With many things in life, it's worth paying a little extra to get quality. There are times where my kids need a cheap item for an afternoon and a quick trip to the dollar store will take care of things without much pain to my wallet. But when it comes to investing, it's almost always better to stick with quality...
One of the great investors of all-time was a fellow by the name of Ben Graham. He focused on companies that he could buy very cheaply and overall he managed to garner a great long-term track record in investing. Warren Buffett (the richest investor in the world) learned from Graham, but changed his investing approach over time. His basic approach is summarized with his quote, "I would rather buy a great company at a fair price than a fair company at a great price."
I follow the Buffett approach and try to focus mostly on quality investments in my portfolio, but there are times when a great deal comes along that seems hard to resist. A good example of this would be Consumer's Waterheater Fund. I bought this company a number of years ago but then sold it when its prospects dimmed. However, a number of months ago, this trust cut it's distribution in half and the stock price plummetted - which got my attention yet again. I could now buy into this stock at less than half the price I had sold it for! This company is in the very simple and stable business of renting out water heaters to Ontario homeowners. This company has been churning out cash since the 1950s and paid out an impressive dividend of over 13% AFTER the dividend cut and stock price collapse. So last fall, I bought 3,000 units at $4.45 each.
However, a few months later I replaced my own rented water heater with one purchased at The Home Depot. When I went to drop off the old rental unit, I saw hundreds of old waterheaters being discarded by homeowners. I chatted briefly with the fellow who was in charge of taking back old waterheaters and he told me how new companies were grabbing hundreds of customers from Consumers Waterheater every week. I was already aware of this problem when I originally bought the shares, but this attrition rate did not seem to be subsiding. In addition, another stock I had wanted to buy more shares of had fallen in price - ExxonMobil.
So last month, I closed out my position in Consumers Waterheater and used the money to buy more shares of ExxonMoBil - possibly one of the best-run oil companies in the world. I managed to earn a little over 23% in six months with my investment in Consumers Waterheater, so things turned out okay. With Exxonmobil, I am getting a company that pays a much lower dividend, but also has raised its dividend every year for over a quarter of a century. In addition, this company owns over 20 billion barrels equivalent of oil and natural gas in the ground, and over time I expect this tremendous asset to appreciate. Waterheaters on the other hand have a finite life span and tend to depreciate over time. Finally, Exxon reinvests the lion's share of its profits so over time this will generate significant wealth for shareholders - so I'm happy to be buying quality...
