Saturday, June 8, 2013

I have too many investment ideas!

People are afraid of missing out on the new big bull market – forgetting that they have been missing out since the bottom of March 2009. But then, what if the current correction turns out to be the beginning of the end of the world? After all, with the collapse of Japan’s bond market that end can’t be far off!  So maybe we should sell everything we own right now!

And then there are the long term interest rates that are on the rise in North America and the ‘tapering off strategy’ of Bernanke’s Central Bank because the economy is doing too well! So should we buy or sell? Should we buy real estate with the Canadian Real Estate markets about to collapse as we’re reading every day in the newspapers? You’re damned if you do and stupid if you don’t and afterwards every guru claims that he or she saw the ‘disaster coming’ way before their buddies.

If you know that you’re hearing garbage, treat it as such. Don't alter your investment strategy with each change in the direction of hot economic air. Just buy a quality business, enjoy cash flow from its appreciation and/or from its dividends. Yes, dividend paying stocks like BCE or Pembina Pipelines are expensive, but if you own them already you will receive their growing dividends year after year. So, yes they may fall from their current high stock market prices, but they are sound businesses that will keep on growing and keep on churning out more and more dividends over the long haul. If you calculate your dividend yield based on your purchase price rather than on the current high stock price then you may realize that you still make fabulous profits. 
As said many times on this blog, we don’t care about schizophrenic emotional stock market pricing. We only care about owning good investment businesses that we buy at good prices. You’re not quitting your job every time the stock price of your employer is down! In fact you’re buying more through your employee stock savings plan. Of course, a business can truly turn sour, even the one you chose to work for. But what are your employer’s assets worth? A poor manager can be replaced. Poor cash flow or high debt can be overcome – although with pain. But good assets are irreplaceable.If you researched your employer you may have chosen it because you could buy your employer's assets through your savings plan at 40, 30, or 50 cents on the dollar and augmented by your employer’s savings plan contribution, which often equals 100 to 150% of your own contribution. Your savings plan holdings likely become one day extremely profitable. So, you wait it out and accumulate. Yes things may go wrong, but chances are good that you’ll make an enormous profit.
The same with your other stock market investments and… with your real estate. Always buy investment that are self-sustaining, that is: once you’ve made your investment, other than giving back a bit of cash flow from time to time, your investment should not require new funding. That way you can wait and hold on to it until the cows come home.
If you look around, you will see good businesses everywhere and you can select from these only the very best. You don’t need many. Who needs to own more than 30 companies to get rich? Who needs more than a dozen or so properties to build up a sizeable cash flow stream for retirement?  If you think about it, there are plenty of great investments around and you will have plenty of time to get familiar with them so that you can make well informed investment choices. There is no pressure to buy nor sell right now. Once you realize that you are not in a hurry to buy or sell, you will make better decisions.

Every time you have an investment that becomes too expensive or if you feel that you made a lot of insane profits, you will have to ask yourself these questions:
1.       If I now sell, I’ll lose my interest free government loan in the form of capital gains taxes which will come due upon sale. So without the ‘tax leverage’ will my ROI be just as good when I buy this stock back after it falls and recovers?

2.       Have I made now so much profits that this is a once in a lifetime opportunity and that I will never again make significantly more profits by holding on to this investment?
 
With this approach, you will build up cash while approaching the next market peak and then you can use this cash to buy more brilliant investments following the unavoidable downturn. Also, you will find that you’re never running out of investment ideas. There are always many more investment ideas than you have money to invest.

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