Saturday, November 30, 2013

There is no investing for dummies! The Deadly Comfort Zone

Many people feel still burned by 2008.  9/11 is etched into our minds as the event that once again made us lose a piece of our innocence. 9/11 created a society of endless suspicions and with numerous means to spy on each other. 9/11 was the event that provided our governments the excuse to develop a nearly Orwellian society while today’s technology provided the means.

Similarly 2008 is etched into our minds as the new era of fearful investing when we learned that there is no such thing as the ‘Golden Years’, an image that is so often presented to us by Insurance companies, banks and financial planners. “Let us help you… steal your money!”
Really, if you want to live the ‘Golden Years’ dream it will cost you. Whom do you pay? You’ll pay all those financial advisors, planners, banks and insurance companies. You also will find out that often the promised dream won’t work out. Even if you achieve the ‘Golden Years’ dream in spite of the ‘help’ from you financial advisors, the dream may  turn out deadly!
LADIES and GENTLEMEN, there is no free ride!  There is NO CERTAINTY in this life, no matter how much you crave for being Grand Parents with perpetual smiles and no money worries! Get over it!  Now with our time on earth increasing, we better learn that each stage of our life is governed by our past actions, and yes by today’s, and that there is no cruise control toward heaven once you retire!
See your life as a series of graduations to ever new and challenging stages in your growth as a human being. Those who stay too long in their comfort zone will perish first! If you stop exercising, you’ll get out of shape fast!  And, boy, can it be tough to get back into shape.  It is easy to lose your exercise regime and when you give in, first you will not notice how your body weakens… but it does!  Then everything comes to a head, you’ll develop a pot; you find out that you have suddenly a heart disease or diabetes and god knows what else.  “Where does that come from?  As a teenager I won the triathlon! “ Yes, you did and then you stopped exercising and by 30 you were pudgy; by 35 you got out of breath running the staircase; by 55, just when the kids left home, you were diagnosed with cardiovascular disease! By 60 you are dead!
The same with other things in live – you always did your best in life, worked hard at school; worked hard to get a job; worked even harder to marry the dream of your life and build a family; worked hard to make a good salary and get your own house. By 55 or by 60 you have deserved your restful ‘Golden Years’ and you stop working hard. You don’t want to worry about money any longer, you only want to golf and go on vacation. Within two years of said retirement, you also will be out of shape; within 5 years you lost touch with your old profession and colleagues.  After 10 years, you only do have bingo friends and none of your bingo friends, or you, knows what is going on in this busy world that whirls around you. In 15 years you will have forgotten how to think and then, unexpectedly you are a stranger in a strange land; you don’t know how to deal with this life by yourself any longer; you lost your life energy and basically you are dying. In fact you started dying when you ‘retired’ and started to live the ‘Golden Years’!
Really, whatever the story, the real reason we fall by the wayside is that we no-longer want to struggle in our daily lives; we are tired and remain within our comfort zone and… we literally die from that!
Yes once you reach ‘financial adult hood’, (i.e. you are graduating from working out of financial necessity to working by choice) your life is not over!  To the contrary, your life is just beginning a new adventurous stage! Just like during your other stages in life, you can stay within your comfort zone or you can move on to doing new challenging things. Only the latter will lead to further personal growth, renewed energy and a longer and more satisfying life. If you give up control because you feel that stock market volatility is too much for you; because real estate management requires too much energy; because learning new things is too difficult, you will start to die financially.
Investment markets are not there to make your life easy!  They are tools of the predatory capitalist world.  Stockbrokers are not your friends; they make a living of their clients – you!  The banks don’t lend you mortgages out of the goodness of their heart and neither do they pay interest on your savings through GICS because they love you.  When you invest, you put your money to work in a shark invested pool. If you don’t know how to swim with the financial sharks, you and your money won’t survive no matter how friendly those sharks are and how much lip-stick they have put on!   No matter how much lipstick you put on a pig, it still will be an ugly thing. Guess what, the same is true for sharks!
I don’t talk about the glossy dreamy ‘Golden Years’ model that even if you achieve it, will only lull you into complacency and death. I want us to reach ‘financial adulthood’ where you are accountable only to one person in your life – you! – It is only a stage in your life, just like going to high school!  If you don’t learn and don’t do your homework at high school, you are likely less successful as a teenager and during the rest of your life (some luck out). If you don’t learn to invest and if you don’t  work on living from your savings and on a career that may last longer than you ever dreamed of as a youngster, you will not fare well either!
There is no sacred black box for investing and retiring. Your struggle outside your comfort zone will continue until your last breath. If you don’t, you’ll die prematurely as if you were suffering from bad health!  There is no ‘Investment for Dummies’

