Someone is Sitting in the Shade Today

Financial freedom does not need to forever remain a dream. Financial freedom is achievable if you set realistic goals and objectives, you educate yourself, and you are disciplined.


Today’s Guest Post is from Taylan and Tanya (last name protected at their request).

I stumbled upon Taylan’s Retire via Dividends blog several months ago and we have kept in contact ever since.

I like Taylan’s discipline when it comes to investing. He and his partner (Tanya) have been making rapid progress on their journey to financial freedom. I, therefore, asked if they would be kind enough to share with us how and why they are making such rapid progress.

They graciously accepted and so without further delay here is the interview in which they explain how the rapid reduction of the mortgage on their principal residence and equity investing are being used to help them achieve their goals and objectives.

Charles - Taylan and Tanya, thank you for taking time from your hectic schedules to share your story. Perhaps you can start with your background.

Taylan – I was born in central Turkey. In order to provide a better future for our family my parents decided to leave Turkey when I was much younger. Initially, we relocated to Paris, France. After 12 years in that city, my parents decided Canada provided far superior opportunities; we immigrated to Canada in 1995.

Tanya – I was born in Bulgaria. My parents experienced a life of poverty for many, many years.

I came to Canada in 2003 on my own. By 2009 I bought my house using the $20,000 I had diligently saved during my first 6 years in Canada.

Taylan and Tanya – Both of us were raised by parents who learned to make do with what they had. They had no choice but to learn to be frugal. They never spent money they never had. If we wanted anything we had to save first. Buying things on credit was unheard of in our families. The lessons we learned from our parents are ingrained in us.

Charles – When did you start investing and what spurred you to start?

Taylan – I started investing in 2007. I was a neophyte and started investing through dividend focused mutual funds in my Registered Retirement Savings Plan (‘RRSP’).

I was single at the time and with my frugal lifestyle I managed to save a good portion of my income. My goal from the very outset was to generate a portfolio that would ultimately provide me with financial freedom far sooner than the average Canadian.

When the Financial Crisis hit my investments suffered a hit but I remained disciplined and continued to invest.

The proverbial ‘light bulb’ in my head, however, turned on when I noticed that my investments in the mutual fund were lagging during the ensuing recovery from the Financial Crisis. Here I was paying fees for ‘professionals’ to manage my investments yet I didn’t feel that I was truly getting value for my money. I found that I was at the end of the line when it came to generating returns from my money.

In late 2012 I said ‘enough is enough’. I liquidated my mutual fund investments and started investing on my own. I invested in a low cost Vanguard dividend focused ETF.

Over the next few years I read as much as I could about investing. I then branched out into equity investing and stopped investing through mutual funds.

Tanya – I bought our house in 2009 before I met Taylan. As a result, my free cash flow was directed entirely toward the reduction of my mortgage. As a result, I did nothing in the way of investing. My house was my investment.

I typically leave the equity investing decisions to Taylan. He has done pretty well on this front so I tend not to interfere. We do, however, discuss how to manage our cash flow.

I am a pretty savvy shopper and really know how to save money.  I am very careful when I shop; it is something I learned from my parents. I buy organic food and food grown locally, clothing at the end of season, and we only go to restaurants on special occasions. People may have the opinion that we are penny pinchers but we view ourselves as frugal. We would much rather be frugal and to be financially free at a relatively early age than to buy stuff to impress people.

In my opinion, if you work really hard to generate an income why would you want to easily squander your money? It defies all logic.

Taylan and Tanya – While we have been investing in equities we have directed a significant proportion of our free cash flow to the elimination of our mortgage. We are on track to eliminate our mortgage within the next three to five years. By that time I we will be in our early 40s. Once our mortgage has been eliminated we will redirect our mortgage payments toward investing and travelling.

Taylan – Our equity investments are held in my RRSP, Tax Free Savings Accounts (TFSAs), and in a Registered Education Savings Plan (RESP) for our son. Once our mortgage has been eliminated we will also be in a position to invest in Non-Registered Accounts.

