Mediocre Failures
A couple of weeks ago I had almost posted how well I was doing. Commonwealth Bank shares were up 25%. Tidewater was up 7%, Bombardier was up almost 20% and with exception of Precision Drilling, I was up quite a bit of money. This week, not so much.
Commonwealth is down, though I’ve bought more. Tidewater came out with reduced earnings that missed expectations and I sold Bombardier today for a 17.6% profit. The TSX went down 8% and has since recovered some of the losses. In summary, the markets are no man’s friend for long.
Have I mentioned investing is dull and boring? Waiting for quarterly reports is hardly actively doing anything.
I need to find a real hobby.
The Inherent Risk of an Index Fund
There’s always a latest rage in investing. This is ironic because in actual practice, investing is boring. Investing means reading quarterly reports. Investing means pouring over numbers to decide if a company is worth owning. Investing is not exciting.
Yet there are such things as “investment crazes”. The tech boom was one. Millionaires were made over night. High schoolers were successful investing, so their parents gave them their college fund to invest. Then April 2000 came and went. And so did trillions of dollars invested in over-priced stocks and worthless dot-com’s.
I read this guy and agree that agree that Index and ETF’s are the next fad. They’re not necessarily poor investments. They’re just not the end-all, be-all that they’re advertised to be. And because they’re popular, they’re open to abuse from those who want to take our money.
Basically an index fund is a mutual fund that does nothing but buy the stocks (or bonds) in an index that is widely tracked. They have cheap Management Expense Ratios (MER’s). They consistently beat most other actively run mutual funds because they have low trading costs, no research costs, and thus are more likely to beat mediocre to poor active fund managers. Index funds beat 75% of actively managed mutual funds. I’m not suggesting you don’t consider them. They’re great.
The problem is that a sector index fund doesn’t have to be “widely-tracked” or even “diversified”. Investing in the TSX300 index (back in 2000) meant that 30% of the index was in Nortel. When it shot up to $127/share the index sky-rocketed. When NT dropped to $0.67 it took the index with it. There are all sorts of indices to track. The iShares tech index XIT used to be 25% Research in Motion (RIM), 25% Nortel (NT) and the rest in other tech companies. Buying the index fund in this case is neither diversified nor wise.
Exchange Trade Funds (which often track indices) create several problems. Yes, you can buy them in a heart beat. And you can sell them equally quick. The problem is a) you get nailed for a commission from your broker and b) being so saleable means you won’t think twice when the market looks uncertain. Buying and holding is harder when its so liquid without the proper discipline that I don’t have.
Because index funds and ETF’s are so popular, expect lots of “selection” from the mutual fund companies. They’ll sell you an exchange traded index fund that tracks the number of turkeys in Kentucky. They’ll rename their mutual fund just to call it an index fund. People will blindly buy an index fund because the media is calling it the next sure thing. Everyone pours their money into them, it’s logical with facts from 80 years to back up the arguments for them and suddenly every stock in the i60 is priced twice as expensive as everything else. Sooner or later the expected growth of the stocks dwindles to zero and pensions liquidate, leaving private investors in the lurch.
That’s you and me.
I have index funds. They are cheap. They beat active managers 75% of the time. Just don’t buy an index that doesn’t have 300+ stocks. And avoid specific sectors. Hedge your bets. If you put money on every number, unlike roulette you’ll actually fare better than most.
Happy hunting.
Two Competing Investment Philosophies
If you watch Mad Money, or read some of Jim Cramer’s books, he’ll spell out in great detail how he ran a successful hedge fund through the 80’s and 90’s. Despite the stupidity of his TV show, he does follow a systematic approach to investing. Basically he chooses sectors that are growing, then chooses businesses that are first or the best in that sector, while carefully avoiding “paying too much”. He looks at profitability, quick and current ratios, cash-flow – all to select the stock most likely to be at the top in the end. He places a strong emphasis on the PEG ratio – or the expected Price/Earnings divided by the expected Growth. If it’s > 2, the stock is expensive and you should avoid buying, or sell, when it gets to that point.
Another older successful philosophy is the Value approach, originally spelled out by Benjamin Graham and David Dodd in Security Analysis, originally written in 1934 and updated 5 times since (the latest 6th edition is over 700 pages and re-published in 2009). Warren Buffet wrote the introduction.
The Value approach places emphasis on ignoring any expectations for growth and relies heavily on how a company has performed in the past. It has 7 solid rules to identify the companies that, should a recession hit, will still be around and profitable during the bad times as well as the good. They’re simple enough: size of company, liquidity to cover debts, some past growth, and a low price relative to its book value and its current earnings.
