Tuesday, December 18, 2007

The forest for the trees

As investors, we tend to get caught up in the fact that the stocks we buy and sell, when you strip away all the hype and/or pessimism around them, have some sort of quantifiable, underlying value to them. They're worth something in absolute terms, we reason, every time we buy a stock. If they didn't, why would we buy? They don't bring us any pleasure or improve our lives in any way, really, like a consumer product might do. They're pure financial instruments, so what's the point of buying them if we're knowingly paying too much for them? It must be quantifiable somehow, we tell ourselves.

But as much as I understand, and to a certain extent believe in, concepts like fundamentals, efficient markets and intrinsic value, the thing I'm learning as I age as an investor is that ultimately, none of of these companies are worth a penny more than what somebody else is willing to pay for them at any given time.

Among numerous other things to his credit, Ben Graham came up with the concept of Mr. Market. Mr. Market was essentially the collective wisdom of all the other investors but yourself, setting the prices for what he was willing to pay for any given security, often regardless of what the business was worth yesterday or how much money they actually make. He sometimes goes by different names, but Mr. Market has since made an appearance in a variety of different investing books.

I thought I understood the parable, but it's really hitting home of late, because my own stocks have been quite volatile for the last few months. Sometimes, I've been able to pin it on one particular event of piece of news. But often, I'll watch my stocks gain or lose several % in a single day without any idea why it's happening. I find it hard to learn from those sorts of situations.

Value investors like me love the thought that they're buying stocks "on sale." The rest of the market may not like it, but we're the kind of people who secretly cheer when a blue chip company's stock gets hammered, because it opens the door to us owning the company "for less than what it's actually worth." But really, there's nothing to say what a stock is going to be worth tomorrow, much less 30 years from now.

As much as we can try to ensure we keep an eye on things like cash flow, low P/Es, dividends and whatnot, ultimately, there isn't a thing we're going to be able to do if our cash-generating, dividend-paying, recession-proof blue chipper isn't catching Mr. Market's attention at any given time. Our options then are the same that they always are: sell to him for whatever he's willing to pay, or hold in the hopes he'll change his mind later.

Something to keep in mind at the moment, while you watch your blue chippers sink like a stone despite growing earnings, and wonder why.

Monday, December 17, 2007

So be good, for goodness sake...

There's a limit -- I discovered after 6 straight hours on the couch in my parents' house where I was visiting last Sunday -- to just how lazy one man can be.

Desperate for something that could credibly pass as "productive," I decided to do a little Christmas shopping at the mall near my childhood home, so I headed out the door on foot. About halfway there, a rather portly, older man shoveling his drive caught my attention.

"Hey," he wheezed in my general direction. "Want to make a little money?"

Shoveling driveways for $10 apiece through the neighbourhood was a business I thought I'd left behind when I was about 16, but I could see the guy was struggling, so I picked up a shovel. I told him he didn't need to pay me anything, that I was happy to help him do it for free, but he protested: "If you're not going to let me pay you, you can go on your way right now because I'm having none of that," he said, reaching for the shovel. I'd welcome anything he felt was appropriate, I told him with a shrug, and set to work on the unplowed lower half.

We worked in tandem -- I did the heavy lifting, so to speak, leaving him to clean up whatever I missed along the edges, once he'd gotten his breath back. We made small talk to pass the time; he moved onto the street a few years after my parents did. (The fact that we'd never crossed paths before made me feel somehow awkward, I don't know why.) Turns out, he has a son about my age I used to play road hockey with very occasionally.

One sweaty half-hour later, I was finished. He held out a tentative twenty-dollar bill, which I sheepishly grabbed once I saw the look of concern on his face. I thanked him for his company, and continued on my way.

It wasn't until I rounded the corner that a sudden pang of guilt hit me. Shouldn't I have been a little more insistent about not being paid? I'm sure he would have appreciated the good turn. Leafing through my wallet, I found the guilty $20, and wondered how to rectify the situation. My head was halfway through a plan to put the bill in his mailbox with an anonymous Merry Christmas note attached when I spied a better alternative. Rolling the bill up, I slipped it into the Salvation Army box to the right of the mall's entrance doors. The woman watching it smiled and thanked me for my donation. It made me feel warm inside -- which was great, considering the chilly job I'd just finished.

All in all, it was just the kind of return on investment I was looking for.

Wednesday, December 12, 2007

Cuando, cuando, condo?

What with the no less than 9 semi-erect condo towers I pass every day on my 25-minute walk to work, it's clear that Toronto is in the midst of a full-blown real estate love affair. Part of it is justifiable -- as more people come to this economically sound and culturally active city, there's going to be a need for high-density accomodations so we can house them all sustainably. So I'm not some anti-condo NIMBY by default. But even I've got to say that the whole phenomenon seems to be getting out of hand.

As far as I can tell, the target demographics for these condos appears to be two groups. 1) Twenty-something young professionals who have been priced out of the downtown house market and want to live in funky parts of town, or 2) affluent middle-agers who want to use their wealth to custom-make a living environment for themselves that requires absolutely no maintenance. I don't hear of many condo owners who aren't in one of those two groups.

