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All in to throw the first stone, none caring to heal anything.
“Hell is paved with good intentions!” we are taught. Yet, so many amongst us, some intelligent, keep on believing that they have the key to the Paradise and it’s made of… you guessed: good intentions! After all, is common sense, isn’t it?! But then again, the old saying “common sense is not so common” is always true in the case of others. Ahhh, the arrogance of thinking that good intentions amount to the worst of plans.
In the hardest of times as well as in the best of times, good intentions trump reasoning. Politicians do it wrong, corporations are to blame, welfare and health care are off the hook or they are not enough. What a blessing it must be to have a simple mind which sees everything as very simple and the choices that we have as being between good and bad! How simple must be everything when Jews or evil corporations or lazy bums are to be blamed for everything! People can straighten all the evils of the world in just 2 hours, over a pint of beer of glass of wine.
Now we are going through a deep economic crisis and people who went happily for the ride when this crisis was being cooked in the oven, are screaming and calling for heads to roll and throwing generous ideas as plans for recovery. Who is to be blamed for this crisis? THE OTHERS as poor Sartre was saying. Who are THE OTHERS? Bankers, corporations, politicians. Right?! WRONG!
(I am not really sure who am I writing this for because those who understand the situation, know it already, those who scream in the street, don’t care much and are too blinded by passion to give my words a second thought. Yet, here it comes.)
Bankers/Corporations – CEO and upper management are making money. Sure. With disregard to the deep social implications which most probably they didn’t give too much thought. Indeed. But, people – THIS IS THEIR JOB. They need to make money, to create profit and to reward the stockholders. If they don’t, they are kicked out on the spot. Check out what happens now on the market (not that you screamers ever bother to check the S&P, understand economy etc.) – if a company misses their PROFIT target, the share price goes down, most of the times ending with the company having to do massive layoffs. I repeat – even if they ARE making profit, just not as much as last year. Are these people making good money?! Of course they are but they argue that they did what they were supposed to do: profit, and deserve to be compensated. Did you ever refuse a pay raise?! They are greedy – of course they are. Would you stay 12h/day at work, travel extensively far from your family and dear ones, if you were paid 20-50% more than if you were to have a comfy 9-to-5 job?!
Smaller ranks, clerks need then to be at fault. After all it wasn’t the CEO of Bank of America who was forcing them to give the loans to UNQUALIFIED people, bad payers, poor people. What sane and good person would give 500,000$ mortgage loan to a family who earns 50,000$ (BEFORE taxes)?! They must be evil! But do you think they were giving it a second thought?! Upper management decided that the price of housing can only go up, so mortgage loans will always be paid, gave bonuses/commissions to those who could bring in people interested in buying a home. As long as your 50-60,000$/year salary becomes 80-90,000$ salary and what they were doing was not only legal but encouraged by their bosses, who would have said NO?! After all, one could argue – I am giving their house, their very own place to live to poor people, I am doing them a favor.
(This pertains to another discussion – what is the real good, is being gentle and permissive momentarily the same one with being good and doing good?)
Stockholders – so stockholders with their lack of patience and desire for quick profit are the ones pushing for more profits. To hell with stockholders! After all, who are they?! Business people wanting to speculate the pain of the working people, living a lavish life with their proceeds, people like Bill Gates, Richard Branson, Warren Buffet… Right?! WRONG. We are ALL – ALL who know and (most important and more) ALL who don’t have a clue. In N America, people can’t rely on government pensions so they invest, save for that future in which they are too old to work. Mom and pop, after working a lifetime, they are happy when their 100,000$ saved over 20 years becomes a 4-500,000$, allowing them a peaceful old age. If their 100,000$ becomes 2000$, we hate the ones we hate now anyway: they entrusted their money to people who were supposed to make them a profit, grow their initial investment. Would you accept a banking account which “gives” you a negative interest?! Let’s say it takes 10% of your savings for whatever reason: to feed the hungry, to keep jobs in your country, to save the whales, or pure and simply to squander it in bad investments? Would you open a “Big-Heart Account” or “Incompetence Account”?
In Europe and other places, people rely pretty much on the government to care for them in their old age. But how is government able to do that?! Print money?! Yes, they are doing it and that is why we’re in such a shitty place now. But is it feasible and logical to think that 1-200 EU/month you contribute to pension will generate in 20 years 1000EU/mo which will last another 20 years? How could this happen unless that money is INVESTED and, more so, it brings PROFIT? Government pension funds need to obtain profit, lots of it, to be able to sustain Social Services, so generous in Europe, to be able to pay for pensions. That or print money. So either you know/accept you are a shareholder or you have no clue, it’s a very good chance you or your loved ones depend on PROFIT to get by.
Politicians – Why haven’t the politicians done anything?! They are surely to be blamed. But a politician – I am not talking about the scumbags from poor countries – react (like all of us) when bad things are happening. What was bad before the crisis broke, before 2008, to require their reaction?! Corporations and banks were making sh*tloads of money, government was raising wonderful taxes on these piles of cash, people were happy either because now, magically they could afford a house to call their own (instead of, more appropriately, “the bank’s until the mortgage is paid”), or maybe because their house doubled in value in 3-4 short years. Workers had jobs sustained by construction, equity loans based on the house equity were flowing and eternal sunshine was glaring over the country, over all countries to an extent. This wealth, as rotten as it was, was fueling discretionary spending – more TVs, stainless steel fridges for everyone, 2-3-4 cars and vacation houses. “WE DESERVE IT ALL” – I hear this line from people “lost in shopping”, all the time. We do deserve it all – everything that happens to us is only OUR fault.