Where these philosophies are the same, both try to identify profitable companies that will serve the investor well in capital appreciation and risk. Where they significantly differ is in regard to the future. Graham would put little to no emphasis on any forecasts, as people are just as likely to be right as to be wrong. And should they be wrong, they will lose money – to be avoided at all costs. Reducing risk while still realizing capital gains is what the investor requires. Forecasting, and its detrimental hit to a portfolio’s value, is speculation.
Investment is not successful speculation. Speculation is buying a horrible or hugely overpriced stock, knowing all the risks of doing so. Investment is buying part of a company at a reasonable price to insure against loss of principal.
Invest in Index Funds
I recommend XIC, XIU or some other low MER% index fund of the whole TSX if you’re Canadian. But for whatever reason I’m going to invest in stocks directly. Here’s my list that I believe are or were trading below intrinsic value:
Bombardier (BBD.B)– bought at $4.59 plus commission last month. Now trading at $5.55 or so now. When I bought, the price-earnings was 8x. Now it’s almost 12x. Waiting for its next quarterly/annual report.
Tidewater (TDW) – bought at $47.17 USD. Now trading at $50 but the rising CDN currency has wiped out most of the real gains. Price-earnings is < 7x.
Precision Drilling (PDS) bought yesterday at $9.10 USD including commission. There is a concern that both Precision and Tidewater have exposure to the price of oil. But at only 6x price-earnings and both being profitable with dividends, they’re serious bargains.
Commonwealth Bankshares (CWBS) – bought this week at an average of $1.84 USD. Reason: it has $1.41 in cash/equivalents alone. The revenues have not decreased since years past, but its loan provisions have eaten into its earnings. Trading at 1/7th of book value.
Tucows (TC or TCX) – bought at around $0.72 CDN but only 4.5% of my stock portfolio (i.e. excluding index funds). At 4x its price-earnings, it reflects that those earnings probably aren’t repeatable. But maybe it is. Call it speculation that earnings will be continued.
Note – Price/Earnings ratio is not the sole criteria, but it’s a popular metric.
Update – the market indices XIC has price-earnings of 31x and XIU has price-earnings of 25x with dividends of 2.7% and 2.4% respectively. Should the earnings expectation not pan out, there may be significant drops.
Never for a thousand years
Something started in 2000 that will not be repeated for another 990 years. No longer will we refer to the year as two-thousand and one or two thousand and two etc. Today, we start referring to our year as twenty-ten or twenty-eleven (next year). Not until the year 3000 will we once again refer to the year in the long form rather than the butchering of the English language we normally used for 19XX and will once again continue in 2010 and beyond.
English might progress in the next 990 years to be unrecognizable. It could be the last time we ever refer to the year in that fashion. There was a brief attempt to refer to the year as Y2K but it didn’t follow much into Y2K+1 or any further.
No, we shed a tear for the long form of the year that will rarely be used again. We say good-bye.
What will we be doing in Y3k? Will we be finally flying cars to the mall? Will we have malls? Will the malls be located on different planet systems run by apes?
Or will humanity even make it that far? Will robots turn on their masters and kill us with large bloody machinery? Will nuclear warfare or the Large Hadron Collider destroy us all? Will we be wiped out by a plague of biblical proportions?
I don’t care. It’ll be someone else’s problem I’m sure.
Holidays are not for relaxin’
Christmas Eve to New Years Eve has been the busiest time for me this year, period. Four Christmases in 24 hrs (Ruth’s family for Dec 24th supper, our own family Christmas Dec 25th morning, my extended family for lunch, then Ruth’s extended family for supper) is a hefty toll. It involved a fair chunk of driving and Kaylah took a few days to recover. That didn’t mean however, we slowed down.
After the Christmas marathon, we went to the Toronto Zoo for Boxing Day. It was “half price” day, although we expected it to be “completely free” day. I guess the zoo gave that up years ago, sometime between Ruth’s adolescence and Kaylah’s childhood. Half the animals weren’t viewable to the public, so it wasn’t any better value than any other time. I got to try out a new lens I picked up on Craigslist and there were fewer crowds to deal with compared to our other recent Zoo trip in mid-November.
Dec 27th was another Christmas on the Greenwood side. More gifts exchanged. More family to see. Surprising to see how much in that little time Kaylah’s talking improved after interacting with her red-headed cousin Sinead.
Dec 28th we were back in Mississauga to purchase bathroom improvements. We found a nice vanity at Lowes that didn’t break our budget plus a couple of sinks. We have the faucets and I’ve picked up some other doo-dads to make the job easier. We’ve decided on the new bathtub (after seeing the nice one my brother put in) and now its mostly a matter of picking it up.
Yesterday Ruth, Kaylah and I all went to the Ontario Science Centre to view dead bodies in Body Worlds & the Story of the Heart. Although it was pretty clear these once were living, breathing people, I didn’t have the same life reflections I’d have at a funeral. They were sufficiently plasticized that it didn’t equate to fleshy dead people while walking through the exhibit. Kaylah had little attention for it and had much more fun in the kids section of the Science Centre. That building was made for kids – we’re considering getting a membership.
