investment tips

Fisking John Heinzl

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The problem with investing is that it is as much an art as it is a science.  There is no one formula which will lead to success.  Investing is more about a person’s temperament than it is about implementing rules of success. Nevertheless, financial columnists are always giving rules of investing.  John Heinzl of the Globe and Mail offers several today in his article “Thirty nine investing secrets revealed at last!“, and I list only the ones in italics that I wish to comment on:

1. Learn as much as you can about investing. Nobody (except maybe your heirs) cares more about protecting and building your wealth than you do.

This is probably not feasible for many people.  Sure if you have nothing to do except read about investing it fits.  But consider my father-in-law who was a successful entrepreneur who started two different prop-shops in his career in two different cities.  His greatest investment was his own business, and when it came to his retirement savings, he needed to rely on others.  My own father was a physician; during my entire childhood I don’t remember my dad ever watching an entire 1 hour television show without falling asleep.  People with successful careers must unfortunately rely on others.

2. As the ING guy says, “Save your money!” Without savings, you have nothing to invest.

3. If you’re having trouble saving, track your income and expenses to the nearest dime for a few months. It’s the only way to find out where your money is going and, hence, the only way to figure out where you can cut back to save more.

Being able to save many not be about tracking every dime so much as keeping in check one’s desires and cravings.  But sure, track your expenditures and see analyze how you are spending or even wasting your money.

5. Keep a percentage of your savings, roughly equivalent to your age, in low-risk bonds or GICs. This is your “sleep at night money.”

In periods of inflation, fixed income assets that pay low interest rates are as risky as any other asset class.  With governments actively seeking to create inflation, all investments are risky.  All of them.

7. Always be on the lookout for “black swans” – rare and destabilizing events that aren’t supposed to happen but do. (Credit meltdown, anyone?)

Well disasters can happen.  Even death.  That’s why it is important to have faith in God and trust in Jesus Christ for one’s eternal salvation.  But being on the look out is not the same as being prepared.  How would one have prepared for the last credit crisis?  I think by not being leveraged to the hilt and therefore having the cash or credit to be able to take advantage of the bargains that will be out there if there is another meltdown.  If it ends in your country being defeat or annihilated in a world war , it won’t matter what you invest in.

8. Invest a portion of your savings in a low-fee index mutual funds or exchange-traded funds.

This is advanced investment advice?  Fifteen years ago when I had a less than $2000 for my registered retirement account I used mutual funds.  But I eschew both ETFs and mutual funds today, because as a DIY investor I pay far less in commissions and management fees at $9.99 per trade for stocks.

9. When buying individual stocks, stick with those that pay dividends, preferably rising dividends.

My best performing stocks don’t pay dividends.  They are small, junior oil companies that are high risk but largely off the radar.  You usually pay premium for large companies that pay rising dividends.  In the long run, they perform very well, but neglected small companies can give multiple rates of return which greatly outperform the dividend payers.

10. Reinvest your dividends and interest payments to benefit from compounding.

11. Remember that investing isn’t a sprint but a marathon – a very, very long marathon. The longer you invest, the greater the benefits of compounding.

This is true.  Reinvesting the earnings from my stocks that pay monthly redistribution has really work out well for me.

12. Don’t listen to stock tips from your brother-in-law.

My father-in-law gave me a great tip:  tfl, which became mel.  It is my best performer thanks to my strategy of averaging down.

13. Avoid “story” stocks. They’re usually duds.

I don’t know what a “story” stock is.

14. Stay out of debt. If you’re in debt, get out.

In October 2008, my wife and I took a HELOC and bought numerous Canadian income trusts.  Thanks to trading, distributions and my day job, I’ve been able to pay it off completely.  Then I borrowed funds on my margin account in order to do carry trade against the US dollar.  I am making net profit from the distributions and am waiting for the investments to improve in value and the US dollar to depreciate.  So far I can’t complain.  Not all debt is equal.  Some debt is good debt.

