Do It Yourself Investing

 

Do It Yourself Investing does not need to be complicated but it can be disastrous when you do not know what you are doing. Nick shares his story.

Nick is a subscriber to the site and based on our correspondence I thought his background and investment experience would be well worth sharing with you.

Nick and his brother started working at a very early age in the family business their father founded in 1968. In 1992, Nick and has brother joined forces to assume the responsibilities of running the business from their father. Together they grew the business and eventually sold it in 2018.

Nick, first and foremost, thank you for sharing your thoughts with us.

Perhaps we can start by you sharing a bit about your background including how you and your brother built a business to the point where you were able to sell it and have the ‘choice’ of whether you wanted to retire or not in your early 50s.

My brother and I were essentially born into the family business. When we were very young we started helping my father in any way we could. Nobody can accuse my brother and me of never having done anything we would not ask our employees to do. We were truly exposed to all aspects of the business.

In 1992 I combined forces with my brother to assume the responsibilities of running the business. This permitted my father to focus more on supporting/guiding us.

We knew how hard he had worked to build the business so the last thing we wanted to do was to mess things up. If we messed up we would be disappointed in ourselves but worse yet, our father would have been disappointed in us.

This is why we decided to keep things simple. We segregated responsibilities and did not interfere with what the other was doing. Having said this, we certainly discussed major decisions. We did not make major decisions unilaterally.

My brother handled the buying and selling aspects of the business and I handled the administrative duties. I was also responsible for all the financial decisions but it was a joint decision when it came to major financial decisions.

You obviously had to do things that most people would not do to reach the level of success you attained. Can you give us some ideas of what some of those things were?

By being in business for ourselves we learned how difficult it can be to run a business in all types of economic conditions. You have to deal with customers, suppliers, and human resource, regulatory, and financial issues. Unless you have been in business you might not have a full appreciation of how a business owner gets pulled in all different directions. You also find yourself thinking about the business when you’re at home and when you’re on vacation. You’re pretty much thinking about the business to some extent all the time.

We took calculated risks but were always cognizant that high risk decisions could destroy years of hard work. As a result, we never gambled when it came to running the business.

Despite your business success you have mentioned to me on a few occasions that your experience with equity investing was not nearly as successful. Tell us a bit about this.

I view my initial equity investing experience much like going to an amusement park. In amusement parks you have roller coasters in which you go up, you go down, and you also perform loops. At the end of the ride you have a headache. Depending on your personality you immediately want to get on that ride again or you’re thinking that is the last time I ever ride a roller coaster.

Never seeing another roller coaster in my life is similar to the way I thought after my first few years of equity investing.

I started do it yourself investing in 1997 when a stockbroker recommended my brother and I invest in mining stocks and biotech start-ups. In hindsight, these were not the types of companies in which we should have ever invested. We were essentially speculating.

Imagine one of your first investments being in a company like Bre-X before everything came crashing down. When I initiated a position in Bre-X, this junior mining company had just ‘discovered’ a sizable gold deposit at Busang, Indonesia (in Borneo). NOTE: Readers unfamiliar with Bre-X can find more information at the Canadian Broadcasting Corporation’s Digital Archives.

Bre-X bought the Busang mining site in March 1993 and in October 1995 it announced that significant amounts of gold had been discovered.

It was originally a penny stock but following the announcement of this ‘discovery’, its stock price soared. If I recall correctly, the stock price peaked at ~CDN $286.50 in May 1996 on the Toronto Stock Exchange (X), and had market cap in excess of ~CDN $6B.

When it came to light that Bre-X was a fraud, the company collapsed and Bre-X investors lost a bundle.

I don’t mean to dwell on the negative but how did you go about determining what companies in which to invest back then? What are some of the other companies in which you invested?

Fast forward to the dot.com bubble and we had relatives in the US who kept telling us how well they were doing in the stock market. I figured that if they were making money in the stock market then so could I so I branched into tech companies.

I think back to 2000 when I was glued to the internet and all the business new channels (eg. CNBC). I made investments in extremely speculative tech companies which had virtually no revenue and which were losing money but the investment community was valuing these companies in the hundreds of millions (even billions) of dollars.

Initially, I was a do it yourself investing whiz. I experienced amazing success and the value of my investments exceeded CDN ~$2 million. I didn’t cash out, however, and when the bubble burst the value of the portfolio plunged to the point where my brother and I gave back everything we had ‘made’!

I don’t like to think about some of my initial investments but I share some of the ‘low points’ so your readers can learn from my mistakes. Revisiting these mistakes also serves as a reminder for me not to speculate.

I vividly remember acquiring 2000 shares of Rambus (RMBS) at $66.00/share in early 2000. Want to know what happened next? Look at the company’s stock chart. Brutal.