Today Ruth heads out to see some mommy-friends and I’ll continue to plan out my evolution of our bathroom. I have the hacksaws primed and ready.
Bring on the Destructicons.
Filling Other People’s Shoes
I took a photo of Kaylah that summarizes my title. I’m sure I could BS some philosophical theory and write a blog post about it, but mostly I found Windows Live Photo Gallery and want to see how well the integration works between it and Live Writer. So far so good.
To the right is the inline photo. I want to write AROUND the photo because I think that when it takes up space between paragraphs (like directly underneath) it looks tacky. Having it this way is far superior in my opinion. Nothing says Awesome Web Designer like having stuff written around photos… and I consider myself an objective web surfer.
Not like the people who come to THIS web site searching for entertainment 
I kid, I kid.
The Ultra Boring Investment Fund
So I face an uphill battle. First, I’m trying to beat professional money managers at their own game. Second, I’m going against the Efficient Market Hypothesis that claims I can not consistently do better than an index fund. Third I have a full-time job, a wife and child so my time is at a premium.
On the other hand, I have a few things in my favour.
- First, I can’t be fired. It’s my money. Investment managers often are hired and fired depending on how they fare, but usually little of it is there own. If they lose it, they’re out a job. If I lose it, I have to take on a second job to pay it back. That’s a substantial difference in motivation.
- Second, unlike the professionals, I can follow a customizable financial plan combining a passive investor stance with a few enterprising investments. I’m in complete control… assuming my wife agrees.
- Third, spread and transaction fees. Buying small blocks is cheaper than buying in large blocks. I can buy 100 or 1000 shares easily without moving the market. But buying 100k or a million shares will push the market up and cost the buyer more.
Will keep you posted.
When I Grow Up, I want to be an Investment Manager
Perhaps you may have heard this recently from a cute child, wide eyed and innocent basking in the desire for untold riches and insurmountable power. But I never have. Few people watch Wall Street (starring Michael Douglas and Charlie Sheen) and want to be either character. The ugliness of their greed is unmatched nay for the recent mortgaged backed security crisis of 2003-2007.
However I’ve always liked the idea of a) picking stocks and b) choosing the ones that do better than the rest. To say that I’m experienced is untrue. To say that I’ve had great luck in the past is also untrue. Most people (myself included) are better off buying an index fund (TD has some great ones like TD216 or Barclays XIU). The cost is small and they usually beat paid money managers consistently simply by the difference in fees.
Now I won’t be a REAL money manager. Since I’m not registered with the SEC, the OSC nor the Mutual Fund Dealer’s Association, I’m not allowed to claim anything. I can’t charge for managing money. Nor would I. Keep your money. I just want to be right.
Also keep in mind that most of my money is in index funds spread around a few sectors and geographies. No more than 15% of my portfolio will find its way into this “Enterprising Investor” mix. I always allow for the possibility that I’m wrong.
Personally I’ve seen two significant bear markets and a number of “corrections”. I’m patient and cautious. This isn’t Mad Money – this is retirement savings. I’ve learned quite recently that even well-diversified index funds can take on stomaching churning losses. It may take me years to get back to where I was – blindly following the index strategy has its risks as well.
For the moment, I’ll cover only one eye.
Where’d the Recession Go?
Remember when we were in a recession? Banks and Investment Institutions raced to be the first to say we were out, with the Bank of Canada making the prediction in the summer. Prices of houses had dropped… briefly. June 2008 came roaring back turning a buyers market into a seller’s. The latest news for housing noted the only place still a buyers market in Canada is Saguenay, Quebec. Otherwise, sellers are reaping the rewards of their hard work… of living in their own purchased shelter.
Somehow 2009 is beating the records of 2007 which beat all previous records of any year before it. In 2007 lots of banks and banker’s economists were predicting a housing bust – housing affordability was off the charts. Today, houses are even more expensive, less people have jobs (8.5% of Canadians are out of work) although interest rates are next to zero. The Bank of Canada just recently warned us that we’re spending too much, we’re not saving anything and our cheap mortgages are going to balloon. The Great Recession was a economic hiccup – but there are signs we’re not past the worst.
I work in the Investment industry and a coworker calculated that trading activity for pensions and mutual funds is about a half to a third of what it should be. Most are sitting on mounds of cash, waiting to see when things settle down. That’s where the smart money is – the guys who’s job it is to navigate the markets profitably. With Dubai and Greece almost defaulting on their debt, and the US and Europe over-extended with mountains of deficits, there’s a lot of market ugliness out there.
Tread carefully.
