Thursday, August 16, 2018

What the trade wars are really about

How competitive is the world’s car industry and what is TESLA’s share?   Our cars are becoming more autonomous and better in quality by the day. Very exciting but how much profit do car makers make? 
Figure 1. World market share of leading car makers totals 51.4%   Source: Statistica
During the 1950s, the U.S. Big Three Ford, GM and Chrysler dominated the world markets. But today Fiat-Chrysler doesn’t even make the top 10. Ask yourself, how many models and brands are sold by Toyota?  15? That would mean that the typical car model has less than 0.5% of world-market share.
North America produces around 17 million cars per year and Tesla aims to make just over 5000 cars per month or 60,000 model 3s per year. Be generous, say Tesla makes 100,000 cars in total annually - if they can keep up the pace!  That is 0.5% of North America’s output. Make it worse, globally we produce around 70 million cars per year and thus Tesla's share is 0.1%   What do you think the chance is that Tesla will compete with Toyota who produces 6.4 million cars per year ?  But then… Who guessed in 1950 that GM would not be the world’s largest car-maker?
Remember the saying: What is good for GM is good for America?  Well that is a thing long gone. And here we have Ontario clinging desperately to the Car Industry and a new ‘Auto Pact’ under NAFTA.  That while Justin Trudeau claims oil and gas are fading out. The man really has no clue! 

Recent numbers from AutoCanada, one of Canada’s largest car dealerships say that it has a gross margin of 5.9% on every car sold. Well there are a lot of other charges to be deducted before we can say how much a new car sale contributed to its NET INCOME!
I am not saying that the car industry is a sunset industry, far from it. I just question its profitability. Just think of it. Those top 10 car makers listed above control just 51,4% of the total car market. The net profit margin, depending where in the economic cycle we are, averages 4.1% but they are at times it is as low as negative 3.9%.  I don’t think the car industry is dying but I don’t think they are great investments either.

Also, it shows the futility of bringing back heavy industries to North America. Our economies have changed. North America provides services (Amazon, Google), commodities and innovation. It is like my Dutch home town and Berkshire Hathaway. Once we were textile-industry driven. Now there is not a thread in sight, unless it is in your email. 😊

Our economic make-up evolves and maybe with robotics, we will get some manufacturing back but probably not as a significant source of employment. Our Western industries will evolve and if we want to stay economic leaders, we have to be innovators and creators of new ways of making money rather than focusing on a return of manufacturing jobs in obsolete or super competitive industries. We need to produce what the world craves not what it drowns in. Next time we’re so desperate about NAFTA and the Canadian auto industry let’s think again. Is it worth the effort or let the Donald ‘win’?   It also begs the question: why are so many German car manufacturers in the top 10?

For the large picture, what is Trump really trying to achieve with these trade wars?  I guess it is about the future; the remainder of this 21st century. Look at the demographics.  China and India will probably be adding 1 or 2 billion people to their middle class. Africa is in for tremendous population growth that leaves the rest of the world behind in a dust cloud. Totally we are projected to have 10 to 11 billion people on this planet. Africa could easily exceed 5 billion people. With extreme poverty on the decline, 3 to 4 billion people from Africa will join the middle class over the coming century. Thus, between Africa and the emerging economies we may add 4 to 6 billion to the middle-class lifestyle. In comparison, Europe and North America will barely grow.

That is what this is all about. The U.S. must protect its intellectual property, it must protect its manufacturing base. Today when its economy is strong, it will have to fight and establish the economic rules.  If not it will be economically overrun by the ‘Hun’.  If it does not force China today to behave as a mature and responsible economy rather than stealing intellectual property and limiting access to its markets, the U.S., Canada and Europe will be the losers of the coming century.  I may not like the Donald, but that doesn’t mean that the current trade wars are without merit and unnecessary.

Wednesday, August 8, 2018

Corporate Debt is a killer especially in Oil and Gas

You may have noticed that when you tried to get a mortgage that the bank is more concerned with how much you make than what the property is worth.  That is because you pay back the principal and interest out of your income rather than by selling securing assets.

