tag:blogger.com,1999:blog-91428010455079135192024-03-13T09:25:14.836-07:00Starting Started at 22Mistakes made and lessons learned about personal investing and economics in Canada from the age of 22 onwardMikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.comBlogger28125tag:blogger.com,1999:blog-9142801045507913519.post-52739337735352067712013-02-26T20:27:00.002-08:002013-02-26T20:28:31.735-08:00UpdateHello to any wayward readers. It's been quite a while since I last posted, so I thought I'd do a quick update in bullet point form.<br />
<ul>
<li>My total return for 2012 was +9.4% (includes dividends) versus +13.4% for the S&P 500</li>
<li>My current holdings are:</li>
<ul>
<li>Cisco Systems Inc. (CSCO) (write-up <a href="http://startingat22.blogspot.ca/2012/05/stock-analysis-cisco-systems-inc.html" target="_blank">here</a>)</li>
<li>Dolby Laboratories Inc. (DLB) (partial write-up <a href="http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/dlb-dolby-laboratories-inc/msg82792/#msg82792" target="_blank">here</a>)</li>
<li>Kulicke & Soffa Industries Inc. (KLIC) (write-up <a href="http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/klic-kulicke-and-soffa-industries/" target="_blank">here</a>)</li>
</ul>
<li>I will be posting my first net-net write-up shortly</li>
</ul>
Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-11178655893498294812012-05-10T21:49:00.003-07:002012-05-10T21:52:44.663-07:00Stock Follow-Up: Cisco Systems, Inc. (NASDAQ:CSCO)I felt that I should write another small blog post on Cisco Systems, since their <a href="http://www.bloomberg.com/news/2012-05-09/cisco-third-quarter-profit-rises-as-networking-spending-gains.html">quarterly financials were released today and caused over a 10% drop in the share price</a>. I took a quick glance at the numbers and immediately felt that the market is greatly over-reacting to earnings falling short of analyst estimates. Both revenue and gross profit increased slightly over last quarter and more significantly over the year-ago quarter. Profit margins, research and development, and selling/general/administrative costs all stayed stable over the last four quarters. Net income only shrunk slightly over that of last quarter, and earnings per share stayed around the same. Owner earnings actually grew by 12% over last quarter, and there was only a small increase in the number of shares outstanding.<br />
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I take all this to mean that my <a href="http://startingat22.blogspot.ca/2012/05/stock-analysis-cisco-systems-inc.html">original investment thesis on Cisco</a> still stands, despite the significant drop in share price. Therefore, further purchase of shares would make sense for me, since the long-term fundamentals of the company have changed very little or not at all. I am not concerned that the stock price has dropped by around 17% from my initial entry point. I am still convinced that Cisco has great potential over the long term, and am comfortable with my conviction. I would only take a loss of 17% in value if I were to sell my shares right now, but I don't intend on doing so for a very long time yet.<br />
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Disclosure: I am long CSCO.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-84899303003231629142012-05-02T19:52:00.003-07:002012-05-10T21:51:26.417-07:00Stock Analysis: Cisco Systems, Inc. (NASDAQ:CSCO)I haven't posted a stock analysis in a long time, and I've learned a lot about fundamental analysis since my last "stock analysis". I put that in quotes because my previous analysis mainly involved the use of common ratios and how they fit into a relatively rigid dividend growth investing strategy. More recently, I have begun analyzing stocks based on their income statements, balance sheets, cash flow statements, annual reports, and proxy statements. In addition, I intend to only invest in businesses that I understand. My circle of competence is relatively small, but I am beginning to expand it by learning about a second industry. I have just recently finished a Bachelor of Computer Science degree, and so my only real area of expertise is technology. Tech stocks are unpopular with a lot of Buffett-style value investors because their competitive advantage(s) usually rely on continuous capital expenditures and research and development. With that said, it's still my best area of knowledge and I've done a thorough enough analysis that I am personally comfortable with. So without further ado, I'll dive into my analysis of Cisco Systems Inc.<br />
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If you aren't aware, Cisco Systems' core product line is the development of equipment for computer network routing and switching. The entire Internet and all private networks rely on routing and switching equipment, and Cisco is the biggest name for enterprise routing and switching, and a significant competitor in the consumer router space.<br />
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All of my numbers-oriented discussion relates to the past four years of annual financial data regarding Cisco. They would be best summarized in a bullet list:<br />
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<ul>
<li>Consistent gross margin around 64%</li>
<li>Consistent R&D expense around 22% of gross profit</li>
<li>Consistent selling/general/admin expense around 42% of gross profit, which isn't a bad percentage</li>
<li>Net income as a percentage of revenue is consistently above 15%</li>
<li>Over $44 billion in cash and short-term investments</li>
<li>Cash/short-term investments plus accounts receivable is consistently around 2 times current liabilities</li>
<li>Four times annual net income is consistently around 2 times long term debt (could pay off all long term debt within 4 years or less, using only net income)</li>
<li>Return on assets is 10% on average</li>
<li>Consistent retained earnings growth</li>
<li>Return on equity consistently greater than or equal to 14%</li>
<li>Debt-shareholder equity ratio consistently around 0.8</li>
<li>Consistent annual decline in shares outstanding by around 3%</li>
<li>Capital expenditure divided by net income is 16% on average (even 25% or less is good)</li>
<li>Average annual owner earnings of $8,004 million (Net income + Depreciation/Amortization - Capital expenditure)</li>
</ul>
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<div>
The thing you immediately notice about this bullet list is that consistency is mentioned in almost every bullet point. That is why I focused on average values or approximate values, rather than percentage growth or decline year over year, but more on that later. Consistent cost management and return on assets/return on equity make for a pretty dependable stock. Debt is not used in excess, and is manageable in terms of being able to service the debt. Retained earnings growth, share repurchases, and lots of owner earnings are all good signs too.</div>
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Another point that I left out to talk about separately is that the company has recently begun paying a quarterly dividend. At the moment, the payout ratio is only 8%, but Cisco has more than enough owner earnings and cash to pave the way for long-term dividend growth. If I start building a position in the stock now to hold over the long term, the dividend yield-on-cost could be significant.</div>
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Unfortunately, revenue growth, net income growth, earnings per share growth and owner earnings growth are not consistent year over year, but they do seem to be in a long-term upward trend, despite dips every other year recently. The following chart gives a quick visual of Cisco's net income since 1998:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhy7BEcnXIx5CKL-z8F9kNCIoUBLEBHPlXAO8yLtUEjFRba4Oaub8izKjpamk3WVTCWm0m-qkd4S2FR3XnSDzWxEb1VHAyJrsZuUMWMOlLPORABi0IAV1C2I2qoWMyvkHWUDnE23SaOrOI/s1600/cisco-net-income-since-1998.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="243" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhy7BEcnXIx5CKL-z8F9kNCIoUBLEBHPlXAO8yLtUEjFRba4Oaub8izKjpamk3WVTCWm0m-qkd4S2FR3XnSDzWxEb1VHAyJrsZuUMWMOlLPORABi0IAV1C2I2qoWMyvkHWUDnE23SaOrOI/s400/cisco-net-income-since-1998.PNG" width="400" /></a></div>
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An investment should not be made based solely on financial statement numbers, and so I will now move on to a discussion of the company's management and macro-economic outlook. To start, I will state some quotes from Cisco's 2011 proxy statement. Out of all the corporate governance policies, three stood out to me as good elements to see in a company:</div>
<div>
<br /></div>
<div>
<ul>
<li>"The independent members of the Board of Directors meet regularly without the presence of management" - This is good because there is no pressure on the board to withhold negative comments or constructive criticism of the CEO, which would be the case if he were present. It is the job of the board to evaluate the CEO and reward his performance or lack thereof accordingly.</li>
<li>"Cisco has adopted a compensation recoupment policy that applies to its executive officers". Further reading in the proxy shows that this comes into effect in the case of a restatement of past financial statements. This motivates the executives to ensure honesty in the financial statements.</li>
<li>"Cisco has stock ownership guidelines for its non-employee directors and executive officers". In particular, the proxy goes on to say that the CEO is required to own 5 times his base annual salary in Cisco common stock. In reality, "[the] CEO holds over 100 times his base annual salary in Cisco common stock". This means that it is in the interest of the board and the executives to put shareholder interests above all else.</li>
</ul>
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<div>
I listened to Cisco's most recent fiscal year-end quarterly conference call, and found the following notes of interest:</div>
</div>
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<br /></div>
<div>
<ul>
<li>CEO seems to have a good grasp on the technology itself being used in Cisco's router and switch products</li>
<li>"Intelligent" routers are a main focus of Cisco product development. Coming from a computer science background, I take this to mean that the "intelligence" or routing algorithms are being moved closer to the hardware (the routers themselves). This most likely leads to vast performance improvements in terms of network bandwidth and capacity.</li>
<li>Cisco customers buy into an entire networking architecture. This makes it easy for customers to upgrade to newer Cisco products as they are developed, and also makes it hard for customers to switch to a different networking architecture from a rival company (due to the amount of time and money it would take).</li>
<li>Data center trends are moving toward consolidation, virtualization, and private cloud services, all of which Cisco can address with its products. Having worked in software development positions for large private companies, I can see the value that a private cloud would provide for a company's internal intranet, document and source code storage, software compilation and testing, etc.</li>