And when the crisis hit, what you would have done?! It would have been a sensible thing to let GM and Chrysler go bankrupt, let the banks go bankrupt because they deserve it. But it is estimated that auto-industry sustained 800,000 jobs and millions of people who depended on these jobs. If you are not living in a state where 20% of the jobs depend on automotive industry, you can say “let them die for the crappy job they did”; but if your constituents livelihood depends on these jobs how can you say “Go to hell!” ?! Come on, do-gooders, how can you tell some guy who tightens the same screw for 20 years (and does it badly) that he will have to get new skills and look for a new job and still expect to have him vote for you?! So, you save the few million NOW , hoping that someone else, not YOU will give tens of millions to the dogs when the seeds you planted NOW will reap the huge crisis. You print money and you pretend that happy times will be back in a jiffy… when in fact they are not coming back soon.
Government should have had control over the banks and companies and regulations. Indeed – but if you ever worked in the government, you know what a waste there is – people paid with 80-120$/h (160-240,000$/year), doing jobs for which they would have been paid 50K/year in a private company. 5 persons barely taking care of the workload of a single person – why?! Because of the damn regulations and damn comfort of the job they are in. Government is a black-hole and EU is a good example how regulations can stifle economy, growth, profit and thus jobs, pensions, stability.
I could go round and round and round but the fact is SIMPLE, if only the simple minds would accept this assessment: no one can cast the first stone, because we are ALL to blame. The arrogance, the gull of some idiots who take it to the market armed with good intentions but otherwise without a plan where everyone can win will not convince me. Do I want to live in a world where profit is balanced with the needs of the people? Do I want to live in a clean, eco-friendly world? Do I want to enjoy the benefits of modern healthcare and technology and what have you? OF COURSE I DO. I simply know that revolution is NOT the answer. Good intentions are NOT the answer. Big-heart is NOT the answer. We need BRAINS and careful information, we need an action plan which mediates between the interests of ALL segments, we need balance, not hippies shouting Mao’s lines, who – invariably – will end up being upper management in large companies. If we use our hearts and not our brains, we simply end up pave the hell.
There is a lot of GOOD to do. How can we do that?! Think and identify the LEAST of EVILS – because that is what GOOD in this world is.
I thought I should capture some economic indicators that can help you make an informed decision when buying stock. These indicators and theory can be found in many places but it’s easier if they are in the same place, eh?! None of these indicators are an ultimate factor but each gives you a picture of a company – the more positive findings, the better the investment. These are the ones I used but each investment school thinks some others are more important. It might be so but one needs to walk before running.
Indicators to identify a bargain stock
- P/E (Price/Earnings) Ratio – I discussed it before. A good investment has a lower/much lower P/E than its competitors/sector/industry. It shows how quickly, keeping up the earnings the same, the stock will be paid off from these earnings. A company with a P/E of 30 but with a 80% annual growth for the last 3 years most probably is a much better investment than one with a P/E of 25 but with 20% annual growth. Rule of thumb is that one should be very cautious with companies with P/E over 30-40 (they might still be a very good investment but please check carefully)
- Price-to-book Ratio – How much the company is valuated on the market compared with the declared assets. A Price-to-book below 1 seems like a real bargain (in theory, if the company would be liquidated, you would get more money than if you were to sell your share on the stock market)… but be wary! Corroborate with all the other aspects, with its competitors/industry to find out WHY it is so undervalued. Below 2 should be still be fine.
- Price-to-sales Ratio – Share price divided by revenues per share. It is useful when evaluating how quickly the company is growing and how fast it is growing its sales/revenues. Smaller is better – useful when comparing companies in the same sector. A company might be growing very fast, becoming quickly competitive, yet it did not attract yet the attention of the analysts, investors.
Financial Strenght (debt evaluation)
- Quick Ratio – this is a quick look at the cash flow, the power of the company to cover its short-term debts with the money it generates. Above 2 is a sign of financial strength.
- Debt-to-Equity Ratio – Total liabilities divided by equity of the shareholders. A high ratio here means the company is financing its growth by borrowing and that the growth would not be sustainable in time. (Sort of a person taking 10K from a line of credit and then bragging “I have 10K all the time in my chequing account”). It should be checked within the industry range. Capital intensive industries might have such a ratio as high as 2, while others have a normal range of below 0.5. Should be looking for those below 0.5.
- Dividend Payout Ratio – This is the yield (money paid out) vs earnings per share. When we chose a company for the reason it pays dividends, we want to make sure they will continue to pay those dividends. Remember – dividends can be suspended at any time. Beside the length of time the company has a solid dividend paying record. Each recommends a different threshold – some people recommend a ratio of below 50%, others like it to be a little big bigger (70-80%), because it means the management is committed to having performance of the company high. In any case, any dividend payout ratio over 80-90% is a red flag. There are companies paying over 100% but, in long term, that is not sustainable (they pay more than they earn). Mind you – some investments – like REITs – are forced, by law, to distribute more than 90% of their income to investors, so it is ok in those cases to have a payout ratio of (let’s say) 95%.
