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A Detailed Peek Inside My Investment Strategy: How Do I Invest And Why?

A Detailed Peek Inside My Investment Strategy: How Do I Invest And Why?

7 min read
David Shafer

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I do the opposite of what the FINANCIAL EXPERTS say to do!

I am going to apologize in advance for the length of this post, but I think some explanation is needed when you [as many other on here do] invest differently than most of the financial industry thinks you should. I keep my investing fairly simple and don’t over think it, nor spend every day looking up the values. I analyze the results and how it all fits together a couple times a year. Further, I have been blogging on this since 2007 so my results are easily documented since then.

In the mid 1990s I was doing exactly what the financial experts of the time told me I should do; Invest in mutual funds inside a 401k/IRA wrapper. However, since then I have made drastic changes. I had to wait to quit a job to get ahold of my 401K money, so that took a while to get that money into a place that I was happy with. Here is an outline of what I have:

  • Equities
  • BRKb Berkshire Hathaway
  • MMP Magellan Midstream Partners
  • Real Estate
  • HCN- Health Care REIT
  • Farm Acreage
  • EIUL
  • AVIVA EIUL

I am sure you see some real differences between what I do and what the experts say to do!!

My Thinking Behind My Investment Strategy: Berkshire Hathaway

Berkshire Hathaway is the largest holding I have by value, representing somewhere around 60% of my total investable funds. I started accumulating it in the late 1990s and have never looked back. After much research back then [it was library work back in those pre-internet days] I came to the conclusion that if Warren Buffett was willing to invest for me for a princely salary of $100,000 who was I to say no. When I started to accumulate the stock, the price [adjusted for splits] was around $30. It currently sits a little over $100 at $103.33. So those early shares I bought have tripled in value in 14 years, producing a return of around 9.24%. By the way, using Buffett’s book value as a measure of value the stock has gone up 448% since I started buying or 11.31% average per year. Either value is fine with me, considering the last 10 years the overall market has basically been flat. I still think the stock is a little undervalued considering it’s return on equity is over 10% and it has over $73B of free money to invest [float from insurance operations].
Frankly, it has been producing so much cash over the last 5 years that Buffett has not been able to put it all to work.

Now the experts would say it is crazy to have so much of my portfolio invested in 1 stock, but to me that is nonsensical. This stock has over 60 diverse businesses in it that range from a railroad, to energy, insurance, and candy. It is so well diversified itself that no single issue could possibly destroy its ability to create cash flow. On top of that it has invested in more than 20 equities, but the majority of equity ownership is in 4 [American Express, IBM, Wells Fargo, Coca-cola]. All pay increasing amounts of dividends to Berkshire. The death of Warren Buffett might temporarily decrease the stock price, but it will do nothing to stop the cash from flowing in. Berkshire pays no dividends itself so this is my main growth provider. I’ll take the 9.24% average return, but would like to see that pop up over 12% in the future and believe it will.

My Other Income Strategy: Income Producers

The next category is those that produce income. Once again I am pretty concentrated with only 3. I have a petroleum product transportation and storage company called Magellan Midstream Partners. I began acquiring this in 2008 when the price was incredibly low and only continued to buy for about 18 months. Hence, my yield to cost is 15%. As a bonus this stock has gone up in price from an average acquiring cost of $17.90 to $49.74 or an average price growth of 22.68%. Frankly, I never expected this type of growth and purchased it for its income stream. The dividend yield has gone up substantially over the last couple years and is predicted to maintain this torrid pace of increasing dividends for the next couple years. Note this company stores and transports oil products and does not refine them. Because some of the transportation of oil products is regulated the toll price gets automatic increases every couple of years making the income stream more consistent. As we are using less refined products, MMP has started to lessen the transportation of refined products and have increased their transportation of crude oil resulting from the Midwest Shale Oil. This is proving to be productive in both the transportation segment and the storage segment for MMP. Long term I will keep a close eye on the use of oil products, but in the short run I don’t see any big decreases coming down the line with these pipelines MMP owns. MMP is not price sensitive to the actual price of oil as many of the energy companies are. The main threat is to a large overall decrease in usage.