We specifically chose to focus on retiring our mortgage well before the 25 year amortization period. We chose to do this so that down the road we would have choices. While friends, family members, and acquaintances will still be working to retire their mortgages we will have luxury of being able to make decisions we would be unable to make if we were still saddled with mortgage payments.

In addition, we have been in a low interest rate environment for several years. Who knows what interest rates will be like 5+ years into the future! It is one thing to have a mortgage at 2.7%. It is a whole different thing to have a 6% mortgage. We have no idea if mortgage rates will reach 6% but we decided we don’t want to find out the hard way. This is why retiring our mortgage has been a priority.

Charles - Are there any professional investors whose investment style appeals to you?

Taylan – Jeremy Siegel, Warren Buffett, Charlie Munger, and even Jim Cramer. Jim Cramer doesn’t come close to the other 3 investors but I still listen to what he has to say.

I have read various books written by them or about them.

I encourage readers to read Stocks for the Long Run by Siegel and Get Rich Carefully by Cramer. There are also countless books about Buffett and Munger. Read them all if you truly want to get a sense about investing properly for the long run. You Tube is also wonderful in that you can find Buffett and Munger presentations or interviews.

Charles - What kind of reaction do you get from friends/family/co-workers if you start talking about equity investing with them?

Taylan – It is amazing how people see the progress we are making but when I encourage them to learn about investing and to take control of their money they have no interest whatsoever. These people are stuck in their comfort zone. It is as if they have resigned themselves to the status quo. Somewhere along the way these people had their dreams sucked out of them.

A few months ago I decided that to save more money I would take the bus to work and I would bring my coffee from home. It is surprising how much you can save by eliminating these two expenses from your daily routine! Every day, however, I see people who take the bus at the same time as me. They all pop into the local Tim Horton’s to buy a coffee and something to eat. They are easily spending $5 every morning 5 days a week. That’s $25/week and if they do this 48 weeks a year that is $1200/year.

In addition, some of these people smoke. I have no idea how much they spend on cigarettes but if they also kicked that habit they would probably be able to at least save another $1200/year.

After having switched from driving to public transit for a few months I can tell you there are definitely some benefits to public transit. I can read investment related books while on the bus. I have also eliminated gas and car maintenance expenses; they far exceed my public transit fares. I am saving at least $2000/year by using public transit as opposed to commuting to work by car.

Charles - What have been some of your most successful investments? Are there any particular investment experiences you can share with us?

Taylan - My most successful investment by far has been Apple (NASDAQ: AAPL). I acquire AAPL in 2 tranches. The first was in July 2013 and the second was in January 2014. In both cases I viewed AAPL as being relatively inexpensive given its growth potential.

I observed just how many people had AAPL products and understood the brand name was still valuable. It is my largest holding and rather than liquidate some of my AAPL shares to rebalance my portfolio I have chosen to invest in other companies so as to reduce my AAPL concentration.

In addition, I added US equities to my portfolio when our Canadian dollar was roughly at par with the US dollar. It had been decades since our Canadian dollar had been at that level. I knew this window of opportunity would not last forever so I ‘backed up the truck’ and added several US stocks to my holdings.

Charles – Sometimes investments don’t pan out as planned. When this happens, what process do you follow to determine whether you are going to exit a position?

Taylan – When I started investing, I invested in mutual funds which had high management expense ratios (MERs). As I mentioned earlier, I realized the mutual fund company was making money from my investment even though it was an underperformer. Once I had read a considerable number of books about investing I liquidated my mutual fund investment.

At one point I invested in a few Real Estate Investment Trusts (REITs) because I was lulled by their attractive monthly distributions. I finally came to the conclusion that these REITs did not appreciate significantly in value and the distributions did not increase significantly.  Secondly, I found that a portion of the monthly distribution was a return of my investment. Thirdly, I noticed these REITs were continually issuing new units to finance their growth thus reducing my ownership position.

