Month: October 2024

Baseball and Investing

Warren Buffett often references Ted Williams, the legendary baseball player, to explain his philosophy on disciplined investing. In his 2005 Berkshire Hathaway shareholder letter, Buffett described how Williams approached hitting by dividing the strike zone into 77 squares, each about the size of a baseball. Williams knew his batting average would be much higher if he only swung at pitches in his “sweet spot,” or areas where he could hit well.

Buffett compares this selective approach to investing, noting that investors don’t have to swing at every “pitch” (investment opportunity) that comes their way. Instead, they should patiently wait for the right opportunities—those in their “sweet spot” of understanding and valuation. By only investing in situations they feel confident in, they can improve their “batting average,” or success rate, just as Williams did with his strategic approach at the plate. This analogy has been a cornerstone of Buffett’s approach to value investing: patience, discipline, and understanding the pitches (investments) that best suit one’s skills and knowledge.

On average, we take just 15 to 20 “swings” each year, carefully choosing investments that land in our ‘sweet spot.’ This disciplined approach has served us well: in 2024, we’ve taken just seven swings, yet these have yielded an impressive average YTD capital gain of 19%.

Here’s a recap on how we select our ‘Timely Ten’:

Step three in our process involves monitoring our quality dividend growers regularly, which can become quite challenging depending on the number of companies we track. Fortunately, we rely on ‘The List’ instead of the vast array of stocks in the index, which streamlines our task. Nevertheless, we continually seek methods to enhance our efficiency. Through dividend yield theory, we’ve discovered an approach that has proven remarkably effective in aiding us with our efforts over the years.

Dividend yield theory is a simple and intuitive approach to valuing dividend growth stocks. It suggests that the dividend yield of quality dividend growth stocks tends to revert to the mean over time, assuming that the underlying business model remains stable. In practical terms, if a stock pays a dividend yield above its ten-year average annual yield, its price will likely increase to return the yield to its historical average. Knowing that price and yield go in opposite directions, this theory helps us find stocks poised for a positive price correction.

We have pre-screened our candidates using the criteria we initially laid out in building ‘The List’. This helps us considerably narrow the universe of investable stocks.

1. Dividend growth streak: 10 years or more.
2. Market cap: Minimum one billion dollars.
3. Diversification: Limit of five companies per sector, preferably two per industry.
4. Cyclicality: Exclude REITs and pure-play energy companies due to high cyclicality.

Next, we rank ‘The List’ by how significantly each stock is priced below its fair value (Low Price), as calculated using dividend yield theory. To determine fair value, divide the current dividend by what you consider to be the stock’s historically high yield.

All companies above the thick black line have a current price below fair value (sensibly priced). The stocks above the thick black line make up our ‘Timely Ten’.

Selling Guidelines

We take a patient, long-term investment horizon when we invest and expect to hold the stock for decades, keeping portfolio turnover low. Portfolio turnover will be minimal, so selling will be rare. We will only sell a company under the following conditions:

1. if the safety of the dividend payment has come into question
2. the company’s long-term earnings power appears to have become impaired
3. the stock’s valuation reaches seemingly excessive levels, or we find a more attractive idea

Based on the first two conditions, we won’t be selling any of the companies in our model portfolio. However, we will consider ‘pruning’ positions if valuations become excessively high.

Let’s take a closer look at one of the top performers in our portfolio—Royal Bank (RY-T)—to evaluate whether its recent success has pushed it into overvalued territory. To make this assessment, we rely on two valuation metrics: historical fundamentals and dividend yield theory. These tools help us gauge whether the stock’s current price has outpaced its intrinsic value or drifted too far from long-term averages.

Historical Fundamentals

The company’s operating results will determine a stock’s price in the long run.

Analyzing a company’s historical fundamentals tells you much about how the business has been valued over a longer time frame. Many of the stocks we invest in have a ‘narrow valuation corridor,’ which means the stock price follows a path that rarely deviates from its historical trading range. A company’s P/E (Price to Adjusted Operating Earnings), OCF (Price to Operating Cash Flow), EBITDA (Price to Earnings Before Interest Taxes and Amortization), and Sales (Price to Sales) ranges tell us a lot about how a company has been traditionally valued.

Purchasing at the bottom of these ranges or selling at the top has helped us manage our entry and exit points to enhance returns.

We use the Fundamental Analyzer Software Tool (FASTgraphs) to visualize how a company has been historically valued. We like to see it trading within its typical ‘valuation corridor’ based on a ten-to-twelve-year timeline. This gives us a clearer picture of how the stock is traded in different economic cycles.

Adjusted Operating Earnings 

The following colours/lines on the FASTgraphs chart shown below represent: 

Black line: Price

White line: Dividend

Orange line: Graham average of usually 15 P/E (price/earnings) for most stocks

Blue line: Normal P/E

Dashed or dotted lines: Estimates only

Green area: Earnings

Green dots: Purchases

CALGARY, Alberta, Oct. 01, 2024 (GLOBE NEWSWIRE) — News Release – TC Energy Corporation (TSX, NYSE: TRP) (TC Energy or the Company) today announced that it has completed the spinoff of its Liquids Pipelines business into South Bow Corporation (South Bow).

The TC Energy common shares will resume “regular way” trading on the TSX and the NYSE on Oct. 2, 2024, under the designation TRP. The South Bow common shares will commence “regular way” trading under the designation SOBO on the TSX on Oct. 2, 2024, but will not trade “regular way” on the NYSE until one trading day after the U.S. Securities and Exchange Commission (SEC) declares South Bow’s registration statement on Form 40-F effective. TC Energy currently expects that the South Bow common shares will commence “regular way” trading on the NYSE on or about Oct. 8, 2024.

Estimated proportionate allocation of adjusted cost base between TC Energy common shares and South Bow common shares is expected to be posted on the TC Energy and South Bow websites when available during fourth quarter 2024.

What did TC Energy shareholders receive in the spinoff?

TC Energy shareholders received:

1 new TC Energy Common Share for each TC Energy share they held on the Distribution Record Date of Sept. 25, 2024

0.2 of a South Bow Common Share for each TC Energy share they held on the Distribution Record Date of Sept. 25, 2024

What happens to my TC Energy dividend?

TC Energy and South Bow each intend to declare independent dividends for the quarter ended Dec. 31, 2024 on Nov. 7, 2024, reflecting their respective proportionate amounts of TC Energy’s dividend prior to the Arrangement. The dividends are expected to be paid on Jan. 31, 2025, to shareholders of record on Dec. 31, 2024. All dividends, including the expected dividends to be declared on Nov. 7, 2024, are subject to the discretion and approval of each company’s respective Board of Directors.

Even at 3% inflation, you will need 25% more capital in ten years to pay your expenses. How are you going to get there?

One of the biggest misconceptions in retirement planning is the idea that, as you age, you should shift away from equities and into more fixed-income investments like Bonds. This outdated strategy is often referred to as the “Age Rule.”

The “Age Rule” suggests you subtract your age from 100 to determine the percentage of your portfolio that should be in stocks. For example, at age 65, it recommends 35% in stocks and 65% in bonds and cash. By age 80, your stock allocation would drop to just 20%.

Now, let’s examine what happens to a $100,000 Bond over 10, 20, or 30 years, as inflation steadily erodes its purchasing power.