-Warren Buffett

Having recently looked though my investing journal, I noticed my own occasional “toe-dipping” investing behavior. I would identify a security, study it, find it suitable for investing and buy a relatively small amount of it. Perhaps I thought that the price could decline further, giving me an opportunity to buy more. Perhaps I was concerned that a large position may result in a large loss. What often happened, however, was that the price would increase and having refused to add to my position at higher prices, I would end up with a small amount of a winning stock. In percentage terms, I did well. In absolute terms, however, I did not make as much money as I wanted.

Other times I would over-diversify. When investing, I would buy securities in addition to those I really liked, just to spread the risk among more names. Again, often my best ideas would do well and the ideas further down on my list would do less well, lowering total performance.

Having identified this investing behavior, I imposed a minimum on all my investments. I decided that I would not take any positions less than 2% of my portfolio. This worked well. The rule forced me to do double- and triple-check the facts, explore hypothetical scenarios that could kill my investment and focus even more on margin of safety. I guess this was my own version of a “punch-card” strategy.

It appears to me that a “punch-card” approach can also be helpful outside the investment arena. Similar selectivity may help when selecting business projects; limiting one’s business activity to a few high-quality projects may result in higher success rate and greater degree of success when it is achieved. Similarly, pursuing only the most worthwhile hobbies may result in more time available for, and more enjoyment derived from, each hobby. Same logic can apply to friends and romantic interests.

Have you tried the “punch-card approach?” In what area?

I have done something to bring about my personal freedom, every day, for 2 years now.

Seemingly little things you can do each day become amplified over time.You can buy a few hundred dollars worth of cheap dividend-paying stock and potentially see your capital grow in a few years and throw off an increasing income stream. You can start a blog that will eventually bring in advertising revenue. You can begin to learn a hobby that one day you could monetize. You can get away from distractions, take out a piece of paper and write down your plan to become a free human being.

Even simply reaffirming your determination to strive for personal freedom can be enough to make a day count.

Reader! What did you do today for your personal freedom?

Long story short, we sailed into a storm. There was some chop and some pretty strong wind gusts, as well as some rain. We trimmed the sails (made them smaller to lessen the force of the wind on them), put on rain gear, held on tight and stayed the course.

Sailing through this one was tough. The boat was heeling (leaning) significantly from the wind. Clouds, changing wind direction and the waves made navigation and steering difficult. The rain made the deck surfaces slippery.

Yet we kept going, making adjustments as necessary, focusing on tasks at hand and making sure to stay safe. In time, we sailed out of the storm into calm seas and sunshine. The rest of the day went great.

You may have already figured out the point I am trying to make. Personal freedom is our ultimate goal. But the path to it is not always easy. Sometimes, we must weather storms along the way; we may have problems of personal or professional nature. Yet, in most cases, personal freedom is worth it. If you keep your mind on the end result, working towards it will be easier. If you keep sailing, you will get there.

No, this wasn’t a vacation, it was a business trip. But what Las Vegas trip is complete without going to a casino?

So to a casino I went, with a group of conference co-attendants. Most people in my group had decided on their gambling budget; these varied from several hundred to several thousand dollars. Everyone knew that the odds were stacked against them. Most people understood they were unlikely to win. Nevertheless, they decided to bet.

When I asked for reasons, people told me it was just to have fun. They said this losses were “cost of entertainment.” Some said they had a fool-proof strategy for playing craps. Some knew how to win at Black Jack.

I stayed and watched. Here is what I noticed.

• If there is fun in gambling, I did not see it. There was nothing fun about losing money. I watched one person lose $200 in 2 minutes. The process was so quick and efficient that even if it was fun-filled, it would have been too short-lived to enjoy. But the matter-of-fact transfer of money from the gambler to the casino was more clinical than exciting. Sort of like surgery. Quick excision of cash from that particular gambler’s hand. If only actual surgery was as precise and effective as casino operations.
• Gamblers do not have a snowball’s chance in hell of winning. Every now and then, I hear stories of people winning in casinos. However, these “winners” never talk about their losses, even if they happened during the same night or even the same game and even if they eventually exceeded the winnings by a comfortable margin. Incidentally, I saw very little winning during my evening at a casino, and I spent a lot of time at several different game tables.