<li>Cisco has partnerships with VMware (the biggest virtualization software company) to accomplish these goals.</li>
</ul>
<div>
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<div>
I don't simply take these statements from the conference call at face value. Because of my understanding of and background in software development and computer science, I can verify for myself that these statements make sense. This is a good example of the importance of investing in a company whose products and services you understand.</div>
</div>
<div>
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<div>
In terms of macro-economic trends that would benefit Cisco, I think that the move toward cloud services (both private and provided by 3rd-party companies such as Amazon) will continue to grow. Additionally, the move to Internet Protocol version 6 will necessitate the purchase of equipment that supports the new protocol (which Cisco routers satisfy). The internet in general is constantly growing, and its existing users are constantly demanding faster speeds and more bandwidth. In addition, mobile smartphone growth is also continuing, and network infrastructure is needed to support this growth. For these reasons, I believe that Cisco has a lot of revenue growth potential.</div>
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Cisco's closest competitors are Hewlett-Packard and Juniper Networks. I did some quick analysis on Juniper Networks, just to see how competitive they really could be with Cisco. Here are some bullet points that I found over the past 4 years of their financial data:</div>
<div>
<br /></div>
<div>
<ul>
<li>R&D costs are consistently above 30% of gross profit</li>
<li>Much less net income than Cisco (most recently an annual value of $425 million compared to Cisco's annual $6.5 billion)</li>
<li>Negative retained earnings every year with no discernible upward trend</li>
<li>Return on equity and return on assets consistently below 10%</li>
<li>Higher capital expenditure as a percentage of net income on average</li>
</ul>
<div>
<br /></div>
I haven't done extensive research on the quality of Juniper Networks' router and switch products, but I would imagine that they are inferior to those of Cisco based solely on the fact that Juniper Networks has been around since before 2000 and I had never heard of them or seen any of their products in use at various software development positions I've held. This is somewhat anecdotal, but I feel that it is telling of Cisco's brand recognition and large market share.</div>
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<br /></div>
<div>
One concern that I have about this stock is that Cisco mainly fuels its growth through acquisitions, which can be prone to being more costly than profitable. Cisco has recently announced the end of its Flip Video product line that it acquired several years ago from another company. If many acquisitions are made over time, some of them are bound to turn out badly, to the detriment of shareholders. Luckily, management admits that things turned out badly and discontinues the product line, rather than pumping more money into it. In addition, I believe that Cisco's core router and switch product lines aren't likely to be of such poor quality that earnings will suffer in a significant way.</div>
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Finally, valuation of Cisco shares must be considered to see what kind of margin of safety exists at the current price per share. I assumed a conservative growth of owner earnings of 5% annually (although this has the potential to be much higher). Factoring in discounted cash flows over ten years, Cisco's total assets and total liabilities, I came up with a target price/intrinsic value of around $34 per share. As of this writing, Cisco shares closed at $19.84. I have initiated a position and plan to buy more if shares dip even lower in the near future.</div>
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Any thoughts on my analysis?<br />
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As always, this blog post should not be considered financial advice, and you should always do your own research before making any investment decision. Disclosure: I am long CSCO.<br />
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Edit: <a href="http://startingat22.blogspot.ca/2012/05/stock-follow-up-cisco-systems-inc.html">Click here</a> to read some follow-up thoughts on Cisco Systems after their most recent quarterly earnings release.</div>Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com1tag:blogger.com,1999:blog-9142801045507913519.post-23111196964236679032012-04-13T17:55:00.000-07:002012-04-13T17:55:09.183-07:00Transferring TD Mutual Fund RRSP Account to Questrade Self-Directed RRSPAbout six months ago, I decided that I wanted to get more actively involved in picking individual stocks using a value investing approach and that my TD mutual fund RRSP account was not enough for me. I looked at converting to a TD Waterhouse account, but it had an annual fee of $100 and cost $30 per trade. Since I'm just starting out as an investor, I want to conserve as much money as possible, so I decided to transfer my RRSP account to a Questrade self-directed RRSP with no annual fee and only $5 per trade. I already have a TFSA trading account with Questrade and hadn't had any problems with them, so I decided it would be a good move to have my RRSP with Questrade as well.<br />
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After waiting until I could sell my TD mutual fund units without incurring an early trading fee, I moved everything to a money market fund with no early penalty fees and initiated a transfer. The first step was to open a Questrade RRSP account. You are allowed to have more than one RRSP account, you just can't contribute more than your total allowed annual contribution limit between the two accounts. I finished the Questrade RRSP application up to the point where you need to fund the account. Then I found the appropriate transfer form from Questrade's website. It will even fill out all your new account information for you, and you just need to provide the details of the relinquishing institution. I didn't need to contact TD in any way at this point.<br />
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Once Questrade initiated the transfer, they informed me that the transfer would take 10-20 business days (which translates to about a month). So I patiently began waiting, and researched stocks and read about value investing while I waited. TD and Questrade were true to their word and took the most amount of time possible before I would start to get impatient. Exactly one month plus a day, I logged on to my TD online banking and the RRSP account had been sold out and closed. I thought I might have to make a separate request with TD to close the account, but it turns out they did that for me. But when I checked Questrade, expecting to see my RRSP balance, I instead found that the transfer had been rejected.<br />
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According to Questrade, the relinquishing institution said that the account number was invalid. I found that confusing because the account was closed according to TD EasyWeb. Questrade said they could re-initiate the transfer (which would take another 10-20 business days) if I sent them an account statement with my name, address, and account number on it. I uploaded a scanned copy of the document and waited a couple more days. Nothing was changing, so I called TD. They said that my RRSP was closed and that they had no other information. So I called Questrade and told them the situation, and they looked into the problem.<br />
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Apparently the account was transferred to Penson financial (who provides holding services for Questrade), but the transfer could not be completed to Questrade because of the account number. What happened was the following. When I was filling out the transfer request form on Questrade's website, I wrote in the full 10-digit RRSP account number that I saw in TD EasyWeb. When I checked my account statement, the account number was only 7 digits. What I actually needed was just the last 7 digits, which is what caused all the trouble.<br />
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So after Questrade opened a ticket for me and reviewed my uploaded account statement, two days later I was informed that my Questrade account was funded and that I could begin trading. Before initiating the transfer over a month ago, I Google searched a bit to see what kind of transfer fees TD would charge me for moving my account to another institution. From what I found, I was expecting that TD would take about $100 from my RRSP in fees. To my delightful surprise, I found that they didn't take a cent!<br />
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So now my self-directed RRSP with Questrade is funded, and I'm ready to do some value investing!Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com5tag:blogger.com,1999:blog-9142801045507913519.post-50439606843317773872012-03-19T21:03:00.003-07:002012-03-19T21:06:18.264-07:00Hasbro Share Repurchasing: Follow-UpBack in February, I wrote a <a href="http://startingat22.blogspot.ca/2012/02/giving-cash-back-to-shareholders-is.html">blog post about Hasbro Inc.'s use of free cash flow to repurchase shares</a>, and how sometimes the amount of shares repurchased approached or exceeded the company's free cash flow. I'll admit that I initially panicked at my findings, as I was about to make a purchase of Hasbro shares. On the advice of a friend, I did some further investigating on the issue, and I am now writing this blog post to summarize my findings.<br />
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I spoke with Hasbro investor relations, and they were very helpful in providing me with details of Hasbro's policies on use of free cash flow. Hasbro generates a healthy amount of cash, and there are multiple options for what to do with that cash. According to investor relations, Hasbro's first priority is to reinvest in the business, typically in the order of tens of millions of dollars. Acquisitions are an option, however they are not typically pursued as the value obtained is not sufficient, but intellectual property is sometimes purchased. Cash could be used to pay down debt, however Hasbro makes use of "good debt" that is manageable and adds to the business's ability to operate. If you take a look at Hasbro's annual balance sheets, their total current liabilities are typically less than their total long-term debt.<br />
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At Hasbro, it is a tradition to return cash to shareholders. Hasbro has maintained or increased their quarterly dividend every year since 2002. Hasbro has been buying back shares for a long time, and continues to do so under their current authorization since 2005. Hasbro's reason for buying back shares is to offset dilution of shareholder value as a result of stock-based compensation of management, and to buy back shares over and above that offset in order to increase shareholder value. Hasbro does so opportunistically to take advantage of low share pricing at times. Typically in the past and going forward, Hasbro does not use debt to repurchase shares.<br />