The real reason for not approving keystone !

It is all pure cosmetic politics for Europeans to declare that Canada's oil is dirty!  The U.S. is a not too distant 2nd in hypocrisy - they just want to squeeze our resources at the cheapest possible price using our U.S. oriented infrastructure and by stoking envy and short-sightedness amongst Canada's provinces while claiming to be concerned about the environment.  If anyone is truly concerned about greenhouse gas emissions then China and the U.S. ought to be the real targets!  The following two EIA July 2013 graphs tell you all you need to understand the real story!

Where again is Canada?

Figure 7 EIA Jul 2013.  Really Canadian Oil Sands are a major contributor to greenhouse gases in the world, eh?? The real reason behind the Keystone decisions is about squeezing the prices of Canadian resources to the U.S.   Why are we Canadians so gullible?

It just gals me when people in the OECD with-holier-than-thou attitudes discriminate using the environment as grounds against Canada! Canada, the most pristine country in the world!  Some expression about a splinter in thy neighbour’s eye definitely comes to mind! You know what the Keystone decision is really about? Plain old protectionism! 

Sunday, November 24, 2013

Summer Storms - Chasing stocks on the rise is a recipe for disaster

These days we’re clearly in a bull market. Yes there is room for a correction somewhere after or around April - my guess. But probably another good stock market year lies ahead. I think we just entered the last stage of the bear-bull market cycle where people start to throw away all caution.
They may say things like: “ Yes I am a fundamentals guy, but look at Facebook; look at Amazon. I don’t understand why, but these stocks keep on going up while my dividend stocks linger. I better switch to buying these momentum stocks.”
This is the fear of ‘losing out’; ‘standing besides the sidelines while others make big p[profits’. Just like in your neighbourhood, many investors want to keep up with the Joneses. But  a lot of the Joneses hold only hot air and once their balloons are pricked, the air runs out and only an empty bag remains.  That leased Mercedes, that fancy house, the vacations in Mexico were not paid from amassed wealth but from the hot air of consumer credit. The moment the Joneses’ are hit by a snag, like a lost job, their Mercedes, their fancy house and the boat on the lake are gone and the only thing left is a financial mess.

The same with you trying to copy the profits bragged about by your friends who all of a sudden turn out to be stock market ‘experts’ (weren’t they a year a ago all quietly suffering from their devastating 2008 losses – claiming to never again invest in stocks?). You should not let their hot-air stories tempt you to invest in the speculative garbage that shoots up (for a few moments) during the exuberance of this final stock market stage.  Contrary to what you will read over the coming months, risk is rising along with the rising stock market.  We don’t know how far these markets will rise or for how long – but we are in the latter stages of the bull.
Remember, the canary in the coal mine is the revival of the commodity heavy Toronto and Vancouver markets. We may still get one hell of a party, but now is the time to control your stock buying and get ready to take profits – building cash for the next bear.
BTW, don’t burn all that cash in the first moments of that bear market – that is one of my common mistakes: buying too early in the bear market. Fortunately, that is still quite a bit away.
Stick to buying good companies at good prices. When you don’t find such companies then stop buying and don’t chase rising stocks that you don’t understand.  Yes, you may not be the center of the party talk, but neither will you stand naked on the beach when the tide falls.  During the dark days of a bear market we’re looking for light at the end of the tunnel, during the summer of a bull market, we’re looking for the early signs of storm.