Earnings-per-share, Sales, Dividend Growth Rates – all these, when compared to the competition/industry average, show how fast the company is growing. A company with traditionally not so good indicators – which makes it stay below the analysts’ radar – but with low debt and big growth in the late 1-2 years – might allow you to be an early investor in a success story.
Beta – discussed before. It is an indicator of price change. Not so important in economic terms but important for your risk-tolerance. The higher the Beta, the more the price of the shares fluctuates. If you are easily unnerved, avoid anything above 1.
There are many other indicators for the solidity of a company. Some are composite indicators I.e. GER Analysis is another composite indicator which combines some of these indicators and some others: P/E, Debt-to-Equity, Return-to-Equity, Price-to-Earnings-vs-Growth, Growth rates, Earnings-per-share, Revenues to provide a composite number 0 (weak) – 100 (strong).
It’s just my life philosophy that I am trying to share with you. Everyone is completely free, in what I am concerned, to decide how to spend their money. The issue that I have is with the unhappiness money generates. I always believed that while money doesn’t bring happiness, they help preserve it. Well, it’s not true. Families with incomes of 150,000$ or more end up unhappy, in debt. I see them trading their long term peace of mind, relaxation for the “cheap” thrill of unwrapping NOW that desired gadget or car or thing that somewhat complicates their life and makes it less happy.
Money is meant to be spent. I agree. Up to a point. All?! Even money one doesn’t have? How much borrowed money do we need for our happiness?! Pretty much none. I did it, don’t get me wrong – even my motorcycle was financed with borrowed money. Yet a measure must exist – you pleasure yourself, then I believe you should take a break from pleasuring yourself… for a while. I have even witnessed the idiotic vicious circle: I am in debt, can’t make ends meet, I am unhappy sooo… I will buy myself some knick-knack that will make me feel better. What is even more infuriating is that the people will feed you wise sayings such as “life is more about being and less about having”.
As I was saying, happiness is much simpler and cheaper than you think. Renovating the kitchen with 600$ and some work – change handles, paint it, some spots, new window covers – will make you happy in ways a 12,000$ renovation made by some contractor will never be able to do. At the end of 2 years that you have been saving money, purchasing that set of living-room furniture you dreamed of will reward you infinitely more in joy than living with the dangling sword of 5000$ loan taken right before losing the job. What is wrong with saving and letting the Joneses get into bankruptcy?! The 10000$ invested when you are 30 that becomes 20000$ at 40, will buy you that peace of mind that the quick thrill of shopping never can.
The common point seems to be this desire for perfection NOW. Purchased a new home?! What kind of dream-home is that which doesn’t have hardwood floors, interlock patio, new furniture?! And the sad truth is that when we achieve our dreams we don’t fill fulfilled but EMPTY. We reached our goals. And now what?! Now we should mess our lives: get more toys, a bigger house, get in debt, break the marriage over accumulated debts, blame the other for decisions we helped take.
We need goals in life. Most of us don’t have Earth-shattering goals: to build a pyramid, to circumnavigate, to compose a symphony. So I believe that we should spread our goals over a longer period of time. Instant gratification doesn’t work. Not for those who seek peace and happiness.
We hear in the background – IMF and EU offer 78 billion EU bailout to Portugal, US debt reached 14.3 trillion $ (BBC Source), Greece has close to 500 billion EU debt and pays 13% interest rates on 10-year government bonds (BBC Source) … Still very few people stop to ponder what does this means for them?! Even fewer see the writing on the wall. It’s in our nature to believe that we can make any kind of excesses and that we’ll never pay for them. US, a country ridden by debt, this is the first year when people are allowed to pay their due taxes using a CREDIT card.
What does it mean 14.3 trillion $ in debt ?! It means that each American – old, young, newborn, making 12,000$/year is liable for close to 48,000$. And this doesn’t include the personal debt! Right now the Federal Reserve keeps the interest on this debt artificially low, close to 0%. What if US would have to pay 7% (less than Portugal pays right now and almost half of what Greece pays)?! That would mean 1 trillion $ in interest only, every year.
So why should one care?! Well, to finance these huge debts that countries run without much worry, the printing machines are running hot. US is financing this huge debt by printing money. All our monetary system is pegged onto USD so we are all liable to pay for it when The Reckoning Day arrives. Many people are completely oblivious about what it means inflation, not the real one or what is called hyperinflation (BBC Source). Yes, prices are rising but what if they increase by 3000% per year as it did in Brazil in 1994 (BBC Source)?! The bread that costs 2$ today would be costing 60$ in a single year and 1800$ in the second year. Do you think that your salaries or the ones on which you depend to live your life would increase at the same rate?! Yes, people will make strikes, pressure on the governments would increase (as we have seen in France, Greece, Portugal etc.) and actually by creating an unstable political system it would become worse. Soon. Very soon. Can you see this future with 20-30% unemployment, with public sector continuous strikes, with interest rates of 80-90-120%?!