15. Pay off your mortgage as quickly as possible.

This is too true.  Because we replaced our mortgage with a HELOC. The advantage is that the money that we now borrow against our house is used for investments for which the interest is deductible (in Canada, interest on the mortgage for a person primary dwelling is not deductable, only interest on investments which provide an income).

16. Take full advantage of RRSPs, TFSAs and RESPs.

This is advice for Canadians (like me soon to be) and residents of Canada.

17. Invest in Canadian banks. The same reasons we hate them as customers – too big, not enough competition – are why we love them as investors.

Ok.  Canadian banks however experience periods when they are over bought.  They are not a panacea investment.  I’ve lowered my exposure to banks recently in favor of higher yield oil companies.  I have profitably traded Royal Bank.

18. Invest in boring companies – pipelines, power producers, utilities.

I think Enron was a utility company, power production and pipelines.

21. Always question your adviser, and never pull the trigger on a trade until you get a second opinion from someone you trust.

When we had an advisor he would talk us out of our ideas.  At first he saved our asses because we didn’t know anything.  Later it became annoying; so I took over completely our portfolio and learned to rely on my own judgement.  I win some and lose some, but I now always save on commissions.

22. Read The Investment Zoo by Stephen Jarislowsky.

23. Visit the website, dividendgrowth.ca, run by Mr. Jarislowsky’s biggest fan, Tom Connolly.

24. Read The Single Best Investment: Creating Wealth with Dividend Growth , by Lowell Miller.

Thanks Mr. Heinzl!  I’ll have to check these out.

25. Keep your trading costs as low as possible.

27. Keep trading to a minimum to reduce commission costs.

I have had some success, and some failures, in well-timed trades.  My commission at $9.99 are a negligible cost.

28. Resist the urge to check your portfolio every five minutes. It encourages excessive trading.

I confess.  But I don’t trade excessively at all.

29. Consolidate your investments with one broker. It’s easier to track how you’re doing.

Once over 1 million in an account you aren’t insured anymore in  Canada.  Be careful not to exceed that limit.  Also beware of the Madoffs in the world.  The worst possible investment would be to be consolidated in pyramid scheme.

34. Don’t invest in anything you don’t understand.

Thirty-four is very true.  But you don’t have to understand absolutely everything, just the basics like P/E ratios, revenue, dividend yield, book value, market capitalization and net asset value (NAV).  Also, one should have a fundamental understanding of the business, why their products sell, and who are their competitors and their markets.

The worst investment decision Warren Buffet ever made

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Or: On Outperforming Warren Buffet

Warren Buffet is hailed as the best investor in the world. His net worth as an investor is generally regarded as proof.  I started 100% DIY investing in March 2006 when we transferred our remaining holdings from our full-service investment adviser to our discount brokerage. We are currently standing at 31% over book value. In the same period, BRK-A, Buffet’s holding company has gone from trading at US $90,625 to yesterday’s close at $103,000. That is a 14% gain. Does that make me twice as good an investor as Warren Buffet?

An article in Canada’s Globe and Mail recommends that individuals invest like Buffet. There are many articles of this kind floating around; Buffet is considered a prophet of investing, the Oracle of Omaha. I’ve also shared here some of my tips of investing and there is some overlap between the way the Buffet invests and my style.  Yet in the commentary section of the Globe and Mail article I wrote:

I cannot invest like Warren Buffet. He breathes and the market reacts. It is harder for him to buy shares on the open market too, since if he were to let it be known that he wanted a billion dollars of shares of something, the price would go up uncontrollably. That’s why he often buys preferred shares which aren’t available to guys like me. He can’t invest like me either. Unlike Buffet, whenever I buy something the price seems to go down immediately. I buy very small stakes in companies that I think have promise or which have good yield. But it’s too small for anyone to pay much attention. I like it that way.

