Pot Pourri

A few finance-related things I've found of interest out there on the Internets:

1) Are we in a recession? A bear market? A correction? And is it over? I have no idea. But I do know that when Starbucks starts departing from their traditional strategy of selling overpriced coffee, the big guys must be worried. $1 coffee and free refills? What is this, my local coffee shop?

2) Beyond the shock value of a nice big round number, I couldn't put my finger on what exactly I found so troubling about the news that a french trader at Societe Generale racked up over $7-billion in stock market losses, until Eric Reguly nailed it for me:

What is astounding is the amount of money he would have had to invest to pile up losses of €4.9-billion. European indexes are down 15 per cent, give or take a couple of points, since the late autumn. This implies the face value of his positions must have been €30-billion or more. How could a single, young bank employee have built enormous positions without the risk gnomes knowing about it? The answer is obvious: There are serious flaws in SocGen's oversight and risk management departments.

And if it can happen there, what's stopping it from happening somewhere else?

3) I thought lowering interest rates was supposed to make currencies weaker, but today's news that the loonie gained nearly 2 cents bucks that logic. Just more evidence that all the rules are apparently out the window in our current, nervous and crazy markets.

4) Ink-stained wretches like me, take heart. People do indeed still like reading newspapers. They just don't like paying for it, and they're doing it online. Maybe this blog thing is going to pan out for me after all. Of course, I'd probably need more than my current 25 cents a day from Google Adsense to live off it...

Why I'm not worried

OK. Calm down. Breathe. You're going to get through this.

I'm not going to lie to you, it's not pretty. The TSX has been a ski-slope downwards all year, and all of 2007's gains have been wiped out in the first three weeks of 2008.  And today's 600-point loss is just the cherry on top -- although I suspect there's more to come.

If you're new to this game, you're probably cursing your rotten luck for jumping in at the worst possible time, or worse, blaming yourself and thinking you're the only dummy managing to lose money on the stock market. You're not -- we're all in this together.  And I promise you, there's a way out.  

The old me would have been right there with you. Whining, and wincing, and screaming about the injustice of being cheated out of money for doing the right thing and investing even while everyone else my age is blowing their cash on vacations, cars, and consumer debt.

But that's not me anymore. There's a new sheriff in town, and his hand is calm and steady when he's staring down the bad guys. I'm not worried. For a few simple reasons.

Thanks to the pruning I've done in recent weeks and months, when I look at my battered portfolio today, there isn't a single name that I don't think has the ability to weather this storm and be a thriving, growing business several years down the line. Not next week, or next month. But down the line. And I'm likewise sure that those beleaguered stock prices are one day going to be worth much more than they are today -- not to mention much more than what I paid for them -- at some point in the mid to distant future. Gone are the penny stocks, the poor-quality income trusts, and of course, the Biovails (down another 5% since I sold, not that I'm keeping track or anything  :)  ) that ordinarily made me worry because they were speculative flyers I bought out of greed. I'm down to the bedrock I'm building my future on.

I'm looking at the banks, large-cap ETFs, asset managers, REITs and of course, failed textile manufacturers that populate my portfolio and I like what I see. I don't necessarily like the numbers next to them at the moment, but I'm sure these are the companies I want to own for the long-term. That's how I'll sleep tonight.

Will you?

The great investing experiment

My sister, bless her heart, is not what you might call great with money. I've discussed this a few times on this site, but basically she's a textbook case of someone with a high income, but high expenses, who's always complaining that she never has any money left over at the end of the month. I've had a look at her cash flow and in truth, it's not as bad as it may seem. She's deep in debt, yes, but it's primarily "good debt" -- a mortgage and a $48,000 loan to put her through law school she's currently paying off. But still, that four-figure credit card balance she rolls over every month makes me wince -- as does her tendency to drive to work and pay $20 for the privilege (when the streetcar gets her there in 25 minutes, stress free).

I like to tease her about it, but truth be told, that's probably just my natural sibling tendency to play down how well she's turned out. She's a wickedly smart cookie, a success by any reasonable metric, albeit one with some shoddy financial habits she's been able to get away with because of a high income. Bottom line is, I'm really proud of her, which is why I'm particularly enthused by the plan she's concocted to help get her on the right financial path.

For Christmas, her partner's affluent father was amazingly generous and bought the two of them a brand new car, to replace the two clunkers they've each been driving since about the mid-1990s. She'd originally planned on driving her car under it literally died on her (as opposed to trading it in for a small head-start on an expensive new one) but this new development means she now has an unneeded asset she can sell. She's poked around and according to autotrader.ca, each of their two cars has a resale value of a little under $3000. So selling both would net a windfall of at least $5,000 in "found" money.

