Thursday, November 27, 2008

two sides of the coin

One of the reasons why stocks change hands a million times over everyday is because no matter how great or dire the economic/corporate earnings outlook is, there is always two sides to the story. Optimists and pessimists will always disagree, and each side can usually make a compelling case to either leverage yourself to the hilt and buy stocks with all your resources, or to sell everything stash most of your cash underneath your mattress and use the rest to build a bomb shelter. I think most would agree that it feels like we are on a very bad footing right now economically, but yet stocks are still finding bids, and the sun continues to rise every morning. Here are some reasons to be optimistic or pessimistic about the near-mid term economic/corporate earnings outlook:


  • Consumers and businesses are buckling down for a number of reasons which include economic uncertainty, rising unemployment, recessions, falling home prices, and trouble obtaining credit.
  • The U.S. government is building a massive debt load, and recent actions that they've taken shake the very foundations of capitalism and promise more risk aversion, and government regulation, of industries and markets in the future.
  • The former 'BIG 3' automakers are in trouble, putting millions of more jobs at risk.
  • The growth within emerging markets like China and India is slowing and recent terrorist acts add to the fear and uncertainty in these markets.
  • Deflation is now taking over from inflation as a worry because the price of goods are declining quickly.


  • Fuel and other commodities are much more affordable than they were just months ago. This allows consumers and businesses to cut costs and leave room for consumption and investment.
  • The S&P 500 index has fallen over 40% since the start of 2008. Shares of many companies can be bought for significantly less now versus in 2007. Severe declines in forward earnings have been priced into many stocks making them less risky investments.
  • Interest rates around the world are coming down making credit and mortgages cheaper for many.
  • Emerging markets like China and India are still growing at very high rates and demographic, and lifestyle trends indicate that they will require the rest of the world's goods and services in a big way for years to come.
  • In a Darwinian type of way, plenty of the inefficiencies, mismanagement, redundancy, greed, and waste is being washed from the system. Most of the issues which have been dealt with and are being dealt with right now will come out the other side cleaner, leaner, and more stable. (ie Big 3, Financial sector, credit markets, consumer debt)

Feel free to comment on which camp you are in and why.

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Wednesday, November 26, 2008

must-read blog posts

Here are three posts that I really enjoyed over the past little while from three must-read blogs:

Why Don't We Buy Stocks When They're On Sale, by Dividend Money. This is not the first time the U.S. has looked like a very bleak place to be invested in the stock market.

Lotteries Millionaires, and a Sense of Scale About Money, by Michael James on Money. Whenever you are struck by a large sum of money, think about it in daily increments. Whether it is winning the lottery, being paid in dividends, or buying a ball glove for your son, you'll see it differently.

In Leveraged Investing & Prime Interest Rates, Million Dollar Journey provides an interesting chart on the Dividend Yield Required to Break Even with Leveraged Dividend Investing. I would add that this chart indicates the yield required on purchase to break even on returns from dividends alone given no dividend cuts, and a steady or dropping prime rate.

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Tuesday, November 25, 2008

potato wedges - luggage

After enjoying and featuring "..Kraft Dinner.." by the colourful blogger, Potato, over at Blessed By The Potato, we thought we'd sign him to a temporary guest column series contract with the moneygardener for an undisclosed sum... This post series promises to be unlike any other consumer reporting/ offbeat commentary you've ever read. John Stossel eat your heart out.... This series will be a change of pace, and we're calling it potato wedges. Enjoy...

potato wedges
It's important to have good luggage if you're going to go travelling for an extended period of time, or so I've heard. For the most part, I've found it important to have a good backpack (which I use daily), and then when I go away I just muddle through with a duffel I got for free. Occasionally I've found the need for a rolling suitcase -- which I found fairly cumbersome, especially on the train -- but couldn't deny the obvious benefit in the airport. It's been rare enough though that I just borrow one from my parents.

So when Wayfare and I got married, we registered for some good wheeled luggage, paying particular attention to it being lightweight (though I don't know why we bothered, since what we fill it with is going to be the main determinant of the final weight) and having good wheels and bearings. I remember having to haul my (borrowed) suitcase down a long gravel walk at one hotel, and having wheels that were a little bit bigger than average really helped there. Some particularly small plastic rollers will lock up on the smallest piece of dirt, turning your wheeled luggage into dragged luggage. Another point we looked for was a handle that would operate smoothly with one hand (retract, extend): Wayfare's old suitcase required holding the suitcase and button with one hand and yanking the handle with the other, trying it one-handed would as likely as not just lift the suitcase entirely, or tilt it over on its side.