The same is true for corporations, including publicly traded companies. In fact, lenders are here even more focused on the corporate revenue and earnings than when dealing with a mortgage. You see, a company that makes no money is slated for bankruptcy, which means management can't generate enough revenue to pay off debt and interest. Selling assets off during bankruptcy hopefully returns some of the lender’s money but they would have preferred that your company generated profits and revenue from which to repay your debt.
Fig 1. Relatively healthy company
So, having too much debt may paralyze or even bankrupt a company. In our example spreadsheet, the company’s revenue is $1000 which covers the costs of goods, the admin to run the company and its operating profits. Interest payments are not part of operating profit; the latter are sometimes called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

When you sell a product you make an operating profit that is, in part, used to finance the company's purchase. The down payment in your house is comparable to share holder equity, while money borrowed to buy or build the company are the mortgage. Now lenders don’t care about assets as long as you pay the interest; repayment of debt is nothing more than shifting the financing structure. Paying off some debt means you increase the shareholder equity or down payment.  The lenders prefer you never repay the debt as long as you pay them interest including inflation. De government recognizes this interest as the costs of doing business and thus it is deducted from operating income prior to taxing it.
Also, when a mine or oil company produces its reserves, it converts those reserves into money while depleting the reserves. The depletion has to be replenished by new reserves for the company to survive. The same with a manufacturing company that wears out, i.e. uses up its equipment over the years. The annual costs to replace new machinery for the worn and obsolete stuff, that is depreciation and it Is paid as a capital expense. That capital to replenish depreciated machinery has also to be paid out of operating profit. Amortization is the costs of wearing out real estate – same thing as worn out equipment but now that we’re dealing with worn out buildings it is called amortization. 
EBITDA minus depreciation and minus interest payments are called taxable earnings over which the company has to pay income taxes. What remains are the NET Earnings or AFTER-TAX earnings. Shareholders finance the business in order to share in the profits. Part of the profits are paid as dividends; the proportion of earnings paid to shareholders as dividends is called the ‘Payout Ratio’ and it can range from 0 to over a 100%. Of course, if a company pays more dividend than it earns, the money has to be borrowed and that increases debt. 
What is left of the net income after dividend payment is added to the company’s equity or bookvalue.  This money is used for expansion of the company, for acquisitions or for debt repayment. This left-over is also referred to as ‘Free Cash Flow’.  If a company has no free cash flow, it cannot grow and the corporation stagnates which often means it will lose market share and gradually disappears from the face of the earth.
In the first spreadsheet you see all those numbers in a relatively health company. It has $1000 debt which is $50 dollars per year in interest paid out of an EBITDA of $300. You see, it is very important to know your EBITDA. It is more important than your ‘GROSS’ profit margin or operating margin.  With $1000 in revenue and a profit margin of 30% you make $300 EBITDA but if you have an operating margin of 15% and revenue of $2000 you also have $300 EBITDA. Basically, in both cases the Enterprise value is the same (total share value or market capital plus debt = Enterprise value). 
Market Capital is not the same as shareholder equity. It is the price the shareholders can sell their shares for in the stock market. It is the Market capital, the value of the Company's shares plus corporate debt that equals the Company’s Sell Value or Enterprise value. It is the price you sell your house for minus debt, i.e. home owner capital which can be a lot more than just your down payment. Get it?
Net Income owned by all outstanding shares is $40. When a share trades at a Price/Earnings (P/E) ratio of 10 that means a company earning $40 dollars is worth 10 times $40 or $400.  If the P/E is 15 then the company is worth 15 x $40 = $600 in market capital.  Thus our spreadsheet company has a Market Capital of $600 plus $1000 in debt and its Enterprise value totals $1600. 
If you have $1000 debt and interest has to be paid out of EBITDA than the DEBT/EBITDA is an important ratio because it indicates how much FREE CASH flow a company makes (depending on interest rates and outstanding debt and payout ratio).  So by itself an DEBT/EBITDA ratio of 3.3 doesn’t say much about FREE CASH Flow other than that it will take 3.3 years of operating earnings to pay out all debt.
Fig. 2  Increased debt to $1400 results in a significant dividend cut or severely reduced free cash flow.
Now say that the company has $1400 in debt. Then it must pay 5% interest or $70. Its Net Income falls and it would have fallen even further, did not the increased interest reduce taxable income and thus taxes. And look you have now only free cash flow of $12 instead of $20. A lot less money to spend on expansion. But, ouch! You think the stock market likes a dividend cut from $20 to $12 dollars. Not likely and the market cap falls just based on fundamentals from $600 to $340 or nearly 43%!  If market psychology caused by the dividend cut drove the P/E down further as well, share holders would have lost even more.
Management could increase the Payout ratio to ‘maintain’ the dividend as companies often do. In this case to 84%. But OOPS, Free Cash flow is nearly gone to zero  and that means NO growth for this company. You realize the problem?  Oh and Debt/EBITDA has skyrocketed from 3.33 to 4.67.
Figure 3. $1400 with dividends maintained. Destroys Free Cash Flow.
What if Debt was increased to $2000?  Oops, NO FREE CASH FLOW and the company’s dividend went to zero no-matter the payout ratio.  It takes now 6.67 years of EBITDA to repay the debt and the shares are worth NOTHING!
This company is now owned by the ‘BANK’ and it won’t be able to grow. It is bankrupt and even lenders are unlikely to get all their debt repaid.  You can build a simple spreadsheet like this for yourself and see the effect the debt load has on the company whose shares you own or want to own.  Just as an exercise, go back to the healthy company with $1000 debt. 
Imagine this is an oil company and oil prices fall by 30% from $100 to $70 per barrel. That means without any further changes its revenue falls 30% to $700. Oops, its free cash flow dropped to MINUS $32. The company is bankrupt and even its lenders won’t see much back of their loans. A price drop in oil from $100 to $70 is not unheard of. In fact, in 2015 we dropped all the way to $26 per barrel. To say that this industry was in dire street was an understatement. In fact nearly every oil company was broke in those days!
Fig.4 A debt load of $2000 destroys the company utterly.
If you wonder why Justin Trudeau is so hated along with Rachel Notley then just look at the devastation caused by an oil price drop from $100 to $26 per barrel! With Alberta hurting in semi-death rattle, these two  implemented carbon taxes! Trudeau helped Bombardier, a company living only of government subsidies and based in Quebec, with a $300 million bail out loan, while sabotaging every pipeline proposal and not sticking out a finger in financial help.  To top it off, Alberta had to pay Quebec $11 billion in Federal Taxes and other Transfer payments; Quebec claiming to balance its budget while denying port access for an important pipeline with the excuse of Beluga Wales. And 3 months after TransCanada moved its pipeline port it announced to build a commercial port at the Beluga site instead.

