Let’s talk about investing today, specifically how I put my money to work. There are a couple of big changes I’ve made over the years as my net worth has gotten bigger.
I’d rather talk about your hot mom.
Really, Italics Man? A mom joke? You’re better than that.
Whatever. You control me, you talentless hack.
Wow. My alter-ego is a pretty big dick.
When I was 18 years old, after a few years of after school jobs, I had a net worth of approximately $15,000. That cash was mostly tied up in short-to-medium term GICs, which paid approximately 5% annually at the time. Oh man. What a time to be alive.
(I also had a couple grand in a market-linked GIC. Which came due in 2002 or so. My timing was not great there.)
Anyhoo, an opportunity came my way, thanks to my dad. He was an avid real estate investor who owned a dozen or so properties. A local landlord was looking to sell one of his properties, a small two-bedroom house renting for the grand total of $285/month. My dad negotiated with the guy and they came to an agreed price of $16,000.
I jumped at the chance to buy the property, especially after I was told the market could easily demand $350 in rent. After deducting 25% of rent for expenses, I was offered to buy an asset with a 19-20% cap rate. How could I say no to that?
(Fun fact: as soon as a very nervous Nelson went to raise the rent the tenant immediately left. The property was soon re-rented, but there were a few nervous days in there)
This story has a happy ending, too. A full 17 years later I still own that place. I charge the tenant $400/month, which is a little low. Market rent is closer to $450-$500. But he’s been there for something like 12 years. I’ll gladly give long-term tenants a break in exchange for their undivided loyalty. BOW TO ME, PEASANT.
When I bought this property, a full 100% (plus more!) of my net worth was tied up in one asset. This wasn’t a fantastic asset, either. Sure, it had the potential to return 20% annually, but let’s face it. It was a crappy house located in a crummy real estate market. It’s probably gone up 150% over the last 17 years. Other real estate markets have seen a 300-500% increase in the same time period.
But I was comfortable making that move when I wasn’t worth that much. 18-year old Nelson knew $16,000 wasn’t that much money. I could recover if this one investment didn’t work out.
These days, I’m way more serious about diversification. It’s much more about preserving wealth rather than growing it. Now don’t get me wrong, I do want to get richer. I just don’t want to take giant risks to do so. I’m confident my portfolio of great businesses that pay dividends will return 8-10% annually. Sure, I’d like to make 12-15% annually, but to do so I’d have to concentrate my portfolio into 8-10 names I think will do the best. Such a strategy carries much more risk than wide diversification, so I don’t do it.
No more deep value trash
I used to proudly buy the trashiest businesses I could find. If it was cheap enough I’d gladly throw a few bucks at it, content in knowing the assets would eventually come back.
Sometimes, these investments did quite well. I nearly tripled my money investing in a coal mining stock back in 2015, for instance. But most of the time these investments would either do nothing or promptly tank. There are still a couple of zeros in my account, including Danier Leather.
Aside: that is an interesting bankruptcy. I’ll write about it.
These days I’m slowly punting those investments from my portfolio. I sold TransAlta, the troubled Alberta-based power producer for about 10% more than I paid for it. Yellow Pages got punted for a 25% gain. HMG Courtland Properties, a small Florida-based property developer, was sold at a nice gain, too. I even made some money on Dover Downs, a casino in Delaware.
These investments were satisfactory, but ultimately they were crappy businesses that deserved to trade at crazy cheap multiples. Plus it wasn’t really a tax efficient way to go about things. Constantly trading in and out of positions comes with a tax bill each time you sell, unless you do so in RRSPs or TFSAs.
Focus on dividends
One nice thing about owning great businesses is they have the ability to pay nice dividends. These dividends tend to grow over time, too.
Ultimately, however, the focus on dividend investing comes down to this. It allows me to build a tax efficient passive income stream that should grow at least at the rate of inflation for the rest of my life.
Note the two bolded words in that last paragraph. The power of tax efficient dividends are undeniable. As I’ve previously outlined, I can make $50,000 a year in dividends and pay no taxes. My wife can too. There’s nothing wrong with that.
Let’s wrap it up
Is that a condom joke or just a bad way to tell people the post is over? NO TIME TO DECIDE.