But this will not happen, some would say, because US can continue to manipulate the currency and make the games. It is not so. For years now, they are having a hard time convincing the world countries to keep USD in their local reserves. Pressures on Saudi Arabia, made them change their mind in 2009 about leaving the current system. Last week, Mexico purchased gold worth 4 billion USD. Chinese government, stuck with huge loads of USD (close to 1 trillion $) that they acquired by financing American splurge, is on a shopping spree to make use of these reserves which soon might become worthless.
Not scared enough?! How bad can it be? In 1923, 1 USD was worth 4 trillion German marks! Prices were doubling every two days! In 1985, Bolivia suffered inflation of 12,000% for 1 year.
What is there to do?! Surely there will be life after the crash of USD. Maybe not as we know it but there will be. We have to minimize the risks. Go back to basics: live without (or as little as possible) debt, save and invest, learn to do more with less and… don’t forget to enjoy life. Who remembers that old saying “Best things in life are free”?
My ex said once that we are still born slaves and it is our duty to pay for our freedom. This made me think and compare it with what we accept as being slavery. In Ancient Rome, slaves had the option of saving the tips, do business and profit and, in the end, pay themselves out of slavery. Few did so, indeed. Most would use it for pretty things, wine, instant gratification. Their children, born out of a slave would remain slaves as well.
Truly, there isn’t much difference. Most of us hate to work, to be at specific times somewhere, the rush hour, being away from our children. But we all love confort and instant gratification and we are having issues defining clear and sane boundaries. At 20 we call a confortable car one that doesn’t break in the middle of the road, has running air-conditioning and, maybe, automatic transmission. At 45, suddenly we are having a hard time driving a car without heated seats, without DVD player and navigation system, 7 seats which we fill once a year and 300 HP to carry all that load. At 25, a one bedroom for ourselves is comfort, at 45 we NEED that 3500 sqft and 5 bedrooms for two adults and one child. And to pay for this increased comfort, we have to work, to go where/when we don’t want to, to have 2-3 weeks of rest per year, half of it being used to maintain that huge house…
Easy debt makes us stay always behind the moment of freedom. Bigger income, bigger house, more comfort and we never repay ourselves out of this modern slavery. Comfort?! What could be more comfortable than the thought of playing with the children in the park, reading a book in peace, having enough time to do our chores properly and still be left with some “me time” – all these without thinking of the next bills?!
I believe that everyone should live their lives whatever way they want. Yet I am still shocked that people can’t see this hamster wheel. And they stay blind not for 5-10 years but for all their lives. They declare that they want happiness but don’t seem to notice how miserable they feel after 20 years of doing the same thing, upgrading, replacing, redecorating. Or if they notice they have something missing in their life they blame it on anything else but on this behaviour.
Now, don’t you think that I am blameless! I’ve been through this but when I discovered why I was living hand-to-mouth, I asked myself what am I doing with my life, why do I work in a profession I don’t particularly like – to pay the bills. I want comfort too and I have urges for luxury too but then I fight myself and discover that I can be happy without that Mercedes and without increasing the square footage of my home. The thought that one of these days, soon, I will have repayed my debt to Capitalism, that I will be able to pay my minimum bills with the income I generate, is soothing.
Freedom, for me is to be able to do what I want, when I want. As long as I didn’t reach that point in life, my philosophy is not to over-live. Live the day with the soul, not the wallet.
I thought I shouldn’t close this cycle without giving you basic tips. In the end, keep in mind that only YOU have to judge and understand what makes sense for you. I know, I know, it’s difficult: you have to take responsibility of your life and your decisions and who is ready to do this?!
The simplest thing are mutual funds. As you most probably know, mutual funds are a collection of stocks, meant to spread the risk over a number of companies of either the same profile, or in the same country, region etc. There isn’t much to evaluate:
- what sector/country/type of business you believe will grow. There are technology mutual funds, health, energy, emerging markets… endless possibilities.
- what type of fund you select – large or small: large funds have stability should problems show up but the downside is that they tend to have issues liquidating assets not performing. Think about it: selling 3% of 10 billion dollars, means selling 300 mil $ worth of stocks and they cannot do that overnight, especially when that asset has hit hard times, or else they might shoot themselves in the foot, dropping the price even lower.
- who manages what. In this area the mutual fund manager is important – experience in finances, experience in that sector etc. Do your homework because it will pay.
- performance. Look for a track of performance and check the best and worst years. Especially the worst to see if you can stomach those drops. At the same time, if the average looks good enough and you are not really close to retirement, take a chance because there is no gain without pain. Many mutual funds with high-load boast about their “performance” in years when the market is losing money. i.e. A mutual fund might lose 15% when the industry it’s focused on lost as a whole -23%… yet as somebody was pointing, we can’t eat negative returns. Same mutual funds in years when the industry made 12%, only managed to achieve an 7%…
- Fees. MER (Management Expense Ratio) is the most important because it is ongoing. A mutual fund with 0.7% is a great deal but most, in Canada at least, charge 2.3-3%… It might seem paltry to bargain over 1% yet over years that translates in lots of money. Ofc, as somebody was pointing out there is no point in getting a very low fee fund if it doesn’t perform… yet there seems to be no direct relationship: there are low-MER funds that perform well and high-MER ones that don’t do so well. Other fees that can kill you are the loads: front-load and back-load. Front-load means they take a commission upfront, while backload means they will take some money, less and less as years go by. Usually most of it goes to the financial advisor. Most of the funds have versions that incorporate a 1% for the financial advisor while one can get the same mutual fund without that load or with a much lower load when buying a different series of that mutual fund. I personally believe that in the beginning, index funds are great – very low MER and very few other funds manage to beat them year over year. All you need is to figure out what area of the economy will grow. I have 2 iShares mutual funds – Gold and Asia without Japan – doing quite well.
