Chris Mayer runs the Capital and Crisis newsletter, often looking for far-flung stocks or odd special situations, and
he sometimes brings an interesting idea or two to us through his teaser pitches … so I thought we’d take a look at his latest idea today, a spiel about some stocks that you can buy and hold for ten years, watching your wealth gradually compound.
Which is one of my favorite things, not least because it allows me to be patient and indulge my inner lazy man. I talk about compounding earnings and dividend growth with some regularity, but if you’re going to follow this strategy you need to come up with some pretty solid companies to start with — companies that you can easily foresee remaining vital and vibrant and profitable a decade from now.
Mayer’s last teaser pick has done well so far, paying a nice big dividend and beating the broad market so far this yeaer … so maybe we’ll find more to like? We won’t know until we dig into the hints and details, so let’s get started …
Here’s how he got my attention:
“The Hands Down Laziest Way To Grow Rich
“Buy these 5 stocks. Forget about them for the next 10 years. Come back to find they’ve multiplied your money….
“It’s called the ‘Coffee Can Portfolio.’ And if history is any guide, it could turn a small initial stake into a massive fortune.
“That’s a pretty odd sounding name for a portfolio, I know…
“It comes from the Old West, where people would store their valuables in a coffee can and put it under the mattress for safekeeping.
“Now I’m suggesting you do the same thing, but with a very few, select stocks.
“Choose to play the FIVE stocks I’ll introduce you to. Store them away. Go live your life. Go explore the sights and sounds the world has to offer. Go relax….”
That’s nothing shocking, of course — it’s hard to buy and hold in this environment, with everyone telling you that “buy and hold is dead” and urging ever newer trading systems designed to get you to buy and sell things more often. There’s little money to be made from the investor who just buys stuff and sits on it, I’m afraid.
Buffett’s version of this is that you should construct a portfolio that you’d be happy with if the market shut down and you couldn’t check the stock quotes for a few years — which is, if nothing else, a reminder that what we do with stocks is invest our hard-earned money in companies. Not in pieces of paper or securities, but in partial ownership of companies that build stuff or make stuff or trade stuff or provide some kind of service.
If you became a silent partner in the restaurant or the dry cleaner down the street, you wouldn’t expect to be able to pull your money back out in three or four months to try a different restaurant with a better menu or a cuter bartender, or because you find out that the sidewalk in front of your business is going to be torn up for six months, and the guys at the barber shop tell you that this will cut your sales in half — you’re making a commitment to a business that you made sure to understand really well before writing a check.
This kind of strategy will not, of course, work every time if you apply it to buying stocks … and it won’t make stockbrokers happy … but it is a great discipline to use in screening companies: Would you be willing to hold that company through both good and bad news, ignoring the gyrations of the market?
And I don’t mean to endorse everything about Keynesianism with this, but for the extreme version of “buy and hold” you can throw in one of my favorite Keynes quotes, too, from his magnum opus The General Theory of Employment, Interest and Money (1936):
“The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.”
And that was in the 1930s, when the average holding period for a stock was something like ten years — that dropped to about six months in 2010, which had everyone wringing their hands, and as of last year it was reportedly down to five days (though that’s likely skewed by the large number of high frequency traders).
So there’s your backdrop: there’s a lot to be said for buying stock in companies that should be able to endure, and then just ignoring them (or at least ignoring those 5-10% moves up and down that come with earnings reports or news stories) — hopefully you’ll find after five or ten (or thirty) years that a few of those companies lost more than half of their value and withered, but several provided excellent compound returns that beat the market handily and one of them grew up into a world-dominating company and made you wealthy when you weren’t paying attention.
Which begs the question — which stocks do you buy? And for a fee, Chris Mayer will apparently share some of his favorites with us. Here’s how he introduces them:
“In my search to find the very best stocks for the ‘Coffee Can Portfolio,’ I conducted a little study…
“I surveyed my list of newsletter readers, asking them to submit suggestions for what stocks should be put into the can.
“The emails poured in.
“In total, I received more than 125 stock ideas. And I’ve spent more than six weeks now researching each and every idea — narrowing down the list to just FIVE stocks I recommend my readers buy and hold forever….
“They’re not speculations on what’s going to be the next big thing.
“They’re not opportunities that leave you on the bleeding edge of making or breaking your wealth.
“Each stock I’ll show you is designed to be a safe, steady, proven wealth builder….”
