|Dow Jones and TSX over last 3 years. Sourced from GlobeinvestorGold|
Tuesday, May 24, 2011
Monday, May 23, 2011
|Keen store in Portland|
|OPT schematic of PB150|
Saturday, May 14, 2011
As a budding investor I watched the stock market day by day. I got concerned when a stock did not keep up with the market because it affected my portfolio significantly. Today, I couldn't care less. Only when an investment hasn't panned out for several years do I start to wonder if I should get rid of it, or hold on, or to buy even more.
Last month oil prices were sky rocketing and oil stocks peaked. This month we have a large correction. The earlier media screams about buying the hottest oil stock in town have been replaced by cries ranging from the end of the 'oil bubble' to changing your portfolio significantly away from commodities. As if one could do that when invested in only the Canadian stock market! Look if commodities prices crash, so will real estate and so will manufacturing and so will Canadian banks. In Canada, all is intertwined. Never forget that!
When looking at the masters most take on the longer view, whether it is W.B. (the oracle of Omaha) or John Templeton or Jim Rogers who was recently quoted in the Globe and Mail.
On the 'collapse of silver', Rogers states: "I hardly see how silver could be a bubble when, even at its [recent] top, it's still below its all all-time high. That is not much of a bubble. A bubble is when things are screaming up every day and they go to new highs, two to three times their old highs. We'll have a bubble, we'll have a bubble in commodities, we're not there yet."
Question: So silver fell 27 percent last week, was it enough for you to buy more?
Rogers: "Well, I'm too lazy, I'm doing other things right now, but I hope at some time in the next month or two if it goes down or stays down then I will get the energy to go around and buy some more silver, yes. Or maybe it will go to $25, I don't know".
Question: But didn't you sell anything?
Rogers: "No, no, no I have not sold any commodities. I protect myself by being short… in other things. I am nearly always short in something. I'm nearly always long something, fortunately my shorts went down too last week."
Question: So what are you short versus long?
Rogers: "Well, I'm short emerging markets and I'm short American technology stocks cause those are two areas of the world stock markets that have been very over-exploited in the past two to three years. They're not great bubbles, they're not great shorts, but they're better shorts than nothing."
[Godfried's comment: does that mean that he is overall bullish?]
Question: Then what are you long? Commodities then?
Rogers: "I'm long commodities, mainly its commodities and currencies.
[Godfried's comment: Here comes the crux regarding the long view of a seasoned investor]
Question:" Now you've been saying that there is no oil and that's why oil prices are going up. What did you specifically mean by that?"
Rogers: "Well, there have been no new elephant discoveries in over 40 years. All the great oil fields in the world are in decline now and unless we find a lot of oil quickly then we're not going to have any oil at any price. The international Energy Agency is going around saying "look, the world is running out of known reserves at 6 per cent per year."
Well say its 4 per cent per year, say they're wrong. I mean in 25 years, Ms. Steel, we won't have any oil at any price unless someone does something very quickly that's all I mean, there's no oil, there's no new oil."
Question: It just seems like if that's the case then natural gas price should be through the roof in preparation of a lack of oil?
Rogers: "Well, there is a short term glut of natural gas, but you're exactly right, people are going to have to use other forms of energy and if I were looking at energy markets right now I would start by looking at natural gas because its way down and oil is way up."
Question: So how high will oil go on this supply issue?
Rogers: "Oh, if I told you how high the price of oil would go over the next decade, you'd stop talking to me, you wouldn't believe me. 'He's finally lost it, he's gone over the deep end.'
Do the arithmetic. If reserves are going to continue to climb [Godfried: should be 'decline'] at 4 per cent-5 per cent-6 per cent a year, in 10 years there is going to be very little oil left. Now we would have brought in alternate sources such as natural gas and other things but we are still going to be in a bad bind. Prices are going to be very high.
Eventually prices will go so high that people will probably start finding new oil ... if oil goes to $200, they'll drill on the White House lawn, $300 drill at Buckingham Palace. Hopefully, someday, we'll find more oil, or more sources of energy and people will cut back at the same time."
So natural gas would be the one you'd focus on?