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If you look at the table in my last blog post, the only year in which Hasbro spent more than 100% of their free cash flow to repurchase shares was 2010. According to investor relations, this was to offset the conversion of a convertible debt offering issued in 2001 into common stock. Hasbro's net change in cash for 2010 was +$91.75 million, even though it repurchased $546 million of common stock. Hasbro also took on debt that year to raise cash. I had read through multiple annual reports dating back to 1997 from Hasbro in search of why this particular year was so aggressive in terms of share repurchases. I found multiple references to convertible debentures and share repurchases, but I did not find any mention of their connection to each other.<br />
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In terms of whether Hasbro believed its shares to be undervalued when purchasing them, the only answer I found was an average price quote for a time period that I should have written down but must have missed, and that purchases were opportunistic.<br />
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All in all, I've accomplished some in-depth research on Hasbro, and it was my first time calling the investor relations department of a public company. Hasbro seems to care about share dilution and seems dedicated to returning cash to shareholders, while growing its core brands and operations. I'll mull over Hasbro a little longer, but I don't want to over-analyze it.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com1tag:blogger.com,1999:blog-9142801045507913519.post-43481014915350463262012-03-18T11:47:00.000-07:002012-03-18T11:47:31.682-07:00An Austrian School Contradiction: RevisitedIn my <a href="http://startingat22.blogspot.ca/2011/12/gold-standard-austrian-school.html">previous blog post</a> about Austrian School beliefs regarding price fixing and the gold standard, I described how fixing the rate of change in price is essentially the same as setting simultaneous floor and ceiling prices. This is technically untrue, since a rate of change implies the involvement of a time variable, however my floor and ceiling price limits have nothing to do with time. In other words, the price of a good can fluctuate between those price limits as quickly or as slowly as it may. All the price limits accomplish are a minimum and maximum absolute value difference between a good's starting price and its ending price, whichever point in time that may be.<br />
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Price limits aside, I was reading through a blog post on Mises.org ("<a href="http://mises.org/daily/5953/Is-Inflation-about-General-Increases-in-Prices">Is Inflation about General Increases in Prices?</a>") and realized that I may have misinterpreted some Austrian School beliefs, as I suspected I might have at the end of the last blog post.<br />
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The key difference that I failed to distinguish previously was that inflation is dilution of the money supply, not an increase in size of the money supply. For example, if gold is the medium of exchange in an economy and someone mines more gold, he is participating in the market's demand for gold. If he decides to cheat and dilute the money supply by melting down gold coins and reproducing them with less gold content, or by printing extra gold recipts (paper money), this person would be using the new "money" to buy something for nothing. In other words, he did not exchange wealth for wealth, he exchanged nothing for welath, which leads to a misallocation of resources in the economy.<br />
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This one paragraph doesn't do the concept justice, so I suggest you read through <a href="http://mises.org/daily/5953/Is-Inflation-about-General-Increases-in-Prices">the original Mises.org article</a>. In conclusion, Austrian School advocates of a gold standard aren't trying to regulate the size of the money supply; they are trying to control dilution of the money supply. Having real gold as the medium of exchange makes it much more difficult (although not impossible) to dilute the money supply than if the medium of exchange were a fiat currency (as we have today).Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com1tag:blogger.com,1999:blog-9142801045507913519.post-77777768699216354772012-02-28T06:44:00.007-08:002012-03-19T21:07:41.102-07:00Giving Cash Back To Shareholders is Nice... When You Can Afford ItOver the past few weeks, I've been looking at various stocks trying to find my very first Warren Buffett-style value investing stock pick. One of my main considerations was Hasbro, Inc. Hasbro has a lot of brand power under their belts: Monopoly, Battleship, Boggle, Pictionary, Risk, Scrabble, Trivial Pursuit, Transformers, Nerf, not to mention more targeted brands such as Magic: The Gathering and Dungeons and Dragons. I went to Zellers the other day and took a stroll through the toy section. Many of the toys were made by Hasbro, meaning that Hasbro has a lot of retail store shelf space at stores like Wal-Mart, Zellers, Toys R Us, and so on. Hasbro has also been diversifying their brands toward movie production, such as Transformers and G.I. Joe. Upon examining the management, I found that the CEO of Hasbro personally heads the Corporate Social Responsibility Committee, a task that could easily have been delegated to a sub-manager. To me, that shows that the CEO actually cares about what goes on at those committee meetings.<br />
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When considering Hasbro's financials, I found a lot that matched a checklist I've built, based on reading how value investors like Warren Buffett pick stocks. Hasbro has low capital expenditure, consistent profit margins, return on assets in the 9-10% range, growth in net income and growth in what Buffett calls "owner earnings". Owner earnings, or free cash flow, are equal to the company's net income, plus depreciation/amortization, minus capital expenditures. Since depreciation/amortization are a non-cash expense, the cost is added back in to the equation, and offsetting depreciation/amortization is taken into account by subtracting capital expenditures. The result is the amount of cash that the company can decide to re-invest in the business, use to acquire other companies, or pay out to shareholders in the form of dividends or share repurchases.<br />
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Something Buffett likes to see in a stock is good treatment of shareholders. At the time of this writing, Hasbro currently has a dividend yield of just over 4%, which is pretty good. They also have an on-going share repurchase program. Since 2008, Hasbro has repurchased about 10.6 million shares. The result has been a steady increase in earnings per share. After valuing Hasbro's future cash flows with a modest 5% growth per year, I came up with a valuation of the company that is higher than its current share price, offering a margin of safety around 25%. If I were to assume a higher growth rate, that margin of safety would be larger, but I don't want to over-estimate. In any case, I had all but convinced myself that this stock would be a good buy, according to the value investing principles I have been learning about. The only reason I haven't purchased this stock yet is that I'm still waiting on transferring my RRSP account over to a self-directed account that I can use to buy individual stocks. Perhaps this was a blessing in disguise.<br />
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Buffett says that when you find a good investment, you should place a sizeable chunk of cash on it. Since I would be placing a sizeable chunk of cash on Hasbro, I want to be sure that I'm right about its prospects. After all, the whole strategy of focus investing is simply to just buy good companies, and avoid bad ones. I wanted to make sure I wasn't buying a bad one. It seemed strange to me that shareholders were being so lavishly rewarded year after year with dividend payouts and share repurchases, when news pieces on Hasbro had such a modest or grim outlook. I whipped up a quick spreadsheet, and here is what I found:<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPbzqLDfOwuXZ6EpGoBnt8p5pFiN8ux4AdTUZknnrerb5xe4v0MY5xYYRAPqxS_qeO7EUaLgepQm6-Geu8ZA3nBZmNH68x_bqqSVyec5RvYlGZZXJu480Xpm_tDJHfYB0qUmoYwrdRy8I/s1600/hasbro-shareholder-payouts.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgPbzqLDfOwuXZ6EpGoBnt8p5pFiN8ux4AdTUZknnrerb5xe4v0MY5xYYRAPqxS_qeO7EUaLgepQm6-Geu8ZA3nBZmNH68x_bqqSVyec5RvYlGZZXJu480Xpm_tDJHfYB0qUmoYwrdRy8I/s1600/hasbro-shareholder-payouts.PNG" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Data taken from <a href="http://www.google.ca/finance?q=NASDAQ:HAS&fstype=ii">Google Finance</a></td></tr>
</tbody></table>From what I see in the spreadsheet, Hasbro has been paying out more than 100% of its owner earnings to shareholders! At the same time, it has been borrowing hundreds of millions each year. It looks to me like this is unsustainable. Cash should only be paid out to shareholders if it can't be better used elsewhere to grow the company and add value for shareholders. From what I can tell, at least some of the cash being borrowed and/or paid out to shareholders could probably be better used by re-investing in the business. This realization has led me to reconsider my plans to purchase shares in Hasbro for the time being.<br />
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Edit: I did some follow-up research on this topic, and wrote a <a href="http://startingat22.blogspot.ca/2012/03/hasbro-share-repurchasing-follow-up.html">blog post summarizing my findings</a>.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-26353864757719582152012-01-04T19:26:00.000-08:002012-01-04T19:39:45.735-08:00Book Review: Warren Buffett and the Interpretation of Financial StatementsOn the advice of a friend, I just recently purchased a book on how to read and interpret financial statements (income statements, balance sheets, and cash flow statements) for publicly-traded companies. Since I wanted to learn how to read these statements in the context of Warren Buffett's style of investing, I found the perfect title: <i>Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage.</i><br />
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The book is a short one, weighing in at only 175 pages of reading. It also includes appendices containing model financial statements, an index, and a particularly useful glossary that not only defines a list of financial terms, but also explains the term's significance when it comes to finding signs of a durable competitive advantage in a company. The book goes through each type of financial statement, line by line, and explains its meaning, possible abuses, and usefulness in determining the health and advantages of a company. After each financial statement is covered, the book also has a few chapters on valuation of stocks, Buffett's equity-bond theory, and when to buy and sell a stock in Buffett style.<br />