Her idea is to give this cash to her "investing nerd" of a brother, so he can use his dizzying valuation skills to make them both overnight millionaires, or something like it. I can already hear the clamour of voices screaming "DON'T INVEST -- PAY DOWN THAT DEBT FIRST" and believe me, I agree. But unfortunately, it's a non-starter for her. She refuses to do anything as "boring" as paying down debt with this windfall -- no matter how many times I assure her it's extremely unlikely I, of all people, can better, on the stock market, the 19% after-tax return that bringing Mr. Visa down to 0 would do. But she's insistent. I'm cautiously willing to go along, on certain conditions. She's assured me she'll pay down that debt out of different funds, but she really wants to "have a little fun" with this mini-windfall. It's an emotional reaction, but it's one I can understand I suppose. I think she can do it all if I keep working on her.

So the obvious question is, what investments am I going to buy for her? Ordinarily, if anyone in their 20s or 30s comes to me and asks "what should I invest in?" I say as long as it's for the long-term, stick it in a broad-based ETF like XIC or VTI and forget about it for a few decades. But it's not that simple, in her case at least. She has a bunch of underperforming mutual funds that, strangely enough, seem to do nothing but bleed out fees and commissions without giving her any paper gains of late. (Editor's note: Sound familiar?) So, buying her $5000 worth of XIC, for example, wouldn't give her any more exposure than she already has in her anemic balanced funds, and would only sour her views on investing even more. And I can't bring myself to tell her to give the $5000 to her adviser because I don't think she needs to be paying this person like, 2.5% per year, when an ETF could do pretty much the same thing for her.

As such, my aims for her are a little bit different. I can roll the dice and stick my lot in with one or two companies, with the knowledge that her balanced funds will at least track the stock market as a whole. I'm going to be very strategic with my picks, as I'm trying to convey two broad notions to her:

1) Investing is about the long term. It's great if she can look at my picks in six months and see that she's "up" or "made money" on them, but ultimately, that's not important. I want to pick a company she can buy and hold for years, that'll increase in value slowly over time, so the magic of compounding, and stock splits, and dividends, can get to work for her. I want to rid her of the notion that you can get rich quick, and show her how getting rich slowly is not only easier, but also actually attainable.

2) Dividends are cool. Capital gains can be fleeting, but companies that pay out any excess cash in the form of dividends to shareholders are the best in my book. The day I realized that essentially, these firms are paying me to own them was an eye-opening one for me. I want her to get that, too. Plus, the dividends can be like little rewards for her. It's cash she can take out of the account and spend as she sees fit, without having to sell or reduce her stake to monetize. Surely that will turn her into a buy-and-hold investor -- quarterly cheques she can spend as a reward for her patience.

One thing I should mention is that I'm going to be conducting this little experiment in an unregistered account (i.e. not in an RRSP) I'll set up for her with a low-fee online brokerage like Qtrade, Questrade or Etrade. My sister has a large income and puts relatively little into an RRSP at the moment, so she's got a lot of unused contribution room. One day, when she's figures all this stuff out, that contribution room is going to be worth a lot to her as a tax shelter, so I don't want something I screwed around with today to impact that. I'll keep it unregistered, and we'll worry about capital gains if and when they're up and we sell. If that happens, it'll have been a worthwhile lesson for her, so it's not a bad problem to have. And I should also add that I'm going to be including her, as much as she's willing, in the selection process. Because this is supposed to be a learning experience for her. I want her to understand the how and why of what I'm doing, as opposed to her just shooing me away and saying "you deal with this stuff," the way she does at the moment with anything regarding money.

As far as companies go, I've got a few contenders I'm currently researching based on my above-stated criteria, and I'll keep you updated on how this progresses. But I'm eager for feedback and suggestions on this. Feel free to try to convince me why she's better off paying off the Visa bill -- like I said, I agree with you. But it's a non-starter for her, so this seems like the next best thing.

Trading note -- BVF to CDZ

Last week, in an attempt to stop the bleeding, I put my first ever stop-loss order on my stake in Biovail. A few days later, the trigger was hit, and my online brokerage sold the entire stake. I haven't calculalted what the total damage was, dividends and all, but i'd guess it was somewhere between a 40-50% loss.