So what are Mayer’s “Five Stocks to Buy and Hold Forever?” Well, let’s see what clues he provides for us:
“COFFEE CAN STOCK #1: Profit from The Fire-Sale of The Century
“It’s no secret that we’ve just witnessed the biggest real-estate bust of our lifetimes. Banks lent too much money to people who had no chance at paying it back.
“Now, in an effort to shore up their balance sheets, the banks are desperate for cash… and they’re unloading their real-estate portfolios for mere cents on the dollar.
“Luckily, there’s one company there to take advantage of this fire-sale. And it’s the first company I recommend you buy and store away for safekeeping.
“They’re up 41% since the start of last year. But I believe we’re still in the early stages of this winning play.
“It’s a turn-key way to turn the crisis of the 2008 meltdown in housing into opportunity – without having to become a landlord and without having to fix a single leaky toilet.
“If you buy it and store it away, my guess is that you’ll come back to find that it’s multiplied your money.”
This is not enough info for even the Mighty, Mighty Thinkolator to be 100% certain — but both of the prominent publicly-traded companies that are buying up single family homes have indeed gone up by almost exactly 40% since the beginning of 2012, so it’s a solid bet that we’re looking at either giant Blackstone (BX) or smaller Two Harbors/Silver Bay here.
Two Harbors (TWO) wouldn’t be the pick for a housing recovery — that would go to the spinout of TWO that holds single family homes for rent, Silver Bay Realty Trust (SBY)…. but The 41% performance number works well for holding TWO from January 1, 2012 to the present and continuing to hold the spun out shares of SBY. The spinout didn’t happen until December, since which both TWO and SBY are up about 10-15% or so (not including dividends — TWO is a mortgage REIT and pays a high dividend, SBY is a startup REIT that’s unprofitable and doesn’t pay much of a dividend yet).
Blackstone has famously built a massive portfolio to buy single family homes out of foreclosure, spending well over a billion dollars snapping up these houses — and they’re not alone, similarly huge funds from other hedge fund managers like Colony Capital have been buying, too (though Colony’s founder Tom Barrack this week said he thinks we’re entering another housing bubble). There’s not necessarily an end game in this buying, though there’s been speculation either that these houses will mostly be rehabbed for sale into an improving market after the stink of foreclosure has been scrubbed off, or that these huge portfolios of houses will be spun off into single-family home REITs and will pay dividends on their steady cash flow.
But despite the large number of investors who are trying to build up big portfolios of single family homes, I don’t know that owning huge numbers of individual homes has really proven itself to be a profitable business model yet. It’s not clear how much, if any, economy of scale you can get from owning a few thousand homes even if you narrow it down to a half-dozen metro areas — I can see how this could work in a spreadsheet, with homes likely to appreciate in value at some point even though the investment gets depreciated for tax reasons, generating pretty good cash flow over many years as you collect rents, pay the bills, and occasionally sell houses … but I can also see the other side, that even if you have two thousand homes in the Tampa area your per-home maintenance, management and marketing costs may not be that much better than a mom and pop investor that owns two or three rental homes and retires on the rent payments.
Certainly the big investment fund has less “skin in the game” for each house, and doesn’t put in “sweat equity” to repaint the porch railings or carefully interview the potential tenants or get to know them like an individual property owner might, but the big investors can probably hire managers who oversee a few dozen houses each and maintain them at least as well as an amateur owner, and probably get the lawns mowed and roofs replaced less expensively if they’re buying those services in bulk. But it makes me a little bit nervous, trying to picture how any firm can buy 400 houses a month (like Silver Bay) or several times that many (at one point Blackstone was buying $100 million in houseos a week, which at $150,000 per house would be more than 2,500 houseos a month) and make good individual choices about each of those individual houses.
Blackstone is the more proven performer here, to be sure — and they’ve been buying and managing real estate for a bit longer — so that’s my guess for which of these single-family-home buyers is being touted as a “buy and hold forever” pick by Mayer today … but it is just a guess.
BX has been suggested by newsletters many times, of course, since it offers both a nice dividend, a somewhat complicated structure that confuses people (it’s a publicly traded partnership — so you get a K-1 for your taxes, similar to owning a pipeline MLP), and a good growth story, though I haven’t personally owned these shares recently and I’m a little nervous about big, leveraged single family home portfolios.
Blackstone, though it’s also a major and more diversified investment bank in many ways, is probably the largest real estate investor in the world now … so I can see the argument that if you’re going to go with buying up single family homes but don’t want to manage them yourself, buying shares of BX instead is a logical step, even if the idea of massive corporations managing thousands of thousands of homes spread across hundreds of neighborhoods seems like a recipe for disappointing returns (unless we do get a nice sustained recovery in home value sand they can sell ’em). Steve Sjuggerud was teasing this one late last year, by the way, so you can see some older BX comments here in that article. The stock is up about 30% from then, it has a trailing yield of about 3.5% that will probably grow, and it’s cheap based on next year’s earnings expectations (forward PE on analyst forecasts is about 7).