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Overall, I've found this to be a helpful book that has expanded my knowledge of fundamental analysis of companies. It was an easy and informative read; I ended up finishing it in under 24 hours (which is saying a lot for me!) After reading the book, I summarized what I had learned by skimming each chapter over again and creating a Word document that contains a checklist of things to look for in financial statements when searching for whether a company has a durable competitive advantage.<br />
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I currently only own one stock position (it's been almost 4 months since I bought it) that I had researched a fair amount at the time of purchase. Armed with my new and deeper knowledge of financial statements, I did another analysis of the stock's financial statements based on my new checklist. Happily, the stock passes nearly all the line items on my checklist. This has renewed my resolve to hold on to the stock for a long period of time. However, good financials and a bargain price are not the only things Buffett relies on to become so wealthy. Warren Buffett is a believer in investing inside one's own "circle of competence", or "invest in what you know". The stock I own is a uranium mining company. Admittedly, I know very little about uranium mining, the accompanying industry, competition or external factors that can influence the company whose shares I own. In any case, I will hold on to my stock regardless and hope for the best, but in the future I plan on investing within my circle of competence. As Warren Buffett once said, "<i>You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.</i>"<br />
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Coming back to the book review, I would definitely add this book to my list of recommended reading. It remains to be seen how financially beneficial this book will be to me in the future, but my guess is that it will be greatly valuable.<br />
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To buy the book from Amazon, click the link below. If all you can see is an Amazon ad, just refresh this page. Disclaimer: If you do so, I will earn a small commission.<br />
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<center><iframe frameborder="0" marginheight="0" marginwidth="0" scrolling="no" src="http://rcm.amazon.com/e/cm?t=mika0c-20&o=1&p=8&l=as1&asins=1416573186&ref=tf_til&fc1=000000&IS2=1&lt1=_blank&m=amazon&lc1=0000FF&bc1=000000&bg1=FFFFFF&f=ifr" style="height: 240px; width: 120px;"></iframe></center>Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-48275595785208313052011-12-30T13:06:00.002-08:002012-03-18T12:00:04.053-07:00The Gold Standard: An Austrian School Contradiction?One of the chief arguments of the Austrian School of economic thought is that a free market should be allowed to determine prices of its own accord. Fixing of prices leads to adverse effects on other areas of an economy that are not immediately obvious. For a detailed description or if you are not familiar with the argument against price-fixing (a form of economic planning), please read pages 190 to 209 of the following PDF of Economics for Real People by Gene Callahan: <a href="http://mises.org/books/econforrealpeople.pdf">http://mises.org/books/econforrealpeople.pdf</a><br />
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In the pages above, the author describes a scenario in which a person proposes fixing the floor price of a stock at $10 per share. A conversation about this topic ensues, outlining why this would be a bad idea. Accepting the premise that fixing prices is a bad idea, I'd like to explore if it's also a bad idea to fix the rate of change of prices. In the example above, this would be equivalent to limiting daily stock price movement to a range of, for example, -5% to +5%. Suppose the opening stock price is $100. This would mean that a floor price for the stock during that day would be $95 and a ceiling price for the stock during that day would be $105. In other words, fixing the rate of change of a price is equivalent to fixing simultaneous price floors and ceilings.<br />
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In my previous blog post "<a href="http://startingat22.blogspot.com/2011/12/inflation-and-optimal-money-supply.html">Inflation and the Optimal Money Supply</a>", I outline the case for attributing inflation to rapid changes in the size of the money supply, and how fixing interest rates (a form of price fixing) is equivalent to tinkering with market supply and demand for cash holdings. Many Austrian School economists advocate the return to a gold standard to resolve this problem. In other words, every dollar should be redeemable for the equivalent amount of gold. Since the amount of gold in the world is fixed and only so much gold can be mined per year, then the money supply won't be able to change size so quickly.<br />
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One Warren Buffett quote that got me thinking was the following: "[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."<br />
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If we want the same effects of a gold standard without needing to mine the actual gold, we would simply need some sort of law or restriction that the money supply can only grow by a certain amount per year, similar to how only a certain amount of gold is mined every year. In essence, we would want to <i>fix the rate of change</i> of the size of the money supply, which is a form of economic planning. As I've outlined above, fixing a rate of change of a price is essentially fixing the price to a certain range. Upon realizing this, I noticed a contradiction: the Austrian School advocates against price fixing and economic planning, and the Austrian School advocates a gold standard, which can be seen as a way of fixing the rate of change of the size of the money supply through economic planning. This seems to be a contradiction.<br />
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I don't know the answer to this conundrum, nor am I entirely certain that I haven't misinterpreted or mis-stated the beliefs of the Austrian School of economic thought. Comments are welcome, as I would love to know more about this particular topic.<br />
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Edit: I've thought of some additional insights on this topic; see <a href="http://startingat22.blogspot.ca/2012/03/austrian-school-contradiction-revisited.html">my other blog post</a>.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com3tag:blogger.com,1999:blog-9142801045507913519.post-43304464119683876062011-12-18T14:33:00.000-08:002011-12-30T11:49:13.562-08:00Inflation and the Optimal Money SupplyIn recent months, I have learned much about fractional reserve banking, central banks, inflation, interest rates and money supply. In this blog post, I'd like to explain some aspects of inflation, its relation to the money supply, the gold standard, and some considerations on the optimal size of the money supply. In order to accomplish the goal of a discussion on these topics, some background information is necessary.<br />
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To begin, I will give a brief overview of fractional reserve banking. To my knowledge, all banks in Canada today are fractional reserve banks. In the early days of banking, customers of a bank could deposit their gold at the bank for safekeeping. To facilitate easy economic exchange between parties, banks began to issue promissory notes representing a certain amount of gold, so that two parties wishing to exchange gold between themselves would not need to withdraw, transport and deposit physical gold. An individual could exchange the note at the bank for the corresponding amount of gold at any time. This is called full-reserve banking with money tied to a gold standard. The promissory notes issued by the banks functioned as currency because their validity was universally recognized within the community, and because the holder of a note equated to the owner of the gold it represented. As people began to use these promissory notes more and more often, the banks noticed that not many people actually came and exchanged their notes for physical gold. As a result, the banks issued more loans to people by distributing more promissory notes for the gold they had just sitting in their vaults. This is called fractional reserve banking, where the bank "loans out" the gold sitting in their vaults. Eventually, banks began to loan out more money than the total gold they had, in effect loaning out more than 100% of their gold deposits. In modern day, money is no longer exchangeable for gold, instead fiat money is used. Fiat money means that the government has declared the bank notes legal tender, and the government's central bank can print more money if they so choose. Most of the money in circulation today comes from loans issued by banks, which is characterized as money creation through lending of credit (since only the central bank can truly "print" money). An astute reader might also notice that this means that interest must be paid on all money created through lending of credit. The total of these two amounts of money issued is called the money supply.<br />
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Inflation is defined as a rise in prices of consumer goods. There are many aspects to inflation, however the generally accepted cause of inflation is growth of the money supply. When more money is created, each new dollar represents a smaller fraction of the real wealth in the economy, and so more dollars are needed to pay for the same item than before the increase in the money supply. When the initial new money is created, there is an increase in spending as the money changes hands repeatedly. Entrepreneurs see this increase in spending and increase prices accordingly, in order to make a higher profit. According to the previous paragraph, there are two sources of money creation: printing of money by the central bank, and bank-created money by lending of credit. This may seem the case, but the real cause is only one of the above. Firstly, it may seem in the interest of fractional reserve banks to issue as many loans as possible to make more profit. This is not the case for two reasons. Firstly, fractional reserve banks are required to maintain an asset-to-capital multiple. Loans issued by banks are called assets, because they produce interest (income) for the bank. Capital is the amount of cash or easily-convertible-into-cash securities. Banks must maintain a certain amount of cash so that if everyone wants to withdraw their deposits at once, there won't be a run on the bank. (For an amusing example of a bank run, watch <a href="http://www.youtube.com/watch?v=Qa6j4lEpQi0">this YouTube video</a>). Secondly, the central bank has the power to set the interest rate (called the key interest rate) at which banks lend money to each other. If this interest rate rises, it becomes more costly for banks to borrow money, and so they raise the interest rates on their consumer loans, which in turn discourages further borrowing and encourages paying back loans by consumers. If the key interest rate is lower, it becomes cheaper for banks to borrow money, and so they can issue more loans at lower interest rates, which encourages consumers to borrow and spend money. The central bank uses this key interest rate to control the money supply indirectly and speed up or slow down the creation of credit and the functioning of the economy.<br />