Rogers: "I would start by looking at natural gas or maybe uranium. Uranium has been pounded down recently for obvious reasons. It will probably have to sit around on the bottom for a while but that's another place that's very depressed. And we are going to have to have nuclear power whether we like it or not. "
But say wind and solar don't make it on your list?
Rogers: "No, of course it does ... but wind and solar are not economically competitive at these prices. Now if prices go higher and higher of course, they'll be very competitive and, of course, governments love wind and solar, so they will subsidize. If you can find competent people in that business, you'll make a fortune. "
I know I've been harping on gold, silver, and oil but what is your favourite commodity? The one you think that has the most upside long term?
Rogers:" If I were looking for new commodities now I would start by looking at the things that are depressed. Natural gas, you picked an obvious place to start, I would look at things like rice, rice is very depressed ... silver's cheaper than gold on a historic basis.
I would start looking at those places. I don't like to start with the things that are making new highs. By the way, there are plenty of great investors who do invest that way, they are momentum players. They jump in and get on a moving train. I'm scared to death to get on a moving train and if I do I always get hurt. "
Godfried's final comments: If you have enough investment funds you can afford to buy low now, e.g. natural gas, and wait for several years for this investment to come to fruition. It does not take a genius to figure out that gas is selling at prices below which it can be explored and produced. So it is just a matter of time for prices to double or even triple. Can you wait for 5 years for the price to double? As Jim Rogers says: "Do the math" and use the rule of 72. Divide 72 by the number of years it takes for your investment to double and the result is your annual compound rate of return. So 72 divided by 5 is 14.4% compound ROI per year.
You can look at real estate the same way. Prices in Calgary rental condos are depressed but on average over the last 40 years or so they appreciated at a rate of 4 to 6%. Using leverage that would translate in a return of nearly 20% as shown in earlier posts. So can you outwait an undervalued real estate market?
With a small portfolio waiting five years while it does not grow or even declines may seem interminable torture. But over the long term holding on will bear its fruits. If you have a diversified portfolio, other investments may take up the slack and it may be easier to be patient.
Also, larger investors have learned that this approach works. That is why the Warren Buffetts and Jim Rogers of this world have the fortitude to stick with their bets unless there is a truly fundamental change such as the discovery of a cheaper alternative energy than oil. For now that is a risk far out at the investment horizon; even for Jim Roger's investment horizon. Jim is in his seventies and Warren Buffett is in his 80s, so how long an investment horizon can you have when you're 25? Especially if you're thinking family net worth, this may include future generations!
Saturday, May 7, 2011
I have been enjoying my new Blackberry Playbook immensely. With painless updates, it gets better and better. Analysts may sound grumpy about the need for a companion blackberry phone, but that is just what I love so much about my playbook.
I don't need an extra wireless subscription! With Playbook I connect by Bluetooth to my cell for which I already pay a subscription and download my e-mails. When at home, I lock into my wireless network, just by walking through the door!
I also love the on-line news services, paid for by the newspaper advertisers. I have now access to the Globe and Mail, the National Post, the Calgary Herald and the Edmonton Journal while sitting at the breakfast table. Talking about green! No more newspapers in the recycling bin. Well, that is when I can convince my wife to switch to her own Playbook!
And then there is Conrad! "Who is Conrad?" you may ask. Well, Saint Conrad is a visionary columnist, I swear he is so good, he forecasted the Conservative majority and the rise of a two party system in Canada while all the pollsters and other pundits in the newspapers were scaring the crap out of us little investors (sorry for the liberal word 'crap') by telling us we're gonna have a NDP-Liberal minority government supported by the Bloc. But Conrad knew better. Not only that: Conrad's linguistic skills are much more erudite than this poor blogger's disastrous rumblings.
Hat's off to our partly exonerated, very persistent ex-jailbird. Lord Conrad may have been at times arrogant and pompous, especially in his days as invincible CEO or Chairman of a wide variety of corporations, but he has seen the light. I guess, in his older more-confident days he pee'd off the wrong people and poor Conrad was dragged into jail for whatever reason the accuser could dream up. In the end Conrad was convicted (if I got it right) for carrying out some boxes in the dark while being recorded on video. Even bringing back the boxes, no matter what they actually contained, kept Conrad out of jail. Too many in this society, love seeing a successful person paying the price! Not that we're all socialists or fans of Jack Layton, but seeing one of the powerful elites bite the dust gives a sense of satisfaction to us members of the grey masses.
