S A V E
I T .
Rare Earth Elements
I N V E S T LEGAL
Minority Shareholder Rights
I T .
Profit Margins and ETFs
P R O S P E R . EDUCATION
The High Cost of College
Issue 1 | Winter 2014
Sound Advice for
Investors YOUNG
The investment industry has neglected young people because they do not have enough money to generate big fees.
By Jeff Miller
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W
hy decide to publish again after a fourteen year hiatus? Didn’t we learn our lesson the first time around? When we started publishing “B2i”in late 2000, the financial markets were about to collapse and the ensuing economic turmoil (yes, I was in New York City on 9/11) was simply too much to handle for many of our clients, most of which consisted (and still do to this day) of small, public emerging growth companies. While many circumstances have changed, the “David vs. Goliath” story has not. Unlike the Books of Samuel though, Goliath crushes David in today’s markets as well as in business in general. He wields his muscle while unleashing almost unbearable legal, financial and marketing power onto his opponents. At Born2Invest, we intend to give a voice to the “Davids of the market,” those companies that typically fly under the radar of most investors as a result of under-exposure and lack of marketing. Take Amur Minerals, for example (pages 18-19). I would bet that less than 1% of our readers have heard of this company despite the fact that the company is one of the lowest cost nickel discoverers in the world. The fact that Amur’s shares are traded on the London www.born2invest.com
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Letter from the Editor
SAVE IT. INVEST IT. PROSPER.
DOM EINHORN Editor in Chief
AIM (formerly known as the “Alternative Investment Market”) may have something to do with it. Of course we will never turn a blind eye to the macro-economic reality that shapes our daily lives and the world we live in. In this issue, for example, we bring you several timely features about real estate investing (p20), US stock ETFs (p22) or an analysis of the costs and benefits of a college education (p26). This issue also features an excellent, in-depth feature story on rare earth elements (p6-15), courtesy of our German friend, Stephan Bogner, mining and commodity analyst with Rockstone Research Ltd. We do hope you will enjoy this publication and its companion web site, www.born2invest.com. Here is to a great 2015. Happy holidays!
Dom Einhorn 310-383-8200
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Index
LEGAL
16 | Texas Supreme Court Ruling Adversely Impacts Minority Shareholders In Private Companies ADVERTORIAL
18 | Amur Minerals Corporation Ltd. (Amc.l) 19 | Project Location: Kun Manie, Far East Russia REAL ESTATE
20 | Is Buying a House a Terrible Investment? ETFs
22 | Profit Margins and ‘Fairly Valued’ U.S. Stock ETFs EDUCATION
27 | Thinking About The Cost Of College INVESTING
28 | Sound Advice For Young Investors FINANCE
32 | What Happens When Berkshire Hathaway Pays a Dividend a Decade From Now?
Financial Term of the Month Exchange Traded Funds An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stocklike features. ETFs are the most popular type of exchange-traded product. Only authorized participants, which are large broker-dealers that have entered into agreements with the ETF’s distributor, actually buy or sell shares of an ETF directly from
or to the ETF, and then only in creation units, which are large blocks of tens of thousands of ETF shares, usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the longterm, but they usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets. Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market.
Issue 1 - Winter 2014
Tim McAleenan, Jeff Miller
Publisher Born2Invest
Layout and Design Cătălin Ciolca
Editor in Chief Dom Einhorn
Contributors John Daniel, Tung Nguyen, Lam Nguyen, Mia Nguyen
Source: Wikipedia
Feature
6 | What Does the Rare Earth Element Market Urgently Need? (Besides Economic Sense)*
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Editorial Stephan Bogner, Kyle Fishman, Beverly Valore, Gary Gordon, Marc Chandler,
Printed by Shweiki Media, San Antonio Issue 1 | Winter 2014
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‘Wealth consists not in having great possessions, but in having few wants.’ Epictetus (AD c. 55 – 135), Greek sage and Stoic philosopher
‘It’s how you deal with failure that determines how you achieve success.’ David Feherty (born 13 August 1958) is a former professional golfer on the European Tour and PGA Tour
‘An investment in knowledge pays the best interest.’ Benjamin Franklin was one of the Founding Fathers of the United States and in many ways was “the First American”
‘Opportunity is missed by most people because it is dressed in overalls and looks like work.’ Thomas Alva Edison (February 11, 1847 – October 18, 1931) was an American inventor and businessman
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By the Numbers
SAVE IT. INVEST IT. PROSPER.
2 Billion! More than 2 billion people will soon have disposable income for the first time. By 2025, 53% of the world’s population will have entered the middle class. The majority will be in the developing world, notably Asia. Source: McKinsey Institute
12
MILLION
There are 12 million millionaires in the world, but only 1 million of them are worth more than $5 million. Source: Cap Gemini
110,000 110,000 people in the world are worth between $30 million and $60 billion. They represent only 0.001% of the wealthy but control 1/3 of the wealth in the world. Source: Cap Gemini
4.4
Million
4.4 million North Americans (those with at least $1 million in investable assets) will hold a total of $15 trillion by 2015
Source: RBC Wealth Management
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What Does the Rare Earth Element Market Urgently Need? (Besides Economic Sense)* *Economic Sense: Ultimately, the ability to produce a mineral concentrate as a ďŹ rst step preceding downstream processing needs to be achieved with positive economics, that is, within the context of current prices. Unfortunately, this is simply not the case even with current producers, such as Molycorp or Lynas. A junior or a major must be able to produce a product that they can sell at a proďŹ t at the current prices, or risk hemorrhaging capital as anyone can see both producers are. A junior or major has little to no ability to change 3 fundamental things: 1) the composition and mineralization of their deposit, 2) the cost to process the deposit, and most importantly, 3) the value of what is being produced.
Currently, all major REE mines (apart from the ion-adsorbed clay deposits of Southern China) produce a minimum 30% TREO mineral concentrate as a necessary first step before further downstream processing.