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So in essence, the central bank of a country controls the creation of the entire money supply, either directly or indirectly. But, there is a key difference between government-created money and bank-created money. When money is created through credit, the money can be paid back and consequently cease to exist. When money is "printed" by the central bank, it stays in existence. In addition, if the central bank keeps interest rates low, more loans and bank-created money are added to the system. For these reasons, one can blame the central bank for consistently increasing the money supply over the years, and consequently perpetuating inflation.<br />
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One might draw the conclusion that the money supply is "too big" and ask the question, what would be an optimal money supply? As it turns out, there is no "optimal" amount of money to have at the scale of today's economy. If central banks were to stop targeting interest rates and printing money when they deem prudent, the free market would determine the amount of money in circulation via supply and demand for money (or cash holdings). Similarly, supply and demand for credit would determine the market interest rates for loans. Inflation is not caused by a single increase in the money supply over the long term, it is caused by the fact that new money is not propagated across the economy instantly. When new money is created, those that hold it benefit by being able to spend the newly created money according to existing prices. Once the money propagates through the economy over time, prices tend to rise to adjust to the new total money supply. At some point, prices will reach a new range and tend to stay in that range according to the business cycle and other factors, provided no new increase in the money supply occurs. Due to central banks, the money supply changes constantly and rapidly, and so the new adjusted price range is never attained before the money supply increases again. The result is a constant increase in prices over the years.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDG4flQTDxtZ-gex7b8whrh-CbzsWmkXP3oQAkcdUN_lyXrwhTN_q9jwFtBPsf4dm8oMZWYU2Pc1mNh2H919w4AqY95mUBsHP7LFA5QDOUqUwvjaXVZ0E4u0BRipjkqhUin2Wei2ovkXM/s1600/historical_cpi.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiDG4flQTDxtZ-gex7b8whrh-CbzsWmkXP3oQAkcdUN_lyXrwhTN_q9jwFtBPsf4dm8oMZWYU2Pc1mNh2H919w4AqY95mUBsHP7LFA5QDOUqUwvjaXVZ0E4u0BRipjkqhUin2Wei2ovkXM/s400/historical_cpi.gif" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Taken from <a href="http://www41.statcan.ca/2006/3956/htm/ceb3956_000_1-eng.htm">http://www41.statcan.ca/2006/3956/htm/ceb3956_000_1-eng.htm</a></td></tr>
</tbody></table>Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-89272182724236968112011-12-12T20:50:00.000-08:002011-12-12T20:50:08.950-08:00Alternatives to Government BondsJust recently, I've decided to sell all my government bonds for three reasons. The first reason is that I believe there could be a <a href="http://startingat22.blogspot.com/2011/12/coming-government-bond-price-crash.html">government bond price crash</a> on the way. Secondly, I've just finished reading an introductory book on the Austrian School of economics. The Austrian School differs in many respect to the mainstream views of Keynesian economics, one of the most significant being the idea of government deficit spending. Keynesian economics recommends a government borrow money (by issuing government bonds) and spend beyond its current means to kick-start a slowed economy. The Austrian School feels that this is unsustainable, and I decidedly agree. For more details, see the link above to my other blog post about government bonds. My last reason is related to the second: I feel a moral opposition to holding my own government in debt to myself. I disagree with deficit spending, and it doesn't feel right to me, similar to how a banker shouldn't feel right lending more money to an already debt-burdened borrower, knowing full well that the borrower can't pay it back.<br />
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So, having decided the above, what should I replace my government bond holdings with? Government bonds are <i>the</i> go-to fixed income investment. They're typically safe (just pretend to ignore what's going on in Europe right now), and make a good hedge against stock market price movements and the risks of the equity portion of your portfolio. After some initial research, I've come up with some possible alternatives to holding government bonds. An alternative should fulfill the same requirements that government bonds do: produce income, provide safety, and price movements are independent of the stock market. Not all the suggestions below fill all the requirements perfectly, but they're what I've come up with so far.<br />
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<ol><li><b>Corporate Bonds - </b>Most bond funds have some corporate bonds thrown into their mix. Corporate bonds tend to be riskier than government bonds, but they also tend to have higher yields. Corporate bonds satisfy the income requirement. However, corporate bond prices can take a hit just as hard as the stock market in an economic downturn. At least if a corporation goes bankrupt, the bond-holders are paid off first, then the preferred share holders, then the common share holders, so at least there is some safety.</li>
<li><b>REITs and Real Estate - </b>Many people are still very wary about real estate exposure since everything that happened in 2008. However, if you're holding quality real estate investments that produce income (such as an REIT), rather than buying for the sake of capital gains, real estate can easily make up a significant chunk of a portfolio. Typical model portfolios I've seen on the web always seem to have "just a smidgen" of real estate exposure. If one does proper research, I don't see why real estate can't compose 10-20% of a portfolio. Real estate prices are supposed to move independently of the stock market, although that hasn't always been true in recent years. If safety is important, consider real estate investments such as companies that rent out to grocery stores and other essentials. Even in 2008, people still had to buy food, which means grocery stores were there paying rent so they could supply food.</li>
<li><b>GICs and Market-Growth GICs - </b>While GICs typically offer very low yields, they are still a possibility. Another alternative is the market growth GIC. If you buy one of those, you could earn interest anywhere from 0% to some ceiling, depending on how the stock market performs over that period of time. While your principle is always guaranteed, you should be comfortable with the fact that at the end of the term, you may not end up earning any interest at all.</li>
<li><b>Gold - </b>This last list item doesn't produce income, although I'm starting to give it consideration. Gold prices tend to increase as inflation increases, and governments always seem to be printing more money to pay off their debts and causing inflation. This could make gold a safe investment. There are many ways to get exposure to gold, and I'm researching more on the topic.</li>
</ol><div>My holdings in government bonds currently consist of mutual fund units that can't be sold for 90 days since purchase without incurring an early-sale penalty fee. I intend to stop purchases and wait the 90 days to digest the information I've stated above and to consider alternatives. I might post back again in 2012 about what I decide.</div>Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-72198633064813606002011-12-10T11:04:00.000-08:002011-12-10T11:07:58.181-08:00The Coming Government Bond Price CrashToday, I finished an introductory book on the Austrian School of economic thought. The differences in economic beliefs of the Austrian School compared to the mainstream Keynesian school of thought are quite stark. According to Keynesian economics, when the economy is slowing or has slowed down (recession), the government should use deficit spending and set low interest rates to kick-start the economy again. Ever since 2008, the U.S. federal funds rate has been quite low, and the federal debt has increased significantly. Canada has managed to grow federal debt at a much slower rate, however interest rates in Canada are also quite low.<br />
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Because both countries are in relatively large amounts of debt (although to different degrees), both countries have a significant portion of the federal budget devoted to interest payment on that debt. There are three ways a government can obtain income for the purpose of spending: taxes, borrowing, and printing money. Tax increases are quite difficult to implement due to typically fierce opposition. This leaves borrowing, and printing money. Since governments are aware of what can happen if too much money is printed (hyperinflation), printing money may still be used to service debt, but not likely in excess. All that is left is to borrow more money to pay the interest on currently borrowed money. The U.S. debt scare during the summer of 2011 is proof that borrowing will simply continue because it's the only way not to default on interest payments (never mind paying down the principle amount!).<br />
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The method through which the government borrows money is to issue government bonds. Individuals and institutions buy these bonds, and receive their principle back plus interest at a later date. As with many other securities, bonds can be bought and sold on the market. Bond prices tend to move opposite of current interest rates at the time. To see why, consider the following. A bond yielding 2% interest is offered on the bond market for a certain price. Interest rates go up, and new bonds being sold yield 3%. Why would anyone buy the 2% bond when they could buy the higher-yielding 3% bond? To attract buyers, the price of the 2% bond must go down. If interest rates were to go down to 1%, the bond yielding 2% is now actually more valuable because it yields more interest. If this is the case, the price for the bond goes up.<br />
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As with any market good, bonds are subject to the laws of supply and demand. If there are few bonds being sold (small supply) and lots of people wanting to buy bonds (large demand), prices will tend to go up, and the highest bidders will get to buy the bonds. Conversely, if there are lots of bonds (large supply), and not many people wanting to buy bonds (small demand), prices will tend to go down to try and attract buyers.<br />
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At the current moment in time, it is difficult to tell what the demand for bonds is. Some consider bonds a pretty safe investment, and so may want to buy bonds. Others may not want to invest in bonds because they want access to their money right away, or they may not want to do any investing whatsoever due to all the horror stories about the economy not doing well. However, due to the government needing to borrow to service debt, it is safe to assume that the supply of bonds will in the best case stay constant and in the worst case increase.<br />