So … wanna buy and hold BX forever? Could you stand to invest 5-10% of your portfolio in this stock and just ignore it, letting the dividends compound and the share price (hopefully) grow over time to turn it into a bedrock of your retirement? Since the recovery from the financial crisis the shares have had years when they’ve doubled, and years when they’ve lost 40% — and that’s the good news, because the stock has generally been doing well over that time … if there’s another real financial crisis, with all leveraged companies and financial assets falling in value, it’s worth noting that Blackstone fell from its ebullient 2007 IPO price of about $35 to a disastrous $4 at the March 2009 lows. I expect the next crisis will be different, but you never know …
And we’re running out of time here as I got to too much thinkifyin’ about houses, but we’ll get you one more quickie (and we’ll catch up with the other “Coffee Can” stocks soon, I’m sure):
“COFFEE CAN STOCK #4: How to Buy The Company That Holds 20 Acres of Prime Maui Real Estate… At NO COST On Their Balance Sheet
“Our next recommendation comes from a spin off of America’s largest owner of mall properties. And here’s the thing…
“Despite being worth millions, some of their properties are carried on the company’s financial statement at NO COST, creating a huge market anomaly in their share price.
“Other properties are carried well below their market cost. Each creates huge hidden opportunity in the balance sheet of this company. And don’t just take that from me.
“Here’s what the Motley Fool reports:
‘[This Coffee Can company] owns 20 acres of ranch land in Maui and holds 80% of the air rights over the Fashion Show on the Las Vegas strip — and carries them both on the books at a value of $0!’
“Once investors catch on to this hidden gem and begin to revalue the company, I think shares could double.”
This one is the Howard Hughes Corporation (HHC), spun out of General Growth Properties a few years ago as the holding company for a disparate group of assets that didn’t fit into the “big malls” category that GGP dominated — the stock has been in a steady climb in recent years, and has been recommended by a great many people on the hedge fund lecture circuit, but it has taken time for it to get the attention of investors. Partly that’s because it’s a real estate company that doesn’t pay a dividend (or make money), so it doesn’t have a natural constituency … but what it does have is a group of very valuable assets that are carried at low valuations on their books — the 20 acres of ranch land in Maui is not a key asset of theirs, but it is a low-cost asset that’s worth more than the book value, I expect.
Their key assets are the Woodlands and Summerlin master planned communities (Houston and Vegas, respectively), and the South Street Seaport in Manhattan, a future high-end mall/residential/hotel development in Honolulu that’s now underutilized as a big box store/warehouse area, and many others, including those Vegas air rights that could become a casino on the strip at some point (though most people don’t seem to see a lot of growth in Vegas right now).
Howard Hughes is still pretty closely attached to some of the big players in the General Growth bankruptcy and recovery — Bill Ackman’s Pershing Square is a large investor, as are the Brookfield companies, and Ackman — who is also Chairman of the Board at HHC — talks the company up whenever he’s at an investing conference. Which has to be more fun than talking up JCPenney, another high-profile company where he’s a major investor and board member.
HHC is a value creating play as they turn these strange assets into profitable businesses and/or spin them off or sell them, they’re not likely to pay a dividend, but you can certainly see them compounding their earnings by selling assets (like home lots in Summerlin, for example) and using that revenue to reinvest in developing and redeveloping new office towers and malls, making their properties, most of which are carried at less than their value, even more valuable. I don’t know if they’ll ever become consistent, given the lumpy and property-by-property nature of their portfolio, but they have certainly been consistently more adored by investors over the past two years.
I haven’t ever owned this one and don’t have any great insights into the value of their assets, but it’s hard for me to consider a company to be a “buy and hold forever” type of operation when it’s in this kind of grand transition and redevelopment phase. Doesn’t mean they won’t be more valuable in ten years than they are today — it seems likely they will be, if they haven’t been broken up or otherwise sold or spun into other operations — but I don’t think I understand well enough what their goals are.
So those are two of the five picks that Mayer’s touting as “Coffee Can” stocks — do they make the cut for you? We’ll look for some good answers on the other three shortly (at least one more of them is also in real estate, on the retail side), but in the meantime feel free to shout out your comments or your favorite “buy and hold forever” ideas for your fellow investors with a comment below. Thanks!