Another painful investment experience was Nortel. I bought Nortel shares at ~CDN $65 and felt great when the share price rose to ~CDN $125. That was the up part of the investment roller coaster.

When Nortel imploded (the roller coaster descent) we at least had the sense to exit our position when shares had retraced to our purchase price. Many investors hung on to their Nortel shares all the way to $0.

We also invested in great companies like Intel (INTC), Cisco (CSCO), and Microsoft (MSFT). The problem, however, is that we never paid attention to valuation. When we invested in those companies they were grossly overvalued. Ultimately, they plunged in price when the dot.com bubble burst.

We also invested in several DSL Networking IPOs and took a beating when we held shares too long.

You stepped away from equity investing for a very long time following the bursting of the dot.com bubble.  In hindsight what would you have done differently?

Other than not speculating to begin with I should have focused exclusively on investing for the long-term in high quality companies (ie. profitable, strong free cash flow, competitive advantages).

Because I did invest in higher risk companies which appreciated in value very quickly I should have taken my initial investment off the table. I should have hedged my positions through the use of put options to give me some downside protection.

What eventually prompted you to look at investing in equities again after an 18 year absence?

A lot has happened in 18 years. My brother and I built our business to the point where we generated record sales and profits in each of the last three years. This led us to the opportunity to sell the business and for me to retire much sooner than I envisioned (early 50s but I like to think I still look like I did in my 20s).

My brother has always enjoyed the business so when we sold the company he decided to carry on and to hold a minority interest.

I didn’t like the business to the same extent as my brother so I opted to cash out and to invest my money wisely so as to generate sufficient income to service our family’s living expenses.

Your goals and objectives when it comes to equity investing are obviously very different from 20 years ago. Do you mind sharing these with readers (eg. preservation of capital, leaving an estate for the next generation, never having to go back to work, generating income from investments to maintain standard of living, etc.)?

I don’t think our goals and objectives are much different than that of most people. We’re focused on life experiences and making this world a little bit better. We worked really hard to get to where we are but not everyone in this world is presented with the same opportunities. Helping others less fortunate is certainly one of our goals.

We recognize that at some stage of our life we will not have the stamina we have today to do some of things we want to do. We want to cross things off our ‘bucket list’ before it is too late. We don’t want to reach the stage later in life where we regret not having done the things we want to do.

In a nutshell, the following is important to us:

  • Generating investment income to maintain our standard of living;
  • The preservation of capital;
  • Leaving an estate for the next generation;
  • Never having to return to the workforce because we have to;
  • Helping family;
  • Helping those less fortunate.
You have gone to great lengths to interview investment professionals in an effort to find someone with whom you would entrust a portion of your wealth. Care to share some of your observations as you went through this exercise?

In meeting with portfolio managers and salespeople in the investment industry I am disappointed at how little they have to offer. I know there are some very good investment professionals so I am not implying that everyone in this industry will disappoint your readers if they go through the exercise I went through. This industry is much like any other industry. There are very good investment advisors and there are some who should not be in the business.

The challenge most individual investors have is how determine the difference between a good and inferior advisor. In my opinion, a great investment advisor will put the client’s best interests first.

Some investment advisors, however, are more focused on ‘landing the client’ and generating income from that client’s portfolio.

If you want to find a great investment advisor it takes a lot of work.

You employ the use of investment professionals so why have you also decided to manage some of your own money?

In my opinion, nobody should have more interest in your money than you. You work hard to generate savings to invest. Don’t stop there. Work smart to learn how your money can work for you.

After an extensive process of interviewing financial advisors I selected one who I felt understood my goals, objectives, and risk tolerance.

I wanted a relationship that was mutually beneficial and didn’t want to blindly turn our money over to a third party to manage. I wanted my relationship with an advisor to be one in which I could learn because I didn’t want to repeat my previous unpleasant investment experiences.

The advisor we selected to manage a portion of our investments shares information with me that allows me to learn. He doesn’t just share reports reflecting our holdings and investment income.

Now that you are personally managing a portion of your money, what are the things you look at before investing in a company? Can give us some examples of the types of companies in which you have invested/would invest?

I like to keep things simple. The more difficult I make things the greater the likelihood that I stand to lose money.

I want to invest in fairly valued or undervalued companies that are profitable, which generate strong free cash flow, and which have competitive advantages.

I would much rather invest in a wonderful company at a fair price than to invest in a fair company at a wonderful price. I didn’t make this up. I got this from Warren Buffett. If this practice has worked well for him then I think it will work well for me.

I like to invest in companies with a track record of increasing their dividend over several years but I won’t chase yield. I am not averse to investing in low dividend yielding companies and am also open to investing in companies which do not pay a dividend but this would be an exception to the rule. An example of such a company would be Berkshire Hathaway.