So perhaps comparing myself to Warren Buffet is a bit of bravado on my part, a testosterone-filled pissing match. It’s not comparable at all because Buffet is investing billions and I’m like an ant crawling around the big toe of an elephant. And to be fair, there have been times when Buffet’s done much better. I’ve been lucky during this recession, I’ll admit it.

But there is a fundamental difference between Buffet style and mine. He is buying America whereas I’m shorting the US dollar and buying Canada–a strategy that may back fire according to Roubini; but I don’t think it will because all the trends in the US government until the 2010 election are inflationary. Ken Boessenkool in the Globe and Mail writes about Canada’s dollar, the loonie:

… perceptions of future investment returns on a country-to-country basis are often affected by large shifts in fiscal policy. Bad fiscal policy – in the form of unsustainable deficits and debts – will cause investors to expect increases in future taxes and lower rates of return. In that case, the relative attractiveness of that country as a place to work and invest will fall, driving down economic growth. In response to poor fiscal policy, a falling currency can provide the automatic stabilizer to lower growth rates resulting from rising deficits and unsustainable debts.

And this is exactly the picture we are seeing south of the border. Barack Obama has put the United States on a debt and deficit path that is far worse than Canada experienced in the early 1990s, when The Wall Street Journal called Canada an “honorary member of the Third World” and our dollar was flirting with historic lows.

Moveover, our world-view is informed by biblical conservatism. The Bible is a good guide to investing; it affirms risk taking, generosity, unselfishness and not allowing money take hold of you (I am of the opinion that selfish people make bad investors).  It also warns about indebtedness. In my view, the US government’s profligate debt-based spending is a path towards poverty that is immoral and self-destructive. This kind of behavior is not affirmed in the Bible at all.

Warren Buffet knows it is bad in the US. But perhaps he is in denial about the single worst investment decision that he ever made:  his ill-informed endorsement of Barack Obama for President. Ill-informed because had he paid attention to Obama, he would have known that he was a radical leftist–perhaps it is not too far to say that BHO is a Marxist given his background. He would have known also that BHO knows nothing about economics and has never been an executive of a company or any other entity which would have qualified him for becoming the CEO of the United States. The man who is famous for researching companies before risking billions failed to do his research into BHO and it is literally costing Berkshire Hathaway billions in market capitalization.

The Obama Dollar

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I wrote back in January that Obama budget deficit would lead to inflation.  Now finally financial writers are calling it the Obama dollar.

In personal finances, debt is not a good thing unless properly managed.  Advisers distinguish between good and bad debt.  Bad debt is spent on consumer goods and services (Christmas gifts, food, vacations, etc.).  Good debt is used to buy appreciating assets like a house or investments which will produce positive cash flow (e.g., Crescent Point Energy Corporation, which pays 23 cents per share Canadian per month).

I lamented that Obama called his profligate budget an “investment”.  But there is no question that government debt is bad debt.  It is used neither to purchase appreciating assets nor cash-producing investments; rather government debt is spent on programs and make-work projects that will never have a profitable rate of return.  1.4 trillion dollars was borrowed in the 2009 budget year and it has led to inflation of the US currency as I predicted in January.  Let’s consider the difference in Canadian dollar:  On Jan 23, the Canadian dollar traded at 1.234 to the US Dollar; now today it is at 1.03 per US.  This is a drop of nearly 17%.  But it is not as though Canadian currency is not also being inflated by low interest rates.  In Canada, most investments, including stocks and real estate, have nearly completely recovered from the downturn.  Housing is now completely recovered in much of Canada, and this has financial writers worried about a bubble in housing prices.

I am still shorting the US dollar (it means that I gave borrowed US to purchase Canadian-based Barrick Gold (ABX: NY), Enerplus (ERF: NY), and Daylight Resources Trust (DAY.UN: Toronto).