If you think that Alberta Separatism is not an issue, then look at the economic devastation on these simple spreadsheets. What would have happened if something like Ontario’s auto industry was hit like that?  Now let's talk about B.C. and Horgan... It is hard to have someone more despised as that thing in Alberta. 
Fig. 5 Drop in oil price from $100 to $70 per barrel destroyed this relatively healthy seeming company.
Do you think that Saudi Arabia was smart starting a price war in those days when its government spending was largely financed from oil revenue?  No, I think they were imbeciles. Only, when OPEC got its act together and cut its production, oil prices somewhat recovered. The good news is that oil service companies and employee salaries all came down as well and thus the COST OF GOODS (I.e. drilling costs, mineral rights and many other costs collapsed as well – probably by half, that is what saved the oil and gas industry's bacon but the results were severely reduced landsale revenue and royalties for government and a lot of unemployed oil patch staff. The unemployment rate amongst geologists and engineers was nearly 80%!  We still have a lot of unemployed oil patch workers but there is light at the end of the tunnel.

Tuesday, August 7, 2018

Trump and Democracy

They said Obama and the politics of audacity, but it is Trump who is truly audacious. Whom else than an academic could have come up with the word 'audacious'? That is what today’s backlash on democracy is all about. Most people want a simple life without complex immigration issues, with a steady job not some form of contract work with a two-week termination clause.  Yes, the ‘home-office’ sounds entrepreneurial and something for a free-spirit – having two minimum wage jobs may sound like building a future of wealth but it all are signs of uncertainty and lack of visibility in today’s life. We have many guys (and gals) that think ‘straight forward’; want a family with kids; a job and BBQ parties with friends on the weekend.  They don’t think about politics in contorted intellectual and subtle fashion. They don’t think like the intellectual cliques that create laws and rules for every eventuality and who create extensive bureaucracies that protect their careers and defined benefit pensions.