I like the Big 5 Canadian banks, Class A railroads, and the major telecommunication companies.

In the case of Class A railroads in North America, for example, ask yourself how many new railroads have been created in the last 20 years. The answer….none. The barriers to entry are so significant.

Roughly how much time per week do you spend managing your investments or performing investment research?

I am retired so the amount of time I spend on my investments is perhaps far greater than most people. I spend roughly 25 hours a week but that is because I enjoy this.

In my opinion, most people spend 40+ hours a week to generate an income. If that is the case then why would people not spend at least 5 – 10 hours a week to ensure they are making proper decisions to ensure their money is working for them?

I know many people might not enjoy doing what I do. If that is the case then they had better be certain they find someone to do it for them who will not make the management of their money a one-sided relationship. Even if your readers don't want to go down the path of do it yourself investing, it is extremely important they take an interest in how their money is being managed to ensure the performance of their investments is meeting or exceeding plan.

We recently experienced a pullback in December. How did you react?

I should have been deploying money in December but I didn’t. Having said this, I didn’t kick myself and I didn’t panic when the market pulled back. I knew I had invested in good companies that would most likely still be profitable many years from now.

Don’t try to time the market. You will drive yourself nuts if you try to time the market and approach investing with a short-term mindset.

Your kids were brought up in a household where they had the benefit of being around a business minded individual. Are there any suggestions you can offer readers to encourage their kids to take an interest in business, investing, and planning for the future?

I would like to think that parents should be discussing/teaching investing with their children in a way that they can relate. The problem, however, is that a significant number of adults can’t do this because they have trouble investing for themselves. You read stories about how a significant segment of the population is living paycheque to paycheque or is at risk of financial ruin if they are unemployed for a short period of time. We also have a large number of adults who rely on lines of credit or, worse yet, payday lenders. Parents in this predicament are the last people who should be discussing investing with their children.

I also suspect do it yourself investing is done by many people who truly do not understand how to read a company’s financial statements or how to properly assess a company. A lot of people just look at stock graphs and make investment decisions on the basis of what they see in those graphs. In my opinion that is really not investing.

Unfortunately, our education system does not teach proper money management. As a result, people need to look for other sources of information or they have to rely on someone else to manage their money.

Most of my friends and family are of the opinion that investing is complicated and time consuming. It doesn’t have to be this way. It will certainly take some work but that is like anything else worth doing in life.

If you have to any advice for someone contemplating do it yourself investing, what would it be?

How can you expect to learn anything if you just turn over your investments to someone else to manage for you?

There is a wealth of information out there. Some information is great and other information is total garbage. Be careful what you listen to. Watching investment related TV shows where someone is yelling at you, pulling levers and pressing buttons, or where guests and hosts are raising their voices and arguing with each other…that is not the way you learn about investing.

If someone is interested in do it yourself investing but doesn’t know where to begin I will leave it to them to contact you. I don’t want to recommend something extremely basic if some of your readers already have some investment knowledge. Unless someone can give me some sense of where they are coming from I can’t really make any suggestions.

At the very least, I strongly feel that everyone should have a basic understanding about equity investing. Secondly, don’t make things complicated. Think about the products and services you consume from great companies such as Microsoft, Johnson & Johnson, Visa, The Royal Bank of Canada, Mastercard, etc..

Once you figure out which companies are great you then need to determine if the company is fairly valued or undervalued. I mentioned earlier that I invested in Intel, Cisco, and Microsoft during the dot.com bubble. Most, if not all, high tech companies were grossly overvalued and if an investor has hung on to these investments for the past 18 - 19 years there is a strong probability they have yet to break even on their investments.

On a final note, have you derived any benefit from following Financial Freedom is a Journey? If so, what have you found worthwhile?

Financial Freedom is a Journey is a wonderful site for the do it yourself investor who doesn’t have the time or knowledge to properly evaluate companies.

What I like about the site is that you focus on high quality companies and if you recommend a company as an investment you actually invest your own money in the company. There are many other sites which write about a company, recommend it as an investment, but the writer takes no position in the company. On the other hand, you also disclose when the company you have analyzed is somewhat expensive or is not a company in which you would take a position.

I also like looking at your FFJ Portfolio because that shows me the type of companies in which I should be investing for the long-term. The companies in which you own shares are not the types of companies where I would lie awake in bed at night wondering whether they will still be in business when I wake up in the morning.

On a final note, I find the articles are informative and easy to understand.

Nick, thank you so much for agreeing to share your story and investment related experiences. I am certain they will resonate with many readers.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to charles@financialfreedomisajourney.com.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.