T
his fact is illustrated in the chart below from Dahrouge Geological Consulting Ltd. strongly indicating that it is a baseline requirement for economic REE mining operations since all downstream processes (the largest cost of the entire metallurgy process) are simplified with less volume requiring processing, i.e. costs are minimized. Furthermore, this becomes an easy first criteria
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to separate the top REE projects from the ones that lag behind in this respect. In other words: Those REE deposits in development that have the greatest chances of success (i.e. being developed into a mine, and thus, offering the highest share price appreciation potential no matter if REE prices remain low) are those that host a REE mineralization out of which a >30% TREO mineral concenIssue 1 | Winter 2014
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trate can be produced with an industry standard process that makes economic sense. Bottom-line: Remember the acid! It is the most expensive single input to the flowsheet. More mass removed means less material to dissolve into solution, which means less acid consumption. Acid consumption will be discussed in more detail with our the next update. Unfortunately for REE investors, today there exist not many undeveloped REE deposits hosting a mineralization out of which a high enough grade mineral concentrate can be produced, and easily processed, which would be saleable to global REE processors (also known as separation or refining facilities), and from which the numerous
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<50% recovery 89% recovery
47% TREO
Great Western Minerals Group Ltd.
52% recovery
34% TREO
Peak Resources Ltd.
56% TREO
71% recovery
44% TREO
Commerce Resources Corp.
Feature
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REE end-products, which are saleable to the industry, could be produced. Thus, those few REE development companies capable of producing a >30% TREO mineral concentrate should (and will) be the focus of REE investors, if not already. According to our research only 3 active development companies have attained this base requirement (see the graphic on bottom column 1).
Which one will make it? Peak Resources announced on August 7, 2014, a “beneficiation breakthrough” at its Ngualla REE Deposit in Tanzania: “The successful production of a mineral concentrate grading 34% TREO”, which is achieved by reducing the ore feed mass by 92% (8% mass pull, which means that only 8% of the whole ore must be treated with costly acid). Peak’s Managing Director, Darren Townsend said: “The ability to produce such a high grade, clean concentrate is an outstanding result that sets Ngualla apart from other rare earth development projects.” However, the recovery stands at 52% only. Thus, Peak’s metallurgical “breaktrough” needs further optimization, that is to say improving the recovery to appreciable levels (>60%) and further reducing the iron oxide minerals in the mineral concentrate, which
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Camp at the Ashram Deposit in Quebec
are the main consumers of acid in the recovery stage. Time will tell if Peak succeeds in improving its recovery economically. Although significant grade and tonnage, Peak is a pure LREE deposit with no appreciable HREE component, limiting some of its development potential. Great Western Minerals announced on June 20, 2014, the completion of a Feasibility Study (FS) for its Steenkampskraal REE Deposit in South Africa being able to produce a 47% TREO mineral concentrate at 89% recovery. However, the mass pull is relatively poor at 45% and the FS sees a mine life of only 13 years envisioning Steenkampskraal as a “small underground mining operation” with no resource expansion potential for additional mine life. The deposit also has a small annual production scenario in an effort to extend the mine life to a reasonable
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‘Time will tell if Great Western Minerals finds financing for such a small underground mine.
length. Time will tell if the company finds financing for such a small underground mine (total CAPEX is attractively low with $173 million only, but the total OPEX of $760 million appears daunting), because in the end it must make economic sense. Commerce Resources announced in December 2013, the production of a 44% TREO mineral concentrate at 71% recovery and a mass reduction of 97% (3% mass pull) from the Ashram REE Deposit in Quebec, Canada. Most recently on August 19, Commerce published an update on the progress of the Pre-feasibility Study (PFS), and confirming Ashram’s processing flowsheet at the crucial bench scale. Ashram’s simple, and thus cost-effective, flowsheet has now proven to be repeatable for the production of a high-grade mineral concentrate (>40% TREO) using industry standard techniques applicable at the commercial scale. This is a stage most REE companies will brush over to produce an end-product for “show and tell”. However, the process is then not representative and typically far from economic. Commerce compellingly appears to have taken the proper approach to maximize its chances of success by way of developing a sound bench scale process, which Issue 1 | Winter 2014
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Feature
is repeatable using industry standard techniques, and one that has achieved the apparent minimum 30% TREO mineral concentrate required for success. Time will soon tell how much abundant economic sense this all makes. In early July, Commerce completed an infill drill program for its PFS yielding results that exceeded expectations as our interview with geologist Darren Smith from Dahrouge revealed. Mineralized material was found in the pit where waste was modelled in the PEA and, more importantly, the MHREO Zone was significantly expanded, where the highest valued rock is found. The 25 year mine life is set to increase with the upcoming PFS, whereas further expansion potential exists. Total CAPEX in the 2012 PEA stood at $763 million, whereas OPEX ($8/kg REO produced) is one of the lowest of all development projects in the REE space, followed
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Greenland Minerals & Energy Ltd. also enjoys one of the lowest OPEX ($8/ kg REO), however total CAPEX is in excess of $1.5 billion for its Kvanefjeld REE Deposit in Greenland, where uranium mining is still an issue as the deposit is also enriched with that radioactive element. However most importantly, the Kvanefjeld Project is not capable of producing a high enough mineral concentrate as its 2012 PFS yielded a TREO mineral concentrate of only 15%. Time will tell if Greenland Minerals succeeds in developing a metallurgical ďŹ&#x201A;owsheet that makes economic sense and produces a high enough mineral concentrate of >30% TREO at appreciable (>60%) recovery.
