I don’t often think about how certain events impacted my life since my nature is to look forward. But one thing is certain—I would never be an active investor if it wasn’t for my dad’s influence.
The funny thing is, he was never really into stocks. He preferred owning real estate as passive income and was an entrepreneur during the day. He chose to mainly stick to blue-collar industries because there was less competition, skills were easy to pick up, and customers appreciated an air of professionalism in industries that didn’t traditionally show it. He also preached living a simple life, embracing frugality, and never letting success go to your head.
Even though he still only holds a portion of his portfolio in stocks, he’s taught me some timeless lessons on how to be a successful stock market investor. They’re simple, but in this business, the best lessons often are.
Buy when no one wants it
In Alberta in the 1980s, real estate was a dismal place to be. Foreclosures were commonplace after the price of oil collapsed, interest rates were high, and the general economy was still relatively weak.
And yet, my dad was buying.
It has turned out to be a wonderful decision 30 years later. But even at the time, he was able to borrow money at 10-12% annually and collect a cap rate of 20%. That, combined with creating a huge savings rate, ensured he could avoid taking on huge debts.
One stock that fits that mold is Manitoba Telecom Services Inc. (TSX:MBT), the beaten-up provider of Internet, home phone, wireless, and cable television for customers in the province. The company is depressed because investors are concerned about a pension shortfall and because of concerns with its Allstream subsidiary. The dividend could even be at risk, since its yield is much higher than competitors.
But the company is cheaper than its larger rivals on almost every metric. It can afford the generous dividend and is a logical acquisition target in the future. For investors willing to look past the short-term issues, there could be value in the name.
Remember those rental houses my father was buying up in the 1980s? He still holds them today.
The fun part of holding for so long is figuring out his yield on cost. His rent has only barely kept up with inflation, mostly because of a series of tenants who stayed for years at a time. But even after keeping rent artificially low, his original yield on cost is approaching 50%—and he has an asset that has at least tripled in value. That’s the kind of patience you can take to the bank.
One stock he’s held for more than a decade is Wal-Mart Stores Inc. (NYSE:WMT). Attracted by the company’s scale, its massive moat and some short-term weakness, he bought a large position and never looked back. Now, the stock is his largest holding, and his dividends each year are nearly 5% of his cost. It’s been a great investment and he has no plans to sell.
Every time he bought another rental property, my dad would do a very simple analysis. He’d take the expected rent, knock off his known expenses and a little for vacancy, and it would spit out an expected return. If the number was below 15%, he wouldn’t do it.
This led to periods where he had capital, but got shut out of the market. But it also led to nice returns over the years.
One opportunity for the patient investor is energy. Both oil and natural gas are depressed, as traders sell off both commodities on short-term news. For investors with more patience this could be a buying opportunity.
Encana Corporation (TSX:ECA)(NYSE:ECA) is currently pretty depressed as investors punish it for buying Athlon Energy at the peak of the market. But the company has just raised $1.25 billion in new equity and has cut capital expenditures to the bone. The dividend is secure via cash from a recent asset sale, and there will be plenty left over to pay off debt that matures over the next couple of years.
You won't regret buying quality
Perhaps the most important lesson my dad preaches is to buy quality names. At the core of his portfolio is a collection of rock-solid blue chip companies.
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Fool contributor Nelson Smith has no position in any stocks mentioned. His father owns shares of Manitoba Telecom, Wal-Mart Stores, and Encana.