This is what the revolution of demagogues is about. The common man (and woman) is sick and tired of the slick intellectuals that tell them how to live. They want the bureaucrats and the powerful who forever change the rules to their advantage to get out of their lives.  They love Facebook to chat with friends the world all over, share photos and live carefree. They don’t want to worry about the intrusion of large corporations in their private lives – look Apple has the same market capital as the GDP of the Netherlands – now is that not excessive economic power? That is why the Cambridge Analytica issue is so disturbing – big politics and big business going through the photo albums of the simple citizens of the world to exploit for power and money. 

When the ‘common man’ elected Trump over the intellectual cliques; when they elected Italy’s new government; when they voted for Brexit and any other form of political disruption, they kicked against the legs of the establishment; of the sycophants we call sometimes ‘the Deep State’. Trump is a bully who disrupts; who loves kicking Justin into the ground because he doesn’t like the condescending ways of Mr. Sunny who represents the aloofness of Liberal globalist intellectual politics. That is why the Donald loves the current diplomatic spat between Saudi Arabia and Canada. That is why he loves splitting Canada and Mexico in the NAFTA negotiations.

Trump is not about the loss of democracy, it is about getting rid of the condescending attitudes of the ruling intellectual cliques that constantly tighten their regulatory chains on our daily lives. The unintended consequences of this may be quite dramatic and undesirable. The collapse of the nuclear deal with Iran for example is offsetting any good that may have been gained with the improved terms in North Korea. Now that the disastrous liberal emigration politics are testing the limits of practicality and tolerance in many a nation on this planet, are we turning to the other xenophobic extreme? 

I don’t think that neither Trump nor Trudeau spell the end of democracy, but it is the cry of the people who shout: Stop the ideology and govern with pragmatism and civility. If the current leadership is not capable of doing so, we will find a new leadership that can!  When we observe the extreme behaviors of Trump, Putin and Saudi’s MBS, we are seeing the kneejerk reactions of hardnosed leaders who are riding with discomfort the horse of democracy and don’t know how to deal with it. When we see the Pipeline wars and Justin Trudeau we see weak leadership impotent in solving the important issues of our society and crumbling under the weight of special interest. These are signs of the time. We need change – we need to acknowledge as a people that we need a pragmatic and fair government not one lead by dogmatic ideological extremism. The current liberal intellectual leadership and the brass Trumpism are two sides of the same coin – we learn everyday that government led by ideology fails and that if we don’t make our wishes known through voting and honest discussion rather than through ideological blablah, the tyranny of social media,  and the sensationalist press then we should truly start to fear for our democracy and freedoms.

Sunday, August 5, 2018

The ‘Secrets of the Rich’ delusion – KISS wins again

Tiger 21 club; HNW clients with more than 1 million in liquid assets; no they must have at least 5 Million in liquid assets on top of their paid-off residence! This is all hype created by banks and money managers that try to seduce you into buying their (non-existing) secret investment sauce and of course they do so for a modest (hahaha) fee!  The rich need advice from lawyers, accountants and any other sycophant who preys on the funds of those ‘wealthy’ and as a favor also advice you although you are not ‘quite there’.  All those news stories about ‘how the rich do it’ are pure marketing baloney – yet here again another such article in the Globe and Mail.

Most of those HNW advisors have no wealth of their own and the banks put employees on their HNW clients who can only dream of accumulating large amounts of investable funds. If 68% of Americans live from paycheque to paycheque and less than 1% of households have a Net Worth INCLUDING their residence and other real estate in excess of $1 - 2million, who really has 5 million in liquid investable funds?  I bet it is less than 0.1% of our population – not exactly a large market for Banks and HNW advisors to make significant money. Rob Ford’s residence was recently put up for sale for 2.5 million. Rob Ford, a son of a wealthy family that includes his brother Doug Ford, Ontario’s newly elected premier That is not exactly a shockingly high price for a Vancouver or Toronto single family home. Many Torontonians and Vancouverites and home owners elsewhere in the country have houses in that price range. The recent housing boom made them wealthy, but their assets are difficult to handle for these so-called HNW managers. How many of these home owners would want to sell their homes to create liquid assets for investment in a 'higher return' stock market, which we all know carries a lot of risk.  

