Shifting perspectives: Profiting from the proliferation of shortermism

Never has there been a time where so much information is readily available than now. Not only is more information available it is available faster than ever before. Photos don’t need a week to develop; you don’t have to wait until morning to read the newspaper to find out what happened in the world yesterday. Instant news and results are the new normal.

Business and investing is no exception. There are dedicated business news channels, websites, blogs, podcasts, books, magazines, newsletters, twitter feeds, seminars and pundits, all offering their opinions (this blog included!). Mass media headlines sway the market, stocks prices and the sentiment of investors. Analyst upgrades and downgrades trigger knee-jerk reactions, compounded by high frequency trading, stop losses, short positions and the heard mentality.

But access to all this information should make investing easier. As an investor, you consider oil prices are down, the Canadian dollar is down – consumer staples should do well. You can buy iShares S&P/TSX Capped Consumer Staples Index ETF (TSX:XST). Sound logic, wrong perspective. Here is the problem – you missed the boat. With a P/E (price to earnings) ratio of 24, now is not the time to buy consumer staples, but to consider selling them. In 2011, the TSX Consumer Staple index was 13.9 (historical P/E ratio of the TSX is around 15). This is what I call shortermism. Shortermism, is a natural progression of today’s society in general and is the companion of a get-rich-quick mindset.

Let’s look at this from a different perspective. Stocks prices follow supply and demand principles. When demand increases, prices go up. When demand decreases, prices go down. You can buy the latest smart phone the day it becomes available to market but you will pay a premium. You can buy the same phone a year later, when demand has gone down for much less. Same phone, same functions, huge savings. Your retirement fund doesn’t need the newest phone, or the hottest stock. You need to make money, not show off that you own the latest trends.

Stocks are shares in a company (physical assets, people, intellectual property etc.). I don’t think the intrinsic value of a company changes as much as the stock prices change. Here lies the opportunity.

1)    Invest in the Long Term

Long term isn’t 6 months or a year from now. I invest with a 5, 10 or 25 year horizon. I won’t be 65 for more than 20 years, so why wouldn’t I invest for the future? I can’t tell you what will happen tomorrow on the markets, but I believe the price for useful materials that have limited supply will ultimately go up (real estate, oil, uranium, metals, etc.). Invest in areas (via ETFs) or specific stocks that you believe have long term potential. Look at the big picture, ignore the noise.

2)    Look for Value

Find companies and ETFs that are trading below their average P/E ratio and/or have huge potential. I like companies that are profitable and pay a sustainable dividend, even when times are rough. You don’t need to do complicated technical analysis. Quickly look at long term trends, history and averages.

3)    Find the Sweet Spot

When you can marry long term potential and value, you have hit the sweet spot.

Last October I bought Agrium for $94 (TSX:AGU) . I had been watching the stock price for many months. Good long term prospects – check, good value – check, profitable – check, pays dividend – check. I bought ½ my intended position. I was planning to buy the other half if it dropped to $90. It didn’t. Agrium is up about 50% in the last 5 months. I was lucky it did well in the short term, but I still hold it for the long term.

I like (and have a long position in) PrairieSky Royalty (TSX:PSK). I recently bought it below the original IPO price. Good long term prospects – check, good value – check, profitable – check, pays dividend – check. I am not worried about this investment. Another investment that I have held longer but has not appreciated is Cameco Corp (TSX:CCO). I’m not sure what will happen in the next year or two, but Cameco is still profitable, it pays a dividend and I believe they are very well positioned for the future.

If you look at long term trends and buy stocks/ETFs when they are cheap – you can forget analysts’ recommendations, market fluctuations, short term trends along with the rest of the noise and have peace of mind. You might just beat “the market” while you are it…

Be happy, live long and prosper! Farewell Leonard Nimoy and thank you.

Top 10 Holdings (January 2015)

It is the beginning of a New Year, a good time to take an objective look at your investment portfolio. Here is a list of my top 10 holdings that comprises approximately 40% of my overall investment portfolios.

1.     Enbridge Income Fund (TSX:ENF)

Fortunately, I have owned this stock for many years. I previously wrote about Enbridge Income Fund here in April 2014. My sentiment hasn’t changed. It is a great buy, hold and forget about it stock. It is large, diverse and pays a dividend. It has made fantastic gains recently. I suspect it may drop in the short term or stay where it is. No problem, it pays a dividend and is eligible for a synthetic DRIP. A true unsung hero.

2.     Pembina Pipeline (TSX: PPL)

I love pipelines. Due to the fantastic growth of Pembina Pipeline over the years, it has become one of my largest holdings. Unlike the turbulent price of oil and share price of oil companies, pipeline companies are more consistent, along with their dividends. Competition is limited and the future remains bright.