by Ngualla ($12/kg REO) and Steenkampskraal ($13/kg REO). Namibia Rare Earths Inc. announced in May 2014 the start of a PEA for its Lofdal REE Deposit in Namibia, whereas metallurgical tests have indicated the ability of producing only a 20% TREO mineral concentrate. Time will tell if improvements can be made without losing economic sense. Although an HREE deposit, Lofdal is a very small deposit at low grade. The lack of a meaningful tonnage is perhaps its greatest challenge. With the exception of Greenland Minerals, all of the aforementioned companies have one important mine development criteria in common: The primary REE minerals have been processed commercially in the past or present. Other well-known companies with deposits hosting primary REE minerals with an unproven metallurgical flowsheet (that is to say REE minerals that have never
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The latest news from Commerce continues to prove that the Ashram Deposit is leading the pack and that all peers in the REE space are lacking behind in terms of proving a metallurgy that works economically and with commercial viability. Ashram is the only REE development project that fulfills the crucial criteria of being able to produce a >30% TREO mineral concentrate at appreciable (>60%) recovery. The ongoing PFS is on the way of proving that this can be achieved with abundant economic sense, whereas Commerce is currently at the crossroads to have the potential to practically make any product that the REE market wants.
been processed commercially) include Tasman Metals Ltd., Arafura Resources Ltd., Matamec Exploration Inc., Quest Rare Minerals Ltd., Avalon Rare Metals Inc., Ucore Rare Metals Inc., Texas Rare Earth Resources Corp. and Geomega Resources Inc. (not to say that they are all incapable of producing a high enough grade mineral concentrate but simply to point out their unusual mineralogy).
Why is it important to own a deposit with REE minerals that have been processed at the commercial level historically? Because otherwise an entire new metallurgical flowsheet must be developed proving commercial viability, typically a time-consuming and soporific venture. In the REE space, this is often not possible. In 2011, Matamec did a joint-venture with Toyota and Frontier Rare Earths Ltd. with KORES (Korea Resources Corp., the wholly-owned mining and natural resource investment arm of the South Korean Government). Until today, both have invested significantly to find a way to economically process their specific REE-bearing minerals and rocks, eudialyte (Matamec) and laterite (Frontier) – until today, without much success as their
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TREO mineral concentrates continue to appear trapped well below 10%. Frontier has recently chosen to go straight to whole ore processing, a testament to the difficulty in processing of their material. Frontier basically gave up on producing a mineral concentrate. Time will tell if it makes economic sense to put the entire ore body into solution as acid consumption is the highest cost block in processing REEs. Remember the acid! There exist numerous parameters to further improve the already robust economics of the project; as per Commerce’s latest news of August 19: “To date, no optimization testing has been completed (e.g. temperature, pH, reagent dosage, etc.). This suggests that significant scope remains for increased recovery. The next steps of optimization work will proceed in parallel with increasing focus on the production of a variety of potentially saleable end-product(s), using representative mineral concentrate feed material, in preparation for a full-scale pilot plant to be run before completion of the Prefeasibility Study.” “A mixed REO/REC concentrate is seen as a major milestone for the Company as it is a basic, relatively purified, feed stock for REE Issue 1 | Winter 2014
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Feature
separation facilities, in and outside, of China. Ability to purchase such a concentrate aligns well with the interests of potential Joint Venture Partners who have excess separation capacity and need a concentrate source. Further, due to the high-grade nature of the Ashram mineral concentrates that are dissolved into solution (PLS), the impurity content is relatively low. Low impurities allows for more options and a potentially simpler means of downstream processing into relatively pure saleable product(s).” “The versatility afforded by Ashram’s high-grade mineral concentrates (i.e. lower-cost downstream processing and limited impurities), allows for a greater number of potentially saleable products to be evaluated. Such versatility is
sought after by potential Joint Venture Partners interested in partial/intermediate products. Options for partial separation will be evaluated as part of the next phase of hydromet work. Additionally, Commerce expects to evaluate the production of a range of separated oxide products, with a focus on the five critical REOs (CREOs) that the Ashram Deposit is enriched in. Final products such as neodymium oxide, europium oxide, terbium oxide, dysprosium oxide, and yttrium oxide would be attractive to a large number of end users and potential joint venture partners. They are therefore seen as viable commercial targets for the next stages of hydrometallurgical investigation.” Going through Commerce’s latest news release, we get the
“The objective going forward is to optimize specific aspects of this mineral processing flowsheet. At the same time Commerce intends to initiate downstream processing studies directed firstly towards the production of a cerium-lanthanum depleted, and thorium free, mixed rare earth carbonate (REC) concentrate. This is one of many potentially saleable products which might be produced. It is the preferred feed stock for numerous global rare earth element (REE) processors. The company will also evaluate the production of select separated oxides as final products.” Commerce’s latest news of August 19
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SAVE IT. INVEST IT. PROSPER. The Ashram Deposit is located in the Labrador Trough in northern Quebec, about 80 km north of Lac Otelnuk, the “largest iron ore deposit in Canada with the potential of becoming one of the largest in the world” according to Adriana Resources Inc. Lac Otelnuk has the FS scheduled for completion by year-end.
sense that, with all the technical details and language, it was written/addressed more to potential joint-venture partners than to the public. The next phase of metallurgical testing will deliver a detailed overview of the costs associated with producing the mineral concentrate as well as numerous REE end-products in order for interested parties to find out themselves how lucrative it would be to purchase the mineral concentrate (or even finished end-products) from Commerce, or as its President, Dave Hodge, put it: “We are again very encouraged by the successful usage of the conventional and lowcost techniques detailed in the Ashram flowsheet. This testwork has produced one of the highest grade mineral concentrates in the REE sec-
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tor and we believe that our current results are the most logical indicators of Ashram’s potential for positive downstream economics. We look forward to the results from the next phase of metallurgical testing and to a better definition of our costs to produce final end products.” Thus, once details on the cost structure are disclosed in the upcoming weeks, we anticipate those to be highly profitable for processors of mineral concentrates and end-users even at current low REE prices. Hence, we expect a strategic partner to step up rather sooner than later.