- Don’t forget to chose DRIP in case they pay dividends (and many do). Year after year, those dividends will start making a difference.
With the stocks the situation becomes more complicated – more work, more risks but at the same time potential for more growth is better. I generally subscribe to a number of newsletters who bring to my attention a number of companies within the larger picture of the industry. It was said that an average company within a stellar industry performs much better than the best company in a sector in recession. What we are trying to achieve is identify a good player in a good/excellent industry. Stay away from top performers posted in your local newspaper – read about them but normally, if they hit the large press these stocks are overpriced. How do you know that a stock is overpriced, how do you know when it’s risky?!
- P/E Ratio – Profit of the last year/Number of shares = Earnings Per Share (EPS). Divide the price of the stock with the EPS and you get P/E Ratio which is a basic indicator of how much is the confidence in that company. Another way to put it, this P/E Ration shows how many years the earnings of that company should stay at least the same to pay for the stock itself – to get your money back. Both Google and Apple, i.e. show a P/E of more than 22, yet they grow a lot each ear… P/E Ratio is only relevant when compared to the industry average but it is something you can take in consideration. Check the growth of the company as it may justify the large P/E Ratio.
- Dividend/Yield – if you, like me, are focusing on dividends (recommended in these uncertain times), this is important. Check for companies with long track of paying dividends, since these are not guaranteed but a long track says something. Yield will change over time as the price of the stock unit increases or drops: it’s the value of the dividend divided over the total cost of the share: i.e. if the company pays 1$ in dividends per year and the stock is currently 10$/share, the yield is 10%. If the share prices becomes 20$, then the yield is only 5%. Focus on companies that increase their dividends over years.
- 52-week price: shows the low-end and the high-end of the stock during the last year. If the company is financially sound (check their financials) and the price is close to the bottom, chances are you will be doing good.
- Beta – index to show how volatile a stock is, or else said how much its price varied in the last year. S&P500 – is given a beta of 1. If the Beta index of the company is below 1, it means it was more stable than the market; if it is over 1 it is more volatile. Normally, you should look for stocks with high-returns with a beta bellow 1. If you can stomach higher risks and the company has a Beta over 1, it might still be a good deal, since higher risks should always mean higher potential return. But by itself it’s not a good indicator because it is only math, not the real situation of the industry which might be in a restructuring period etc. Use it only for short-term planning.
There are more indicators but the best indicator is common sense. It is a fun game but don’t expect to win it every time. If you are not a gambler, then don’t gamble! Make solid investments that need maybe 1-2 re-adjustments per year and keep an eye on them monthly – in normal times even this could be bypassed yet surprises are to be expected in such a roller-coaster ride. Never “play” more than you can afford to lose – maybe a 10% of your portfolio – this means buying and selling on short term, stocks not so reputable. They might be a bargain but then again neighbour’s garbage is an even bigger bargain.
Other rules of thumb which, while well-known, might be news for some of you. These are normal fluctuations:
- “sell in may and go away” – stocks drop over the summer as industrial activity slows down, less interest in the market, people redeeming investments to pay for vacations. Yet, I would recommend to start when everyone else is selling. Yes, they might drop a little bit more yet in September, if you chose good investments, it will pay off and you will rejoice with the timing. Beside this, much timing cannot be done on the investments, unless you are a day trader… in which case, why the hell are you reading this?!
- It’s normal for companies being acquired to have the stock going up and for the ones purchasing to have their stock going down
- Before the dividend date, many investors buy that stock 1-2 weeks, maybe 1 mo, in advance, depending on the rules established (“this will be paid to investors who were on the record at the date X”). Buy outside of those rush periods and you might save a 1-2% or even more. In general, try to avoid the stampedes for a certain stock – for every Apple, there are many obscure but solid investments.
- If your stocks follow the market indexes (NASDAQ, Dow Jones), don’t panic – it’s quite normal. Actually, don’t panic in any circumstance. Keep an eye on the investments and if they have sudden moves – drops or raises check the news to see what caused those moves.
Get Rich! Slow!
I knew since the beginning of this cycle that this would be the hardest chapter, only I didn’t imagine it will be so hard. Why?! Because while there are only limited number of investment strategies, there are as many personal situations and characters as people on this world. This confusion, though, lasted only until I remembered something important: I am NOT a real financial advisor, writing for an audience of millions. Phewww – so all I need to do is to talk about the general guidelines that govern my decisions, rules of thumb etc. I will lay down some of them but probably now and then, as my experience grows, I will add more.