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Given the above statements, it is easy to summarize what will likely happen to bond prices in a chart:<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEtNjg82D3xuhS6p3_iKGq127f3Ne6YVvhaizL1Ujcs23KeDtYQkTm7DCrsRDRrgGOZ_9KAQjp6pfzdEfBub6FtYvWAZTxHOufVdYNe1vO6QFM7XN3_uDvrR6E88jc4Q1eWuZPXSCxJLU/s1600/supply_demand_bonds.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEtNjg82D3xuhS6p3_iKGq127f3Ne6YVvhaizL1Ujcs23KeDtYQkTm7DCrsRDRrgGOZ_9KAQjp6pfzdEfBub6FtYvWAZTxHOufVdYNe1vO6QFM7XN3_uDvrR6E88jc4Q1eWuZPXSCxJLU/s1600/supply_demand_bonds.png" /></a></div>Since it is more likely that the supply of bonds is going to increase, the price of bonds will either stay where it is if there is enough demand for bonds, or the price will fall (either somewhat or significantly). But remember the effect interest rates have on bonds! (Not represented in this chart). If interest rates go up, bond prices tend to go down. Interest rates are already low, and so have nowhere to go but up. So if we factor in that at some point in the future, interest rates will eventually go up, we can conclude that bond prices are in for a plummet at a certain point in time. This point in time will be when there is increased government borrowing and increased interest rates, both of which are almost certain to happen.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-1520161588664139212011-12-10T07:03:00.000-08:002011-12-10T07:03:02.184-08:00Success #3: Back To BusinessWell, this blog of mine seems to have been feeling kind of neglected lately. It's because of many reasons, some of which are that I started blogging about finance on my work's internal blog not viewable by the public, I've been very busy with university, and I haven't had many funds available for investing.<br />
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Since I only started learning about personal finance about a year and a half ago, my views on how to invest have been constantly changing. In addition, I've been reading some books on value investing, as well as economics. Since it was my birthday in August and I changed from age 22 to age 23, I figured it was time to update my blog title. Not only that, I felt that a theme change would be fitting for my renewal in this blog's interest.<br />
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So what can you expect in the future on this blog? I'll be blogging about economics, as well as personal finance and investing. I'm decidedly a big believer in income investing and value investing, and I've learned much about how money is created, what central banks are, and some views on how those should play a role in the economy as a whole. I'll add a new "economics" label for posts so that there is a new category, as well as an "opinion" label. I hope you enjoy <strike>Starting</strike> Started at 22's revival!Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-34710087656747395872011-10-23T15:45:00.000-07:002011-10-23T15:45:44.297-07:00Questrade Commission-Free ETFs, Not YetI've heard a lot about a couple brokerages in Canada offering no-commission ETF trades on specific ETFs lately, so I thought I'd ask Questrade if they had any plans to release such a feature. I don't want to switch away from Questrade's low commission fees, since I buy stocks as well as ETFs, but I don't mind waiting.<br />
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Here was my question:<br />
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<br />
"Hi,<br />
I noticed that two brokerages in Canada have now begun offering commission-free ETF trades for specific ETFs. Does Questrade have any plans to offer a similar service? If so, I would switch my RRSP account to Questrade in a heartbeat, provided the variety of ETFs is good.<br />
Thanks,<br />
-Mike"<br />
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Here was their reply:<br />
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"Unfortunately, we currently still charge commissions on ETFs. We may look into the no commission ETFs; however, no discussions have occurred yet. Please feel free to contact us if you have any additional questions."Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-32904207061105660472011-06-09T03:46:00.000-07:002011-06-09T03:46:59.765-07:00Success #2: Rebalancing RRSP TD e-Series Mutual Funds for More ExposureLast year, I <a href="http://startingat22.blogspot.com/2010/10/success-1-recogizing-when-fees-are-too.html">recognized that my mutual fund fees were too high</a>, and I switched my units over to the TD Canadian Index and TD Canadian Bond e-Series mutual funds. Since then, my investments have been doing well. However, I decided that since the S&P/TSX Index focuses a lot on financials, energy and mining, it might be a good idea to broaden my investment exposure. After all, true couch potato index investing states that one should invest in everything and diversify as much as possible. The S&P 500 (which the TD US Index e-Series fund tracks) has a pretty good balance across sectors that I wasn't exposed to with just the Canadian Index fund. I also decided to allocate a little bit of my portfolio to the TD International Index e-Series fund to get some exposure there as well.<br />
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Overall, I decided on the following balance between e-Series funds: 40% TD Canadian Bond, 30% TD Canadian Index, 20% TD US Index and 10% TD International Index. I did some reading on the experiences others had had with rebalancing their TD e-Series funds, and I came across a very useful spreadsheet: <a href="http://www.canadiancapitalist.com/sleepy-portfolio-rebalancing-spreadsheet/">http://www.canadiancapitalist.com/sleepy-portfolio-rebalancing-spreadsheet/</a><br />
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If you Google search for switching fees regarding the TD e-Series funds, you will find many forum posts discussing the issue. I seem to have found an approximately equal amount of people that say the mutual fund units are First In, First Out (FIFO) and some say Last In, First Out (LIFO). With e-Series units, one cannot sell them before 90 days have passed since purchase without incurring a penalty fee for frequent trading. This includes units purchased through a Pre-authorized Purchase Plan (PPP). If the units are sold FIFO, that would mean that the <i>most</i> recently-bought units would be sold first. If the units are sold LIFO, the <i>least</i> recently-bought units would be sold first.<br />
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In my case, the units seem to have been sold LIFO, where the oldest units were sold first. I have made PPP purchases in the last 90 days, but the full dollar amounts that I transferred to the two new funds correspond exactly with their book values. I didn't see any kind of fee of 2% of the transfer balance.<br />
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Since I now have four different e-Series funds, I tried to figure out how I could contribute to them evenly, while keeping my RRSP contributions fairly low. I don't want to contribute too much to my RRSP since I'll have to start paying off my university student loans next year, and I still have one year of school left to do (tuition to pay, books to buy, etc.). Before, I contributed the minimum PPP amount ($25) to each of my two e-Series funds every month. Now however, I have 4 funds to contribute to. Even with the minimum PPP amount, I would be paying $100/month into my RRSP to contribute to each fund equally. This is more than I can handle, so I tried to see if there was an "every two months" option on the PPP form on TD EasyWeb's website. There wasn't, so I decided to call them and see if they could set something up for me. Unfortunately, whatever options are on the web form are the only PPP options. So I guess for now, I'll leave my two PPP transactions as is, and re-balance some of the units of those funds to the other two every 90 days or more.<br />
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Something strange I noticed about the e-Series funds is that I both sent an email and then an eService message to TD with regard to my PPP inquiry, and in both cases the reply was that "we are not trained in mutual funds, please call TD". I thought the point of e-Series funds was that they were to be managed online and online only. I really hope they don't try and revoke my e-Series agreement, but if they do, I'll point out how I tried twice to contact them through online means.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com1tag:blogger.com,1999:blog-9142801045507913519.post-71151789579499862212011-06-02T18:18:00.000-07:002011-06-02T18:18:52.833-07:00DiversificationIn the past few months, I've been reading and learning about how to do fundamental analysis of a stock to determine its growth or value potential. I did some analysis of a few stocks listed on the TSX, and I came up with 15 potential growth candidates. I haven't done any deeper analysis yet, just some initial weeding out of stocks that didn't fit my basic criteria.<br />
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I decided to create a new portfolio in Google Finance and add my 15 hopefuls to it, just to see which ones outperformed the others. I added hypothetical transaction data to each stock so that the cost basis was around $500 for each one. This is my personal minimum amount to invest in a stock, since it makes brokerage fees around 1% of the total amount being invested. All in all, my hypothetical cost basis was around $7,700. In the two weeks since I started the portfolio, it has gone up to +3% and is now around +1.6%. While it's true that two weeks is a very short time frame for growth investing, I realized something as I checked on the portfolio every day.<br />
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I have read many times before how diversification in a portfolio is essential for mitigating concentration risk. I didn't actually realize the true value of diversification until I saw it in action. The worst of my 15 picks is currently down $62. However, my overall portfolio is up by $63. Just under half of my picks are in the red by small amounts, but from diversifying across multiple stocks I have managed to keep the overall portfolio value positive.<br />
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Since this is all hypothetical, it's purely for the sake of learning on my part. However, it made me re-examine my current strategy for my real stock portfolio. Up until now, I've been working on building a dividend growth portfolio. The dividend growth strategy is a valid strategy, however it takes a fair amount of capital before the dividends start to really pay off. The dividend growth strategy also takes patience, which I don't seem to have when I say that I'm considering switching strategies.<br />