My Real Estate Investment Strategy

I have been investing in a Real Estate Investment Trust since the late 1990s. This REIT [HCN] invests in Health Care Facilities. Most of the stock was bought in the early 2000s. Since I bought this at a time when the sector was out of favor, my yield to cost is high at 16%. This despite dividends increasing an average of only 2.8% over the last decade. The low rate of dividend increase is of course concerning. Part of the reason for that is the 2008-2010 real estate crash that kept dividends from increasing. The other part is that the company has been on an acquiring spree finding several billions of dollars of high quality facilities to buy as they divest themselves of many of the nursing homes they owned in favor of medical office buildings, acute care clinics and senior housing campuses that offer higher returns. They also strategically own properties in high price areas of mostly big cities. But, if the dividends don’t start to increase in the 5-6% range over the next few years as the new strategy is implemented, then I will look to move my money to a place that the dividends increase faster. Obviously as someone who understands demography, health care is going to be a huge growth area and they will need someplace to perform the care. I think this area of investing is a no-brainer, just a little concerned with the low rate of dividend increase. Obviously, so far I am doing well with this income producing asset.

The final piece is farmland. Frankly, my yield to price on this is only in the 4% range. Since it is such a small part of my overall portfolio, it doesn’t drag down the overall income yield much. But, I think farmland is important to our economy, they don’t make more of it, and large corporate farms have pushed the envelope on yield about as far as they can, therefore there is always going to be a place for small farms. One consideration going forward is to see if there are some enterprising folks who might want to turn it into an organic farm for the Indianapolis or Evansville markets. But, for now I am happy having it be a small part of a farmers overall crops that he rents and farms.

With my overall income yield to cost at over 12%, I am satisfied with the results. One area I want to work on is to add significantly to this side of my portfolio. I hope to get the income generated into a place I can live on before retirement, but I have a long way to go at this point.

My EIUL

I have a fairly large Equity Indexed Universal Life policy. This was bought 8 years ago and is almost fully funded. It is with AVIVA, which is not currently a top performer, but is working more than adequately for me, so no need to change it to Minnesota Life at this time. The average interest credit since I bought this is around 7%. Not bad considering how bad the overall index has looked over this time period. The big reasons why I own this are taxes and “sequence of return” risk. As you all might know, money taken out of an EIUL comes without a tax obligation. This can save me up to 40% in taxes on the income when I decide to take it out. The index credit never goes negative, so I don’t have to worry about the market crashing close to when I need to use this money. That takes a huge worry away from me and adds flexibility. The final result is that income derived from my EIUL could be 60-80% higher than if it sat in an equity mutual fund inside an 401K. Incidentally, I don’t list this as an income producing asset, despite that is what I intend it for. I hope to have my basic needs covered with other assets and use this for extra’s and emergencies that might come about during my retirement.

Simple, yet Elegant?

I will let the reader decide this question. But, looking at the overall picture, it should be fairly tax efficient, have the ability to easily convert to income, and so far has produced double digit returns no matter how one looks at it. It also has less risk in my opinion. Compare that to what I was doing previously, you have serious outperformance [the stock market indexes have gone up around 3-4% annually in that time period. I don’t diversify my stocks but instead concentrate on a few good companies [thanks Warren for that tip], I don’t plan on pushing off my entire tax obligation until retirement, and I don’t listen to that financial advice being thrown around. In fact, the day I left that advice behind is the day I started to do well.

The Future?

I want to increase my income producing section significantly. This might mean joining you folks in investment single family houses or notes? Or it might mean purchasing a couple more stocks that have increasing dividends?

Hope this read was worth it for those of you that made it through the whole post. Remember, this is only one man’s idea’s of how to invest, provides no advice as to what works for you, nor is it the only way that works. It just works for me!

How do you invest your money? Leave your comments below!

Happy Investing!

Photo: Tax Credits