Finance Hints and Tips

One good short

I have been short selling a company called Leap Wireless. The premise of my short sale is simple. Out of the last 10 quarters (from Dec. 2006 until today) LEAP has lost money in 9 quarters. Eventually the company will run out of money to lose and the value should go down to $0. On July 2007, the stock was worth $99; today the stock is worth about $10. This reminds me so much of Nortel Inc.

Sexual harassment

Unfortunately I have been a shareholder of HPQ. Although the company’s results have not been spectacular, I thought that the stock had the potential to outperform the index. To my disappointment, the CEO, Mark Hurd, 53, was accused of sexual harassment by Jodie Fisher, a 50-year-old actress (reality shows and soft porn) and former female contractor. An investigation found that Hurd falsified expense reports and other financial documents to conceal the relationship. In other words, the Big Boss of HPQ was using the shareholder’s money to pay for his sexual indiscretions.

It is already bad enough that shareholders have to confront the uncertainties of the financial markets, but when investors have to suffer for the boss’ questionable ethical and sexual behavior, it makes investing almost repulsive. At the time of the announcement, the stock price went down almost 10%.  Mr. Hurd’s imprudence cost shareholders almost 10 billion dollars in one evening. To make matters even more obscene, Mr. Hurd, who is married with two children, will walk away with about $34.5 million in total compensation after being fired from HPQ.

Bidding War

On August 16, Dell Computer made an offer to buy 3PAR, Inc. (PAR) a small company in the business of cloud computing*.  3PAR shares had mostly traded around $10 this year, until Dell announced its $18 per share bid in August, Shortly thereafter, HPQ made a counter offer. Offers and counter offers came and went until Dell finally conceded defeat. At the end, HPQ ended up paying $33 on a stock that was about $10 only two weeks earlier. As a small shareholder, I do not understand all the complexities behind this deal.  However, being the frugal person that I am, I have this uncomfortable feeling that HPQ paid too much for this company. I hope to be proved wrong in the future.

The results for August 2010

So far, my portfolio is beating the Toronto index and the S & P index. I must admit that these good results are due more to good luck than being smart, but shamelessly I will take it.

Alain:
-0.2% for August
Average return of June, July and August: 1.39%
Cumulative return for June and July: 4.422%

TSX index
1.71% for August
Average return of June, July and August: 0.42
Cumulative return for June, July and August: 1.28

S&P 500 Index
-4.72% for August
Average return of June, July and August: -1.24%
Cumulative return for June, July and August: -3.65%

My holdings
CDZ.TO (long position)
HPQ (long position)
LEAP (short position)
SDY ( long position)

Prime Rate: 2.75%

*Cloud computing is Internet-based computing, whereby shared resources, software, and information are provided to computers and other devices on demand, like the electricity grid. (wikipedia)

How I got hooked on Finance?

Some of us learn about investments by studying and some of us learn about investments by trial and error.

Originally I  became interested in investing 20 years ago (1990) when a Money Magazine landed in my hands by pure coincidence.  As I was flipping through the pages I found myself reading an article which sounded like this: “Which bank account will give you the highest return for your savings?” . Since I consider myself a frugal person, I followed the advice of the magazine and found myself earning a few extra dollars for changing my account from bank “A” to bank “B”.

Later on I discovered in the financial newspaper and in the business news that some stocks were going up or down 20 and 30% in one day. My imagination started going wild thinking that I could become rich in just 5 years. I got hooked on TV Business shows and as the TV announcers would say “Buy Intel” I would buy Intel; “Buy Cisco!”, “Buy Nokia!”  and I would follow their orders. As I lost money listening to the TV personalities, I realized that it was not as simple as it seemed and that I had some further learning to do.

I took many finance courses at Concordia University, but after earning my diploma, I realized that higher education did not show me the secret to become rich buying stocks. I did all that home work for nothing.  So I continued my learning by trial and error. I remember spending so many hours playing “what if” scenarios, then trying “the perfect strategy” only to see my dollars dissolve in thin air.