Sunday, November 17, 2013

What ‘Tapering’ means to the Canadian Diversified Investor

Over the years, many posts on this blogs have tried to outline ways of valuing stocks, constructing a truly diversified portfolio, and about buying and owning stocks of healthy companies at a good price while ignoring most of the market hysteria.  ‘Tapering’ is another one of those market hysteria things that creates volatility for the trader but is of no major consequence for the investor.  The reason for ignoring the ‘tapering’ hype is simple. Tapering is a way to keep interest rates low and adding stimulation through increased money supply to the overall economy. It also bails out banks.  At least, that was the intend of QE3 and the $85billion monthly bond repurchase program. Whether ‘tapering’ and QE_so-many helps depends on whom you talking to.  A number of experts state that the bond buying programs help banks get rid of bad debt and replenish their capital, but that those same banks do not spread out the money to lenders elsewhere in the economy and thus there is no real economic stimulus.
Others claim that all the Fed action has created or will create is inflation. Problem, with this theory is that the consumer is not on a buying spree and no price inflation is in sight.  Today, much of the increased corporate profits are from profit margin improvement due to more efficient production methods as well as due to the low cost of credit. Yet, revenue growth (i.e. sales) have not dramatically increased. Thus companies have no significant pricing power which often drives price-inflation. To create price-inflation we need higher consumer confidence and more consumer spending, i.e. higher product demand. Thus there is no price inflation (yet).
On the other hand, investors who want income in this low interest environment are hunting for yield from dividends or from real estate (rental income) and whatever other cash flow they can lay their hands on. Thus over the past 5 years, the only secure ways of achieving respectable cash flow has been investing in dividend paying stocks and in rental real estate.  As a result, from March 2009 onward we have been climbing a wall-of-worry in the stock and real estate markets – a bumpy wall of worry to understate it a bit. The price increases in these assets are due to rising corporate profits and due to increasing rental net income.
But we also start seeing that the valuation of these cash flow generating investments have gone up. Now $1 of net cash flow does not require a $10-15 investment as in 2009 but rather a $15 to $30.  Or in terms of P/E now the market values a typical stock around 14 to 15 times its net earnings rather than 8 to 12x as at the bottom of the market in 2009. This has resulted in significantly increased asset value inflation. An obvious example off asset value increase is the price of gold since the early 2000s.  But on a historical basis, stocks are currently not over-valued; stocks are in the average range of valuation measurements such as P/E or price/book ratios.
U.S. Real GDP is currently growing at a modest 2-2.5% but will likely improve to 3-3.5% at which time the end of quantitative easing have occurred. Bernanke, and now Janet Yellen, seems not willing to significantly reduce monetary stimulus until the unemployment rate has fallen below 6%. In the U.S. the unemployment rate is now approximately 7%. Just like in Canada, the unemployment rate is measured as a percentage of the number of people that are willing and capable to work. This latter number expressed as a percentage of the overall population, called the participation rate, is still declining.  So for the unemployment rate to really fall below 6%, not only do we need more jobs for the current number of people participating in the economy but also we will need jobs for those people that have given up looking for work plus new immigrants plus young people that finished their education and that join the work force.
Thus, ‘tapering’ is still some time off. But what does ‘tapering’ mean?  Well it means that the U.S. Central Bank (or Fed) starts to REDUCE the amount of bonds it is buying back; initially that may mean a monthly reduction of purchases from $85 to $75 billion per month and this does not even affect interest rates. Remember, the Quantitative easing measures did not start until after (short term) interest rates in the U.S. hit rock bottom (i.e. 0%)  So the ‘tapering’ or reduction of monthly bond repurchases from $85 billion to zero may take by itself at least a couple of years and it will not be done until the economy has improved significantly more. Well an improved economy means higher consumer demand and thus higher corporate pricing power, revenue and… yet more profits.  So even if the fed tapered, it would be done in such a fashion that the effects of tapering are offset by a stronger economy and thus provide yet higher corporate revenue and possibly even higher profits!
No, tapering and rising interests may be risky for the bond markets but not for the stock markets – at least not in the near future.  The real risk for the stock market is the threat that investors become over-confident and the price stocks get too high when compared to how much the underlying companies earn. The real risk is an exuberant and, euphoric bull market and as outlined in OUTLOOK 2014, we’re not there yet. 