Luggage, I've found, is ludicrously expensive. A lot of that must be mark-up, because we've seen some pretty incredible sales come by, including a 65% off sale on some Air Canada brand pieces at the Bay last week (Wayfare went with one of those for our new stuff). As much as I ripped into the Bay for their gift registry, they do offer some benefits after the wedding is over: for the next year, we can use all those gift cards we got (as well as our own cash when those run out) to buy stuff to "complete" our registry. And when we do that, they give us a minimum discount, equivalent to their typical sale (or, a recent sale price if we're lucky). So, we can get ~25% off kitchen stuff on our registry for the next year, ~10% off sheets, and 50% off luggage. So that right there should tell you what kind of discount you should be looking for if you're waiting for a good luggage sale (or if you are looking to negotiate).

For reference, the one really huge piece Wayfare originally registered for was $400 (Swiss army, which my parents can't recommend highly enough for their luggage, but you really, really pay for the name). Thankfully, nobody bought us that (I would have felt bad if they paid full price). The Air Canada piece was roughly equivalent in size, weight, and quality, and was even a little bit more visually attractive, too. It was normally about $250, and we got it for $85.

Sunday, November 23, 2008

7 money tricks rich guys know

I recently picked up a copy of the magazine Men's Health as part of my ongoing effort to lose 50 pounds (240 - 190lbs). I'm 80% of the way to my goal which I started in May, 2008. I haven't looked at a Men's Health in years. Apparently they now run a regular section called 'Men's Wealth' where they deal with all things financial. When I first glanced at the article in this section titled '7 Money Tricks Rich Guys Know', I wasn't expecting much, as I find typically when media resources that don't focus on personal finance try to tackle the subject the advice comes out weak and scripted. I must admit Richard Sine from Men's Health does a nice job on this article thanks to Charles Farrell, a Denver-based investment advisor. Here is a summary of the first 3 tricks:

1. Figuring Out Your Net Worth
Would you start a diet without knowing your weight? I think that's a great point. For all the slings and arrows shot at net worth from the personal finance universe, if you take it as a relative measure to gauge your progress I think measuring your net worth regularly is fundamental to working toward your financial goals. Apparently fewer than half of Americans can even approximate their net worth. It's even a good way to better understand whether you should take on certain debts etc. Men's Health goes on to warn that the equity in one's home is an asset but its value is subjective and it's not as useful in a pinch as cash or non retirement investments (too bad more people hadn't concluded this recently).

2. Running Your Ratios
Men's Health points out checking three key ratios to see if you are on track for a secure retirement.
Savings / Income = Changes through life 0.1 to 12.0
Debt / Income = Changes through life 1.70 to 0.0
Savings Rate / Income = 12%

More good advice. As readers have seen from my net worth updates and savings rate calculations, I really like using ratios like this to gauge my progress. I also use:
House Value / Total Assets = Currently about 70%
Debt / Asset = Currently about 53%

3. Gauging Interest
Men's Health argues that all debt is bad debt if you do not keep debt in proportion to your income by using the Debt / Income ratio above. By the way the 1.70 above is suppose to apply to 30 year olds. My Debt / Income is currently 1.36. Men's Health also notes that it is not always better to pay off 'bad debt' before 'good debt' citing an example that shows that the size of the loan matters more given close interest rates. This is good advice that seems to be lost on many people judging by peoples love for real estate and student debt in recent years.

I'll review the next 4 tricks in a future post.

Friday, November 21, 2008

added to Inter Pipeline

I added to my position in Inter Pipeline Fund (IPL.UN) yesterday at $7.04, where is yielded 11.9%. This is close to Inter's 52 week low of $6.91, where it traded down to on October 10. Sporting a pay out ratio of around 60% of earnings, this is another company that is very economically resistant, has perhaps been unfairly sold off, and shouldn't have a problem withstanding a recession. I expect to hold Inter Pipeline through 2011 when it converts from an income trust structure into a regular dividend paying corporation.

How low can the DOW go?