3.     RBC Quant EAFE Dividend Leaders ETF (TSX: RID)

This is a relatively new ETF and holding of mine. It is actively managed (it does not follow a specific index), but the MER is very reasonable, only 0.56%. It holds “high quality dividend-paying equity securities in markets in Europe, Australasia and the Far East (EAFE)…”. As of January 22, there were 143 investments in the fund. I bought it early 2014 for additional foreign exposure, it’s focus on dividends, because it is not hedged to the Canadian dollar (if the Canadian dollar drops relative to other currencies it will gain) and it is underweight in energy.

4.     Inter Pipeline Ltd. (TSX:IPL)

Another pipeline and energy infrastructure company I have held for a long time. I purchased this stock originally for a high, but sustainable dividend. Its growth over the years has been the icing on the cake.

5.     Keyera Corp (TSX: KEY)

Keyera is a midstream energy company. Like pipelines companies, midstream companies have more consistent dividends and less stock price fluctuations than energy exploration companies. I bought it many years ago thinking it would likely do well with the increase oil and gas actively in Western Canada, and it paid a substantial but substantial dividend at the time. It has done very well over the years.

6.     Algonquin Power (TSX: AQN)

Like Enbridge Income Fund, I have held Algonquin Power since it was an income trust. It has had a bumpy road over the years, but with a good dividend yield and a DRIP at work, my investment and patience have paid off.

7.     McDonald’s Corp (NYSE: MCD)

I picked up McDonalds last year for a few reasons: I suspected the Canadian dollar would drop lower, I liked their dividends and in last recession McDonalds was one of the few stocks that was not affected. I don’t like markets with heavy competition but McDonalds is still growing in foreign markets and their real estate holdings – tangible assets are valuable.

8.     TransCanada Corp. (TSX: TRP)

Another pipeline. A few years ago I sold some Enbridge Income Fund to help diversify my holdings a little. If Keystone gets built (I think it will – someday) great! If not, no worries. They have many pipelines, many projects. Dividends pay better interest than any savings bank account.

9.     Cameco (TSX: CCO)

2 weeks before Japan’s earthquake and tsunami in 2011, I sold my Asian focused mutual fund (lucky!). I invested the money in uranium mines (unlucky). Last year I increased my investment in Cameco. I don’t know exactly when my investment will pay off, but I strongly believe it will. Why? Read my article The perfect (nuclear) storm.

10.   Altagas Ltd. (TSX: ALA)

Another energy infrastructure business. I originally purchased it for the 5% dividend yield, but it has performed very well over the long term.

Thoughts

As you can see I like energy and energy infrastructure. But the main reason these stocks make up a large part of my top ten holdings is that they have performed so well, not that I made large initial investments. I am attempting to diversify with purchases of RBC Quant EAFE Dividend Leaders, McDonalds and with the constituents of the ULTIMATE Portfolio. I have trimmed energy positions when I feel a stock gets a head of itself and less frequently I will increase my position if the price is right or to take advantage of a DRIP.

I am not sure what will happen tomorrow, but I am confident in the long term. I sleep at night without worrying about my investments. This is important. If your investments are worrying you contact a professional, read personal finance books/blogs/magazines, get a second opinion, or switch to the ULTIMATE Portfolio or the Canadian Couch Potato portfolio.

Be happy, live long and prosper.

My biggest investing blunders

I have made so many investing related blunders I am truly embarrassed. I used to joke I would stop “playing the markets” and develop a drug addiction to save money.

So I’ve learned a few lessons, expensive lessons, the hard way.

At the risk of looking like a complete fool and my wife taking her RSP out of my care and back to her old mutual fund advisor, I will reveal some of these painful lessons.

Get rich quick mentality

If there is one thing that has slowed (and many times reversed) my accumulation of wealth more than anything else it is a “get rich quick mentality”. The thought of hitting the jackpot and getting 10x or more returns on stocks is a temptation, like a forbidden fruit, especially once you have experienced this elation. It is something I still struggle with.

My fix

I have read at least twenty investing and personal finance books. I now understand gambling and speculating is not investing. Investing requires a get rich slowly mentality. Although difficult, I’ve learned to ignore my emotions and the evil, get-rich-quick whispers in my head. The majority of my investments now are in profitable companies that pay sustainable dividends as well as ETFs. I still follow a few speculative stocks that I think have huge potential and that I believe are undervalued. If I succumb to temptation I buy a small amount say 5% or 10% of what I would invest in a dividend stock or ETF and never in my wife’s account! Speculative stocks account for about 2% of my portfolio and I am comfortable with that.