Conrad has changed in jail. He laments the poor jail conditions and has become a proponent of jail-reform. There are here many considerations, one of them is that putting a large portion of your population in jail does not necessarily lower the crime rate or drug use. Strangely enough, drug use among the native Dutch population (i.e. excluding tourists) has declined with the legalization of some drugs if memory serves me right. It is not that Stephen Harper is right in everything – the topic is just too complex to be solved with a few headlines. But Conrad is standing up for the people that are incarcerated and he speaks from hard experience. I respect that. Maybe Conrad has seen the light and is a somewhat changed man with a softer outlook on life – will he end up with aristocratic sainthood? I doubt it, but Conrad's pre-election analysis and now again his interpretation of what a Harper majority may mean is very instructive and full of interesting insights that go clearly beyond the average newspaper blabber. So hat's off to Conrad and here is the link to his last column. Yes! Conrad called it right.
Market timing is near impossible according most of the big investor names. Earlier I presented you though with some ideas about how to value stocks and to buy at the right price. Opportunities to buy at the right price occur much more frequently during depressed markets or in recovering markets while they become exceedingly rare during speculative market bubbles or raging bull markets. So we're buying good companies at good prices not at any price!
BTW most stocks that I like, I do own myself. I have been muttering about Microsoft, Johnson and Johnson, CNRL, the Canadian banks, XIUs and many others. When I write about them there is a good chance that I own them as well.
I do not make recommendations; I just use these stocks as examples. However, If I write here on this blog that I like a stock why wouldn't I buy them? This is also true for today's example: Manulife (MFC). In fact, I owned MFC for many years and collected faithfully the dividends.
But the events in 2008 disgusted me and I sold because I saw better places to put my money elsewhere. I sold it all. The reason for my disgust was that Manulife's management, in its arrogance or pure stupidity, had sold investments where they guaranteed its performance without the appropriate back up. That was done during a BULL market – how stupid do you get? They had sold so much of this investment type that when the market tanked the company got into big trouble.
Well, they have hopefully learned. In the meantime their sales of many other products haven't declined. Manulife is still a 'play on the stock markets and on interest rates'. A little like Berkshire Hathaway! Manulife uses its insurance premium income to invest. So that is the ultimate form of using 'other peoples' money to make a profit.
The company does extensive research to determine its risk exposure to the numerous hazards their premium payers may experience. Once the potential damage pay-outs and the operating costs (admin, marketing, etc.) are taken care of they can use the remaining money for investment. Since the damage claims do not happen all at once, they can also use that portion of the premiums that is not due right away for investment. Same like Mr. W. Buffett does.
In 2008, MFCs investment acumen was far from perfect and many years of profits where gone out of the window; their stock was punished accordingly (see figure). As of today, their share price is not far off the lows reached in 2008-2009.
Chart is from GlobeInvestor
In the meantime, the company has rebuild a lot of its capital, its revenues have kept on increasing (see figure below) and soon its profits will recover as well (one certainly hopes so). Manulife makes money from higher interest rates and an appreciating stock market – that is where most of their money is/will be invested. Consider it a mutual fund that is highly levered using other peoples money (and hopefully this time with better risk management).
If you are a long term bull, like me, especially when you think we're at the beginning of an era of higher inflation and interest rates, then Manulife is the place to be. Below is a screenshot of the Manulife data as provided by the Canadian Share Owner Association – I highly recommend membership and also subscription to their data base.
The chance that this stock will go down a lot is, in my judgement, low. Based on my assumption of a P/E high of 16, average annual earnings growth of 10% - once its earnings have recovered to their old levels, and a dividend yield averaging 2.5% (better than after tax GICs by itself), the share price might go as high as $95 per share in the coming 5 to 10 years.
So for more aggressive investors who want to diversify away from Gold and Oil, here may be an attractive investment opportunity. This is just an example as to 'how to buy at the right price'. It also shows that this type of investing is not risk free and that you should only do it when it forms a small part of a larger portfolio.