I'm solidly in the former group, which means you'd assumed I'd be excited about the plethora of developers out there who are more than willing to give me an alleged deal on some pre-built unit. But I'm really not feeling it. Mainly, I find the concept of condo fees really distateful (I can't imagine how frustrating it would be to diligently pay off my mortgage and then still owe some idiot $500 a month, to, I don't know, shovel the sidewalk or something) but there's more to it than that.

It dawned on me recently, as I was sketching out a crude monthly budget on the back of a napkin, that somewhat amazingly, I can probably financially afford to buy a condo right now. I have enough of a down payment squirreled away that if I took the money I'm already paying in rent, plus the money I divert into my savings every month, I could more than afford to carry a mortgage in the $150K-$200K range -- more than enough for a starter one-bedroom in this town.

And yet, I have no immediate plans to do so. Some of that is probably cold feet about having to "grow up" and put my plans to run away to some adventure (there's always been a little Peter Pan in me) but it's more than that. Granted, I'm young enough that I'd have enough time to get my money back if I was patient through any sort of real estate crash, but that's a leap of faith I'm not prepared to take at this point in my life.

To be sure, I'm not predicting a cataclysmic correction in Toronto any time soon. The city has a strong economy, and is still a very cheap place to live on a global level. But the returns we've been seeing have been too high for too long. If I have to listen to one more person gloat about how easy it is to make money in real estate because their condo has doubled in value in 10 years, I'll scream. Eventually, the music's going to stop and I'm not willing to be the last man standing.

Maybe next week, I will be.

Monday, December 10, 2007

Dude, where's my infrastructure spinoff?

Pleased as I was to get a stake in a blue chip name like Brookfield Asset Management during a temporary retreat in the stock price, I'm a bit mystified by the radio silence the company has had since releasing their plans to spin off their infrastructure assets into a separate company in July.

From the release: "Brookfield Infrastructure will focus on high quality, long-life assets that generate stable cash flows, require relatively minimal maintenance capital expenditures and, by virtue of barriers to entry and other characteristics, tend to appreciate in value over time."

Sounds like my kind of holding. But the company hasn't said a peep about this plan since the original July announcement, and I'm wondering what's going on. The spin-off was meant to take the form of a special dividend of $1 per Brookfield share, and trade on the NYSE. I assumed it was somewhat imminent, but here we are, five months later, and still nothing.

I'm sure the plans haven't materially changed, but I'm still puzzled by the lack of information. I've been poking around on the company's filings on SEDAR but I can't seem to find even a vague mention of a date anywhere. It's curious.

Thursday, December 06, 2007

The claws come out

Apparently you can add the United Way and the Canadian Institue of Actuaries to the clamour of voices calling for a complete overhaul of Canada's Employment Insurance program.

And while you're at it, there's a new adjective at your disposal to describe the rules: draconian.

I must admit I'm a bit mystified as to why this is all happening now, but I guess somebody's getting some serious mileage out of their lobbying dollars.

The truly troubling thing in all this, to me, is that that $54 billion surplus isn't sitting in some bank account somewhere -- it's actually rolled over into government spending with the promise to pay it back if it's ever needed. Does that sound like a deal you'd like to sign up for? An entity taking $54 billion more of your money than it needs in exchange for a service, with the nebulous promise that it'll be reimbursed to you should the need ever arise? I don't think so. Why not -- oh, I don't know -- put a stop on more contributions until that surplus has been eaten into a little?

I can't wait to see who else steps up to kick EI in the teeth while it's staggering on the mat. My guess? The Canadian Taxpayers Federation. But I'd also bet the Libertarian Party of Canada is lacing up a steel-toed boot as we speak.

Wednesday, December 05, 2007

Dollar daze

Since hitting a high of $1.10 on November 7th, the loonie has come down to earth in a big way and is currently trading around 98 cents U.S. There was quite the hubbub for a few weeks as Canadian investors and consumers tried to digest how their suddenly potent currency was affecting their financial lives.

On the consumer side, we read stories about lineups at borders fat with people discount shopping on the other side, and angry shoppers demanding that prices be lowered here. On the investment front, people like my dad who did "the right thing" and diversified a few years ago by buying up U.S. stocks were seeing red as all of them were in negative territory after several years. Even if they were up in nominal terms, they were well down in absolute terms after the effect of the 50% higher loonie was factored in.

People like me, who bought into what they deem to be solid U.S. firms at the loonie's peak purchasing power point, seem to be in position to do well, as those stocks have been given an automatic boost from their intrinsic value.

Long term, I have no idea what's going to happen with currency fluctuations. If I had to bet on it, I'd say that the loonie will spend more time looking up at the U.S. dollar than it will looking down on it in the coming years -- our natural resource wealth notwithstanding. So I wouldn't doubt that I'll be looking fondly back on my purchases of Berkshire Hathaway and ACAS, seemingly at the exact right time.

But I would say that just as the loonie's meteoric rise to parity and beyond was swift and largely built on people getting too excited about Canada's impressive fundamentals, so does the rush to kick it back down to size seem to be happening too suddenly and too universally now. Sometimes we just never learn, but a loonie in the 90 cent to $1 dollar range U.S. while this commodities boom plays out certainly seems plausible to me.