Right Place @ Right Time Numerous other prospective deposits occur in proximity as well being the main reaIssue 1 | Winter 2014
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son why the current liberal Quebec Government re-invigorated the “Plan Nord” on June 4: “The plan, originally launched in 2011 under then-Premier Jean Charest’s Liberal government, at that time promised $1.2 billion for infrastructure across Quebec’s north...But the plan was put on ice with the 2012 election of the Parti Québécois, who re-branded Plan Nord as Le Nord pour Tous (the North for all.) At $868 million, the PQ plan came in at about $20 million less for infrastructure than its predecessor. The re-launched Plan Nord will operate with the $63 million invested into a Plan Nord fund for 2014-15. The new plan calls for the establishment of the Société du Plan Nord, to
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Other highlights of the 2014-15 budget include the investment of $90 billion on infrastructure over 10 years along with the creation of a Governmental Capital Fund to acquire equity stakes in mineral exploration, development and mining projects.
coordinate development with all of its partners, which the government says will include closer communication with Aboriginal communities.“ Other highlights of the 2014-15 budget include the investment of $90 billion on infrastructure over 10 years along with the creation of a Governmental Capital Fund to acquire equity stakes in mineral exploration, development and mining projects (“...so all Quebecers get a direct share of the profits from resource extraction”, as Northern Ontario Business Newspaper recently put it). This investment fund is budgeted with $1.5 billion for 2014-2015 alone; thus Commerce may see some governmental support and participation as well, especially
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Feature
if a MoU (Memorandum of Understanding), off-take agreement, or strategic partnership contract is executed once the cost structure has been provided, which we expect to be happen shortly. Thus, infrastructure – the only somewhat negative criteria when evaluating the overall feasibility of the Ashram REE Project – is turning out to materialize positively, and faster than expected. Commerce and its Ashram Deposit remain our top pick in the REE development space and is seen with highest potential for achieving economic production.
Technical Analysis Commerce’s share price at the TSX.V has been outperforming the HUI mining index by around 200% since late 2013. Since our initial coverage, the stock appreciated by 283% – thanks to the metallurgical breakthrough announced in December 2013. So far, 2 distinct consolidation phases occured during the new upward-trend, whereas the second one appears to have ended a few days ago as the price started to increase back
Stephan Bogner (Dipl. Kfm. in Economics) is a mining and commodity analyst with Rockstone Research Ltd., a research house specialized in the analysis and valuation of capital markets and publicly listed companies. The focus is set on the exploration, development and production of resource deposits. More information on www.rockstone-research. com
into the (green) channel, thus generating a buy-signal. We anticipate another strong decoupling phase from the HUI as soon as the (red) resistance is broken References: http://www.peakresources.com. au/IRM/Company/ShowPage.aspx/ PDFs/2651-10000000/NguallaRareEarthProjectBeneficiationBreakthrough http://www.gwmg.ca/mining-operations/assessment-reports http://www.rockstone-research.de/ research/RockstoneREEarticlesDec2013Jan2014.pdf http://www.commerceresources. com/s/NewsReleases.asp?ReportID=670087&_Type=News-Releases&_Title=Commerce-Resources-Corp.-Updates-Metallurgical-Flowsheet-and-Outlines-Next-... http://www.rockstone-research.de/research/RockstoneREEupdate5english.pdf http://www.nrcan.gc.ca/mining-materials/green-mining/8214 http://www.osler.com/Expertise/ PlanNord/ http://www.nunatsiaqonline.ca/stories/ article/65674quebec_liberals_recycle_relaunch_plan_nord/ http://www.northernontariobusiness. com/Industry-News/transportation/2014/06/Quebec-launches-ironore-haul-rail-study.aspx http://www.investquebec.com/international/en/about-us/our-subsidiaries/ ressources-quebec.html http://www.rockstone-research.de/research/RockstoneREEupdate5english.pdf http://www.huffingtonpost. ca/2014/04/08/plan-nord-quebec_n_5112285.html http://www.rockstone-research.de/ research/RockstoneREEarticlesDec2013Jan2014.pdf http://scharts.co/1APb1GS http://scharts.co/1xYApFT
“There is a reason why the Rare Earths are called rare. They’re not called rare because they’re truly rare. They’re called rare because it’s very difficult to isolate these elements individually and it takes a lot of skill to do that.” – Constantine Karayannopoulos (former CEO of Neo Material Technologies Inc.) www.born2invest.com
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Legal
Texas Supreme Court Ruling Adversely Impacts Minority Shareholders In Private Companies By Beverly Valore, Esq.
E
inority Shareholders need to understand the impact that the recent Texas Supreme Courtâ&#x20AC;&#x2122;s decision will have upon investors. Prior to investing in any private company, the investors should be advised of the limited remedies they will have available to protect themselves against actions taken by the majority shareholders. In the case of Ritchie v. Rupe, the Court changed the landscape for investors in a six-member majority decision on June 20, 2014. Most importantly, minority shareholders will have to
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ensure they will be protected before investing by negotiating â&#x20AC;&#x153;shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.â&#x20AC;? Prior to Rupe, the majority of Texas intermediary courts recognized either a statutory or common law claim for minority oppression. The Court in Rupe substantially limited any statutory basis for such a claim. They also held there was no common law remedy for minority shareholder oppression. Issue 1 | Winter 2014
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The Court held that “oppression” under predecessor statute and current occurs when directors abuse their authority over corporations with the intent to harm the interests of one or more shareholders in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation. In addition, Rupe reduced the definition of shareholder oppression by limiting the remedy to the appointment of a rehabilitative receiver. The statute permits this appointment only when all other available remedies are ruled inadequate. Courts, prior to Rupe, authorized a lesser remedy of a “buyout” in cases of “oppression.” The Court would not expand remedies available under the processor statute beyond the receivership remedy specified in the statute and concluded that it would apply, including the current version, to all Texas corporations. In the situation, where the majority shareholder, a) engaged in conduct that substantially defeated the majority’s objectively reasonable expectations that were central to the minority’s decision to join the venture, or b) where they engaged in conduct that was burdensome, harsh, or wrongful and also reflected a visible departure from the www.born2invest.com
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‘Minority Share holders need to understand the impact that the recent Texas Supreme Court’s decision will have upon investors.’