The HNW industry is really about seducing you to hand the management of your RRSPs and other liquid funds over to them. Vultures, so they can put it in a bunch of investments that create lots of commissions. Really, market ETFs that earn 7% at current inflation rates and with minimal commissions is where most real wealthy investors make there money along with some real estate. If you pay a wealth manager 2% of assets under management every year then to out perform that 7% they need at least a return 9 to 10%. For that you must put all your eggs in the high growth portion of the stock market. If you have 10% in cash and another 40% in fixed income it is nearly Impossible to make such returns - i.e. you incur lots of risk not your 'wealth manager'.  There is no-way you can achieve the returns these ‘wealth managers’ need to achieve for you to compete with a normal market ETF portfolio performance.

Reality is that real estate markets are a bit boom-and-bust and they can be as volatile as stock markets. Look between 2000 and 2008, the Calgary real estate market was on fire; especially with some leverage you could make a fortune. Just like it was between 1978 and 1982 when we also experienced a major oil boom. For the rest of the time the market was climbing very gradually in value with a couple of major busts in between. Montreal real estate was virtually dead for years until recently and Vancouver as well as Toronto were like many major population centres in politically ‘stable’ countries experiencing major price increases due to super low interest rates and investments from overseas investors who tried to park their new found wealth away from the corrupt greedy claws of the governments in their home countries.  Now these trends are about to change. After nearly a decade of dormancy the Dutch real estate markets are on fire with improved economic performance. And Calgary, with improved oil prices and hard fought-over pipeline access is about to recover and leap ahead, likely outperforming Toronto and Vancouver once again. 

U.S. stock markets since 2008 have tripled but Canada’s lagged. During the 2001-2011 commodity boom, Canada out performed the U.S. big time. There seems to be always this pattern of under and outperforming markets in all kinds of asset classes. But nobody invests only in the bull markets. We allways have underperforming and outperforming assets and thus there are very few real wealth managers that can really provide you a good 7 to 10% return on your entire portfolio plus their 2% fees. Don’t fall for it. It is like voting for a government that takes ‘care of you from cradle to grave’. There is no such thing, but they will charge you an arm and a leg in taxation and bureaucracy. Reality is that the buck stops with you! There is no miracle sauce or black box that makes you rich and certainly not overnight. 

You think the wealthy have a secret investment advantage with low commissions and high profits? Nothing is further from the truth!  Most are cost-conscience small business owners that build up equity over the years with hard work. Or they are frugal money saving employees that sock away every year a bit of money. These 'rich' rise often from the middle class, whatever that exactly entails. They have access to much lower commissions than that of 2% demanding wealth managers through discount brokerages.  As shown in the previous post, you can keep your commissions low AND get (sometimes) good advice from you full-service brokers by NOT trading in-and-out of stock holdings but by building up a steadily performing portfolio of stocks, often dividend paying. Yes, the buy and sell commissions are high, typically 1.5 to 2% of the investment value that you bought or sold. But if you only pay that on a slowly changing portfolio where you keep capital gains taxes low (and thus get an interest free loan from the government) your overall annual commission-cost can be as little as that of that what you spend on the discount brokerage annually.  Paying someone 2% AND outperform the markets is a ridiculous concept.