Margin Accounts

I opened a margin account in the late 1990’s. A margin account lets you borrow against equity in your portfolio, much like a line of credit lets you borrow on the value of your home. My unrealized gains in my portfolio of stocks were much higher than my interest rate. Being young and clever, I borrowed to invest more and my portfolio grew faster. I had investing all figured out, I would cash-out before too long, extremely wealthy for my age. Then the market dipped. I wasn’t worried, I understood technology and I was invested in technology. The dip turned into a crash. I was forced to sell my stock holdings at the worst possible time. My losses were compounded by my margin buying and I had lost money on interest payments. I lost close to one year’s salary in just days. My hard earned money had vanished completely and I had nothing to show for it. Like the old Nortel joke, if I had bought beer instead of stocks, at least I could return the empties and have a few dollars left in my pocket…

My fix

I never buy any stocks on margin. I am adverse to debt, so much so I am debt free just as interest rates are around an all time low. Also with TFSAs, RSPs, and RESPs I have no need (yet) for unregistered margin accounts and their additional tax burden.

Bubbles

It is hard to know when you are in a stock market bubble, particularly the first time. I define a bubble as when stock prices lose correlation with value of the small piece of the company you own. Bubbles typically form slowly. In the technology bubble around the turn of the millennium, I knew wireless technology was going to be huge in the future. I invested in the top wireless chip makers. I wasn’t concerned about P/E (price/earning) ratios, in fact I didn’t look much at earnings or forecasts at all. My investments did very well and I continued to buy as their stock prices rose. Was I right about wireless technology? Yes, the number of wireless devices on the market now, 15 years later, is mind-boggling. Did my investments pay off? No.

My fix

As an engineer focused on continuous improvement, I rely on quantitative data and analysis to help identify issues and prove they are resolved. I now use simple quantitative analysis for investing too, focusing on P/E ratios, earnings and earnings forecasts, and dividend payout ratios. I also use Moringstar’s Quantitative Rating (offered free through my online brokerage) as a sober second though, like Canada’s senate. If a stock gets overvalued based ratios compared to historical trends, I will sell some of my holdings if I still like it long term, otherwise I may sell the position entirely. The inverse also applies. If a stock price drops very low and its value and long term fundamentals are good I’ll buy it or buy more.

Pump & Dump

When I first started trading on the markets I often bought penny stocks. I read and received information from investing bulletin boards and related email distributions. I would read some great news about a stock, the stock would take off, and typically as fast as it went up, it went down. The majority of these holdings ended up delisted (zero). I’m not sure how much of this has changed over the years. But in hindsight it appears I fell for the classic pump and dump scheme. Watch the movie The Wolf on Wall Street.

My fix

I don’t invest in speculative penny stocks anymore. The odd speculative stock purchase I may make is in Canadian companies I have heard about from reputable sources, or seen interviews with CEO and followed the stock price. I will look at the company’s website and I consider financial health, growth and take over target potential. If I have any doubts I do not make the purchase. If I do buy the stock it is a very small fraction of my overall portfolio. I do not partake in any stock related chat rooms.

Leveraged Products

A few years ago I purchased 2x leveraged natural gas ETF. It tracked the commodity price, not industries. This product was designed that for every 1% change in the natural gas price it would move 2%. I was confident natural gas prices had bottomed. As luck would have it, natural gas prices continued to fall for an extended period of time. The leverage, relatively high management fees (> 1%), combined with poor index tracking was like adding salt to an open wound.

My fix

My days of short term commodity speculating are done. I would rather buy a related and profitable industry leader, ride out commodity cycles and collect dividends while I wait. I don’t pretend to understand exactly how leveraging works and right now, I don’t need to know. But leveraged products, like a margin account, coincide with the dangerous and often expensive get rich quick mentality.

Stock Tips

I have invested blindly in stocks suggested by friends or relatives. Why? Because I thought they were successful investors. Who better to follow? In hindsight, the adage past results are no guarantee of future returns is true. I lost big on few tips. Stocks that went to zero. I lay no blame on the person who provided tips. I asked for tips and the tipper full heartedly believed they were worth the risk (and lost too).

My fix

I now know getting lucky speculating and being a good investor are not synonymous. I admit I still love stock tips. I might listen to BNN and hear the top picks and I will look at the stock. If I like it I might put it on my watch list. I like to date a stock for while before committing to it. Sometimes a stock runs away in price before I can buy it. I no longer fret when this happens. There are plenty of stocks in the markets, and more than likely there will be awesome buying opportunities in the future.

I’ve done a few things right too

Just so you don’t think I’m a complete idiot, I have learned from my mistakes and I’ve made some good investments. I saw value long term value in nanotechnology/rare earths, pipelines and energy infrastructure when these were not popular investments.

Since January 2009 (the oldest data available from my brokerage) to the end of October 2014 I have outperformed the Toronto Stock Exchange cumulatively by about 70% (166.46% vs. 96.99%) and I have even outperformed Berkshire Hathaway (124.84%) in this relatively short period of time – although I am no Warren Buffet!

I am sure I am still making mistakes, but I am optimistic the frequency and the cost of these mistakes are decreasing.