- Invest LONG TERM. You are NOT a day-trader (trust me!). Trading often means commissions that can chew up your profit and – probably – translates into trying to time the markets. Not a bad career, interesting, exciting, but this activity is outside of my scope and I hope your too.
- Information is MONEY. Information and information processing. Not only financial reports but being up-to-date on the news and maybe trying to understand the world we live up to the point where we know where we are going to. I.e. If one knows that the world population is increasing by 74 million yearly at the same time that we continuously lose agricultural land due to misuse and abuse, the logical conclusion is that in the next 10-20 years agricultural-related companies will do well. Subscribe to economical magazines, financial newsletters, read the economical page of major publications… keep informed
- Discipline and Common sense is MONEY. Invest periodically, chose solid investments and stick to them for as long as they make sense. Just because many are selling that is not good-enough a reason to be selling – maybe you should be buying and taking advantage of the herd (but, yes, sometimes the herd can trample you so use that common sense)
- Greed is GOOD… but so is realism. A line in an article drew my attention – many intelligent investors know and prepare well for buying but very few are disciplined when selling: “Shouldn’t I stay with this investment some more?! It’s doing well, maybe it’s going to be making more money”… but then again, maybe not. If you estimate that there is no more growth in that sector and that is not compensated by other means, like dividends, sell it at a fair price. If the sector is doing less than good, take the beating and accept the losses. Better -7% than -35%. And remember, we’re not in this to double our money in one year but to grow them into a financial stable future.
- DISTRIBUTE the risk. The purpose is that overall you are making money and profits are beating the inflation. Especially in the beginning, I know what psychological impact would make losing money by betting all your cards on a single horse. So diversify by betting on the good geographical and economical areas.
- REINVEST. While I know that it would be very tempting to take those 2000$ profit to have that wonderful vacation, those could mean 8000$ in 20 years. If you put it that way, it might not be such a good deal. Dividend reinvestment (if you chose companies who pay dividends while insuring some growth) is a sure way to grow solidly. A conservative return of 7% will DOUBLE your money in 7 years. Not good enough?! Get a gun – 300$ – and rob a bank and you can make as much as 10,000% profit in 1h… which then you can hand it to a lawyer or a judge for a more lenient sentence
- Don’t forget about TAXES. If you invest outside RRSP/401K, made sure you know what you’re doing and evaluate the impact of taxes on your return. Some investments might seem meager but allow for tax deductions while others might seem booming but less so after tax. Subscribe to tax-reduction tips newsletters and use whatever means you have to reduce the taxes. Don’t give me that BS that you’re not believing in RRSP/401K/TSFA etc. – they are not GOD to believe in; simply some accounts with some perks that we can use for our own good.
- Invest in what you understand. Just because something makes good profits and everyone says it’s a good deal, don’t jump in the boat before you researched and made your own mind. Look for products and companies that you like and find useful. Warren Buffet said that if the business is good and solid (i.e. product is good) the price of stock will follow.
Let’s leave the theory and systemization to the ones who can do this. How did I go about investing?! Sergiu Preston helped me a lot – our conversations cleared my mind, confirmed some knowledge I wasn’t sure about and opened new idea threads.
- Gold was a good investment although most articles were announcing that it peaked and there is no more place for growth. But then I read an article where somebody was pointing that in 1982, gold has reached 850$/ounce. Adjusted for inflation, that meant 2300$ in nowadays dollars so 1200$/ounce left ample place for growth. As the governments are printing more and more money (few years ago 440 million dollars deficit for US was a tragedy, now 1.4 TRILLION is a fact of life), it simply makes sense that all the investors would seek the shelter of gold. Fearful that the gold itself might be though too expensive and worried about liquidating should there be an issue, I turned my attention on the companies mining for gold and low-cost, no-load index mutual funds.
- Dividends make sense in this tough economical times. Companies who seek growth when everyone is watching their pockets are making a huge gamble and by investing in them, you take one yourself. Better companies with moderate growth that put cash in your portfolio on a regular basis. I was shocked to find out that investments with 7-8-11% yield (dividends paid divided by price of share) don’t have to be risky business. Dividends are NOT guaranteed yet there are companies with a very long track of paying them – thus some certainty that, unless something earth-shattering happens – they will not cease to pay those dividends.
- Energy – despite all the conservation promoted by the governments of the world – is required for growth and the demand drives the price of energy up. I found out that there are very good Canadian Trust Funds (google the term) which are about to transform into corporations and that the uncertainty made investors shy away from them, despite paying very good dividends 6.5-9%. With the capitalization they have (tens of BILLIONS of dollars) it’s unlikely they will vanish and bargains are to be taken advantage of. One of them, which drew my attention already converted to a corporation, it’s unit price grey by more than 4% and they still pay 6.3% dividends and there doesn’t seem to be a stop or diminishing them.