standards of fair dealing or fair play, the Supreme Court rejected both principles. Many commentators consider Rupe as a victory for the rights of business owners. However, it may be detrimental for them in attracting investors due to the stringent burden minority investors will have in protecting their interest before investing. The steeper legal landscape in asserting claims against majority shareholders will have to be evaluated as claims and remedies are tested through the courts in the future. Although, the majority emphasized that minority shareholders should protect themselves before investing by negotiating “shareholder agreements” that reflect their “mutual expectations and agreements,” the dissent indicated there are situations that arise, from a relationship standpoint that can make this difficult. They compared the formation of a business relationship to a marriage, where the parties enter “optimistically and ill-prepared.” In Rupe, the minority owner inherited her shares from her husband who acquired them in a family-owned business where the parties saw little need for shareholder agreements. Beverly Valore is an attorney specializing in minority shareholder rights. She can be reached at 713-414-4956.
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AMUR MINERALS Corporation Ltd. (AMC.L)
A
mur Minerals Corporation (AMC) is a developing mineral exploration company focused on base metal projects in the far east of Russia. The company’s principal asset is the Kun-Manie sulphide nickel, copper project located in Amur Oblast, with JORC resources in excess of a 830,000 nickel equivalent tonnes and a positive independently compiled pre-feasiblility study. Discovery costs of less than $US 0.03 per pound of nickel rank it among the lowest cost discoverers in the world. Amur is listed on the AIM market of
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the London Stock Exchange and trades under the ticker symbol AMC.L.
Key Metrics • • • • • • • • • •
AIM listed in March of 2006. 100% ownership of the Kun-Manie project. Nickel, copper, cobalt and PGM. Positive pre-feasibility study - sulphide. Conventional process technology proven to work. Governmental support of foreign investment. Mining license moving through the regulatory system. Proximity to targeted Asian markets. Funded with zero debt. Company maintains its focus on exploration and advancement of the project.
Website: www.amurminerals.com Email: info@amurminerals.com
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Advertorial
PROJECT LOCATION: KUN MANIE, FAR EAST RUSSIA KEY INVESTMENT CONSIDERATIONS l Amur offers a low Investment threshold for new investors. l Presently nickel price is culling lateritic and pig nickel production capacity. l Resources rank among the largest sulphide deposits in the world. l BRIC nickel demand remains stable underpinning
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• 700 km from China • Hydroelectric power • Year round port facilities • Elgan Coal Rail Complete
long term pricing of $19,800 per CBIC consensus survey of 20 international financial intitustions. l Experienced management team guiding Amur and its wholly owned subsidiaries. l Kun-Manie flagged as a key project in the development of the Far East. Website: www.amurminerals.com Email: info@amurminerals.com
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Real Estate
Is Buying a House a Terrible Investment?
T
here is a lot of evidence to support the notion that money grows much faster in stocks than it does in real estate. Yale economist Robert Shiller, one of the world’s most respected experts on the study of home values, analyzed home prices over the last century and discovered that home values only rise at about the same rate as inflation. This view is also shared by USC Economics Professor Robert Bridges, another respected expert in the field. Rather than investing a large amount of money into a house which only keeps up with inflation, it is my view that it is far more productive to put that money into an index fund which has historically risen at a faster rate than inflation even before including dividends. I believe renting is a far better alternative to owning, for a large number
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of reasons, some of which go beyond the cost and have more to do with the convenience and complexity. Maintaining ownership of a house comes with a cost. Homeowners still have to pay “rent” in the form of: • Property Tax • Maintenance/Repairs • Insurance • Mortgage/Interest (if applicable) • Opportunity Cost (the amount invested in the house could have alternatively been producing gains in the stock market.) That’s big price to pay simply to maintain something you already own! Buying a house in the first place also includes transaction costs (legal, real estate agent, title check, inspections, etc.) that often come to 7% to 10% of the cost of a house. So you are 7% to 10% down immediately. And then you pay another 7% to 10% when it comes the time to sell. Besides the cost, there are other advantages renting has over owning: • Renting comes with a lot more convenience. It is the landlord’s responsibility to make necessary repairs, keep the driveway plowed, and keep the lawn mowed. • Renting also makes you more mobile; it’s easier to move quickly whether you find another job or have some other reason to move such as safety concerns, conflicts with neighbors, or changes in the neighborhood like construction. Issue 1 | Winter 2014
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There is • Real Estate is illiquid. If inconsistent with intelligent a lot of you need to quickly access investing principles. Buying cash during an emergency, evidence a home creates unnecesyou won’t be able to get that to support sary complications, doesn’t money out of your home in a the notion produce worthy returns on timely fashion. A house that is that money investment, and narrows for sale can stay on the market grows much your diversification. Renting without getting any offers for faster in is a much more efficient and a very long time. By contrast, effective alternative to home stocks are very liquid, can be stocks than ownership. Due to these reait does in sons, a house has no place sold at any time, and even real estate in anyone’s portfolio. It is produce dividends which can be either distributed as income or never a good idea to buy a house outreinvested for further gains. right, let alone borrow money for it. • Lack of diversification: HomeKyle Fishman is a long time buyowners usually put a very large por- and-hold investor from Cleveland, tion of their net worth plus debt into Ohio, who primarily targets value one asset. That’s not just narrowing stocks, but on occasion am open to their investment to the housing mar- “growth at a reasonable price.” Kyle ket, it’s narrowing their investment to is a leading contributor to some of one specific area of the housing mar- the most prominent finance sites on ket in one particular town and street. the Web. With interest rates at historical lows, they have nowhere to go but up; and this could be a potential threat to the growth of the housing sector as lower rates tend to encourage more buying and borrowing. However, history has shown the housing sector doing well during periods of rising interest rates before, so this doesn’t necessarily spell doom for the housing sector entirely, but it is a concern to consider. Many critics of my point of view tend to suggest that because it is easy to buy a house on margin or a loan, you can get a greater leverage on your investment. However, I would counter that point with, “what good is leverage if you have to pay interest on that leverage?” One of my key investing principles To advertise in the Spring is simplicity. Buying a house creates 2015 issue of Born2Invest complexity and headaches. This comMagazine, please call plexity is completely unnecessary and
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Dom Einhorn at 310-383-8200.