Don’t make the same mistakes!

I could have saved a lot of money (and embarrassment) if I had just done 2 things:

• Read about personal finance and investing before investing in the markets, or
• Invested with a strategy like the couch potato or my ultimate portfolio.

The good news for millennials is there has never been more choice of low cost investment products and free information available. Grow and protect your money, don’t learn the hard way if you don’t have to.

Be happy, live long & prosper. Best wishes for 2015!

Eliminating muda (waste)

One of the cornerstones of lean manufacturing is the elimination of waste or “muda” in Japanese. This concept of eliminating waste applies equally well to personal finance as it does to manufacturing. In manufacturing, waste is defined as anything that a customer is unwilling to pay for. In personal finance waste is anything that doesn’t contribute towards your financial goals.

There are 7 wastes categorized in lean manufacturing: inventory, motion/transportation, defects, over-production, over-processing, underutilizing talent, and waiting.

1.     Inventory

Inventory in manufacturing, is raw material or product that is not being used. In personal finance, inventory is money that is not being put to work.

• Minimize funds in low interest chequing or savings accounts
• Invest extra cash
• Transfer funds on the same day your pay-cheque arrives
• Sell old, unused items you have
• Take advantage of Dividend ReInvestment Plans (DRIPs)

2.     Motion/Transportation

Motion is the act of moving inventory, parts and product around. Any type of motion is waste. In personal finance transportation is moving money anywhere it is not appreciating.

• Deposit savings directly into a commission free ETF (offered by some brokerages) or an low fee Mutual fund with each pay cheque.
• Minimize commissions from excessive buying and selling stocks. With investing, action is usually more expensive than inaction. You can start with low fee mutual funds to avoid commission fees.
• Rebalance portfolio by investing in areas that are down in value, rather than doing it annually.
• Take advantage of DRIPs or synthetic DRIPs whenever possible
• Before buying something, ask yourself do you need it, if so, do you need it now? Slowing down consumption will reduce unnecessary movement of money.

3.     Defects

Defects are materials and products that can not be used and sold as-is for full price. In investing defects are investments that are not appreciating in value.

• Stay away from speculative stocks, buy dividend paying stocks that have a history of raising dividends
• Over the long term, mutual funds with very high fees will typically not perform as well as the market. Avoid holding mutual funds with MERs greater than 2%, buy ETFs.
• Avoid paying interest whenever possible. Make sacrifices and pay debt as quickly as possible.

4.     Over-Processing

In manufacturing, over processing is creating more than necessary (creating inventory), but it also producing to higher specifications than necessary. Over-processing in personal finance is probably the largest, silent-but-deadly wealth killer. It is buying/consuming more than you need. Take a close look at all of your costs for over-processing.

• Homes: People are buying larger and larger homes. Your house should be no bigger than you need. Use your space effectively. If your house is too big consider downsizing. Bigger houses are not just more expensive to buy, they have higher associated furniture, cleaning, repair, maintenance, utilities, insurance and property tax costs. These regular monthly costs add up quickly.
• Cars: Bigger more expensive cars are not just more expensive, but may take more fuel, have higher repair costs, and higher insurance costs. Buy what you need, not what monthly payment you can afford. Get a less expensive car and buy winter tires or consider rust proofing to protect your investment.
• TV, internet and phone: A lot us are spending hundreds of dollars a month on TV, internet and phones.
  • TV: Do you really need 400 channels? You can get free (and legal) over-the-air signals with a simple antenna. I get about 20, HD channels (clearer than cable) with $100 antenna I put in my attic a few years ago. Apple TV, Netflix and internet streaming (you can use Chrome or a long HDMI cable to your TV) are other low cost options. It may be cheaper to drop your TV package and go to your local establishment to watch the game.
  • Internet: is your bundle really cheaper? Do you need a super ultrafast, unlimited GB connection? Stuck in bundle that keeps going up in price? Check out alternatives like Teksavvy.
  • Phones: Many people have dropped their landline in favour of their cell phone. If need a landline consider alternatives such as Telehop. Cell phone packages are getting increasingly expensive as people get more and more features. If you need it for business great. But for many people don’t need data plans, or unlimited minutes. With a proliferation of WiFi hotspots, you may be able to reduce your mobile phone costs by eliminating data. Pick or downsize to the plan you need, and consider alternative vendors like mobilicity, Public Mobile, Wind Mobile. You can even use these companies plans as leverage to renegotiate your contract (ask for customer retention). Consider pay as you go options.
• Heating & Air conditioning: Get a programmable thermostat. In the summer you can pre-chill your house on hot & humid days when energy is cheaper. Use sun shades & awnings. In the winter turn down the temperature when you are sleeping and dress warmly in the day. Make sure your blinds are open when it is sunny.
• Avoid impulse buying. Buy what you need, when you need it.
• Buy low cost ETFs instead of mutual funds.