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I have two excuses for moving away from the dividend growth strategy for the time being. Firstly, my whole investing experience so far has been all about learning as much as I can, both by reading about the vast amount of things there are to know about investing, and also to learn by doing. Learning investing through hands-on experience was my inspiration for starting this blog in the first place. Secondly, as I mentioned above, it takes a significant amount of capital to earn meaningful dividend amounts through a brokerage account every so often. It's a little different if you buy shares direct and can hold fractional shares, but that's not the case for me.<br />
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So after taking a good look at my diversified pretend portfolio, I saw the true power of diversification and the role it plays in growing your money. Since I have a very limited amount of money to invest with, I decided to try and grow my account more efficiently and effectively. Perhaps a few years down the road when I have more income available and a larger balance in my TFSA, I can consider re-implementing the dividend growth strategy.<br />
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If I want instant diversification and my TFSA is a discount brokerage account, what's the first thing that comes to mind? ETFs! I did a little research on what types of ETFs are available on the TSX, and what sectors and market caps they cover. I came up with a few choices and put them into a new hypothetical portfolio in Google Finance. Then I scrolled down to the portfolio performance window, and checked off the box for comparing portfolio performance with that of the S&P/TSX index. As it turns out, my ETF choices outperform the S&P/TSX by almost 10% over the past 12 months! I have yet to examine the risks associated with each ETF, and I also need to decide what percentage of my portfolio each ETF should occupy. I'm excited to try out a new strategy, and I've now given you fair warning for the types of posts you might see on this blog in the near future.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-31228390522152940972011-04-09T18:17:00.000-07:002011-04-09T18:17:30.501-07:00RRSP First Time Home Buyer's PlanJust recently, I was getting my taxes done at a tax preparation company, and was discussing my RRSP with the employee there. I mentioned that I was planning on using the <a href="http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html">RRSP's first-time Home Buyer's Plan</a> (HBP) in the next few years for a down-payment on a house. The employee also knew that I have a Tax-Free Savings Account, and politely told me that in his opinion, I should be using my TFSA instead of my RRSP to save for a house down-payment.<br />
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His reasoning was that the money I currently have in my RRSP would disappear when I make use of the HBP, and then I would be missing out on years of growth in that account until I fully paid back the balance. I gave this some thought, and while that fact is true, it's also true of the TFSA, or any other account I might decide to use. Money spent is money lost, which is money that can't grow because it's gone, no matter what account you hold it in. However, his recommendation to use a different account still merited some further reading.<br />
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After reading up on how the HBP works, I have decided that I will make a change of plans, and use an account other than my RRSP to save for a house down-payment. The HBP is essentially a loan that you owe to yourself, and that loan remains even, if you go bankrupt. While I don't plan on going bankrupt, it might still be too stressful to have that loan hanging over my head. Around the time I decide to buy a house, I will probably have just finished paying off my student loan. I know that a mortgage is also a loan, but I wouldn't want to have that extra HBP loan tacked on to me as well.<br />
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If I decide to use my TFSA or some other account to save for a down-payment, I would highly enjoy having the option and not the obligation to pay back the amount I withdraw. This also frees the money in my RRSP of dual purpose. The money I have in there currently will just stay in there and grow for the main purpose it's there: to save for retirement.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-23277002247770185972011-03-05T09:44:00.000-08:002011-06-15T04:24:32.895-07:00Questrade Error: ECN Not SupportedYesterday, I decided to try and place a market order to buy a stock outside regular market hours. Since I work full time and I'm not permitted to use the computer at work for stock trading at any time, I don't have access to the market during trading hours. So I logged in to my Questrade account, and decided to place a Good Till Cancelled (GTC) market order. This means that the order stands until it is fulfilled, or until you cancel it yourself. You can place a GTC type of order at any time, so that means that my buy order will take place Monday morning, when the market opens (since it is a market order, meaning buy at whatever the going price is at the time). I left the Preferred ECN setting on AUTO, and I checked off "All or none", meaning that the order should buy all shares at once, or wait until doing so is possible.<br />
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When I placed my order, I was met with the error: "Order rejected" and "ECN not supported". I tried once again, and got the same error. I decided to go on Questrade's live help chat to see if they could help me with the error. After waiting a while, the Questrade employee looked into my order history, and told me to try placing the order without "All or none" checked off. When I tried this suggestion, the order was accepted and in the "Queued" state. Monday after work, I should have my new stock.<br />
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Update: Turns out Monday after work, my order was rejected again with the error "ECN rejected". I Googled for this error and found that someone else had the same problem when placing a market order outside market hours. It was theorized that market orders are only meant to be executed immediately, so it was no surprise that a market order failed outside trading hours, even when set to GTC. I tried placing a limit order as GTC this time, set to the stock's closing price today. Tuesday after work, I should have my stock.<br />
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For information on Questrade's post-market trading policies, there is information at <a href="http://questradeusa.com/education/trading_terminology.aspx">this link</a>.<br />
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Update: Order succeeded.<br />
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Update: I had similar issues when trying to sell a stock outside market hours. I did everything I mentioned above in this blog post, and yet my orders were still being rejected instantly. I had been setting a limit order to sell at the closing price of that day, but I tried setting the limit price one cent higher than the closing price, and it finally worked. I came home the next day after work to find that the order had been filled, only at a different price than my limit price. Luckily my shares sold for slightly higher than I had put. All in all, very weird. I don't really like doing this trading outside market hours, but I guess I have no choice.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com1tag:blogger.com,1999:blog-9142801045507913519.post-81249927752128964182011-01-27T19:20:00.000-08:002011-05-25T18:45:18.096-07:00RRSP vs. TFSA: Who cares?!Now that the TFSA has been around for a while, people have some significant used or potential contribution room for their account. This has given rise to the debate between the RRSP account and the TFSA account. Which is better? Which should I contribute to? What are the benefits, risks, and best practices for me? What if I'm heavily taxed in retirement? What if I don't get as much Old Age Security?<br />
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If you're young like me (22 years of age), I say who gives a flying fig? I have both accounts, and I contribute to both evenly. Each account has its purpose, and I'll meet whatever complications arise 40 years from now when they come. What else can I do? There is absolutely no way of predicting what taxes will be in four decades, what income bracket I fit into, whether I'll be eligible for OAS. I say that it's essentially a guessing game as to whether taxes will be higher or lower when I start withdrawing from my RRSP when I retire. If I don't qualify for OAS because I have too much money that I can live off of on my own, isn't that fair?<br />
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My plan is this: Contribute to my RRSP for the purpose of a first-time-home-buyer down-payment. Contribute to my TFSA to build a dividend growth portfolio. Simple. Sound principle, should work out just fine if I'm disciplined in sticking to my plan. I don't give a hoot which is better.<br />
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Edit: An update on my RRSP plan: <a href="http://startingat22.blogspot.com/2011/04/rrsp-first-time-home-buyers-plan.html">RRSP First Time Home Buyer's Plan</a>Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-61703258324784966062011-01-19T20:19:00.000-08:002011-01-19T20:19:01.554-08:00Back to InvestingAfter a period of 4 months of unemployment, I once again have an income. I decided not to work during my school term at university, in favour of studying and improving my grades to attempt to renew my scholarship. I have set up Pre-authorized Purchase Plans (PPP) for my two RRSP mutual funds, alternating contributions to each every two weeks (every pay day). This way, I'll keep my allocation at about 50-50 equity and bonds. If I want to fine-tune the allocations, I'll have to save up $100 to contribute since that's the minimum contribution outside of a PPP. I've also started contributing small amounts to my stock-trading TFSA account. Once I get enough for a round of dividend stock purchase, I'll post another dividend stock analysis on what I decide to buy. Stay tuned!Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-20700500229701394492010-12-06T20:58:00.000-08:002010-12-06T20:58:45.805-08:00My Attempt At Technical AnalysisI've been waiting for over a month or so to see how this stock turned out, before I wrote a blog post about it. A while ago, I decided to try my hand at trading on some basic technical analysis. I had read about <a href="http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:support_and_resistan">support and resistance</a> and printed off a few stock charts. After drawing support and resistance lines on the charts, I decided to try and trade <a href="http://www.google.ca/finance?q=TSE:IMG">IMG.TO (IAMGOLD Corporation)</a> to see if I could make some capital gains based on my chart. The following is a screenshot of IMG.TO over the past six months from the time of this writing, as well as my support and resistance lines drawn in. I've also marked where I bought (blue arrow) and sold (red arrow) the stock.<br />
