Flying south

As the Canadian dollar maintains its value above the U.S. dollar, I've turned my thoughts toward how I can use this to my advantage in my investment portfolio.

The easiest, most direct way is to buy U.S.-listed securities. The way I manage my investments, I make two large lump-sum purchases per year in my RRSP, and it's time for my second purchase of the year. (BMO being the first, if you were wondering.) I should have the money moved around by the end of the month. The question is, what am I going to buy with it.

In general, I'm a big fan of indexing to achieve the sort of long-term value I'm looking for, but I'm not averse to placing my bets on individual stocks here and there if I think they're particularly undervalued -- especially when they have a nice fat dividend for me while I wait for the rebound.

As such, I'm basically looking at three options at the moment. Each have their individual plusses and minuses:

Option A -- Buy another Berkshire Hathaway B share. (BRK.B)
I bought my initial Baby Berk share about 18 months ago, and it's fair to say it's outdone all of my expectations thus far. People told me at the time that Berkshire was too big. That Buffett's typical way of investing wouldn't work anymore because the company had too much money, and was hamstrung by having to make billion-dollar purchases that would yield less diamonds in the rough. Berkshire was a great company to buy -- in the 1980s -- I was told. 18 months later, my stake has increased by nearly 30% (in U.S. dollar terms, anyway) and the stock has reeled off a few impressive quarters in a row. Safe to say, I'm not selling my baby berk any time soon. But that's not to say I'm leaning toward buying another. Much as I hate to admit it, Warren Buffett's going to die one day, and when he does, people will panic and I'm convinced the stock will take a significant haircut. But they'll still have the same rock-solid assets, and new management isn't going to change course. All that will really happen is that people who jumped in on the dip will be rewarded down the line when the market realizes Berkshire's the same awesome company it always was. If and when that happens, that's when I'll probably buy more. Besides, buying more shares in that company right now would look a lot like chasing a winner -- usually a big no-no. And the more diverisification, the better. Why increase my stake in one company when there are plenty of equally-appealing different ones out there to hedge my bets?

Option B -- Vanguard's Total Stock Market ETF. (VTI)
Vanguard deserves credit for being the absolute gold standard of low-fee investing. They have a wide selection of products more targeted to specific sectors and styles, but this huge ETF is their broad U.S. market-indexing offering. It's the easy, idiot-proof option here, giving me exposure to the entire U.S. stock market. The downside? Very little, really. There's not much of a dividend and it gives exposure to some companies that won't do very well in the next little while (all this rate cutting and the subprime mess just looks like a house of cards to me) but really, VTI is the safe, secure bet. I just find it hard to get excited about it. Not when there's options like this one lying around...

Option C -- American Capital Strategies. (ACAS)
There are times when I simply adore MoneySense magazine. The time that their recent issue directed my attention to this little beauty's existence was one of those times. ACAS is an asset manager with more than $16-billion under management. Their core business appears to be selling debt and financing instruments to fund private equity buyouts and the like. All in all, sounds like a profoundly boring company -- which I like in my investments. So what has me so excited? Some of the numbers. ACAS has a tantalizing dividend yield of nearly 10%. That's pretty hard to find, unless you're dealing with a stock that's been hammered or had some disastrous short-term event befall it (There are visions of Biovail dancing in my head as I write this....) But ACAS doesn't seem to qualify on those fronts. All they do is lend money out to businesses and private equity groups, and bring it back in at an advantageous interest rate. They don't have any significant subprime exposure, which is the 600-pound gorilla threatening all financial firms in the U.S. at the moment, and they have a consistent history of growing earnings steadily in up and down markets. I like that. The company has a simply ridiculous P/E of under 5. P/E is not a number I normally pay particular attention to, but my general rule of thumb is the lower, the better. Canadian banks have P/Es in the low teens, for example, so 5 classifies as quite good. So basically, I'm looking at a company that, even if the stock flatlines, will pay me back 10% of my investment for every year I own it, and the market is only asking me to pay 5 times its annual earnings for the privilege. If there's a catch, I ain't seeing it.

Thoughts, questions, criticisms and haikus welcome as always in the comments. It should be obvious which option I'm leaning toward, but unlike George W. Bush, I'm always looking for dissenting opinions on my boneheaded moves.

BRK.B -- My very own index fund

It's May. It's the advent of spring, a time when this young investor's fancy turns to Berkshire Hathaway's annual general meeting in Omaha, Nebraska.

I bought a single Baby Berk share a little over a year ago for about $3100 U.S. My reasons, at the time, were that I was looking for exposure to the U.S. market, but mainly, I'm such a fan of the Buffett investing philosophy, I thought having that share in my portfolio would be a good benchmark to hold myself up against. I still really like the way the Oracle of Omaha thinks about investing, but the more time goes by, the more I like my stake in it for new reasons.

I think of it as a sort of actively managed, diversified U.S. equity fund.

I know it's foolish to ignore U.S. equities and they've historically been the real driver of the global economy. But today, the negative job numbers, housing stats, growing federal debt and quagmire in Iraq make me really worried. Worried enough that part of me wants to get out altogether. To be sure, there will be winners and losers even in a down market as there always, are, but I'm rarely smart enough to predict which will be which, so I'd have to go with an index fund and buy the whole market. And that exposes me to the downside risk that I'm convinced is coming.

But via Berkshire, I'm basically getting a stake in a holding company that takes positions in large-cap U.S. companies it thinks will outperform over the long-term. And it's run by the best fund manager in the business. About 50% of Berkshire's revenues come from solid industries like insurance, but there's also a hefty stake in stalwarts like pharmaceuticals, utilities and manufacturers. Not to mention blue-chip retailers and consumer goods like Dairy Queen, Microsoft, Wal-mart and Coca-Cola. And the company has even started to invest internationally.

I guess what I'm saying is, when the bad times inevitably come to U.S. equities, I trust the companies Warren Buffett likes to outperform the market as a whole. It's not like he doesn't have a track record at this. The stock's up 3600% since 1987. That's six times better than the NYSE over the same period. The company's sitting on $46-billion in cash -- enough to buy Bank of Montreal outright and then some, for Pete's sake.

It's nice that the stock's up 17% since I bought it, but I never saw it as a short-term position. I'll be holding on to my stake in Berkshire Hathaway for a long, long time.

The Oracle speaks

Some light Friday-afternoon reading for everyone, as Warren Buffett's annual letter to Berkshire Hathaway shareholders is out and available online.

I'm a big fan of the Buffett investing philosophy and I make a point of reading it every year. It's full of insightful financial insights, but also riddled with quaint and endearing anecdotes that give us a glimpse of the what makes the richest man in the world really tick. I myself own a single Berkshire Hathaway B share and it's on my life's list to one day go down to Berkshire Hathaway's AGM and cavort with the man himself. They call it Woodstock for Capitalists, and it sounds like a nerdy good time.

I bet it'd be full of gems like this:

Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow while both were shopping. The elderly man explained apologetically that he had lost track of his wife and was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also wandered off and suggested that it might be more efficient if they jointly looked for the two women. Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,” the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her,
we’ll look for yours.

What we are looking for is described on page 25. If you have an acquisition candidate that fits,call me – day or night. And then watch me shatter a stained glass window.

You've just got to love a company that can include a section like that in its annual report. That, and the 18.4% return in 2006.