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.

Decision time

Just a quick note to Ontario readers to remind them to get out and vote today.

It's often said that in investing, you're better off to ignore emotions and trust your head.

But I'm urging you today to get out there and vote with your heart. Vote for the party who most represents the kind of place you want to live in. Canadian Capitalist took some unwarranted heat recently for taking a political side in this election, so I'm not going to do that -- not that it should influence your own views even if I did. I don't care who you vote for, as long as you do it. And while you're in that booth (or preferably before!) consider how you want democracy to play out in this province, and vote accordingly in the MMP referendum.

I know people are pretty politically cynical these days, but despite ample evidence to the contrary, it does matter. And it's a privilege, not a right.

Vote.

More bank notes

Since my experience with PC Financial's high-interest savings account has been largely positive, I've been mulling over switching to their no-fee daily bank account for my everyday chequing account.

I currently have a chequing account with RBC, a Visa card there too, and I keep my investments in an RBC Directinvesting account. That didn't really happen by design, but over the years I've grown to appreciate the convenience of having all my accounts in one place and being able to transfer money easily. I'm certainly not with RBC because they're the cheapest. I pay $4 per month to maintain my chequing account there, and $0 for the Visa because I pay my bill on time in full every month. In the past few years I've moved from about 20-30 debit transactions per month to less than 5 as I've been very diligent about putting absolutely everything I can on Visa for the points.

I usually say savings trump other factors , but part of me appreciates that I benefit from their size and heft when it comes to things like customer service when something goes wrong or having to find a bank machine somewhere nearby. If I were to count the advantages of keeping my everyday cash with RBC, I'd have to say they are the proximity to bank machines, ability to make same-day transactions (for paying off Visa or moving money into my investment account when an opportunity presents itself. Taking money out of my PC Financial savings, for example, would currently take at least two business days while I transfer it online to RBC and then find a bank machine to get it out.)

To me, $4 a month ($48 a year) seems a reasonable price for that. But let's do a little more detailed cost-benefit analysis here.

The obvious advantage of the no-fee chequing account at PC Financial? As the name implies, it's the 'no fee' part. That's a $48 annual savings right off the bat. But there's more. PC Financial offers 250 PC points every month for keeping $1000 in the account. Assuming I moved $1000 float from savings into the account to get that reward, I'd accrue 3000 PC points per year -- assuming I didn't use the account at all for things like buying groceries, which would boost my points. How much is 3000 PC points worth? As far as I can tell, about $3 worth of groceries. So my total savings in this scenario are now $48 worth of annual fees saved, plus $3 in benefits. I'm going to assume that things like customer service and prevalence of CIBC bank machines (who run PC's finance division) are a wash, so they don't enter into it.

Is $51 enough to make the switch? Honestly, I don't think so, but there are a few more factors to consider. Like the interest I lose from moving that $1000 out of my 4.25% savings and into effectively, an account that pays me 0% interest. That's $42.50 a year on the other side of the ledger. The benefits are getting smaller.

From where I sit, the only way this makes sense financially is if I play for keeps -- don't use the PC account merely as a "points-generating" mechanism, but actually use if for everyday use. I'd really start racking up some grocery points then. But I really like my RBC Visa card and would want to keep it. My plan to get free rewards from it is working perfectly. If that were the case, and I was going to use a PC account for things like my paycheque and debit transactions, but keep my RBC Visa and investment accounts open, I'd be well-served to keep the RBC chequing account open in some manner as an intermediary to them. Maybe converting it into a pay-as-you-go account would be best, where I'd pay $0 in principle, but a nominal fee (I think it's 50 cents) every time I made a transaction like paying my Visa bill or moving money into savings.

Forgive the jumbled structure of my thoughts on this one, but it's an insight into how my brain works. I'd love any insights from people who've done what I'm thinking of doing.

Essentially, my concerns boil down to this: Can you actually function without in some way being a customer of the big banks, and only use the fringe discount products? Or is that getting too cute by half?

I'd hate to go to the hassle of switching all those accounts over only to figure out the savings I accrued were nowhere near the cost in hassle I paid to get them.

Bank Notes

In a move that clearly demonstrates they're on the cutting edge of the 19th Century, Royal Bank manned up this week and announced they were lowering their online investing commissions to a more reasonable $9.95 for users with $100,000 in their account or who make more than 30 trades in a quarter.

That's some nice window dressing, but I see this as largely a symbolic act. Cutting prices for customers who A) already have the most assets and B) are more likely to recompense your losses by using the service far more frequently is not what I'd call forward-thinking customer service. The discount for active traders is particularly irksome to me because it really looks like RBC is trying to rope people into being day-traders by offering them 'savings'. But I digress. RBC and the other big banks can get away with doing stuff like this because Canada's banking system is an oligopoly, and people like me will more often than not keep our business with them -- especially when I hear about the headaches people have have with the actual discount players like Questrade, Etrade and Credential Direct. As a Big Bank shareholder, bring on the screw-job, I say.

On the opposite end of the spectrum, PC Financial, where I keep my emergency fund/condo downpayment, has very quietly raised their rate on their savings account. It's now at 4.25% for people with more than $1,000 in the account, like me. By my count, this keeps them a full 0.5% ahead of the granddaddy of them all, ING Direct.

What can I say, besides, "I'm glad I made the switch." I'm tempted to open up a no-fee chequing account there and keeping $1,000 in it just to rack up some free grocery points, but I haven't crunched the numbers to see if the money I'd lose in interest would be replaced by the amount of free groceries that would buy me.