- Emerging markets – we, the Westerners, we screw it up. By spending and spending and never saving we eroded our buying power. But hey, there are hungry new consumers on the horizon to save us and afford the luxuries we take for granted. China and other countries in Asia, Brazil and other South American countries are places where economy grows while ours is shrinking. Again, an index mutual fund – 0.73% MER and no load – was the solution to tap into that wealth-to-come. And this is a good example of personal attitude to take – soon after purchasing the mutual fund, it dropped by 7.5%. I studied the situation, I realized that it’s just a herd-attitude and stuck to them. In just 3 months they are back in black, more than 3% and I expect this trend to continue. The Chinese consumers are barely awakening and they will want everything we have: cars, electronics, apartments, nice clothes. The Chinese government started appreciating their currency, the yuan. With this, the average Xuang will see his buying power appreciating and will start buying more – thus better their economy will do. It’s just at the beginning but its a good thing to be in a sector when it starts rising than when it has peaked.
CONCLUSIONS: No matter what you do is still a guessing game. Information can help you minimize the guessing and thus the risk to a bearable level. By being informed and using your common sense, caring for your investments, not being overrun by emotions and keeping your greed in check, you WILL make profits. It’s all been written over and over again yet I write this to expose the human element: the initial fear and the joy when I realized that it’s not such a big deal to select decent investments. Bypassing the middle-man – the investment agent, who is on commision – you are already ahead of the game.
In due time you will discover that not managing your own money leads to losses more times than gains. Probably sooner than later. In a strong economy, the lack of skills of the so-called “agents” is not so obvious. Yet when the mutual fund they chose for you charges 2.5% MER while losing 12% in value every year, things look clearer.
Don’t beat yourself. It took me more than 5 years to make the step. I thought I didn’t have enough money and thought to myself – what difference can 2-3-4% make on, let’s say, 5000$?! And, oh, my gosh, how difficult it can be to figure all those things out. And then, when I was ready, in 2007, personal things made me lose my focus and I dropped everything again. By January of this year, when I started taking the matter in my own hands, I had 10% less than the money I put in. Not so good for a 6-7 years investment, eh?! Well, that’s life! There is a right time for everything. But I also had the support and encouragement that a very good friend – Sergiu Preston –, a person with a vast life-experience and long track in investing, gave me to start this new enterprise, the act of investing by myself. He pounded on myself all these advantages I describe here, like – I am sure – he did for many other people. I am simply trying to pass-it-forward and to make the path to self-investing much easier.
In any case, when you will be ready to step in this brave new world, the first thing you will do is try to figure out who should keep your money. The comments I make below are mostly focused on Canadian brokerages. In the US, options are much wider, deals are much sweeter and things might be different but the base criteria for selecting a brokerage remains the same. Please also read the fine print and try to understand where you qualify. If you still have unclear things, don’t hesitate to contact the brokers with your questions BEFORE you sign, because later it will cost you a dime and a nickel.
Instead of doing my own research – because I am lazy and lazy is sometimes good – I googled it and I found this excellent breakdown for Canadian brokerage firms: Stingy Investor
As you check the brokerages, you will notice the wide-range variation of fees and commisions. Some are well-established and they are cheap… but only if you do >100 trades/quarter or if you keep +50,000$ in their account. For a beginner, that number of trades is unimaginable. Some charge as much as 29$/trade. Well, if you make 20 trades that is a 600$ – so you really want to pay the brokerage instead of getting that LCD TV for the bedroom?!
Ask yourself a number of questions:
- Will I be trading in USD or other foreign currency?! Why is it important?! Because if the brokerage charges you a currency-conversion commission, you need to take that in consideration. In Canada, traditional, well-established brokerage firms will charge you 1% to change the money in USD, and when you sell the equity/mutual funds, they transform it back automatically in CAD, charging you another 1%, although you might as well desire to purchase something else from NYSE. It has been allowed to keep USD in RRSP (Canadian 401K) since 2006 , yet very few had adjusted their systems to allow such a thing.
- How much will I be charged if I change my mind and want to transfer my funds elsewhere?!
- What kind of customer support they have?! How does their trading platform looks like? How can I access it? Google it and see what other people say but take that with a grain of salt – might represent a particular failure and pretty much all brokerages have their share of bad stories they don’t want us to know.
- What are the perks I can get by signing with them?! Brokerages in US sometimes pay incentives and don’t shun the 100$ you get or 100 free transactions they offer because it is, indeed, free money.
- Do they allow DRIP (Dividend Reinvestment) and if they do, do they allow fractional investment?! (Explanation: If the company X pays you 40$ every month, it is a good idea to reinvest it by purchasing the stock of the company. But if the company is trading at 37$, buying it directly means at least 5$ spent for 1 share. DRIP allows you to have that purchase made without any fees. Fractional DRIP means the brokerage allows purchasing 0.98 units of that same share – some don’t, so if the stock is now 43$, they will place the 40$ in your account)
In short, try to imagine what you want to do, read all the publicity and fine print, tick them off with questions and pick up a firm that will satisfy your PARTICULAR needs.
But enough with the theory. Why did I chose QUESTRADE?!
- low fees. 5$ for up to 499 shares, 0.01/share after that; 9.95$ for mutual funds
- 1% rebate on mutual funds’ MER: but to qualify you need a certain amount (still, I can live without since I purchase funds with MER < 1% anyway)
- 50 free-trades in the first 3 months and 100$ of free trades for every friend you refer (and he/she gets 50$ in free trades in those 3 months)
- keep both USD and CAD in the account; the conversion is 0.5% and once changed the currency stays that way, unless I purchase something in another currency
- while their customer service is less than perfect, and speaks with a funny accent (I have a funny accent too, Eastern European one :), they post good FAQ and I mostly rely on written documentation
the joining process was simple and documented, most of the steps were done online.