I would categorize my investment in General Electric (NYSE: GE) as perhaps one of my worst investment mistakes. I invested in GE several years after it cut its dividend during the Financial Crisis. In hindsight, I think I was perhaps too hasty when I made this investment decision. This was a company with financial statements that were far too confusing to clearly understand. I also made the mistake of looking in the rear-view mirror. When you are analyzing a company it is critical you analyze the company’s future potential.

Fortunately, common sense prevailed and I exited my GE position when there were rumblings of another potential dividend cut. Thankfully, my exposure to GE was a very small percentage of the overall portfolio and my loss was relatively insignificant.

Even though my loss was insignificant I still don’t like losing money. Tanya and I work too hard to squander our money.

Charles - What process do you follow to screen potential investments from the vast universe of companies out there?

Taylan - I don’t use stock screeners. I am more of a top down investor. I know some people will look at stock screeners and eliminate companies if they don’t meet certain parameters. I prefer to look at trends and to identify potential investments on this basis.

Some of the companies in which I have invested using this process include AAPL, XOM, CVX, CSCO, MSFT, V, and MA.

Some people may question my investment in XOM and CVX. In my opinion, these companies are well diversified with upstream, midstream, and downstream operations. I am confident the world will continue to require oil and gas for several years to come.

MSFT is not the same MSFT as when Ballmer was CEO. I like how the current CEO (Nadella) and his executive team have transformed MSFT. While MSFT still sells a lot of operating systems that power PCs and servers, it appears to have successfully transitioned to the ‘cloud’. Commercial cloud revenues have grown to ~60% of revenue which suggests to me that MSFT has effectively made the transition to a cloud company. I think the growth as a percentage of overall revenues will likely continue to increase.

I also liquidated some of my REIT investments and invested in V and MA. I see significant growth potential for these two companies as they are continually developing new products. In addition, they are penetrating regions of the world many people would least likely expect. I see considerable future growth from both companies. What appeals to me about these companies is that they do not take on credit risk. They are merely conduits for payments.

Charles – What type of analysis do you perform to determine whether you are going to invest in a company?

Taylan - This is what I look for:

  • Companies with a strong balance sheet. Highly leveraged companies make me nervous. Having said this, I know that some industries are far more capital intensive than others (eg. major oil and gas producers). I, therefore, take into consideration how a company’s balance stacks up against its peers;
  • I like to spread my money across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry. I avoid the retail sector as it is far too competitive and margins are typically low. I am overweight high quality technology companies such as MSFT, AAPL, and CSCO;
  • Industries in which there are high barriers to entry;
  • Companies with a wide moat. An example of this would be a company like Canadian National Railway (TSX: CNR).  This is a highly efficient railroad (it typically has one of the best operating ratios) and there are no new Class 1 railroads entering the North American region. You have BNSF Railway (this is owned by Berkshire Hathaway), CN, Canadian Pacific, CSX Transportation, Kansas City Southern, Norfolk Southern, and Union Pacific;
  • Strong Free Cash Flow (FCF). FCF is like oxygen to humans. A prolonged absence of FCF and the company will likely have to go on life support;
  • A competent management team;
  • Shareholder friendly companies.

Charles - Which investment is your longest held investment? What do you like about that company? Do you still own it today?

Taylan - AAPL is the investment I have owned for the longest; I have owned it since July 2013 when I acquired shares for my TFSA. I know that I am subject to a 15% withholding tax on dividends paid by US companies when a US listed investment is held in my TFSA but I didn’t acquire AAPL for its dividend. I approached my investment in AAPL from a capital gains potential perspective.

Prior to initiating my AAPL position I noticed how many people were using AAPL products and services. It just seemed like everywhere I turned, people either had an iPhone and related accessories or they were listening to music on iTunes. That prompted me to analyze the company which ultimately resulted in me investing in AAPL.