Sure, not every stock that I purchased was a money loser. I remember a few times buying something in the morning and then cashing out with a 10% profit in the afternoon. These sporadic winnings nourished the hopes that one day I would discover the secret of the stock market. However, after many years of buying and selling stocks my strategies were so intricate that I did not know if overall I was winning or losing money. My winnings must have started to surpass my losses because the balance in my bank account started to increase. But do I know how my portfolio did in 2009 or before?  Do I know how I did in relation to the rest of the market? No, I don’t!

How are your investments doing?

It is my belief that most non-professional investors do not know how they are doing either.  They jump from one trade to another, putting little effort into creating and measuring their overall strategies.They may know how much they win or lose in a particular stock, but do they know how their whole portfolio did for the year? Do they know how the portfolio did in relation to the market? To compare how your investments are doing to some kind of benchmark is critical to your success. How would you know if all those hours reading or listening to financial news are worth your time?

Are you playing the market for fun or to increase your wealth?

There are probably hundreds of different benchmarks which represent different investment styles, but for Canadians the most common benchmark is the TSX index (On Feb 7 I wrote a blog What is the TSX and why you should care).  If you find yourself under performing your benchmark year after year, then you have to look at yourself in the mirror and ask: Am I playing the market for fun or to increase my wealth?

Are you emotionally attached to your investments?

One of the major pleasures of playing the market is that it makes for an interesting topic of conversation at cocktail parties. I have often found that people can become as passionate about their stocks as they can be about their favorite hockey team. Even as they see their stock losing value, they say: “it will come back”, “it will recuperate”. Well sometimes it does not come back and many times it goes nowhere. Remember Nortel? The idol of all Canadians went from $124 to $1 in less than 2 years. How about Bombardier?  In January 1996 the stock was about $4.60 and today (14 years later) it is about the same price. Today’s love stories are Apple and Google as people are falling out of love with RIM’s Blackberry.

Are you following a financial expert? a newsletter? If so, how is the expert doing?

As I browse though my Google e-mail or my facebook account I notice this kind of announcement on the side: “How to get rich buying penny stocks”. If they knew how to get rich why are they not rich?  How about Jim Crammer from the TV show “Mad Money” . Has anybody bothered to check how his actual portfolio is doing? If he knows where to invest, why is he still working as a TV animator? How about all those newsletters that you get from your bank, your broker or the hundreds of financial experts? Do they really produce superior results or do they just want your investment dollars? Before you decide to follow an expert, just take a minute to see how he has been doing vs the market. If you cannot find the information, chances are that the experts are struggling like the rest of us.

When we think global diversification, we think of buying global or international mutual funds or ETFs. A global fund is a fund which invests in both Canadian stocks and foreign stocks. Conversely, an international fund is a fund which invests almost exclusively in foreign stocks.

Perhaps an alternative way of diversification would be to diversify by sectors of the economy (e.g. financials, energy, health-care, technology, transportation, etc.).  Investors should aim to have at least one holding in each of these different sectors. As the economy moves in cycles, there is at least one sector that is leading the market, no matter whether the economy is growing or not.

Within each sector of the economy, there are different industries. The transportation sector, for example, includes airlines, trucking firms and railroads (e.g. Air Canada, Canadian National Railways). Within the financial sector there are banks, insurance companies and investment firms ( e.g. Royal bank, Manulife financial).

Most of the time Canadian investors limit themselves to the Canadian companies that are familiar to them. For example, in the banking sector they always think of the big 5 (TD Bank, Royal Bank, Bank of Nova Scotia, Bank of Montreal and CIBC) whereas other major banks such as Deutsche Bank, Barclays Bank and Citi Group are automatically excluded.

The point is not to invest based on the location of the major bank – be it Canada or England –  any more than you would choose a bank based on whether its headquarters are in Quebec or Ontario.  Likewise, when considering  investing in the technology sector, it is necessary to go beyond pure Canadian companies. Otherwise, our sole choice would be Research in Motion and we would lose the opportunity to invest in the Apples and Googles of the world. Canada does not have many choices in the health care sectors and Canadians should consider pharmaceuticals throughout the world – such as Johnson & Johnson, Bayer and Merck.