On Planned Freedom, I spend a lot of time writing about making money. I do this because having more money means greater financial freedom. Today, I’d like to expand on that statement. Merely making money is not enough; one must also be able to keep the money he or she earned. This means not just saving and investing it wisely, but also avoiding wealth-destroying activities and events. Gambling is a wealth-destroying activity.

If you want to exchange money for fun, spend it on something you need and/or want. Often, a few smaller purchases can bring more happiness than one big-ticket item, because the novelty tends to wear off regardless of price. Investing your money will probably be at least as interesting and much more financially rewarding than gambling.

If you are truly daring, you can consider some casino stocks to side with the house instead of the suckers! You will probably have more fun and make more money betting with the house than you ever will betting against it.

There is so much to learn, you have to start right now.

It’s an “investment for the future,” they say.

But do they understand the meaning of the word “investment?”

I think real estate is not a good investment. Allow me to explain.

• You don’t really own it if you have to keep paying for it. Property taxes, anyone? You did not buy your home/condo, you simply paid for the privilege of renting it from the local government. Many local governments currently face mounting deficits, and have recently increased property taxes significantly. The higher these go, the harder is the property to sell.
• If it is yours, you pay to protect it. Homeowners insurance is not cheap. If you live in a hurricane- or flood-prone area, you pay more. An alarm system may be needed to protect a property that is attractive to thieves – an ongoing monthly expense.
• If it is yours, you have to maintain it. Patch the roof, fix the pipes, trim the yard, pave the driveway. if you own a condo instead of a house, you still pay a monthly maintenance fee. Normal wear and tear will amaze you with its intensity. Just keep that wallet open for ever-continuing expenses.
• If it is yours, you have to heat, power and light it. The cost of utilities for the entire house and yard can dwarf those of even a comparable-sized apartment. This is because all four walls and the roof of your house are exposed to the elements. Condos fare better in this regard.
• If you borrowed for it, you have to pay interest. Even with today’s low-interest mortgages, your first few years’ worth of payments will consist almost entirely of interest. Renting is not the only way of throwing money away. It could a few years before you put any significant money “back into your pocket.”
• If it is your castle, you have to defend it. Termites anyone? If they infest your home, get ready to pay big bucks for exterminator’s services.

So what is the benefit of owning a house or a condo? Not having to pay rent? The problem is, by the time you pay all the expenses mentioned above, you may lose more money and have a bigger headache than if you just rented a nice place.

I am not saying that one should not own property. One could, as long as one realizes that a house or a condo is an expenditure, not an investment. If you can afford to spend on a house or a condo that you desire, there is nothing wrong with that.

But if you want to invest, I suggest you look elsewhere.

1. P/E ratio. We know the price, we know the earnings, and often, financial websites give us the price to earnings ratio. Just picking stocks with a low P/E ratio assures they are cheap. Right? Not so fast. First of all, price (market capital) and earnings are not always the best criteria to use in analyzing stocks. I prefer enterprise value in place of market capital and owner earnings in place of GAAP (Generally Accepted Accounting Principles) earnings. Also, high earnings and low P/E ratios can be seen at the height of a bubble with cyclical stocks; this means that investors anticipate a significant earnings decline when the bubble bursts.
2. Dividend yield. A stock yields a juicy 7%. Time to buy, correct? Well, not necessarily. We need to know that the dividend is well covered. A company can pay a sustainable dividend only if it pays out less than it earns. In fact, a portion of a company’s earnings that it pays out in dividends is called a payout ratio. It is probably better to use owner earnings or free cash flow instead of GAAP earnings when calculating a payout ratio. So… Payout ratio = dividends paid / owner earnings. Owner earnings can be calculated from the company’s statement of cash flows, and the money distributed in dividends is directly listed on the statement of cash flows. I prefer the payout ratio to be between 40% and 60%; that way, the company is not being too greedy by paying out too little and is not strapped for cash needed for growth by paying out too much.