Of course, nothing is perfect:
- now I know that you have to log on 3 websites to see all features: one for Penson (the one that holds registered accounts), one for the main account settings, statements etc. and one for trading) – yet I can live with that.
- Estatements are somewhat late – 10th of each month for the previous one
- the free trading interface (one has options for paid ones – probably much better) is not great but does the trick. Now and then they list things in a way I don’t understand (i.e. USD currency kept in account was listed as a number, like a company).
- While they allow for DRIP, they don’t allow for fractional re-investment.
Yet, I am with them and unless they screw-up badly, I will stay with them because I have no-thrill needs – and I hope that you will not try to become day-traders before you can walk 🙂
Next time I will present some basic strategies for picking up solid AND profitable investments.
There are a thousand reasons to do so but they all pretty much translate in “because nobody care for your money as much as you do”.
The so called “investment agents” are simply “sales agents” and once they make their commission, they will forget about you until next year. You might say to yourself, for good reasons: how am I going to get the knowledge of the markets, or understand all those terms like derivatives, options, beta, EPS, P/E etc. Well, let me tell you the level of knowledge of some of the people you entrust your money with. Before migrating my RRSP investments to Questrade, I asked what fees I will be charged if I wanted to sell them. My agent redirected me to his secretary, being told “I don’t know this kind of thing”. My “agent” didn’t know what are the fees associated with my investments! How much worse can I do?!
My ex went to another agent and asked some trivial questions and made some savvy comments to let her know that she is not completely unaware of investing terms. The investment agent was so enthusiastic that couldn’t help herself ask “Did you ever consider a career as an investment agent?! You seem sooooo knowledgeable”. Otherwise she readily agreed with everything that Brindusa suggested. One would think that you walk into an “expert’s” office to get some insights, not smiling nods.
I will not badmouth a whole profession. I am sure there are good investment agents but, from what I’ve heard, those guys have their hands so full that they mostly focus on big-money and for the smaller investor they are pretty much out of touch. Indeed, you might have an active, REAL investment agent who makes you good money but then stick to him/her and thank God you are so lucky.
It just makes sense that the average investment agent will not necessarily recommend you the best investments but the ones that bring the best commission. A standard mutual fund that very seldom, if ever, beats the index mutual fund (the index of the industry the mutual fund is focused on), would charge you 2.5-3%. And that is yearly coming out of your pockets. A well managed fund, with no load – like Phillips, Hager and North (PH&N), which charge 0.8-1% will not be recommended by agents because the commission is too small. I calculated that the front-loads and back-loads (fees for purchasing a mutual fund: either paid upfront or when you sell them if they are sold before a certain period) cost me with my late agent about 2500$. Those loads are traditionally going into the pockets of the investment agent. Why would they recommend you something that makes YOU money and doesn’t leave much for them?!
I know it seems scary. I heard too the stories with people who lost everything. People asked me if I “play on the stock market”. Oh, God, NO! No such thing, not now and probably not ever. I will NOT play with my hard earned money.
Yet things are not as complicated as the fear of unknown makes them seem. After all, it’s a guessing game and, while nothing is certain, you can make safe, educated guesses as well as the “agent”, just less expensive. The point is not going for the “get rich quick” scheme, because there is no such scheme. For smart ones amongst us a “get rich slow” scheme is good enough and there are plenty of strategies. I never aim at outrageous performances – since most of the time they try to hide huge risks and weaknesses. Even so, one could get 5-7-9% dividend from perfectly sound companies, which reinvested, in time, can make the difference between a comfortable retirement and a stingy one.
Here are some initial steps to take:
- Subscribe to some good newsletters such as (you can tell they are good if they have been for a number of years on the market – if they gave poor advice, they would not have survived long):
- Complete Idiot’s Guide to Investments
- follow the tutorials on Investopidia that will guide you with baby-steps to financial success.
- Use a portfolio simulator, such as this one offered by Investopedia here – where you invest virtual funds and make virtual gains or losses.
- Read what other people have to say, follow the financial news and try to get up-to-date with the global economy. By reading constantly the economy news from your newspaper, you’ll start understanding what industries are making money and which are in a volatile position.
- Read and understand the basics of investing without bothering too much with the higher level economical knowledge:
Here are some facts to chew on until part II. Did you know that:
- 300 shares of a stock paying 14% dividend, which you reinvest (DRIP), in 10 years will become 1160 shares?!!!
- by investing 25,000$ in a mutual fund with 0.87% MER (management fees) instead of one with 1.72% MER, with 5% yearly average return, would save you almost 3000$?!!!!
- most of brokeragers in Canada, when you purchase a US equity will charge you 1% currency conversion fee AND, if you sell the equity, they will automatically convert it to CAD, even if you want to purchase another US stock and then charge you another 1%?! Do this thing 2-3 times/year and you doubled the losses that a normal inflation (3%) would bring to your savings.