perceived intrinsic value at the time of purchase. Next of utmost importance and perhaps the biggest challenge practice patients in waiting for the investment thesis to play out as projected over a Longterm horizon” Nicely put sir!
David Waldron [48:03]: Thank you. I believe patients is the scarcest commodity in investing, whatever you hold the scarcest commodity, you’re probably going to do well with it, so patients work.
Tony Kynaston [48:14]: That’s always the thing Warren Buffett says, doesn’t it?
David Waldron [48:16]: Yes.
Tony Kynaston [48:17]: Don’t need a high IQ, you need patients to be an Investor.
David Waldron [48:20]: And I got it, I’m sorry, go ahead.
Cameron Reilly [48:25]: No, after you.
David Waldron [48:26]: Now speaking of Warren Buffet, I’ve quoted him six times in the book and I hope he doesn’t mind me saying this, but when you write a book, of course, as you go as Cameron, you have to send out permission to request, to use any quotes for using them in your book. And I sent the six quotes to Warren Buffett’s assistant in Omaha, Nebraska, not expect not knowing what was going to happen and he’s going to come back and say thanks for trying, but no thank you or whatever. And the next day with 24 hours now, the big publishing companies, I’ve been waiting weeks for their responses. 24 hours later, Warren Buffett’s assistant sends me an email explaining to me that she printed out all six quotes. I have in the book in the manuscript at the time, you know, as we famously know, Warren doesn’t use email, he doesn’t use computers. She presented him the printed emails, he read each one of them signed off on each one of them gave them to her and said, wish Mr. Waldron the best on his book.
Tony Kynaston [49:21]: Wow!
David Waldron [49:23]: 24 hours later. In 24 weeks later, I got some of the major publisher’s permissions or not.
Tony Kynaston [49:32]: And we need to write a book and put a hundred dollars bucks in it.
David Waldron [49:37]: I share that story because it was a wonderful experience because his reputation doesn’t proceed him, his reputation is who he is.
Cameron Reilly [49:46]: The story I’ve told too many times. David is about 16 years ago in the early days of podcasting, Steve Jobs got up on stage at Macworld and said that they were going to put a podcast directory into the next version of iTunes and I did a blog post that day saying, well, that’s nice Steve, but how the hell do we get our podcasts into it? You didn’t tell us that. And I woke up the next morning with an email from Steve Jobs saying, Cameron talked to Eddie Q and I sent Eddie Q an email, he’s now senior vice president at Apple, I sent him an email saying, I’m not sure if this is real or not and he replied right back saying, oh no, that’s real and here’s what you need to do. So Yes, guys like Steve Jobs and Warren Buffett, impressive their attention to that kind of thing.
David Waldron [50:41]: Cameron, I’m wondering if you might’ve spurred Steve Jobs to realize that podcasting was one of Apple’s best kept secrets. Right? The podcast was invented by Apple and they never really promoted it until recently. They kind of hid it behind the scenes.
Cameron Reilly [50:54]: Yes.
David Waldron [50:55]: You got his attention on that one. He said, what are we doing with this podcast? So, let’s get it out there.
Cameron Reilly [50:59]: And I’ve been waiting for them to figure out a way to help us monetize it ever since and they’re not interested.
David Waldron [51:05]: I guess it’s still there hiding in the background.
Cameron Reilly [51:08]: Anyway, David, we should let you go, thank you so much for taking time to come out and chat with us today and congratulations on the book again. For the listeners it’s, Build Wealth With Common Stocks, you can get it on Amazon and every other online bookstore, I guess. I’m not sure if it’s in bookstores in Australia, but we can order it online here. A great book, I thoroughly enjoyed it and congratulations on your success as well.
David Waldron [51:34]: Thank you very much, Cameron and Tony. I appreciate it. Thank you both for being a new source of value investing wisdom for me much appreciated.
Tony Kynaston [51:40]: Thanks David. Really enjoyed the book and good luck, mate.
David Waldron [51:42]: Thank you very much.
Tony Kynaston [51:44]: Okay
David Waldron [51:45]: Thank you mate.
Tony Kynaston [51:45]: Bye.