How funds companies will sell you a lemon and tell you its lemonade

I'd heard of the concept of survivorship bias before, but I've been living the dream for myself this week.

When mutual funds companies boast about their cumulative returns over the years, its often a little bit misleading, critics say, because the money-losing funds they churned out over the years get killed off or blended into new products, so their gaudy failure rates don't get factored into the numbers. In a nutshell, that's what's known as survivorship bias.

To give an extreme example, if you buy a mutual fund that loses 90% of its value in the first year, that's going to be one ugly black mark on that company's performance ratio for years to come. They'd need several years worth of double-digit returns in subsequent years just to get back to break-even.

But, if they take that fund and roll it into a new product after that ugly first year, then all of a sudden they can pretend the one horrific year never happened, and instead trumpet the steady gains they've made for you on the new product. The black mark disappears, replaced by a shiny, new money-making product for you. Ignoring the fact, of course, that at the end of the day, you haven't actually made any money. It's just been sliced and diced around between several products, distracting you from the key issue.

That's exactly what happened to my lone mutual fund this week. That ugly -86% return since inception? Never happened, apparently. But boy, doesn't that 5% return on my shiny new fund sound impressive? Look at all that black ink! And look, the fund's chart actually points up!

Warrants mentioning.

New job

I'll spare you all the customary self-flagellation for being a bad little blogger of late. I've recently had an unexpected job change, and as you can imagine there's a lot of change that goes along with that.

I've got a bunch of ideals percolating around, so stick around.

I promise a more fruitful October around here.

Great minds think alike

It's rare that I find myself agreeing with Canada's major banks on very much, but I was certainly nodding my head more than usual as I read the story in this morning's Globe on what the heads of Canada's major banks think about the current market turmoil.

In a nutshell? Yes, the August swoon isn't pleasant for anyone, but it is probably necessary to shake out some of the bad bets people were making. When money is easy, there isn't adequate pricing of risk. Markets can't go up forever, and the current bull run will emerge stronger because of it.

But we're not out of the woods yet. "People haven't gone to confession yet," TD Bank head Ed Clark was quoted as saying. "Your gut is telling you there's a lot of stuff to come out in the marketplace." In other words, we haven't seen the worst yet because a lot of these credit problems haven't seen the light of day in quarterly reports yet. That's going to happen over the next 3-6 months.

Add it all up and I come to the conclusion that the market's going sideways for awhile. Fundamentals will inch it up, but every time some new company fesses up to bad debts, it'll sink down again. So I'm in no immediate rush to get money into the market any time soon, but I'm still very positive on the mid- to long-term outlook. I have not a shadow of doubt that the Canadian banks will by and large remain the profit-making machines they always have been, so if they keep stagnating for much longer, I might be tempted to scramble together some more money to put into them.

Pay yourself first -- or you won't

You've heard before about how one of the easiest things to do to change your finances for the better is set up an automatic savings program. It doesn't matter if it's as little as 10%, the point is by automatically deducting money from your paycheque as soon as it comes in, you won't have time to spend it, and you learn to live on the balance.

I've had an ASP going for about as long as I've had this blog, and it's developed into a nice tidy sum by now. But a few weeks ago, I cancelled it since I was going to be having larger-than-usual expenses (what with moving and going on vacation and all)

Just as it's amazing how fast your savings will grow by virtue of an ASP, so have I learned how quickly they will flatline when you don't. My expensive time is coming to an end so I'll be setting up another one, but it's really surprising to see how my savings pile has done nothing over the last little while -- even while I have some excess cash lying around in my checking account.

It's a cliche, but it works. Pay yourself first.

Even Ron Popeil knows you're better

off when you set it and forget it...

I was the second gunman on the grassy knoll, too

OK, my man-crush on Warren Buffett may have gotten me in trouble this time.

Mr. Buffett, please allow me to apologize for my actions. You're always telling people to try to convince you why you should buy their companies, and I have this really great business pitch for why you should buy my blog.

The guard spooked me and I panicked. Sorry. My most sincere apologies for scaring your wife, too.

(Note to anyone lacking a sense of humour: I'm kidding.)

Housing Reaganomics

There are many different ways of gauging economic health. The stock market. Job numbers.


One of the more interesting ones (to the star-struck voyeur in me, anyway) is to keep tabs on what the wealthy are up to. I'm not sure they're as clairvoyant as, say, the consumer price index is when it comes to how much cash we all tend to have in our pockets at the end of the day, but there's a gaggle of signs around that suggesting that the well-off are spending like there's no tomorrow -- worldwide credit crunch be damned.


Celebrities don't appear to be feeling the pinch. Whether its private jets or gaudy, $50,000 handbags, celebrities are still splashing money around like its going out of style. Sales of racing horses are skyrocketing, both in volume and individual prices. If oil-rich Saudi chiefs are throwing down so feverishly on their money-losing hobby, the good times will surely trickle down to the rest of us, the theory goes. And lately, prices for the ponies have been heading up in a hurry.


Closer to home, the super-rich are seemingly just as confident. REMAX put out a report this week saying that sales of luxury homes are booming. Canada's real estate market has hot and cold pockets across the country, but sales of luxury homes (the definition of what constitututes luxury changes from region to region) have already shattered last year's numbers, and its only September.


So good news all around, then. Your boss's retirement is definitely within reach. Try to remember that when you check how your stock portfolio's done over the last little while.