With a portfolio of international stock market index ETFs you have a good chance of making 6-7% plus inflation. That means that your net worth doubles every 7 to 10 years. You paid off your house which could be worth over a million when you retire because you are likely to go through at least one of those real estate booms during your lifetime. Saving and investing in an stock ETF portfolio will lead to a doubling of your portfolio every 7 to 10 years. So, say that in your first decade upon reaching 35 years of age you saved $50,000 then it 'doubled' to roughly $75,000 (you didn't accumulate all those savings in year 1); the next decade (you are now 45), your portfolio is $150,000 plus another $100,000 (you are now saving $10,000 per year) or a net worth of $250K plus your house paid for (even if you just made your monthly mortgage payments for 20 to 25 years). By 55 years old, you should have saved another $150,000 while your portfolio doubled again to $500,000 for a total net worth of $650,000 plus your paid-off house. By age 65 you saved as an empty nester and at peak salary over that decade $250,000 – no more mortgage payments, no large purchases, kids are out of the house. Plus, your portfolio doubled again; it is now worth $1.3 million and your net worth is 1.3million plus the $250,000 in new savings for a total of $1.55 million plus a million-dollar paid-off home plus a Canada Pension and OAS worth around $150,000 per spouse. Guess how much your net worth would be if you kept on working until 75? Many 65-year-old baby boomers don’t want to stop working. What do you think would be the case for Millennials when they reach that age? 
Getting rich in Canada is not difficult with a good saving habit. But… it takes time; avoiding the clutches of the tax man and the ‘wealth managers’. If you buy a diversified portfolio of ETFs emulating market indexes in Canada, the U.S., Europe and I suggest also in China or Asia in general, you will achieve those numbers without major brain-power. KISS - Keep It Simple Stupid wins again!

Saturday, August 4, 2018

Investing during these noisy times

I have been writing about poor leadership - Justin and Trump being my current whipping boys. I have been writing about media noise and ever-lying politicians not to mention those fanatics blinded by their ideological or religious dogmas. This we are confronted with everyday; it makes us uncertain about our investments and our investment strategies.  It is already hard to hold on to your stocks during the panics of market crashes, now we have to learn to ignore the daily noise when investing as well. In fact, we all have to become little stubborn Dutchmen or maybe closer to home, Canadian Hockey players😊

We should focus on the real facts and not being swayed by those 30-second panic attacks that we are bombarded with every moment of the day. Some experts tell us to just ‘shut it out’!  That is not realistic and, with effort and tolerance, we may actually figure out, well enough, what is going on and what is truly important to US not to the U.S. 😊 (Oh I am soooo funny today). This is easier said than done.  I see myself reacting on the discount brokerage website - sometimes nearly daily. 

The beauty about real investing is that you may have the net worth many times the total value of a decent business but you don’t (or shouldn’t) have the overhead of such a business.  In other words, without to much effort you can all do it yourself and without it taking up the majority of your waking hours. A successful investor can do a lot of business from a small home office and the bulk of the work done there is paying utility bills. 

That is because most of your investments and the staff at your investments do the work for you. Your task is mostly asset allocation, i.e. building a truly diversified portfolio – I don’t mean a fragmented portfolio. A good investor spends more time drinking coffee from his favorite coffee machine than doing trades at his/her discount brokerage. 

I will tell you a secret. I play my investment experiments at the discount brokerage.  Yes, I make money at the discount brokerages too, but the bulk comes from the full service accounts. At the latter doing transactions is too expensive for buying and selling everyday. Also, I don’t buy real estate everyday. In fact, I just have a small number of self-managed properties, the rest is farmed out except from collecting monthly distribution checks.  And the spreadsheets to record the real estate transactions I haven’t touched in many months. Maybe about time I do though.

The full-service brokerage account fees stop me from many trades and my investments because they are not sold off frequently pay very little tax. All capital gains accumulated over the years are basically interest free loans from the government – no matter who is in government they make money for me everyday.  

The full-service accounts, also provide me with the advice from an experienced stock broker whom I know for over 30 years; he is my devils-advocate. I know what I own except for the latest investments because I often don’t bother to download my monthly brokerage statements. In the end, I get basically all the wealth management I need for a fraction of the costs. I calculated that my fees for the full-service is less than 0.5% of assets each year. Compare that to ‘Wealth Management’ rates which are often closer to 1 or even 2% of assets under management. 

The risky stuff is in the discount brokerages.  Part is to earn income on option trading but the option trades that really make money are the routine trades and for that I use cover-call writing ETFs, for example ZWB (writes covered call options on Canadian Banks). 