Thursday, November 20, 2008

added to IGM

I added to my position in Canadian wealth manager IGM Financial (IGM) today at $31.84. This purchase reduces my adjusted cost base on this stock significantly, and boosts my yield on cost significantly.

IGM was yielding 6.4% and trading at a P/E of less than 10x at my time of purchase. I was actually surprised how well IGM's earnings stood up to the market's recent dramatic down turn. Investor confidence is extremely bleak. I believe this is a good time to add to my position in this best of breed Canadian wealth manager. Most of IGM's customers should take the rational action during these volatile times and stand pat or only adjust their portfolios slightly.

Monday, November 17, 2008

new position - CP Rail

Today I initiated a new position within my non-registered portfolio in Canadian Pacific Railway (CP) at $39.94. CP is a transcontinental railway that transports bulk commodities, merchandise freight, and intermodal traffic.

Why A Railway?
One of the most compelling reasons to invest in a railway is the fact that by their nature they possess incredibly high barriers to entry. What is meant by this is that railways and the rail industry have characteristics that act as barriers to other potential competitors entering. How many North American entrepreneurs will have the desire to build a cross country railroad anytime soon?

Other attractive features of investing of railways include their fuel efficiency vs. trucking (1/4 cost advantage), hauling coal over long distances belongs to the rails, increased trade with Asia mean longer distance runs, truck driving hour regulations, innovations like double stacked and computer guided cars are making rail even more competitive with trucking. Thanks to the monopolistic nature of railroads they also have serious pricing power.

Why Canadian Pacific (CP)?
  • Canadian dividend tax credit makes CP more attractive for me than U.S. names
  • Canadian National Railway (CNR) is a much more expensive stock

Why Now?

I've wanted to own a railway for a few years now but I have never been able to justify a purchase based on the richness of the stock valuations. CNR and CP have traded well over 12x earnings for much of the last few years as the economy grew at a reasonable pace. Now that economic activity and commodity prices have really started to sputter, so has CP's share price. Here are the specifics that really got me interested:

  • P/E ratio of 8x earnings
  • Dividend yield of 2.5%
  • Price to Book ratio of 1.1x
  • Dividend Payout ratio is under 15%
  • Return on Equity is 18%
  • Stock last traded at these levels in early 2005

Compare these numbers with CNR, and the two stocks are not even in the same rail yard as far as valuations go.

I really like the idea of owning CP for the long term because this railway is really tied into Western Canadian commodities, including agriculture, while at the same time the company by nature should experience much less volatile earnings than an actual commodity producer would. CP is an extremely boring business that should continue to stay on "track" with growing long term earnings and dividends.

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Friday, November 14, 2008

net worth update november, 2008

Results for the 2 Months Ended November 14, 2008:

  • Debt/Asset ratio rose to 0.53 from 0.50

  • Net Worth moved down 7.9%

  • Total Assets decreased 0.7%

  • Total Liabilities increased 6.5%

  • House Value/Total Assets rose to 70.4% from 69.9%

  • Non-Registered Portfolio rose 8.0%
  • Calendar Year to Date Gain/Loss: +5.1%

I have to admit that I was dreading putting this net worth report/post together. Our net worth has been hammered down almost 8% since the last bi-monthly update in September. The S&P 500 index is down about 28% since the last update, so this comes as little surprise. Basically the last seven months of net worth gains have been wiped out, as we are now back to April, 2008 levels. As readers know I am buying fist fulls of dividend paying stocks down at these levels. Let's just say that I am investing in future net worth reports. I can take the pain now, and it does hurt, with a look to the future.

Leverage - Liabilities are up 6.5% this update due to us utilizing line of credit funds in order to fund our non-registered portfolio at these low stock valuations. Whether these low stock prices continue for the next few months or next few years, or, god forbid, go much lower, I'll still be glad I started investing these funds now because I'll be receiving dividend income from the funds months earlier.

House Value - I have maintained our house value in net worth calculations at the same level since July of 2007. During this time we've made improvements to our home, however I feel that their affect on the value of the house are negligible when you consider the recent weakness in Canadian real estate prices.

Wednesday, November 12, 2008

how to get rich, explained

If we could boil achieving financial freedom and independence down to one habit, what would that habit be?

Seems simple enough doesn't it? This basically means, ensure that your lifestyle costs much less than your true financial wherewithal. Do this for many years and you'll find yourself in a very good position financially.