Writers and analysts often refer to the Federal Reserve Bank “printing” money.  Actually they don’t have to literally print money, because the central bank has the ability to create money without printing it.  This is done especially well when the Federal Reserve buys US treasury notes.  The dollar is called a “fiat” currency, because money can be made from nothing and out of paper and ink.  Eventually, however, printed money flow will have to increase in order to keep up with prices.  But until then, inflation remains an invisible monster which devours people’s savings and cuts into how much they can earn.

The Carter years (1979-1981) were formative for me, as I graduated from high school in 1981.  I remember them like yesterday, and I remember its high inflation and how Reagan implemented so-called Reagonomics, reining in profligate Federal Spending.  Reagan halted an out of control Congress and put America back on track.  Being a beneficiary after my mother’s death in 1977, I remember my own Social Security check being cut.  Unfortunately, Obama was apparently too busy taking drugs during those years (marijuana and cocaine when he could afford it) and so has returned us to the pre-Reagan economic policies and ideas; but he has, in collusion with the Democrat Congress, implemented economic policies which are even worse than what we had during the Carter malaise.

I met a man from Singapore whose father lived in want much of his childhood and therefore as an old man hoarded enough rice for many years.  In like manner, I am afraid of inflation, because that’s what I saw as a child, and I have been preparing for this moment since I first heard about the Obama budget.  I fear inflation as much as any other investment risk, perhaps more.  The so-called safe haven of the dollar is a complete myth, all the more so when it is the Obama dollar.

Spreading the risk: Investment tips from an amateur

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Early in 2005, I asked my investment adviser for suggestions regarding stocks I could buy in US dollars, and he didn’t come up with one.  When my wife asked to buy Catepillar, he said it wasn’t a good idea.  For these reasons, and because he also received 2% commission for every transaction, I decided to try a self-directed trading account (DIY, do-it-yourself). On November 1, 2005, I bought my first DIY stock, CAT, at $50 per share and sold it at $70 the following February.  That marked my beginning as an investor.  So I have an answer now to that thorny question, “What do you do?”  That question has been embarrassing since 1996 when I finished my doctoral studies.  As a biblical scholar, I’ve never had a full-time job in the field.  Rather, I’ve taught as an adjunct in Canada and as a visiting professor in Africa, I’ve continued my research in the Acts of Paul, I’ve been the director of a charitable project called the Barnabas Venture since May 2004, and I have been very active in my local church.  I do work for my wife’s company too, but only part time.  But imagine trying to explain all that to people.  Now I just say, “I’m an investor.”

Being involved in philanthropy, I’ve desired to increase our ability to be charitable.  This has been one of the driving factors in leading me into DIY; but also, in the last half of his life, my grandfather and role model, Wallace Wilkinson Dunn, Sr., was an investor.  An inheritance from grandfather paid for the first year of my studies at Cambridge.  My father, who received the bulk of grandfather’s estate, paid for the next two years.  Thus, I enter investing with full confidence that it can be done profitably.  Finally, when it comes to our retirement accounts and Tax Free Savings Accounts (TFSA, which is the Canadian equivalent of a Roth IRA), we dare not put them in fixed income with constant ebb of inflation taking away most of our gains.  So I manage all but one of our retirement accounts, TFSAs, and small but growing non-registered account.

This morning I sat down and made short list of my investment strategies which included the following points:

(1) Pay attention to the macro trends in the economy.  Information is key, but one must realize that much of the information out there is provided by incompetent writers or supporters of disastrous policies such as Keynesian economics (keyword, “stimulus”) and Obama’s presidency, which have led to huge budget deficits and inflation.  The conservative world view serves me well as an investor.

(2) Always maintain sufficient cash or credit instruments to take advantage of market downturns.  But I try always to maintain an extremely low debt to equity ratio (far below 1:1–the goal of a business is to be in business the next day–while failed banks like Bear-Stearns had ratios of 30:1).  The investments must also be able to pay for themselves through their dividends.