Wednesday, November 13, 2013


We are now in the 5th year of the bull market which started in 2008. The U.S. bull market has this year exploded; the bull market in Canada’s commodities-heavy Toronto stock market has been less impressive.  To get a better feeling where we may be in this bull market let’s revisit an old post from May, 2011 where we analyzed historical bull and bear market stats.

Historically, the average bear - bull market cycle lasts  ‘only’ 3.5 years and the time to go from trough to peak is only 2.3 years. The maximum duration of the cycle was a lot longer: 7.2 years and it took a maximum of 5.1 years to reach the peak.
From the bottom in March 2009 until today has taken close to 4.8 years and this after climbing the wall of worry that followed the Greatest Recession of the last 90 or so years. The 2008-2009 bear market was the most severe since the crash of 1929 (percentage wise) – it was even more severe than that of 1974. The Dow lost close to 49% in 2007-2009 while stats show that the maximum gain from the bottom of the bear-bull market cycle on record was 149% and averages 72%. If we apply those number to the low of the Dow in 2009 of 7062.93 then the Dow should peak at 7063 X (1+1.42) = 17092. Hmmm! Another 2000 points to go?  That may be a bit simplistic. But clearly we’re well on our way to the next U.S. market peak.

The last quarterly earnings reports resulted in close to 72% of companies with earnings surprises that exceeded analyst consensus. I would suggest that when this percentage of positive surprises levels off and when every guru states that the market will go up much further', then the time of 'crash' is near.  Other signs of an approaching crash are talk of a ‘new economy’; taxi driver gives you stock tips; or worse, your mother in law gives you stock tips. News Headlines talking about the 'great bull market'- especially when on the cover of Time Magazine - are another danger sign. Or... an exploding number of visitors to this blog! :)

We’re not there yet and with the ultra-accommodative central banks of this world, chances are that we are still a bit away. My guess, the market peaks in March or April 2015. There you have it!, A real prediction! 
For that to happen, we also should expect the TSX to pick up significantly. Especially the resource portion of the index should gain steam. In fact, Canadian Banks have had an excellent 2013 and an excellent overall bull market run. But the big catch-up is going to be in insurance companies and commodities. Retail is so competitive in Canada, it is better to stay away from it.
As far as stocks and stock market ETFs is concerned, I suggest 40% Canadian stocks and start going overweight in commodities.  I suspect that the resource bear market is coming to an end. Banks are on hold.  Another 40% of our stock portfolio should still be in  U.S. large caps – I suggest through ETFs of the Dow and S&P500.  Invest the remaining 20% in Europe and no Emerging Markets.
Interest rates  will start to rise but still are low compared to the risk of losing principal. But here is the thing when you invest in bonds or GICs: if you wait until expiry then you will get your principal back. It is only when  you sell prior to expiry and in a rising interest setting that you will experience capital losses; sometimes serious capital losses. I suggest that you start building a small fixed income portfolio by using laddered GICs.  Invest 20% in fixed income: splitting it equally into  1, 2, 3, 4 and 5 year GICs. From now on, every year the 1 year GIC will expire, while the other GICs will expire in 1,2,3 and 4 years respectively. Replace the expired GIC with a new 5 year GIC which will provide the highest interest rate of your fixed interest portfolio thus optimizing the return of your entire GIC portfolio.
Of course, the truly diversified investor will, apart from paper securities, aim to have 50% of his/her investment portfolio in real estate – in particular rental properties that provide positive cash flow.
I think 2014 will become an excellent year for investors; but do become more cautious in the second half of the year; start taking profits in your most overvalued investments around that time and build you cash hoard for the crash which will for sure come. Meanwhile, enjoy the ride.

Sunday, November 10, 2013

When you read this blog, you’re likely a ‘one percenter’

Last month I visited Europe -what I learned was that many Europeans are still pretty down. Yet, statistics indicate that Europe is on the mend; over the last year and half, European Markets have been on a roll! So where are now all those analysts, in particular the all-knowing North American analysts, who predicted the demise of Europe, scaring us into a panic?  Most Europeans could have told you that Europe would not collapse, contrary to the all-knowing pundits.