We often hear the phrase 'Live Below Your Means' espoused by several personal finance pundits but what does this really mean?

Here are some of the most important specifics that I feel define what it is to LIVE BELOW YOUR MEANS:
  • Do Not Purchase a Home for Nearly the Amount that your Lender Pre-approves You For. Lenders obviously want you to borrow as much money as you can theoretically handle based on your income. This figure is usually ridiculous when you consider the fact that you do need money for other items aside from your mortgage, property tax and other related home expenses. Write up a monthly budget and actually examine where your money will go in reality before purchasing a new home. You'll find that your lender would like you to lead a house-poor lifestyle of stress and worry.
  • Save First, Then Spend. "I would save money but there is nothing left at the end of the month". This is a common excuse. Until you adopt the habit to put money aside as savings before you even think about paying bills or buying things, you'll feel like a hamster on a financial treadmill. Automate this by setting up an automatic money transfer to a separate account and it's fool proof. Save at least 15-20% of your gross income and you'll be well on your way.
  • Forget About The Jones'. You might as well face it, your friends and relatives your age will live above their means and you will look poor when compared to them. Until you resign to this fact, you will be extremely tempted to veer off course, following the herd by making irresponsible financial decisions that lead into debt and stress. Let others become house-poor, live paycheque to paycheque, drive overpriced SUVs they can't afford, and take vacations on credit while you manage your finances responsibly by sticking to your plan. Remember, the Canadian banks own the Jones', while you can own the Canadian banks if you choose.

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Tuesday, November 11, 2008

investing carnival remembrance edition

Welcome to the Investing Carnival brought to you by The DIV-Net. Without the ultimate sacrifice that brave men and women have provided and are providing for citizens of the United States and Canada, the pursuits below would not be possible. Lest We Forget!

Stock Analysis
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Stock Pursuit presents Walmart vs Target posted at Stock Pursuit.

Carlos Sera presents A Trader's Tale; Financial Tales posted at Financial Tales.

Fatty presents Automated Day Trader: Double Moving Average Crossover, Test 1 posted at Fatty Fat Fat.

Nurseb911 presents Taking Stock in MFC: posted at Triaging My Way To Financial Success.

Surfer Sam presents Stock Investing With Warren Buffett. Investment Advice From a Billionaire. posted at Surfer Sam and Friends.

Ripe Trade presents Trend trading system posted at Ripe Trade.

greg group presents How to Make Money by Laddering Covered Calls - Associated Content posted at Associated Content.

The Financial Blogger presents Obama is the new President, now what? posted at Intelligent Speculator.

Dorian Wales presents Review: The Gone Fishin' Portfolio by Alex Green posted at The Personal Financier.

Shadox presents Late Day Rallies and Crashes: Why Do They Happen? posted at Money and Such.

Investing School presents Try Buying When You Want to Sell and Vice Versa posted at Investing School.

Michael Cohen presents The Hidden Advantage Of Mutual Fund Investing posted at The Fund Investor.

Timothy Lutts presents The Future of America posted at The Iconoclast Investor.

Paul Goodwin presents Market Timing Simplified posted at The Iconoclast Investor.

D4L presents Stock Analysis: Emerson Electric Co (EMR) posted at Dividends4Life.

FMF presents Why I Sold My Mutual Funds posted at Free Money Finance.

Stock Pursuit presents Walmart vs Target posted at Stock Pursuit.

hank presents How Is What We Are Going Through Now Different From The Great Depression in the 1930’s? posted at MiB Smarter Money.

Value Investing
Vlada Kynsky presents Emerging markets fundamental valuation. posted at StockWeb.

Wealth Accumulation
Bill presents Social Security Sense posted at Learn The Stock Market And How to Trade.

MBB presents How To Calculate Your Net Worth posted at Money Blue Book.

Real Estate
Joe Manausa presents How To Stay Calm In The Real Estate Market posted at Tallahassee Real Estate Blog.

Ned Carey presents Lessons from Warren Buffett on Real Estate posted at Baltimore Real Estate Investing Blog.

LAL presents Mortgage Modifications posted at LivingAlmostLarge.

Alternative Investments
Benjamin presents Gold: A Few Points for the Prospective Investor posted at Trees Full of Money.

Thanks to all that submitted content! Please take a moment to browse the moneygardener.