Bottom line: Diversify by economic sector and see each economic sector from a global point of view. You do not want the best of Canada (only 2% of the global economy), you want the best of the world!

The month was fantastic. My return was 5.29%, whereas the the Toronto index was 3.71%  and the S&P index 6.88%. My income was in between the two indexes. This is normal given that my portfolio is composed of stocks that are part of the major indexes in Canada and the U.S .

On average, I am doing better than both indexes. The reason is that during the month of June, while the market was going down, I had some short positions which increased in value. My average return for June and July was 2.16% vs.  -0.21% for the Canadian index and 0.56% for the U.S index.

Alain:
5.29% for July
Average return of June and July: 2.16%
Cumulative return for June and July: 4.43%

TSX index
3.71% for July
Average return of June and July: -0.21
Cumulative return for June and July: -0.42

S&P 500 Index
6.88% for July
Average return of June and July: 0.56%
Cumulative return for June and July: 1.12%

My holdings

My holdings
CDZ.TO (long position)
HPQ (long position)
LEAP (short position)
SDY ( long position)

Prime Rate: 2.75%

July was the first moths of my paper trading portfolio. This is a portfolio composed of 10 U.S. companies, each company representing a different segment of the U.S. economy.

My original views were pessimistic, so my initial positions were all “Shorts” . As the month progressed, I realized that there was a change of sentiments in the market and almost all of the companies in the portfolio started to rebound. As I realized this, I changed most of my position from short to long. Today, at the end of the month I have 8 longs and 2 shorts.

The portfolio started with $100,000 and now its value is $96,930; This give me a net lost of 3.07%. Conversely, the S & P 500 index went up from 1030.71 to 1101.60 or a net gain of 6.88%.

Over all the performance for July was quite poor.

The Confusing Financial Markets

I watch the business news daily, and every day there is an array of experts talking about their favorites stocks. “Buy!”, “Sell!” and so on. “The economy is in a downturn…”, “We are in recession…”, “Gold is up…”, “The loonie is down…”  and the story never ends. At the end of the day, only 25% of money managers do better that the index (I have read this statistic so many times in several text books, magazines and hear it so much in the business news, that I believe it to be true without bothering to do the actual verification myself).

I am trying to be a prudent man

If most of the experts can not beat the index, how can a regular investor take up the challenge of taking his investment dollars into his own hands and have a decent return? Shouldn’t we just dump all our savings into an index? A prudent man would do just that. Go with the statistics and hope for the best. Personally, I have been gearing my  savings into this sensible approach. Slowly I have been accumulating two ETFs (Exchange-Traded Fund), one in the U.S. (SDY) and one in Canada (CDZ.TO). These ETFs are composed of dividend-paying blue chip companies that have been paying increasing dividends for at least the past 5 years.

Quebecers should fire Michael Sabia from La Caisse

But is this all there is to investments? Certainly if the Caisse de depot et placement du Quebec (with all of its financial geniuses) would have dumped all  Quebecers’ savings into the Canadian index, all Quebecers would be better off. From January 1st 2000 to Dec. 31st 2009 the Toronto index produced a return of 45% (5% per year); for the same time period la Caisse produced a return of 38.95% (4.32%). Under the light of these results, we could have easily fired Mr Michael Sabia (President and Chief Executive Officer) and all the CFAs (Chartered Financial Analyst) and financial experts under him and saved millions of dollars in experts’ salaries, making more money available for Quebecers for their retirement.

I Refuse to listen to reason

In spite of all this hearsay, and statistical evidences, I refuse to admit that all my years reading financial books and listening to business news have been a waste of time, that I could have just as well placed all my savings in the index, save myself all the emotional ups and downs of the market and at the same time be better off than 75% of the experts that make their living managing money.