That is another great lesson!  The man on the street often knows the facts in his heart, while the pundits create nonsensical headlines to help journalists sell newspapers and to create commissions from panic selling and hysterical buying binges for their financial institutions. The market is a gong-show with the excitement of a casino.  Look at all those day traders and high frequency traders – they thrive on market volatility. But we, true investors, we invest in profitable and predictable companies; we only buy (or are supposed to buy) when the price is good. In fact, we like volatile markets as well when we’re buying or selling – for the rest we ignore the market. 
With all this casino noise around us, it is sometimes difficult to keep your head cool. It is tough to say in the dark of a bear market, “IBM is trading close to book value and it is very profitable and has virtually no debt and… it pays a decent dividend at an acceptable payout ratio.  Wow, I like to own a portion of that company and at today’s depressed prices.”  When everyone is shouting that the market keeps going up to ever more crazy prices, it is difficult to sell a part of your portfolio (at prices too good to be true) - maybe you can sell for even more says your greedy inner voice. But you must sell, because the risk of a market crash is increasingly likely the higher the market goes. So don’t be afraid to take profits when you can sell for prices beyond your wildest dreams; sell to build cash so you can buy in the next down turn. Apart from buying when good companies are ‘on sale’ and selling when prices are beyond your wildest dreams, investing is not difficult.  What is difficult is ignoring the noise of the stock market.

Here is another thing to consider when you feel that in spite of a high savings rate; in spite of following the above strategy, you see your neighbours buying expensive cars and buying ever bigger houses while you feel ever more cautious. It is not you who is crazy, it are your neighbours who are nuts. It is tough to think that all those people around you are nuts and that your caution is justified. Alas, you likely are thinking correctly. Today I read that in the U.S. 6.7 million households have a net asset value over $1million in 2009. “$1 million dollar! Wow!“, you may shout. But really, when you live in a $600,000 house and you and your wife have saved another $400,000 are you really rich? Can you live in your house and from your money for the rest of your life, even if you may not die until you are 107 years old?
No. Not likely. 6.7 out of 125 million households (2.6 persons per U.S. households in 2012) or 5.3% of households have a net asset value over $1 million. In 2007 there were 1 million households worth $ 5 million or more; that is less than 1% of all households. So how little does the overall population in North America have? You think North America is bad?  Well, then check out Europe were things are worse! When I stayed for the night in Munich this year, I noticed the conspicuous absence of single family dwellings in the inner city. In fact, as far as I could determine 90% of Munich lives in two-bedroom apartments! After walking around many European cities, I can only conclude that the bulk of Europeans have virtually no net assets.  Only 7% of the Dutch own stocks! Then who controls all those mighty European industries?  Pension fund managers and foreigners, I guess.  Talking about a disappearing middle class!

Upon returning from my European vacation, I landed in Calgary and realized that yes European food is good; but many North Americans live a life of luxury in comparison to Europeans; Europe may have beautiful architecture from the past, but we in North America live in a majestic country with awesome landscapes and in houses that most Europeans can only dream of!  Homeownership, in spite of 2008, is the norm in North America (in Europe most people rent an apartment); 54% or so of North Americans invest in stocks directly or indirectly through mutual funds. And a full 100 persons in the world can now afford to visit the ‘Canadian Diversified Investor’ blog daily – Oops! Where did that come from? J
So, it is not that all your big-house-neighbors and expensive-car-leasing-friends are so much richer than you. Changes are that when you read this blog periodically, that you are part of the 5% or even better, part of the 1%. -When you spend big then your emphasis in life likely is on consumption and living from pay-cheque to pay-cheque. If, on the other hand, your lifestyle promotes saving and investing in profitable assets then you either are a ‘one-percenter’, or you are on your way to the ‘one percent’.  Isn’t that great, before you know everybody around you is going to blame you for all the misery in the world!  Oops!