 If I want to buy a stock, I first start by collecting money selling a put-option with as strike price the price I would like to buy that stock today. Thus, I make money before I even bought the stock! Now this stock fluctuates in price and it may even fall below my intended purchase price. But that is offset by the option premium. If the price falls but not below the strike price, I may even be able to sell another put-option at an even lower put price. If the price of the stock takes off, I may lose out on the deal but I probably would have increased my risk if I chased that price up trying to buy the stock in the first place. Besides, there are always set-backs where I can still buy the stock at the by me desired price. Once I buy the stock (get assigned the stock because it fell below the strike price), I can also make money at the discount brokerage by writing call options but again, the stock can take off on me and I would cap my gains. Overall, you make more money investing this way.  

My discount brokerage strategy is a great way to learn about companies and to hold the riskiest investments. Typically, I outperform the full-service brokerage, but it takes most of my time. Once I am familiar with the companies and they perform, then I transfer them to my full-service brokerage - sell in the discount and buy back in the full service.  The latter is basically, what some may call, my core portfolio. With this method I can panic and get worked up about all that daily noise, and you bet that I do get affected. But my core portfolio provides the long term stuff which I consider buy-and-hold. 

I currently invest in call and put options on a larger scale than before. I have done this  for less than a decade and I think it could provide protection during the next bear market. This is an area of a lot of learning potential for me. The idea is that when the time comes to buy ‘put-options’ offsetting the losses in a falling core portfolio. The theory sounds great but the devil lies in the execution. The good news is that my core portfolio is likely to suffer during down turns, but it will likely recover and go up further in the subsequent bull market. We have calculated and experienced that now many times; so my learnings on buying put-options will only be gravy (hopefully thick not thin). 

There are many ways to make and lose money as an investor. I hope that my way, as I described above (and it is always evolving) is a worthwhile idea for your future strategies as well.

Friday, August 3, 2018

Making money in an irrational world – Call that a miracle but not rational.

I have a subscription to the Globe and Mail - a left of center news paper that claims to support the Conservatives during elections.  This news paper doesn’t really now where it stands other than that it craves for paper selling headlines.  I also subscribe to the Wall Street Journal which is supposed to represent a business perspective and is definitely leaning right - its American perspective lets me know what Canada’s role in the world truly is – it is apparently not much regardless of being one of the world’s top 10 economies and the U.S. largest trading partner. I also read the National Post as antidote to the Globe, but I find it typically a bit too far to the right. In Albertan terms, I would line it up with the Reform Party. Problem is that it tries to sell on-line subscriptions in such a confusing manner that I have given up getting one. If they go under that serves them right – so much for BUSINESS sense! 

I like columnists such as Margaret Wente and Conrad Black with here and there a smidgen of Rex Murphy. I truly hate columnists like Gary Mason and Ibbitson with his Euro-destructive views. Just reading their opiniated headlines makes me sick of the Denise Balkissoon on one side and Terrence Cocoran or Kelly McParland on the other. Sometimes though, reading those latter two is soothing the climate-change-denier in me. It seems like there is no voice of moderation.  If I think that I am opiniated… but when I read that bunch… and they all tell you the ‘truth’!

Today, I read how Cohen, Trumps ex-lawyer had a verbal contract with the promise of a $10 million payment if he could convince the Donald to back a $5 billion dollar loan for some Nuclear plant. Another story was about how a Journalist faked his own murder in the Ukraine to draw out Russian intelligence which then tries to spin the story by having its agents claim that they really worked for some other Ukraine counter- intelligence agency.  If you get that in real life, who needs Charlize Theron in the movie Atomic Blonde?

Then we have Trudeau and her (😊) environment minister Catherine McKenna with their ‘national’ Carbon Tax aimed at Saskatchewan and now Ontario and add to that for next year, Alberta. You listen to the Liberals and it is going to solve climate change; if you listen to the Conservatives it is a just another tax that damages our competitiveness versus the United States and other countries and with no impact on climate. All these arguments are displayed in the most extreme terms so that it grabs for 30seconds your attention and to sell you news paper thingies.   Business reporting is not much better.