Do you know any other common metrics that are often misused? Share what you know in the comments!

His point is that productive assets outperform nonproductive assets in the long term. I have nothing to add. Please enjoy the article.

“Microsoft has not moved in 10 years, why bother with it.”

“Walmart has been dead money for longer than a decade. I am not touching it with a 10-foot pole.”

“Netflix has gone up 60% in the last year. Now that’s my kind of stock!”

Wayne Gretzky said it best. “Skate to where the puck is going, not to where it has been.” Applied to investing, one may rephrase the hockey champion as follows: “Investing is not about where the security price has been, but where the security price is going.“

One should not wonder why investors who chase performance run a high risk of losing money. If one piles into a widely recognized, popular investment, there is hardly anyone left to buy and drive the price up further, and any disappointing news virtually guarantees a selling tsunami.

On the other hand, stocks that have been left for dead sometimes represent successful, growing companies. Take Microsoft. Until recently, this company has been changing hands for just over 7 times earnings when accounting for access cash, while steadily growing earnings and dividends as well as buying  back shares. Finally, the market is beginning to recognize its value, having driven its price by about 20% in the last 2 months. The fact that Microsoft did not move much during the previous decade did not stop it from moving NOW.

Same with Walmart. A company that grew footprint, earnings and dividends at an impressive clip, as well as bought back shares, had a virtually flat stock price for more than a decade. So what? Like Microsoft, lack of price action was likely due to initial overvaluation. It took a decade for the earnings to catch up with the price… But as this great company became almost ridiculously cheap, investors’ inertia prevented the stock price from reflecting it. This was not going to continue forever. In fact, Walmart’s stock price has already begun to increase, also having risen by more than 20% in the last 4 or so months.

Nowhere is a phrase “past performance is not an indication of future results” has been more applicable than with Microsoft and Walmart. Well, there is one other situation that may illustrate this investing maxim fairly well.

Bonds. US government bonds. These have enjoyed an impressive rally throughout 2011. What is an investor to do? Assume that bonds are going to rise in price forever? I do not think so. Real (after inflation) return on US government bonds, at current prices, is near zero, if not below it. As the bad news from Europe and elsewhere subside, or even as things go from bad to less bad, the money will flow into relatively more attractive stocks and bonds will decrease in price. Investors who make forward-looking decisions by looking in the rear-view mirror will sustain losses.

Because past performance is not a guarantee of future results.

As Mr. Heydt worked on obtaining the land, then (1928) owned by Columbia University, he noticed that “Columbia’s income from the land was ridiculously low, and knew as well the delightful fact that nearly all of the land leases held by current tenants would expire within three years. This was like buying an apple tree the day before it burst into fruit.” (emphasis added)

Charles Heydt clearly saw the opportunity. He would negotiate favorable purchase or lease terms based on the meager current income the land generated, then within 3 years he could buy out or evict the current tenants. After Rockefeller Center was built, this land would generate much higher income given much larger square footage in skyscrapers than in then-existing low-rise buildings. The post-development “better neighborhood” would also drive the value of the rents upward.

We could all learn from Charles Heydt. All investing is, to some extent, about predicting the future. But Mr. Heydt did not confine himself to mere prediction. He thoroughly understood the present conditions (abnormally low rents) that made Columbia’s land an undervalued asset and, as such, a good target for investment. He also knew of the catalyst (development of this land by John D. Rockefeller, Jr.) that would unlock the value of the land. Finally, he knew the approach to investing in this land, which was to attempt to buy or lease it for a very long term. In 1928, Rockefeller leased the land from Columbia for 87 years, and in 1985, Columbia University sold the land beneath Rockefeller Center to the Rockefeller Group for 400 million dollars.

I am wondering which assets may be considered “apple trees about to burst into fruit” at the time of this writing. Residential real estate? Defense stocks? Healthcare stocks?

Please share your thoughts.