5.     Over-Production

In manufacturing, over production is creating more product than you can immediately sell (creating inventory). There is over production in personal finance too.

• Avoid having too many stocks in your portfolio. Too many stocks will lead to higher commission fees and require more time to manage. Consider low cost ETFs instead.
• Avoid having accounts with different banks groups, companies and/or pensions plans. Consolidate holdings whenever possible. This can usually be done at no cost. Having fewer accounts will be easier to track and manage.
• Remember work-life balance. Accepting a promotion that requires too much time may cost you more money in the end. Consider factors such as daycare expenses, eating out, commuting costs, relationships, stress and your personal health. You will be worse off financially if burn yourself out or end up divorced.
• Limit your investments if you have outstanding debt. Chances are the interest on your debt is greater than any guaranteed returns you will get. An RESP may the exception here.

6.     Underutilizing Talent

Underutilizing talent is serious problem that is not given enough attention in manufacturing or personal finance.

• If you have a financial advisor, use them. Either directly (fee advisor) or indirectly (via mutual fund fees) you are paying them, make sure you get your money’s worth or more. You should meet at least twice a year to see how you are doing compared to your plan (you must have a plan!). Your plan should change as life changes.
• There are a plethora of excellent TV shows, seminars, websites, books, magazines, newspapers, blogs, twitter feeds, most are free or available at your local library. Have a question? Tweet your question to financial expert or post on a blog. I am delighted to see how people are willing and quick to share their expert knowledge. See links for some suggestions. You can pick up basics easily.

7.     Waiting

Waiting is when a product is not being worked on and is not being delivered. In personal finance waiting is inaction with respect to cash or debt.

• Studies show that waiting to invest in equities statistically provides lower returns then investing immediately. Invest cash immediately or have it directly deposited to a high interest savings account.
• Actively pay down debt. If you have credit card debt move it to a lower interest loan or line of credit. Pay it off as quickly as possible. Make sacrifices while paying it down, but reward yourself once it is paid.
• Get control of your personal finances. Small changes you make now will lead can lead to dramatic wealth later in life. Don’t wait! It is never too late to start.

I’ve listed many examples where you can apply the principle of reducing waste to your finances. Keeping in mind the 7 categories, look for other areas where you can reduce waste. Engineering wealth, like any process, always has room for improvement.

Be happy, live long and prosper.

The perfect (nuclear) storm

The present environment in the nuclear industry will lead to the perfect storm, creating never seen before uranium prices, in less than 5 years.

Just the facts

• 72 reactors under construction*. Construction typically last for many years, sometimes decades and some may never finish being built. Concentration of new plants is in Europe and Asia.
• 437 nuclear reactors operating*. Reactors in operation are getting older. More reactors are being upgraded and working past their original life expectancy due to economic reasons.
• Countries are worried about their environment, climate change/global warming, due to the burning of fossil fuels.
• Renewable/green energy such as solar and wind energy typically lowers baseline nuclear energy production and increases power from natural gas to balance the grid.
• Supply of warheads to use as nuclear fuel is coming to an end.
• New thorium based nuclear power is very promising and could replace uranium as a nuclear fuel in the not too distant future.

Analysis & Predictions

The Fukushima Nuclear disaster in 2011 created a massive imbalance in the nuclear and uranium industries. Plants were shutdown, new reactors were put on hold, the uranium mining industry was cut at its knees. 3 ½ years later, uranium demand is currently greater than the mined supply. Japan will turn their reactors back on. More reactors will come online in particularly in China and India where the need for clean, baseline power is the greatest. Old reactors will continue to run, as long as economically feasible and until other energy sources can be properly and economically utilized. Newly proposed reactors will not be built or completed due to ever ballooning capital costs and the potential of thorium reactors. With new reactors online, Japan restarting and old rectors continuing to run, current mining operations will not be able to ramp up production fast enough to meet demand. Thorium technology and renewable energy and lack of commitment for new uranium-based nuclear plants going forward will discourage any major new uranium mining projects.

These elements will all happen simultaneously, creating the perfect storm – a super-spike in uranium prices (in excess of $200 US$/lb). Although the spike will be temporary, it will rock the nuclear and uranium industries as much as the Fukishima disaster. From an investor’s point of view, a uranium asset bubble will ensue (similar to that of rare earth bubble in 2011), with all the media coverage and the frenzy of merger and acquisition activity. And just like all previous asset bubbles this one too will burst.

*Data according to International Atomic Energy Agency (www.iaea.org), October 8, 2014.

Be happy, live long and prosper.

