Wednesday, December 26, 2012

Merry Christmas and a Happy 2013

We’re nearing the end of the year and I wish you all a Merry Christmas with many presents and a Happy New Year. Being happy is even better than being prosperous. 

Anyway, I am also announcing a change in format for this blog. To date, I have aimed at writing 6 postings or so per month. A lot of the past postings were on ‘How to Invest’ and I have written on the topic as much as I can without repeating myself too often. We’re also are coming out of the Great Recession and the world is slowly recovering – I expect that investing will become less volatile and more predictable (yeah right!).
So, rather than aiming to make my ‘6 postings’ quota, I will post only when I have something meaningful to say. That may be one month with only two postings and another month with close to 6 or 10 postings. I am currently rebalancing the Low PE with Moderate Dividend Portfolio and will publish our first year’s results and adjustments soon.

The Retirement Delusion

If in a few years we become theoretical immortal (the idea that beyond 2015 medical advances would increase life expectancy every year by one year), then what would be the social impact?  Well, I can tell you for sure, the impact would be staggering – for one: never ending Canada Pension payments? J Yeah, keep on dreaming.
Already today we find that not many Baby Boomers seem to like to spend the next 30 years of their life idling around (that would be nearly as long as their money making years). That idea is too horrifying to contemplate for many who at 50 are healthier than most of our ancestors at 30. It is a matter of life energy. Yes, most Baby Boomers would not attack life with the same innocent enthusiasm of a 25 year old just coming out of school. Neither would they consider life over at fifty and avoid any new life changing endeavor. Nor have they peaked in their career and/or profession.
So, a career of having breakfast on the balcony of their empty nester apartment and filling empty days watching soap operas on tv is not appealing. Neither is the idea, as designed by ‘financial planners’, that the Baby Boomer is running out of money at the actuarially projected age of 83 and has to spend the rest of his or her real life eating out of garbage cans.
So, really the old idea of ‘Retirement at 65’ is dead. Long live ‘Financial Adulthood’!  Financial Adulthood is just another stage in life after our early childhood years; after we have our years in school, after we work for a boss and take care of our family while saving for Financial Adulthood. Financial adults –  achieved by some at age 42, by others at 55 or even later in life. Our financial adult life starts the moment we have enough assets and income derived from those assets so that we no longer depend on our career to pay for the costs of living.
We can design a new stage of our life that if truly never ending would encompass numerous stages of its own. E.g. empty nesting; termination of first or second marriage; a life filled with friends and various life companions; grand parenthood; great grand parenthood; great-great grand parenthood; great-great-great grand parenthood… well you get the drift J.  Maybe we’ll have multiple careers.
For example, I foresee for me a long career well into my 70s as a geologist. But how would it be to report to a 50 year-old vice president, or a 30 year-old when you’re 67?  And vice versa! Maybe I’ll be too experienced to be employed in a company. What would be the corporate impact of having such experienced people engaged? Would this truly become the age of Peter Drucker’s knowledge worker?
Of course, you may have multiple careers – for me, I may want to become a landlord in Calgary with the goal of providing nice-but-affordable rental housing. I may become rich just from writing blogs on financial adulthood. Who knows! But we better start to think about our life on a truly long term basis rather than drifting along an aimless path of life never knowing where you’re going and what you want to do in life (apart from winning the lotto and never having to work again).
A friend of mine recently ‘retired’ in Spain. Who wants to retire in cold and miserable Holland when you can live in Spanish lifestyle heaven? After building with his wife a beautiful retirement home in the village where she grew up he now starts… a business. A dream business for many; he wants to organize vacations in Spain for biking enthusiasts. I kid you not – here is a link to his website: Now THAT is financial adulthood.
One day, I may start a coffee shop for investors where I can talk all day long with customers about stock markets and real estate! Who knows – but my clientele better be able to afford $5.00 cups of coffee because I ain’t cheap J
You get the idea. Financial adulthood is a lot of fun, because you have the freedom to do what you want: long vacations; a meaningful (to you) occupation or business(es). Your life is so long that nothing will last forever and your main concern will be to keep up your life energy; your willingness to do new things because your main enemy in life will be boredom. Bored people are terrible for themselves as well as for those around them – thus better start cracking and plan for the rest of your eternity or at least for the next 150 years!

Saturday, December 8, 2012

Cheapest Leverage

You know why buy & hold investing is more profitable for most investors? 
·         you don’t try to time the markets;
·         you don’t sell and buy during crashes and booms;
·         you collect and reinvest your dividends;
·         and you’re a natural value investor. 

But there is one other reason that most of us forget. You have the cheapest and most efficient leverage anyone can dream of!
“Excuse me?  , but I don’t borrow money when investing in stocks.” you may say.  My response: “Bullocks!” First of all,  a true “Buy & Holder” has the cheapest leverage an investor can get except maybe for insurance companies such as Berkshire Hathaway. But why not use borrowed money just like in real estate? More about that in a future post.

"Godfried, how can you claim that a Buy & Hold investment implies the use of leverage?"   The answer is that you borrow from the government interest free!  Let me explain… but first I need a coffee. Oh and you better take some time off this morning so you can soak this incredible idea in! Because it will take some explaining… at least 3 or 4 paragraphs J – but make sure that you will never forget this again!  Beat it into your skull with a baseball bat – but not too hard otherwise it may be the last thing you’ll ever remember.
When your investment appreciates and you sell it to lock in your profits, you also lock in profits for someone else. Yep, for the government! Because when you sell you pay capital gains taxes both to the provincial and federal governments. In Alberta you will pay 0.5 x 39% or 19.5%; in other provinces you’ll pay more. Furthermore, you’ll pay close to 19.29% (on Canadian dividends in Alberta).  So let’s do a spreadsheet calculation.
Case I: you’re a high flying trader and every deal you do is profitable and you make not just 1% but you make on average 12% per year. You are one of those guys that always brags about "Buy & Hold" being dead and you're the best thing since the invention of apple pie!
Case II: you’re an average investor who invests for dividends (3.5% per year) plus appreciation (6.5%)  or a total return of 10% by investing in underperforming Canadian Banks (yeah, right!). But you NEVER sell. Let’s do this for 15 years.
Here are the results for a $10,000 initial investment:
Click on image the magnify

So there you have it. On an after tax basis, the “Buy & Hold” investor can invest much more conservatively than an active trader and still get the same results.  It is as if the government provides you limitless credit for free and for as long as you hold the stock!  This allows you to increase your effective ROI to 12%.  Oh, buy the way; did you notice the effects of dividends on total profits?
The “Buy & Hold” pre-tax profits totaled $27,559 of which $10,523 or 28% came from dividends!