And then we are expected to make based on this sh.t rational investment decisions? I have never read so much news and research in my life but that doesn’t mean I know the truth, if you can define such a thing. Obfuscation! Besides then there remains the question whether all this political and investment bablah really helps making objective decisions?  Especially when you look up from your web browser and see another real world around you.  Does that tree in my backyard even know what is threatening its existence?  I bet it doesn’t even care about climate change nor about TD-bank shares – yet it represents the real world! When hiking in the mountains, do the rivers really know the difference between Justin Trudeau and Andrew Scheer? I don’t think that the mountains couldn’t care less how strong Justin stands up for them and a couple of millennia from now those mountains will still be here but Justin? He is likely gone if not next year then soon there after.

They say your investments must be rational and that the market is responding rationally to the news. By know we know that investors are not rational, and neither are the markets. Short term a voting machine long term a weighing machine?  Look at the price of oil and at the valuation of many Canadian petroleum producers. They are priced today often even lower than in 2016 when oil prices were $26 rather than today's $70.
Is it rational that CNQ’s share price dropped while it reports a 56% increase in cashflow!  And what does the ‘market say’ say according to the news media?   It was ‘dissappointed’ because production was weaker than the forecasted 1.054 million barrels per day versus 1.05 million.  Are you kidding me? A mere 4000 barrels a day difference or 0.4% makes the share price drop by 5% in a matter of days!  4000 barrels is less than the margin of error one can expect in forecasting the production of a company the size of Canadian Natural Resources. You call THAT a rational response?  And Tesla’s pricing is rational?   Oh and now we are doing behavioral psychology to predict market performance? Mankind is truly nuts and it is a wonder I still am making money in that setting. Call that indeed a miracle but do not call it rational.

Wednesday, August 1, 2018

DIviding the national pot - gap between rich and poor.

68% of the U.S. population lives literally form paycheque to paycheque. If they lose their job there are no savings to live off.  You may say that is a rather dismal state of affairs.  But in many ways this is a lot better than what wealth distribution was in the world at the beginning of the 20th Century.  Here is a statistical representation of GDP distribution. On the vertical axis is a representation of the Gini-coefficient. The closer the coefficient is to 0 the more equal the GDP distribution is and the closer it is to 1, the more wealth is concentrated in few hands. This data is based on 173 regions (not countries) in Europe.
From 1900 until 1980 all regions showed a similar trend – a increasingly equal distribution of wealth.  Since 1980 the Gini-GDP, as this stat is called has slightly, but surely increased, i.e. more wealth in less hands. But compared to the early 1900s the middle class owns today a lot more of GDP income.  To say that the ‘rich get richer’ in terms of income distribution is not correct. Still 68% of Americans only getting by as long as they receive a paycheque is depressing.  The thought that a similar percentage of Canada’s Seniors, i.e. 68%, just depend on Canada Pension is to say it nicely ‘very depressing’. No wonder so few can barely afford to live in a nursing home or an assisted senior living facility.

I have some more revealing statistics for the OECD about wealth or better asset distribution. Have a look at the tables below. Canada is one of the worlds most egalitarian countries in terms of wealth distribution while the U.S. is least, i.e. the largest gap between rich and poor. You think Europe is much more socialist but look at the Netherlands, my native country!  It is second after the U.S.!

In fact, yes in the U.S. 80% of the wealth is owned by 10% of its households and in the Netherlands,  it is 68% but look at the lowermost 40% in the U.S. they own NOTHING while in my ‘socialist and bureaucratic’ motherland the lower 40% OWE close to 7% of that country’s wealth to the top 60%
That is in fact a nearly as large a gap than in the U.S.  I guess, high taxes and lots of government interference does not necessarily mean equal distribution of wealth.  In Canada the top 10% owns just over 50% (51.1%) percent and the lower 40% owns a whopping 3.4% that leaves  around 45% for the middle class?


Statistics are dangerous things, yet they may shed surprising light on things. To end on a political note.  That we have currently a silver-spooned liberal government that apparently favors interfering in our personal life does not mean that they favor a more egalitarian distribution of income!  Just look at my native country: the Netherlands.  You may not consider that corruption, but those with their snouts closest to the public trough do tend to enrich themselves at the expense of the rest of the population – I mean both left and right - lets never forget that.  I recently heard a statistics about trust in U.S. government by Americans which was in the 1960s well over 60%. I don’t think that this is the case in today’s Trump era - I checked it: 19%.  According to EKOS, 44% of Canadians trust our government - Ouch!