(3) Keep the watch list down.  It is very difficult for me to watch more than about 20 stocks.

(4) Specialize:  Most investors have their specialty, a nook where they have a better feel for the market.  Some are commodity traders; others trade gold or foreign currencies.  I trade in bank, oil and gold mining stocks.  I am not a competent in options or short selling.  I stay away from investments that I don’t understand.  That’s why I don’t do options trading, because I don’t understand them.  Not being an expert, I also have to depend on analysts at TD Waterhouse and Scotia iTrade to inform me if a stock is a “buy” or a “hold” or “sector outperform” or “underperform”.

(5) Spread the risk:  When we still had an investment adviser, he told us the story of how certain Nortel employees who lost their jobs also had retirement portfolios which were predominantly made up of shares and options in Nortel.  As a consequence, they were severely hurt by the demise of Nortel.  Once while in my bank, a representative mentioned that one would do well to buy, as she had done, bank stocks (which were at an all time low).  She had invested in TD Bank; I told her that she shouldn’t do that since she was employed by the bank.  Well she would have made money, without a doubt, because TD Bank is back up to $68 per share.  But it is necessary to maintain the principle of spreading risk which means that one should never have everything in a single sector or a single company (Don’t put all your eggs in one basket). My wife’s company is in aviation maintenance, so I have chosen never to purchase a stock related to that sector.  So Air Canada, Boeing, Bombardier are all on my never-buy list.

Obviously there is some tension between specializing/keeping the watch list down and spreading the risk.  Buying 100 stocks in several sectors effectively spreads the risk even more.  But I can’t know enough about every sector to manage that; so I am trying to learn more about the gold mining and oil and gas sectors to be able to trade and invest effectively.

In late 2008 and most of 2009, when people asked me what I do, I said I was an unsuccessful investor.  But today, thanks to the recent upswing in the market, I’m still investing, while many professional financial advisers are delivering pizzas, waiting on tables, driving taxi, or just sitting at home unemployed.  For that, I, a DIY amateur, am thankful

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Shorting the US dollar

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A Canadian friend told me that he was thinking about taking a long position in GE.  It was at an all time low and evidently oversold at the time (under $7).  I warned him that stocks held in US currency were risky for Canadians because they would have to buy US currency at a high price but that, with the Obama government overspending and all, the US dollar was going to lose its value quickly.

GE hit its low in early March, and let’s say that my friend bought at $6.66, its closing price on March 6.  On that day, he would have paid about CDN $1.27 for every US $1.  So 100 shares would have cost him $6679.99 (which is inclusive of the $19.99 commission), or CDN $8483.59.  GE today is selling at $16.52 today.  If you add the three quarterly dividends (ex dividend date 17 Sept, 17 June, 17 March), he would be looking at a total of $16.82 per share or a phenomenal 152% rate of return.  But what is that today in Canadian funds?  $16820 = $17755 (1.056)  That is today in Canada, his investment has 109% rate of return, which is still wonderful, but as a result of the diminished power of the US dollar, much less than 152%.  But in the likely event that the US dollar continues to plummet, his return on investment will continue suffer in Canadian value.

I’ve taken short positions against the dollar by borrowing US funds to buy Canadian oil and gold companies (erf, abx: NY) .  Also, I will convert every penny of US funds that come in into Canadian until the currencies reach par.

Yesterday I learned that many investors are beginning to use the US dollar as the new “carry trade currency”.  I didn’t know what that meant so I looked it up.  It is a reference to borrowing currency that has a low interest rate, changing into a foreign currency and making investments in that currency (such as GICs or buying stocks).  Well, I guess my investment strategy is a trend rather than idiosyncratic.  I was basing this strategy on the fundamental conviction that US dollar, despite the current deflationary tendency, would suffer because of the Obama budget deficit.

Links:

Dollar is the ‘New Peso’

Is the Dollar Set to Become the new yen?