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By Gary Gordon
Profit Margins and ‘Fairly Valued’ U.S. Stock ETFs Summary • A large percentage of the investing public is currently embracing a foolhardy notion that bad times exist in the rear-view mirror alone. • Every conceivable method of stock valuation suggests that stocks are overvalued. There is one exception, of course: Forward 12-month P/E. • Sure the S&P 500 has hit yet another 52-week high, but so have long-term Treasuries.
M
oney managers like myself may not discuss it often, but they probably have an “Uh Oh Indicator.” What is it? When certain clients ask why any
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amount of cash rests in money market accounts - why more of the money is not being committed to the stock benchmark du jour (i.e., NASDAQ in 1999, MSCI Emerging Markets in 2007, S&P 500 in 2014) - unsavory greed is supplanting cautious enthusiasm. Granted, there is nothing scientific about an “Uh Oh Indicator” sounding its bell. Nor is there any reason to believe that danger in risk assets are imminent. On the other hand, after 25 years of experience with financial services as well as psychology, Issue 1 | Winter 2014
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I no longer regard “Trouble” as a board game produced by Hasbro; rather, a large percentage of the investing public is currently embracing a foolhardy notion that bad times exist in the rear-view mirror alone. Even institutional analysts are developing new paradigms to explain away the probability of a shock to stocks. Fund management group, Lord Abbett, recently opined that extremely high profit margins for S&P 500 corporations are of little concern. They infer future stock market success based on structural changes like lower global tax rates for corporations, lower interest rates and improved technological efficiency. Really? So we’re going back to the idea of a “New Economy” justifying excessive stock valuations? The last time that irrational folks traveled that direction (20002002), profit margins for the S&P 500 dipped from roughly 8.0% down to approximately 5.5%; the declines coincided with one of the most brutal stock bears investors had seen in 30 some-odd years. Similarly, as profit margins surged from 5.5% up to record levels of 9.5% through the mid-point of 2007, investors once more ignored the warning that margins revert to a mean. The 10/2007-3/2009 collapse in equities was as epic as any decline since the 1929 disaster and it coincided www.born2invest.com
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ETFs
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with profit margins dropping far below 7% (20-year historical average); margins actually bottomed out near 2.5%. Every conceivable method of stock valuation (e.g., Tobin’s Q, 10-year CyclicallyAdjusted P/E, Current P/E, P/S, Market Cap/GDP, Dividend Model, etc.) suggests that stocks are overvalued. There is one exception, of course… Forward 12-month P/E. Yet the only way that Forward P/Es can approximate reality is if profit margins in 2014 consistently hang around their all-time highs of 10%+. In contrast, if we assume that they revert to a historical average, the Forward P/E would be as overvalued as the rest of the valuation models. Permanently elevated profit margins… does that sound likely? When research shows that every economic expansion since World War II experienced slower growth in its second half relative to its first? When 2% dividend yields and 5% junk bond yields may have to face the prospect of a Federal Reserve that will “normalize” interest rates? When the percentage of adults in the U.S. workforce is declining? When recessions themselves cannot be entirely avoided? When inflation-adjusted family income is lower than it was five years ago? Perhaps quantitative easing (e.g., QE1, QE2, Operation
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Twist, QE3) has convinced folks that prices of risk assets can only go higher. Perhaps a continuation of zero percent overnight lending rate policy deep into 2015 can propel U.S. stocks to new levels. On the flip side, we should not dismiss certain signals altogether. Sure, the S&P 500 has hit yet another 52-week high, but so have long-term Treasuries via iShares Barclay’s 20+Year Treasury Bond Fund (NYSEARCA:TLT). Try as one may to explain price gains for long-term Treasuries as a function of more attractive yields than European sovereign debt, or the needs of large institutions, bond buyers clearly doubt the well-being of an economy without extraordinary accommodation by the Federal Reserve. If we can accept the fact that U.S. stock prices have moved into “uh oh” territory, then we’re less likely to get burned when profit margins falter. I
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Foreign developed equities and emerging markets present more compelling valuations.
have owned strong contenders like SPDR Select Health Care (NYSEARCA:XLV) for many years. That said, when XLV falls below a 200-day moving average, I intend to reduce client exposure. Perhaps ironically, foreign developed equities and emerging markets present more compelling valuations. They have traded at P/E and P/S discounts for the better part of the last five years. Only now, though, have investors been willing to increase their overseas allocations. The better “bet” seems to be with the emergers. Whereas the hope for developed Europe/ Far East equities resides with the degree of central bank manipulation, the hope for emerging market stocks is more generally tied to organic growth. The iShares MSCI Emerging Markets (NYSEARCA:EEM):S&P 500 SPDR Trust (NYSEARCA:SPY) price ratio demonstrates a five-anda-half month upturn in emerging market relative strength.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You can reach Gary Gordon directly via Phone: (949)-6006294, (888)-500-GARY (4279) or gary@mypacificpark.com. Issue 1 | Winter 2014
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Education
Thinking About T Summary • A recent study by Fed staff found the benefits of college still outweigh the costs on average. • Time it takes to recoup college costs is at the lower end of where it has been. • For a significant minority, the cost of college may outweigh the benefits.
The beginning of the new school year heightens the anxiety over the rising cost of higher education. The cost of a college education is increasingly beyond the means of the average American family. Tuition has risen faster than inflation, student debt has soared and jobs are difficult to secure. At the same time, it seems that more people are questioning the value of a college degree. The New York Federal Reserve’s Current Issues newsletter recently took a look these issues. The authors, Jaison R. Abel and Richard Peitz, also posted an article “The Value of a College Degree” on the NY Fed’s blog Liberty Street that looks at the cost of an associate and bachelor’s degree. They conclude that the benefits still outweigh the costs. While the costs have risen, the wages to workers without a two- or four-year degree have fallen.