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<div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgY6eFrapcQHniuoAnVYwWdOyxmYtctVWBdQ8G2qprRVMN_ELFxMoXOU-pI8e5ZZAbPzOFNvPOsPgIbod-oBuvct5Fmdoav8-29ncgYIUHV9OQZlXOnV8oPYSkFsLepRb6Izg9tc3g6DRs/s1600/IMG.TO.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="178" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgY6eFrapcQHniuoAnVYwWdOyxmYtctVWBdQ8G2qprRVMN_ELFxMoXOU-pI8e5ZZAbPzOFNvPOsPgIbod-oBuvct5Fmdoav8-29ncgYIUHV9OQZlXOnV8oPYSkFsLepRb6Izg9tc3g6DRs/s400/IMG.TO.PNG" width="400" /></a></div><br />
My figuring at the time point where the blue arrow is, was that this stock price had been bouncing off its resistance for a while now (the middle green line), and was coming up again for another try. I read that if a price breaks its resistance, that level will often become the new support level for the price, and the price will shoot upwards. I figured that if I were lucky and hopped on board right when it broke resistance, it might shoot up. If I were even luckier, it might shoot up past its longer-term resistance (top green line) and who knows how much higher. Obviously I had some unhealthy expectations for this stock.<br />
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So I bought the stock at the blue arrow on the chart. I bought twice as much as I meant to, because first I placed a limit order. Since I wasn't patient enough for the price to hit my limit order, I canceled the order and placed a market order. Then the price reached my limit order (which I thought I had canceled), and I mistakenly bought twice the number of shares that I had meant to. I suppose that counts as another one of my mistakes to post about on this blog. In any case, I held on to see what would happen.<br />
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Unrelated to stock trading, it turned out that I needed the money I was trading with. For reasons why, see my post about <a href="http://startingat22.blogspot.com/2010/11/mistake-2-investing-while-unemployed.html">investing while unemployed</a>. The price dipped a little, and when it went back to where I had bought it, I figured I would stop while I was at break-even (including commission fees), and sell the shares, since I needed the money. I've made some mistakes in investing so far, but I know not to trade with money I can't afford to lose. So I sold the shares at the red arrow.<br />
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I still paid attention to the stock, to see if it turned out that I was right with my basic technical analysis predication based on support and resistance. As of December 6th, the stock has gone down quite a bit (as you can see from the chart) compared to where I bought shares. Through pure luck of pulling out when I did, I missed out on the big plunge. Had I held on, I probably would have fallen for the same <a href="http://startingat22.blogspot.com/2010/11/mistake-3-ignoring-quarterly-reports-on.html">mistake I had suffered once already</a>.<br />
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I've decided not to trade on the basis of technical analysis from now on for two reasons: it's not an exact science, and it does not fit with my <a href="http://startingat22.blogspot.com/2010/10/dividend-growth-investing-strategy.html">dividend growth investing strategy</a>. I've heard statistics saying that a significant percentage of day traders lose money overall, and their trading is largely based on technical analysis. I haven't labeled this post as a mistake or a success, as it was neither. It was simply another step in my journey of learning about investing in the stock market, and I've shared the results in this blog post.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-25359160280321076652010-11-07T05:26:00.000-08:002011-01-26T06:55:38.759-08:00Mistake #3: Ignoring Quarterly ReportsWhile toying around with short-term investments in the stock market, on two occasions I failed to take notice of when a company's quarterly report comes out. Quarterly reports can be a major factor in the stock's price. If investors don't like what they see (lower than expected earnings, for example), they will sell their shares, driving the price down.<br />
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This happened to me while investing in Rogers Communications Inc. Their past quarter wasn't so good because of all the other smaller, low-cost wireless providers just getting started with their ad campaigns. Rogers lost some market share to companies like Mobilicity and Wind Mobile, despite Rogers launching their own Chatr brand. Rogers' loss in market share may only be temporary, or it could be lasting. However, at this point in time, a significant number of shareholders of RCI.B decided that it was time to sell. The stock went down nearly 8% the day the quarterly report was released, and continued to fall over the next few days. Since I was only a short-term investor, I decided to sell my shares, as all my gains from the past month or two were now back down to zero.<br />
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Ignoring the quarterly report actually happened to me a second time. I was trying a short-term investment in IAMGold Corp. based on some basic technical analysis. The stock reached a high point, and I decided to sell my shares. The next day, the quarterly report came out saying that earnings were less than expected this quarter. The stock's volume spiked as everyone sold off, making the price drop over 4% in one day. Had I waited just a day longer, I would have suffered that same loss.<br />
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My lesson learned from these experiences is to pay attention to the fundamentals of a company you are invested in, whether it's for the short term or the long term.<br />
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Update: A good tool to stay on top of important dates with regard to your investments is Google Finance portfolios. If you add all your stocks to a portfolio, its summary page has an "Upcoming Events" section that lets you know when earnings reports, quarterly reports, etc. are due to be released.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-80338096672319483532010-11-03T21:24:00.000-07:002010-11-03T21:24:06.365-07:00Mistake #2: Investing While UnemployedDuring the summer, I was able to save some money from working at a full-time co-op job for school. When the fall came and it was time to go back to school and pay tuition, I was hoping that my student loan would be able to cover me for the term, until I went back to a full-time co-op position. I decided not to take a part-time job, and try to focus on school work instead.<br />
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My mistake was that I've had to dip into my stock account savings to survive until I am employed again. What's worse is that I made a few too many trades during the months being unemployed, because I was trying to re-allocate my assets in a more short-term way. On top of that, I've had to sell some stocks before they've had the time to appreciate in value a little. I think I've managed to stay around the break-even point, but I don't think I'll be investing again until at least next summer, when I'm caught up on bills, saved some tuition money, etc. and have some extra money that I can put away in my stock account again.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-70382465477669642982010-10-31T06:58:00.000-07:002010-11-03T21:24:59.318-07:00Success #1: Recogizing When Fees Are Too HighWhen I decided to open an RRSP mutual fund account, I had done some research on the different funds available from my bank. I had some in mind when I went in to open the account. I have a feeling that the representative I spoke with thought I had no idea what I was talking about when I told her I wanted to start investing. This was most likely because I still get asked if I'm over the age of 18, when really I'm 22. I don't do anything major like start an RRSP without knowing what I'm doing.<br />
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So when I went in to open the account, they didn't even ask me which fund I wanted to invest in, or give me choices. I filled out their quiz, and they said "Ok, here's what we're going to set you up with." I didn't really have a choice in the matter. Luckily, I realized that the bank would get 1.9% of the balance in my RRSP account every year. Later on when the balance is getting big, that's a lot of money to lose out of my retirement savings every year.<br />
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I discovered that my bank offers low-fee index funds, around 0.3% per year. This is a much more agreeable fee, so I applied for the funds by mail. Everything is switched over now, and my annual fees are much more under control now. I've decided that if I need to deal with the bank again, I'll do it in a more direct manner, or circumvent the representative altogether by doing things through mail or email. I'm glad I was able to recognize an unfavourable financial decision, and remedy it on my own.Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0tag:blogger.com,1999:blog-9142801045507913519.post-9368108768297337922010-10-31T06:43:00.000-07:002010-11-03T21:25:11.061-07:00Mistake #1: Didn't Do Proper ResearchI have done enough trading in the stock market to do justice to a post about my first mistake in investing. The lesson learned is: "Always give a stock due diligence in research before buying."<br />
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My first ever stock purchase was of Rogers Communications Inc. My reasoning was the following: Rogers is always first out with the hottest new cell phones (iPhone, etc.), they treat their customers well, and give them free stuff every so often, their customer support isn't out-sourced (at least at the time it wasn't), they have the best network coverage in Canada, and the wireless industry in general is booming. Higher demands on wireless data transfer is necessitating further development of the wireless infrastructure. This might make sense from a general perspective, but I didn't do any fundamental analysis, technical analysis, or even cursory analysis of the stock.<br />
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I just so happened to buy the stock at a good time, and the price went up about 12% over a few months. Then in October, their Q3 financial report came out, people didn't like what they saw, sold their shares and Rogers Comm. Inc. went down about 11% in three days. I decided to sell because I was back down to almost $0 gain, and needed the money anyway.<br />
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A second example of my mistake was investing in Alamos Gold Inc. I had noticed that over the years and months before now, Alamos had gone up, up, up in price. I thought, if I jumped on now, it'll just keep on going. Lesson number two: "Don't base an investment decision on past performance." Alamos went down about 10% from when I bought it, and I decided to sell before it got worse. It was a good thing I did.<br />
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I had read these two lessons before investing anything, but apparently had to learn them the hard way. At least I'm learning from my mistakes, and I did take one lesson to heart without having to learn the hard way: "If things look bad, get out before it gets worse."Mikazohttp://www.blogger.com/profile/02248101760142904816noreply@blogger.com0