Today I have the great pleasure of introducing Jim Collins — Outsider Club‘s newest financial expert. He’s well known as the Portfolio Guru, and you’ve probably seen some of his recent editorials in this letter. He’s also written columns for Forbes and Real Money (a division of The Street).
Jim is an expert in income investing and has over two decades of stock analysis experience as an equity analyst and financial analyst with some of Wall Street’s biggest and most respected firms like Lehman Brothers; Donaldson, Lufkin & Jenrette; and UBS.
He currently has around $10 million in Assets Under Management for clients around the world.
Now, you can get his CFA-level guidance each week in the Outsider Club.
I sat down to get to know Jim a bit better, and pick his brain about how to set up the perfect portfolio, which sectors he’s bullish on right now, and what we can expect from the market in the coming year.
Q: Hi Jim, thanks for talking with us and welcome to the Outsider Club…
Thanks for having me, I’m looking forward to taking things to the next level with you guys…
Q: So let’s start by going way back… when did you first get started in investing?
Well, it goes back to the dark ages…
It all started because my mom was a stock broker. We always had the Wall Street Journal and Barron’s sitting around the house. Even back in high school, I was very interested in the stock market.
So my first major experience was interning with the financial planner in town. When I was 15, I’d ride my bike to his house and do the statements — everything was on paper then.
But that’s where it all started. Once I graduated from college I went to work at Lehman Brothers and went from there…
Q: Sounds like a great gig right out of college. Was that a pretty good time to work there?
Well, yeah, it was a great firm back then — 15 years before anything bad happened to them — but yeah.
I started out doing equity research for automotive companies — cars, auto parts, tires, etc.
I worked for an analyst for awhile and then became an analyst on my own…
So, once I became an analyst I moved to London to follow the European auto companies — and not to disrespect Detroit, I was born there — but getting to drive BMWs, Mercedes, Porsches, Renaults, and Peugeots, getting to go to the Paris auto shows, it was a lot of fun…
You have to do your due diligence, so getting out there with the cars, you’d have your hands on the product and get to meet with management. I’ve been fortunate to drive on pretty much every continent besides Antarctica, so that’s pretty cool…
But now I’m in New York and have to take the subway everywhere, so here we are…
Q: Yes, here we are. So, given your current experience managing people’s money, what is your advice for the typical Mom and Pop investor?
It all starts with two philosophies: Getting income and then reinvesting it…
85% of what I manage is income-based — so it goes back to basic Finance 101: The Magic of Compounding. What we do is buy securities that are producing income — high-yield common stocks with preferred dividends and some bonds.
Then we take the interest and reinvest it in other companies that also provide income and — over time — you get that compounding effect.
For most of what we do I try to be opportunistic with those dividend payments, and my job is to decide where to reinvest them for higher returns.
Q: How do you construct a portfolio for a new client?
The most difficult part — and also the most fun — is constructing that portfolio.
I do it a full chunk at a time — I don’t believe in holding any money in cash for my clients — they aren’t paying me for that. I’m all about fully investing my clients and maximizing the income…
That’s why I can beat indexes and benchmarks. So, I need to have good timing — which I like to think I do…
Q: So how many stocks, on average, do you typically start out with?
The number does vary. But, for example, I just did a client in London recently and I started with 16 — which I call my sweet sixteen.
So, on average, it can be between 10 to 20 stocks, depending on the client.
Q: How do you approach that from a diversification standpoint?
It depends…
With my income strategy, you have to boil it down to dividend payers — so you don’t have your Facebooks, your Netflix, your Teslas — they’re never going to pay a dividend.
So, you have to be careful not to be biased toward financial, utility, and energy stocks. Having lived through 2008 and of course the recent energy issues, you can see why you need to tread lightly.
What I’m looking for are high-yield companies that are not necessarily in the “classic” high-yield categories — which I’ll be writing about in Outsider Club in upcoming columns.
Q: Do high-yield companies ever worry you? Like they could be spending that money elsewhere or risk cutting the dividend at some point?
I try to look at it through the three bullet points:
1) The sustainability of the dividend: I do ratio analysis, like debt ratios, the EBITDA over interest expense — that sort of thing.
2) What percent the earnings are growing: Looking for companies that can actually grow that dividend payment.
3) How the stream of dividends are paid out: I look at this through the dividend discount model, which can help you find out the fair value of a company.
Q: Can you explain the dividend discount model?
Sure thing. So basically, your variables are:
1) The earnings growth
2) The payout ratio which gives you the dividend
3) The benchmark you are going against, like the 10-year treasury.
I keep it really, really simple, and over time, that should show you the fair value of the company. If you see a wide variance in either direction, it’s a buy or a sell.
Tomorrow, we’ll pick Jim’s brain about preferred dividends, baby bonds, what the Fed’s impact will be on the market overall, and the sectors that will benefit most and also be hit the most. Stay tuned, he dropped some very interesting concepts on us…
Until then…