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These two Great Graphics come from their work and illustrates their conclusion. This first chart shows their calculation of the net present value of a bachelor’s degree between 1970 and 2013. It is expressed in constant 2013 dollars. They estimate that the value of a four-year college degree fell from about $120,000 in the early 1970s to about $80,000 in the early 1980s. It then proceeded to more than triple in the next decade and a half to nearly $300,000 by the late 1990s. It has been surprisingly stable since. It has eased a bit in in the post-crisis period, but it remains near the all-time high. The second chart shows how long one needs to work to recoup the cost of college. The authors use the discounted cash flows that were used to calculate the net present value to determine how many
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t The Cost Of College By Marc Chandler
years it take to turn cash flow positive. To say the same thing, after earning a fouryear degree how many years does it take to recover the cost of the degree. It shows that the time required to recoup the costs of a bachelorâ&#x20AC;&#x2122;s degree fell significantly in the 1980s and then leveled off. In the late 1970s, it took nearly two decades to recoup the cost of college. Now it takes about half as long. The authors conclude that the value of a college degree
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Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting ďŹ rms and global investment banks. More info is available via www. marctomarket. com.
remains near its historic highs, while the time to recoup the cost is near historic lows. This study is part of a larger work. In an essay earlier this year, the authors calculated the return on investment for the average college student was about 15%. In a subsequent report, the authors look at the distribution of the wages earned by college graduates and find that for a sizable fraction, a college degree has not paid off. College may be a negative investment for one in four who attend.
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The investment industry has neglected young people. The reason is simple and obvious. They do not have enough money to generate big fees.
Sound Advice For Young Investors
By JeďŹ&#x20AC; Miller
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Summary • The investment industry neglects young people. • It is a time of opportunity, but also potentially confusing. • There is nothing wrong with a “fast decision” to move on -even if it seems like failure. • There are many great resources to get started -- Parents and Grandparents could help. • Learn to be a citizen, but keep your investing separate.
I
f the advisor provides an honest product at an honest fee, the maintenance and compliance costs leave no profit. If the advisor sells something with a big commission, it is nearly always inappropriate. A confluence of events has grabbed my attention. • It is graduation season - with plenty of news from all fronts. • My son graduated, with an excellent honors thesis and a new job in his chosen profession. Part of me wishes he would continue to work with me, where he always made an excellent contribution. But I am proud that he is an independent thinker and has a good focus on his career. • I have had many inquiries from young people, who are wisely interested in planning for the future. I started on this idea a couple of weeks ago. Like many OldProf ideas it represents a good concept but quickly threatens to spin out of control. www.born2invest.com
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Investing
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I have decided to write something now, during graduation season, but keep the theme open for comments and suggestions. I am starting by assembling some hot topics. I invite comments both on the choices and also what I have left out.
Your Graduation Speaker Your commencement speaker was probably boring and predictable. There is a general outline followed by most. There are few exceptions. If your experience did not include inspiration, it is easy to rectify that problem. These are mostly timeless, so the best efforts from history still work today. Here are some good sources: From VOX. Try Steve Jobs, or Conan, or JFK or plenty of others. This is a highlight reel. From CNBC. Michael Lewis’s prof told him not to try to make a living from writing!
Your College Decision Ignore the satire. A college degree remains a great investment. You earn twice as much with a college degree. (NYT) A Master’s Degree has an even bigger payoff, but maybe not a PhD. (Pew Research)
Your Personal Finances There is a lot of great personal finance advice. You should
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quickly learn the following: 1. How to budget and track your expenses; 2. Understanding the power of starting early; 3. How to set aside funds for unusual but predictable expenses; 4. How to save - which means living within your means; 5. How to invest, beginning with maximizing any employer benefits you get and then deploying other savings; and finally 6. Keeping records of everything - since that will maintain your focus. Good starter advice at http://www.marketwatch. com/personal-finance
Your Investments I know and understand the leading advice for young people: Find a couple of good mutual funds. Set aside money each month and dollar cost average your purchases. There is absolutely nothing wrong with this advice. Do it if you can. For many young people it would be more interesting and educational to hold some individual stocks. My guess is that the short-term results would be similar and the longterm results might be better. Why? There is nothing like following your actual decisions to focus your attention. Two warnings: 1. You will want to buy com-
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For many young people it would be more interesting and educational to hold some individual stocks.
panies that you know - and you should. A great company is not necessarily a great investment. Study the financials before you decide you want to buy. Do you wish to own the business at the current price? That is the key hurdle for the new investor, and there is no shortcut to learning it. 2. Do not overtrade. Find investments that have longterm potential and do not try to time the overall market.
Your Future and Your Role as Citizen Your parents and grandparents have done some good things. I believe that a child born today faces better prospects than one born at the time of my own son. He enjoyed better prospects than someone born twenty years earlier. If you live in the US or some other advanced economy, you have already won a lottery. One of the issues you face is demographic. There Issue 1 | Winter 2014
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are fewer workers and more claimants on benefits. This is a long-term economic problem for the US, and it may well be worse in other countries. If I were a young person I would be clamoring for reform and impatient with extreme partisans that blocked solutions. You should read about and study these issues. Here is a simple and powerful introduction from Internet analyst Mary Meeker via Joe Weisenthal: Having said this, you should not let your strong political views interfere with your investment decisions. That was a mistake made by your parents and grandparents. You can do better.