For what it's worth, everything I've ever said about the company remains true. I think it's an excellent speculative high-dividend payer that has the potential for huge gains to anyone willing to roll the dice. I'm just not, at the moment. The stock market is doing some strange things at the moment, and I'm reasonably confident in saying that if we're not in a bear market, we're at least in one that's moving sideway for the foreseeable future until this subprime mess shakes out. I'll stick to my savings plans, and whenever I accumulate enough money, I'll probably add it to some long-term holdings I already have (many Canadian banks are well below where they were this time last year, for example.)

That said, I've decided to park what's left of my biovail cash in my dividend focused ETF. I own Claymore's Dividend fund, (CDZ on the TSX) a basket of stocks that's tailored towards the members of Mergent's Dividend Achievers, who have track records of steadily paying, and increasing, their dividend payout. No sense having cash in the investment account not earning anything for me, and CDZ provides me with some downside protection (in the form of dividends) while keeping me invested in Canadian large caps. I can live with that until another opportunity presents itself down the line.

Changing banks -- update

Ever since RBC made the mistake of denying me their multiproduct rebate for customers with multiple accounts, I've been working towards moving my accounts away from them, or switching to no-fee versions of the accounts I choose to keep with them -- for now.

Things are progressing nicely on all fronts. I opened a no-fee President's Choice chequing account a few weeks ago, and I've been diligently transferring paycheques and automatic bill payments over to that account for the past month or so. Once I knew everything was kosher on that end, I set about cutting the fee-taps on my existing RBC chequing account. I decided there's no point in officially closing it altogether, but I've switched it to what they call a Day-to-Day Savings account in the interim. The account will pretty much be dormant, although it is there if I ever want to fire it up again for some new promotion they're offering me. In the meantime, there's no charge to put money into it via ATMs, and I get one free debit per month (which I'll probably use to pay my Royal VISA with.)

And speaking of VISA, I went ahead and switched from the RBC Platinum Avion card (with an annual fee of $120) to a lesser card that has no annual fee and accumulates points twice as slowly. The key component here is the no annual fee part.

Add it all up, and Royal no longer gets a penny from me in bank fees or VISA charges (since I pay my balance in full every month.) I'm quite pleased with myself for following through with this. There's simply no reason to pay bank fees in this day and age, because it's such a competitive marketplace. The minute I realized this, RBC's goose was cooked.

I should also mention I'd be more than happy to switch back if they'd simply give me what I wanted in the first place -- to not have to pay monthly fees for having a basic chequing account.

My last remaining account with RBC is my investment account, which I'm currently talking myself into changing. It's the last hassle, really, but after having come this far, there's no point in stopping here.

As always, I'll keep you posted.

My number

There are countless little yardsticks that people use to measure how they're doing financially. Some people track net worth. Others worry about how much their stocks have grown (or shrank) by in percentage terms. These are all useful tools to track and ultimately improve one's financial health, but there's another number I've kept my eye on since I've become aware of the awesome power of dividends.

Every year, I like to sit back and calculate how much passive income my portfolio generates for me in the way of dividends -- cash in hand. With apologies to Lee Eisenberg and Alex Berenson, both of whom have written fantastic financial books with the same name on different subjects, I call it my "number."

I'm still relatively new to the investing game, but I've already figured out what sort of investor I am (Editor's Note: A bad one! *Rimshot*) in that I generally eschew newer companies with explosive growth prospects and nebulous earnings I can't figure out. I'm more drawn to established companies that I see and hear about everyday, which, for whatever reason, have stocks that are out of favour temporarily because the company's prospects have taken a tumble, or simply because their chosen industry isn't as sexy as some others. So I'd definitely call myself a value investor, but in addition to that, I'm especially keen on finding undervalued blue chippers that pay me dividends (and hopefully, steadily growing dividends) on a regular basis. I'm not sure what the trigger was, but I've learned that capital gains can come and go, so companies that consistently pay you for owning them regardless of the stock price are the way to go, long-term. For me at least.

It's for that reason that I always get a kick of how much dividend income my portfolio as a whole pays me in actual cash every year. I know my shares are going to go up and down from time to time. So I'm not all that concerned that my $70 BMO shares are currently worth in the mid-50s. They'll come back. And in the meantime, every single one of those little beauties spits out $2.80 a year to me, to reward me for my patience. As long as my total dividend payoff is going up, in a very general way, I think I'm on the right track.

This time last year, my number was at $697.83. I think I've had a fairly inactive year on the investing front (only three new positions taken) but apparently when you couple the organic growth from companies I own upping their dividends with my new holdings, my number has jumped quite a bit. It's now $1232.85.

