I recently increased my position in Apple (AAPL), Berkshire Hathaway (BRK.B), and Vanguard Natural Resources (VNR).
Apple has taken a beating over the past six months, which has caused their price to fall. From a technical perspective, the debate rages on about whether it’s time to buy or sell. But I don’t buy stocks purely from a technical perspective. My wealth building plans don’t involve buying a stock one day and then selling it week later if it increases 5%. That is the behavior of day traders. There are countless studies that have shown that day traders, on average, lose money. In this one, it is reported that 8 out of 10 day traders, over a six month period, lost money.
Instead, my stock investments are driven by more fundamental concepts. Is Apple going to continue to making money with the iPhone? What about the iPod and iPad? Will Apple continue to innovate and make new, ground breaking devices? They have a long history of developing new concepts in consumer electronics and generating a healthy profit. The fact that I’m writing this post on my MacBook Pro (which I’ll never give up due to it’s quality) is another data point.
In April of this year, Apple reported $43.6 billion in quarterly revenue, up from last year’s Q1 $39.2 billion quarterly revenue. Increased earnings is important. Their profits sank slightly from last year’s $11.6 billion to this year’s $9.5 billion, so I’ll be keeping an eye on that. They sold 37.4 million iPhones this quarter compared to 35.1 million in last year’s quarter, a 6.6% increase. They also pulled in $12.5 billion of cash flow from operations leaving them with a cash balance of $145 billion. They are sitting on a huge mountain of cash, and part of the suspense is that they haven’t decided where to plow their huge cash proceeds. Should they decide to develop some new product, they have the cash in the bank to move forward. So I took advantage of the drop in price and increased my position.
It seems awkward when people keep betting against Warren Buffett. I see article after article pointing out how now it seems time to bail on Berkshire Hathaway. Others frame it like “Five Reasons Why It’s Time To Sell”. Frankly, Buffett’s got a much longer historical record than any of these people writing the negative articles. Go back in time, and see how people reacted when Buffett dodged the tech industry. People thought he was daft, had lost his touch, and yet, Berkshire Hathaway didn’t get crushed when the Dot Com bubble collapsed. If you read the annual shareholder’s report, you will get a lot of insight in Berkshire Hathaway operates. It’s probably more akin to the concept of a mutual fund without the nasty issues mutual funds contain. The company owns or has significant investment in over sixty companies. It has had a good 18-28% annualized growth in book value of the past 40+ years. And when others bail out, it doesn’t cause bad results to lock in, the way mutual funds do. You can think of it like a mutual fund, except the person running it has a long, public record compared to the unknown person running your mutual fund, who has no obligation to actually meet your needs, just their own brokerage.
Vanguard Natural Resources
The last company I have poured more money into is Vanguard (not to be confused with Vanguard Brokerage). Vanguard is a master limited partnership. This means they pay 90%+ of their earnings as distributions to unit holders. These payments are essentially tax free. An added benefit is that this company distributes earnings on a monthly basis rather than a quarterly one. I’m using my position in it to pay off a HELOC and hence keep my position. In the long run, if I can pay off the HELOC, I will have a cash flow machine that won’t stop. I can then point it at my rental portfolio and let it help me continue to build wealth. Combine that with their history of increasing payouts, and it sounds like a good deal to me. What are the taxable implications? Instead of paying taxes on the monthly distributions, you pay taxes on the depreciated cost basis. This means that while you hold the stock, it’s original cost basis keeps falling. So if you sold it one day, at a loss to the price you originally paid, you might still face a hefty capital gains tax. But considering my plan is to never sell the stock, it makes for a sweet deal.
While I have a nice pile of cash sitting around to cover my real estate play, it doesn’t hurt to plow some spare cash into companies that I have done extensive research on. I’m only managing five stocks, so it makes it possible for me to track what they’re doing. If I was trying to handle 200, that would be impossible. I’m also not stuck with the decisions of others when they decide to bail on their mutual fund. Warren Buffett doesn’t have to liquidate anything if there is some downturn in the price of the stock, compared to a mutual fund manager who doesn’t have enough cash on hand. Instead, he can focus on what he needs to do: find better deals, invest when the price is down but the quality of businesses are up, and continue to grow the value of the shares of which he owns more than me.