Final Thoughts This will seem strange. You must not be afraid to fail. This means several things: 1. Taking risks. There will never be a better time. 2. Recognizing opportunity www.born2invest.com
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costs. I wish I could avoid the economic lingo, but it means realizing what you could have done with your time instead of what you chose. 3. Getting out of a bad job. When you realize that something is not going to work, you should stop. Right away! Do not worry about appearances. If your immediate sense shows a warning, you are probably right. 4. Failing “fast” is OK. Others may look at your decision as a failure, but it is still wise. I quit a few jobs after a short period of work and I should actually have done it more often. 5. Parents and grandparents might consider helping this along. For some, it could be buying a book. For others, maybe a brokerage account with a starter position in some shares. Just a thought. Resources Megan McArdle’s The Upside of Down. I read and enjoyed the book and have sent gift copies, but I have not yet written my review. Young people should read it. It is replete with riveting anecdotes and the personal lessons are excellent. I have just finished reading Think Like a Freak, a gift from my son. Chapter 9 reinforces the McArdle theme. The entire book is great. Tom Brakke’s Letters to a Young Analyst. We have both gotten questions from those wanting a career in finance. I am honored that Tom included my contribution, and I think the advice is relevant for a much wider audience. Something from Warren Buffett. Much of it is free online. Young people should pretend that the old guys know something that might be relevant!
If you live in the US or some other advanced economy, you have already won a lottery. One of the issues you face is demographic. There are fewer workers and more claimants on benefits.
Jeff Miller is the President of NewArc Investments Inc., manager of both individual and institutional investments. Jeff is a registered investment advisor, and portfolio manager for NewArc’s investment programs.
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What Happens When
Berkshire Hathaway P
By Tim McAleenan
Summary • The benefit of buying a company like Berkshire Hathaway years before a dividend payout arrives is that you can build a nice capital gain and simultaneously avoid tax interference. • Buffett and Munger have dropped hints over the years that Berkshire Hathaway will eventually pay a dividend, although neither man has explicitly come out to say it. • The best investors to benefit from buying Berkshire today are those that are buying shares within a taxable account and possess a 10+ year time horizon.
T
oday, I’d like to talk about a topic I’ve never addressed in any of my articles: investing in companies that do not currently pay dividends, but have a high probability of doing so over the medium term (defined as the coming five to fifteen years). The reason why you don’t hear it get talked about
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all that often is because: (1) there is an inherent element of speculation, even if it is intelligent speculation, that comes with the territory of assuming a dividend payout from a company that is not presently doing so, and (2) it takes a somewhat unique investor to have a time horizon in which he or she is able to wait years and years, potentially over a decade, for those mildly speculative conditions to bear fruit. Given those limitations, why would someone aim to make an investment in a company that may take ten years before the asset starts producing income for shareholders? Two reasons: (1) You find a company that is internally handling excess cash quite satisfactorily, and (2) you are investing in a nonIssue 1 | Winter 2014
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y Pays a Dividend
a Decade From Now?
tax sheltered account where you receive an advantage by delaying the taxation of potential dividend income that you do not yet need (e.g., if you’re aiming to live off an income portfolio fifteen years from now, it’s okay if the company takes ten years or so before paying a dividend because you don’t yet need it). The classic example of a company presently offering these investment conditions is Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). At present, Berkshire is generating $19.6 billion in annual profits per year, indicating that Berkshire is fast approaching the threshold at which available profits could no longer be fully invested above Berkshire’s cost of capital rate. Furthermore, Berkshire’s Vice Chairman Charles Munger has speculated at Berkshire’s annual meeting that the easiest way to quash mindless empire-building after Buffett is no longer running the company is to institute a dividend policy that commits Berkshire to paying out half of its profits as dividends when the new management regime takes over. What might that look like if Berkshire pays out a dividend www.born2invest.com
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ten years from now, assuming that the company grows at the same rate from 2014 through 2024 that it did from 2004 through 2014 (a reasonable assumption given that the past ten years have marked a good, but not great, decade under Buffett’s stewardship)? You would have Berkshire making $51.41 billion in 2024 profits, and if the company then commits to a 50% payout ratio, it would be returning $25.70 billion in cash dividends to shareholders in the initial year of its dividend commencement. The appeal of planting your Berkshire dividend tree in 2014, rather than waiting for an actual payout to commence, is that such a scenario would allow investors to collect an immediate 8.18% dividend yield-on-cost on their investment at the time of the dividend initiation. In other words, you’d be collecting $818 in 2024 on every $10,000 invested in 2014, and the reward for your decade of patience that comes with the territory of waiting for a dividend policy to be initiated is that you did not have to sacrifice money in terms of total returns by paying a tax on dividend income before you need it, and you would
Finance
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also be sitting on a nice capital gain that would surely accompany annual profit growth from $19.6 billion to $51.4 billion. For those reasons, an income investor can add a block of Berkshire Hathaway shares to a taxable account and hold them for 10+ years as a nice estate planning tool that allows a company’s cash profits to compound internally for a period of time and then eventually convert to annual dividend income at a time closer to when you need to rely on that dividend income to meet living expenses. This kind of strategy works best for investors that are: (1) investing within a taxable account, (2) content to wait a decade or so for their investment thesis to play out, and (3) have flexibility with their selling plans in case Berkshire does not come around to paying a dividend and they must instead rely on the price quotations for Berkshire at that time to meet their income needs by selling shares. Over the years, Buffett has dropped subtle hints that a dividend will eventually be in the offing for Berkshire shareholders by noting that Berkshire will not be able to deploy all retained earnings effectively forever. Munger has been more blunt, noting that dividend payouts would put a floor on Berkshire’s stock price if immediate-
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Tim McAleenan Jr. is the editor of The Conservative Income Investor. You can find out more www. theconservativeincome investor.com.
ly instituted after Buffett’s death and the restraint that dividends put on capital allocation would institutionalize discipline upon the next managers of Berkshire’s operating companies and investment portfolio. If you want to reap large capital gains, and allow your money to compound a bit internally before a dividend payout becomes official, it can be intelligent to buy the Berkshire shares now before the day of the dividend announcement eventually comes. Issue 1 | Winter 2014
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