Think about that for a second. I certainly have. If I added not one red cent to my investments all year, and even if every single one of those stock prices cratered, I'd still collect cheques adding up to $1232.85 of new income at the end of the year. That's more than two weeks pay, after taxes, for me. Probably more, in fact, considering the favourable tax treatment of dividends in Canada. To put it another way, my net worth went up by an impressive 25% in 2007, but my "number" went up by nearly 77%, which makes me even more excited.

I have numerous visions of retirement, but a recurring theme is one where I spend my days doing things I enjoy, and I pay off my modest expenses almost exclusively out of my dividend income. A growing number is an excellent way to make sure that happens. Net worth, a higher salary, cutting household expenses and other things are all very important and noble goals to strive towards. But to me, there's no better feeling than realizing my number's moving in the right direction -- up.

You're on notice...

Writing (and bitching) about my stake in Biovail is par for the course around these parts, but there's a new development you all need to be kept abreast of. First, a recap. After taking an initial positiong in 2003 at a little over $30, I've watched and winced as the Biovail rollercoaster has rocketed around for the last several years. After dipping as low as $16, the stock inched all the way back up to the high 20s before crashing back into the teens in 2007 on a whole series of bad news. (Run Biovail through Google Finance for all the gory details if you must)

When it passed below $20 in late 2007, I thought it was madness, so I tripled my stake to 200 shares. I thought it had hit bottom, but it's since dipped even lower, to the point that it's been hanging out south of $14 for the last month. I've come close to selling countless times, just to cut my losses and move on, but ultimately, I'm stopped by two things -- I can't emotionally bring myself to sell at such a steep loss, and fundamentally, I still think the company is worth far more than it's being valued at now.

In general, I find this story from Dec. 26 jibes quite well with my own views on Biovail: "...all the bad stuff is priced into the stock. Meanwhile, any positive development in the spring could launch the shares back into the mid-$20 range virtually overnight. Until then, the company [and its generous dividend] will pay you to wait..."

I still think Biovail has a lot to offer as a somewhat-speculative, beaten-down dividend-payer for anyone willing to roll the dice a little in 2008. So the company hasn't completely lost me just yet. But I have my limits. For the first time, I've set a stop-loss order on the stock of $13. Essentially, after all I've been through, I think the stock still has some upside, and I'm prepared to wait, to a point, to see it realized. But I won't wait forever. If it dips below $13 (it's at $13.51 as I write this) then my brokerage will sell my stake, take whatever cash I can get and in all likelihood, I won't check the stock price on Biovail for a good, long while.

It seems ridiculous to talk of building in some downside protection for a company that I've already lost about 50% of my money on (not including dividends) but there you have it. I have shaken faith in the company's prospects, but I'm not willing to sit and watch my investment in their outlook whittle away to nothing. This stop loss order allows me to accomplish that.

So whatever you've got planned, Biovail, get cracking on it. The clock is ticking. And you're officially on notice...

2008 goals

I'm slowly emerging from my turkey-induced holiday coma here, and I promise to get back to posting with regularity real soon.

What with today being the busiest day of the year at most gyms, I figured it could be useful to have a look at how good I was at keeping my financial resolutions in 2007. I set a fairly ambitious goal for myself of having a net worth of $40,000 by the end of 2007. At the time, it was in the mid-20s, so that represented an increase of more than 50%.

Well, it didn't quite pan out. I was on track until about August, when the word "subprime" first entered into our collective vocabulary, and I've been moving sideways ever since. Truth be told, I'd probably be in the hole by quite a bit were it not for the fact that the new money I'm adding via savings is doing little more than offsetting equity losses.

When I made the goal, I knew it would be hard to hit, but I still wanted to try. I was swinging for the fences going in, but it doesn't mean the ground-rules double of $35,933 I ended up with is worthless. I'll get home eventually. There was some good questioning of the value of tracking net worth (since ultimately, it's a target most people aren't really in full control of) over at four-pillars recently, and while I accept the point, I still see some use in setting targets to reach for.

As such, I'm setting a new goal of $50,000 by this time next year, for a number of reasons. No. 1, it's a nice round number. And No. 2, it's a challenge to hit. To meet it, I'll have to stick to my aggressive plan of setting aside in excess of 30-35% of my after-tax income into savings every month. But even if I did that, and my holdings did nothing but tread water, I'd still only end up in the mid-40s. So I'm also demanding about a 10% return from the equities I already hold. My portfolio's got about a 4% or 5% yield, so I'm essentially trying to double that in an increasingly skittish market. Let's see what I can accomplish here.

Of course, if my circumstances change in any material way, I'll amend my goals as I see fit. But 50K in one year's time seems like a good starting point.