My Last act of rebellion

As an act of rebellion  against reason and the evidence, I have decided to create a fictitious portfolio with an economic value of $100,000.00 composed of 10 different companies in the U.S. In this portfolio I  will be either buying or short-selling the same 10 companies.  At the end of a 12 month period, if the paper portfolio has beaten the index, I will consider investing real money using the same strategy. On the other hand, if the index beats my paper trading portfolio, I will strongly consider trowing away all my finance books and will give up listening to the business news.

The paper trading trail

The premise of the paper trading technique is simple: Buy a company when it is going up and short-sell it when it is going down. It seem so simply that hardly any one uses this technique.  As I will also be trying to follow the very well established principle of finance “diversification”, each one of the companies will be representing a different industry in the U.S. At the end of each month I will publish the progress of the paper portfolio, and how it compares with the S & P index.

The First Move

Since the economy seems to be in a down turn and most stocks seem to be going down, I have started by short selling all the 10 companies of the portfolio. Here is a picture of all the companies.

Please wish good luck to my paper portfolio. Until now, I have enjoyed reading finance books and listening to business news.  I would just like to know that it serves some kind of purpose.

The spring quarter was negative for most North American markets.  The Toronto (TSX) index was down 6.1% while the U.S (S & P) index was down 11.9%. For the month of June,  Toronto suffered losses of 3.9% while the U.S went down 5.4%.

For the month of June, my own personal portfolio was down 0.9%. In comparison to the rest of North America, my portfolio did pretty well. Part of the good fortune was attributed to holding a “short” positions (profiting from the falling in price of a stock). In particular, I “short sold” LEAP Wireless ( a provider of digital wireless services in the U.S.) which has been losing money for the past 3 years.

Looking forward to July, I will try to gear my portfolio toward dividend earning securities. In particular, there are two ETFs; one in the U.S. (SDY) and one in Canada (CDZ) that concentrate on companies that have been increasing dividends for the past 5 years. The purpose of holding these ETFs is to create a regular stream of cash flow that one day will help finance my retirement.

Monday March 1st was the last day that Canadians were able to reduce their income tax bill by contributing to their RRSP. The next step is to make sure that you have all your tax papers so that you can send your income tax report before April 30th.

The principal slip for most Canadians is the T4 (and Releve 1 if you are in Quebec). If you have not received it by now, contact your employer.

Other slips you should be receiving before the end of March include: your RRSP contribution receipts, charity donation receipts, and your T3s and T5s which show the earnings or losses on your investments.

If you took advantage of the Home Renovation Tax credit, this credit could be claimed by either spouse (better to be claimed by the spouse with the higher income).

If you are receiving pension income, do not forget that you can split it 50-50 with your partner. This way the spouse with higher income can reduce his/her tax bill.

Personal finance 101: Never borrow money from your credit card.

Credit cards are extremely expensive. If ever you want to borrow money, go to your local bank and ask for a personal loan at a reasonable interest rate and pay it back within a determinate period of time.

If I were in a position to give financial advice to everyone, I would say: “Please, get rid of your credit card debt!” Do not get fooled by all the promotions and the competitive time offers that the credit card companies use to trick you into becoming dependent on your credit card. Be smart about credit cards. Use them as a convenient way to pay for products or services, pay the balance right away, and never use them to borrow money.

(RESP) Registered Education Savings Plans.

With the help of an RESP you, as a parent, friend or family member, can start putting aside money for a child’s post-secondary education.

RESPs have two great advantages:

1. The federal government will top up contributions by 20%, up to $500 annually and the Quebec government can top up contributions up to $250 annually, Contribution are limited to a $50,000 lifetime contribution per child.

2. All the gains withing the RESP will benefit from tax-free compounding.

If I deposit $25,000 into my child’s RESP account, the federal government will contribute $500 and the Quebec government will contribute $250. This government contribution will give me an automatic gain of 30% plus all the account’s gain will compound tax-free.  I believe that this deal is a no-brainer.