PERSONAL Finance

I love reading personal finance and investing books. The books I have read offer great advice. But do I follow all the advice? No. Personal finance is just that – personal. I pick and choose the things I like, contemplate some ideas and just ignore others. Everyone’s financial situation is different. I’m not a certified financial planner, or fund manager but there are situations when not following the recommended approach may make sense. I would like present some alternative views to financial experts – not as advice – but as food for thought.

Typically personal finance experts recommend: insurance, budgeting, balanced portfolios, regular investing and rebalancing, but dislike credit cards.

Insurance

With any type of insurance the odds are never in your favour. Statistically speaking, you will lose money buying insurance. So buy insurance for only things you, you and your spouse, family or extended resources can not deal with financially. Get less insurance, pay less insurance but save and/or invest the difference, preferably in a TFSA where you can access it without penalty when emergencies happen. And emergencies will happen, you just can’t predict when, with what or with who.

If you are debt free, own a house and have access to a well funded TFSA account you may not need much insurance.

Budgeting

Life is dynamic and budgets typically are not. How do you budget when you have 6 weddings in one summer? Forget the budget, but always pay yourself first. You can spend the rest – but no more. You will need to prioritize and stay on top of your all your expenses.

Balanced Portfolio

I don’t like balanced portfolios in the traditional sense. I prefer dividend stocks and ETFs now to bonds, because the potential for interests rates to go lower is limited compared to the potential for interest rates to move higher in the long term.

I invest for the long term. I look at the big picture. I look for value. I look for companies that have proven track records, growth potential, limited competition and hard assets. I don’t invest directly in automotive companies, airlines, or grocery chains. Competition is fierce, margins are thin and dividends are rare. I like pipelines, oil, real estate, and energy. These companies pay dividends, have hard assets that are limited in nature and although they may be cyclical, their long term trend is always up. When I buy a stock or an ETF I expect to hold it for at least 10 years. For example, I think nuclear power will make a come back in the next 10 years, so I don’t mind buying Cameco right now. It is trading at fair value, it pays a sustainable dividend and it has great reserves. For foreign investments, I mostly stick with ETFs.

Invest more in areas you understand, where you see value, where you expect growth over the long term, even if your portfolio ends up lopsided.

Regular Investing & Rebalancing

I keep a watch list. When I read an interesting article, or see a show that presents a new company that interests me I put it on a watch list. I may watch if for a week, a month, even a year or more. When I believe it is undervalued I will buy about half of the position I am looking to invest. If it drops further I may buy more. Sometimes I miss the boat altogether and that’s ok. There are lots of stocks, and the future will present new opportunities.

I make adjustments to some of my stocks when required, not at regular intervals. I might top up a stock to get a synthetic DRIP. If a stock gets over valued, I may sell some of it. I recently trimmed (10%) some of my over valued energy stocks, and bought McDonalds which I believed was undervalued at the time. If the fundamentals shift altogether I may sell my entire position.

In the stock market crash in 2008/2009 I bought stocks as markets fell. I invested every dollar I could get my hands on. I went all in. It scared the hell out of me. If I had listened to my emotions I would of sold most of my positions while they were still worth something.

Buy low and for the long term, seize opportunities, sell when you need the money. Trim stock positions when overvalued. Don’t let emotions sway your judgement.

Credit Cards

Credit cards are not evil. They can work for you: improve your credit rating, double your warranty, pay for car rental insurance, and give you free flights, cash, or merchandise. How awesome is that? Put everything you can on your credit card to maximize your benefits. The key of course is you must pay the entire balance every month. No exceptions. Ever. Putting stuff you need like groceries, gas, even paying bills is a no-brainer. For everything else, ask yourself 2 questions. (1) do I really need it? (2) do I really need it now? If there is something I want and don’t need I put it on a list until I find a good deal on it and I have saved the extra funds to cover it. Simple. This in effect slows down your rate of consumption. You can have everything you want, just not right now…

It’s your money

Bending the recommended guidelines may be OK if you are atypical, disciplined, think long term and can leave your emotions out of your investment strategy. The more you learn the better. Listen to the experts, consider alternatives, consult a Certified Financial Planner, pick a hybrid strategy that you are comfortable with and that works best for you and your situation. If you are unsure, follow expert advice.

Be happy, live long and prosper!

A valuable kick to your portfolio

If you want to kick your portfolio up a notch, here are a couple of Exchange Traded Funds (ETFs) to consider: First Asset Morningstar Canada Value ETF (TSX: FXM) and Market Vectors Wide Moat ETF (NYSE: MOAT). These ETFs compliment the Ultimate Portfolio perfectly. Data from Google Finance Canada, market close on August 1, 2014.

First Asset Morningstar Canada Value ETF (TSX: FXM)

• Management fee: 0.60%
• Yield: 1.72% (quarterly distribution)

First Asset Morningstar Canada Value ETF is a collection of 30 “value” securities. Value is determined by a formula that equally considers: price to earnings ratio (trailing), price to latest cash flow, current price/book ratio, price to latest 4 quarter sales, earnings per share estimate revision. Securities are equally weighted and rebalanced quarterly.