When I analyzed the company I came away with the opinion that there would be a P/E multiple expansion once the company demonstrated the ability to create a recurring service subscription business which would be in excess of 25% of the company’s annual revenue.

Another thing I like about AAPL is the level to which it is repurchasing shares. I strongly suspect that within the next 10 years we will witness a 30 – 40% reduction in the number of issued and outstanding shares. This will boost EPS and will provide more traction for future dividend growth.

Needless to say, I currently own AAPL shares.

Charles - How are you managing your portfolio given the recent increase in volatility?

Taylan - We invest for the long-term so we don’t get too concerned about heightened volatility. In addition, we don’t speculate and the companies in which we invest are the types of companies we would be happy to hold regardless of economic conditions.

At the moment we are concentrating on paying off our mortgage so the amount we are investing in equities is quite moderate. Once we pay off our mortgage, which should occur within 3 to 5 years, then we will redirect our mortgage payments toward equity investments.

We know the market is cyclical and the direction of stock prices is beyond our control so our game plan is to diligently invest in solid companies which are fairly valued.

Charles - What advice would you give to people who are looking to start equity investing today?

Taylan – Based on my investing experiences I recommend the following:

  • If you’re not doing it already then strive to pay yourself first.
  • It might sound simplistic but if it were as simple as it sounds then why are so many people in debt. It is somewhat foolish to start investing in equities if you are burdened with debt. Focus on eliminating your debt and staying out of debt. Why would you try to earn double digits returns when the elimination of consumer debt guarantees you double digit returns.
  • Once you have repaid your debt it is important you set realistic expectations as to what you want to achieve through investing. Set realistic goals and objectives and monitor your progress. Not everything will work as intended so be prepared to learn from your mistakes.
  • Adopt a long-term mindset. Investing is not a sprint but rather a journey. Stop watching business news channels. If you react to every little bit of news you hear you lose your focus. Remember that business news channels are a form of entertainment.
  • It is critically important that you educate yourself. If you don’t know the basics of accounting then learn. You need to learn how to read financial statements. Too many investors rely on stock screeners to make investment decisions yet they don’t know how to read financial statements. That is a huge mistake.
  • There are countless books about how Warren Buffett and Charlie Munger approach equity investing. Read them. Other books I recommend are:

Joel Greenblatt - The Big Secret for the Small Investor: A New Route to Long‑Term Investment and The Little Book That Beats the Market.

John Bogle - The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share.

Peter Lynch - Learn to Earn and One Up on Wall Street.

Warren Buffett swears by The Intelligent Investor and Security Analysis by Benjamin Graham. These books require some understanding about equity investing. Anybody who is totally new to equity investing will likely get lost before they reach the end of the first chapter of each book.

  • Start investing early in life. Start in your late teens or early 20s. Don’t wait until your 30s or later. Numbers show us that ‘time in the market’ trumps ‘timing the market’ year in and year out. Nobody can consistently perfectly time the market. If you try to be a ‘market timer’ you not only need to know when to get in but you also need to know when to get out. In other words, you need to be correct twice. Being right once is tough enough as it is. Being right twice is very difficult. Imagine trying to consistently be correct with your ‘buy’ and ‘sell’ decisions!
  • If you are new to investing I strongly recommend you invest in a broad based low fee exchange traded fund (ETF). Vanguard or Blackrock (iShares) have low fee ETFs. AVOID mutual funds!
  • Finally, always be open to learning and enjoy yourself. There are enough other things in life to worry about. Don’t stress yourself out when it comes to investing.

Charles – Taylan and Tanya, thank you so much for sharing your thoughts with us. This is all great information.

Taylan and Tanya – Our pleasure. Thank you for allowing us to share our thoughts with your readers.

Readers interested in following Taylan’s and Tanya’s journey to financial freedom are encouraged to access Taylan’s Retire via Dividends blog.

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 [email protected]

Disclaimer: Taylan, Tanya and I have no knowledge of your individual circumstances and are not providing individualized advice or recommendations. We 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.

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