So far, FXM has underperformed the TSX this year.

However this is just part of the story. Looking from the inception of this ETF, we can see the big picture.

Whoa! It has more than doubled the TSX’s returns in just over 2 years!

Market Vectors Wide Moat ETF (NYSE: MOAT)

• Net expense ratio: 0.49%
• Yield: 1.26% (annual distribution)

Morningstar has coined the term “wide moat” to describe companies that have strong competitive advantages. These companies have huge market shares, low cost production, patents and sticky businesses. Market Vectors Wide Moat ETF (MOAT) follows the Morningstar Wide Moat Focus Index. It equally weighs 20 companies that have wide moats, are undervalued and have a proven track record. Not only does this align with Warren Buffet’s philosophy, Berkshire Hathaway is also one of its holdings (BRK.A is about $200,000 a share, this is an affordable way for the DIY investor to buy in). Rebalancing is done quarterly.

MOAT has matched the performance of the S&P 500 to date, and fared much better than the Dow Jones.

Looking at the ETF since inception, MOAT has significantly outperformed both the S&P 500 and the Dow Jones.

Getting your $ worth

As a consulting engineer, providing value based on measurable, quantitative results is critical. Value is also critical to a successful, long term, investment strategy. I like FXM and MOAT because it is value investing based on blind, unbiased rules and data. Results since inception are impressive. You get a decent yield, a diversified portfolio and automatic rebalancing all for a relatively low fee. It eliminates the speculation associated with buying a single stock and the fees are significantly lower than buying a value focused mutual fund.

Why not add a value kick to your investment portfolio?

be happy, live long and prosper

The markets are due for a correction, or are they?

Is it time for a market correction?

The Canadian and US stock markets have done very well over the last year. As of market close July 18, 2014, the S&P/TSX Composite Index is up 20% for the last year and the S&P 500 is up 17%. The PE (Price to Earnings) ratio is above historic norms.

The markets are due for a correction, or are they?

Interest rates are extremely low. Interest rates on savings accounts and GICs are negligible. The threat of rising interest rates has made bonds unattractive. What’s left? The stock market has momentum, corporate earnings are good. The North American economy appears to be improving slowly, primarily lead by the US.

I have talked to a few people who are waiting for a correction, before they invest more in the stock market. This is the reason why I believe a correction is not coming anytime soon. I don’t think the markets are going to climb much further either, with the stock market crash of 2008 still in people’s minds. There will be some volatility in the coming months, maybe a big one day slide perpetuated by stop losses, but other people will immediately jump back in the market. Also with interest rates this low, if there was a correction in the markets would it not make sense to borrow money to invest in the markets? Interest paid for investment loans are tax deductible and capital gains and dividends are taxed at a preferential rate. The case to borrow to invest in blue-chip companies on a correction is logical. Again, this is another reason a correction is not imminent.

Markets will essentially move sideways or slightly up, while interest rates remain low.

What do I do now?

I can’t predict the markets, but my thoughts haven’t changed much since my article: So, you feel like an investing Rock Star? back in February 2014. Here are some suggestions:

• Keep looking for value and growing dividends.
• Diversify your portfolio, look for cheaper markets outside North America (I typically use low fee ETFs to do this).
• Try contrarian investing and buy blue-chips on bad news. E.g. look at Potash Corporation (TSX: POT) it dropped 20% last July and has climbed back up while continuing to pay dividends.
• Hold some cash. Cash doesn’t pay dividends but it is incredibly versatile.
• Add some gold or silver to your portfolio. Last I heard the cost of mining gold is about $1,200/oz so buying gold at this price or less is a good deal. I like silver at $18/oz. You can buy ETFs backed by physical bullion in registered accounts, but for non-registered accounts definitely buy physical gold or silver; any gains are tax free and it’s handy if a doomsday scenario actually occurs.
• Do nothing. Sit back, relax and enjoy the ride…

be happy, live long and prosper

All-Star Stock: Enbridge Income Fund (TSX:ENF)

“Diversified Energy Infrastructure Company Designed to Provide Attractive and Predictable Cash Flow to Our Investors.”

• Ticker Symbol: ENF (Toronto Stock Exchange)
• Price: $26.64
• Yield: 5.18%
• Market Cap: $1.5B
• Initiated Position: 2004
• Current Sentiment: Hold, slightly overvalued at this price, but enjoying the dividends and DRIP
• 5 Year Return: 139% or 27.8% annualized (with a fractional share DRIP)
• Website: http://www.enbridgeincomefund.com/

Data based on April 30, 2014 closing price

Why I own it

I love energy investments and I love infrastructure investments. Enbridge Income Fund is a sweet spot of the two.

ENF is diversified in green power (wind mills, solar, waste heat) and natural gas/liquids storage and transportation (pipelines and soon rail). 67% of ENF is owned by Enbridge Inc. Long term contracts, limited competition, consistent money maker, good strategic growth, DRIP eligible with a stable and growing dividend – what’s not to like? It doesn’t matter how bad the economy is or if you lose your job, chances are come winter you will heat your house. This makes ENF ideal to accumulate during recessions and market corrections.

This stock has managed to fly under the radar. No one talks about it and you rarely hear any news about it. It is a boring stock; no flash, no glamour. But this stock delivers. It is one of my largest and my longest holding in my portfolio. I usually recommend this stock first for people looking to get in the markets, but without get-rich-quick appeal few have taken my advice.

No doubt this stock will help fund my retirement when I stop the DRIP and use the dividends as income.

Put Enbridge Income Fund on your watch list. It is a great long term hold, that hasn’t received the recognition it has earned.

be happy, live long and prosper!

A DRIP that pays

When it comes to investing, DRIPs (Dividend ReInvestment Plans) are a good thing. It is a great way to use the magic of compounding for your investments. Most major banks and brokerages offer “synthetic” DRIPs at no charge. These plans reinvest your dividends. They buy whole shares (sometimes at a discount) from your dividend distribution, with the balance deposited as cash. Sometimes you have to ask to be part of the program. Do it, it is free money. A few key points for this to work:

• Each stock dividend distribution must be greater than the current stock price

• The stock must be eligible for the DRIP with your brokerage (ask your brokerage, if they do not have a list posted)

DRIPs are dependent on the distribution frequency typically: monthly, quarterly, or annually and the distribution amount. The yield is annual distribution total as a percentage of the current stock price. So, the higher the yield and the slower the frequency of dividends, the smaller the investment required to compound your shares. But stock price is another variable to consider. The higher the stock price, the larger the investment required for the DRIP to work. It is the number of shares that is critical. This is something to consider when purchasing new dividend paying stocks. I created the following table that shows the minimum number of shares (for eligible stocks) for a DRIP to work. You should always buy more shares in case the stock price goes up.

Minimum Number of Shares for Stock/ETF DRIPs

Yield	Frequency
	Monthly	Quarterly	Annually
0.50%	2400	800	200
1.00%	1200	400	100
1.50%	800	267	67
2.00%	600	200	50
2.50%	480	160	40
3.00%	400	134	34
3.50%	343	115	29
4.00%	300	100	25
4.50%	267	89	23
5.00%	240	80	20
5.50%	219	73	19
6.00%	200	67	17
6.50%	185	62	16
7.00%	172	58	15
7.50%	160	54	14
8.00%	150	50	13

 Simulations

Thinking about DRIPs it is fairly obvious that if the stock price rises, DRIPs will increase the value of your investments. If the stock price stays the same, DRIPs are also beneficial. But what if the price drops? I created a random what-if analysis in Excel using the following variables: Initial stock price: $20, initial number of shares: 500, initial yield: 5%. I randomized the stock price over a 5 year period. I left the dividends unchanged throughout at $1 total per year (the frequency is shown in legend).

Scenario 1: Falling stock price

The first chart, Scenario 1, chart really shows the power of dividend investing. Even though the stock price declines by 15% over a five year period, the returns are still positive. The distribution frequency (monthly or quarterly) made little difference. But if you did not participate in the DRIP you would have lost about 2% of potential returns.

Scenario 2: Slowly increasing stock price

In the second chart, Scenario 2, you can see that as expected, the gap between DRIP and no DRIP increases steadily over time.

Scenario 3: Sudden 25% price drop

In the last chart, Scenario 3, shows a sudden 25% stock price drop and 5 years for the price to go back to where it started from. You can see that with dividends (no DRIP) after 5 years the total value is up 25% (5% annualized return). With DRIPs the returns are over 30%. Looking at the data, the quarterly DRIP outperforms the monthly DRIP because a higher percentage of the dividends are effectively used to buy more shares, thus the compounding effect is quicker.

It is also interesting to compare Scenarios 2 and 3. In Scenario 3, with the significant correction and no net change in the share price in 5 years, the returns are very close to scenario 2 where there is a 7% increase in share price and no correction. Looks like dollar cost averaging really works!

Key points to remember

• If haven’t already done so, sign up for dividend reinvesting with your broker
• When purchasing dividend stocks/ETFs make sure they are DRIP eligible and you have enough shares to make it work. Refer to the Minimum Number of Shares for Stock/ETF DRIPs chart for a quick reference.
• Look for stocks/ETFs that have a history of raising dividends. If the stock price falls with a market correction, your dividend will mostly likely not be affected. No need to worry, with dollar cost averaging and DRIP on your side you will catch-up quickly…

be happy, live long and prosper!