Investing in BP after the spill

I bought BP shares this past week. In some ways the decision was dead easy, in other ways I must admit that I am still questioning my choice- but not for the regular reasons. Let me explain to you first why it was an easy decision (my rational side) and then lets talk about why it was a tough decision (let's call it my emotional side).

Buying BP was an easy decision

At my target price BP shares would pay a 9.5% dividend, with a great price to book, price to sales, and P/E to name a few stats. They are undoubtedly a solid company with great assets and leadership that has performed well in the past. Even if the dividend was cut in half I would still be content to hold this as a long term investment.
The media has made light of the 'we are going to nail BP to the wall' attitude that the Obama administration has adopted over the last few weeks, but lets look at the facts. The sinking of the Exxon Valdez in 1989 took 20 years to reach the final court settlement of a paltry $500M, plus the estimated $2B that Exxon spent on cleanup and legal costs.  While times have certainly changed in the last 20 years the corporate laws haven't. Don't get me wrong I am quite certain BP will have to pay but there are many factors to the case:

• There are three other companies involved with the rig that will likely be forced to carry some degree of responsibility.
• BP has already come forward with $1B to start the cleanup so isn't cash strapped.
• It will likely take another 5 years at minimum before BP has to pay a dime so they have plenty of time to put aside a settlement fund.

To summarize, despite the media's spin it isn't too likely BP is going to go bankrupt, that their market is going to disappear, or that they are going to be the target of a hostile takeover. Based on this reality and the strong company that is standing here buying BP was an easy decision.

Buying BP was a hard decision

I don't have a ton of moral rules when it comes to investing but there are certain stocks I simply am not interested in owning at any price- such as those directly involved with tobacco, or the production of weapons.  I just don't feel comfortable becoming directly involved and profiting from these businesses. BP is an oil based business, this product has been central to wars, genocide, supporting despots, a whole lithergy of negativity. This and, of course, they are the company who's employees appear by early accounts to be primarily responsible for the current destruction occurring in the Gulf of Mexico. This all leaves me feeling a bit uncomfortable with the whole prospect of direct investment in BP.

I have commented before that investing is often a battle been the investor's rational and irrational sides. My hope is that BP continues to be a strong and profitable company, I also hope though that BP takes the task of cleaning up the mess it has made and undoing the harm it has caused just as seriously. How did you feel about investing in BP?


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Making Sense of Things

It is very difficult to get a true gauge of the economy, the media is full of pundits and economists who create a dizzying amount of idle speculation. Getting down to brass tax is critical. When evaluating a business as a potential investment I often find myself in similar circumstances- too much information. To get past the noise I find the best thing to do is to focus on the fundamentals. In looking at the overall economy I think a similar approach can be taken.

The Vancouver port is one of the largest on the western sea board.  If you are exporting odds are the product went through this port. If you are importing odds are it came through. If we want to evaluate the overall health of the economy looking how the inbound and how outbound shipments have varied is at the very least an interesting prospect and perhaps can also provide some insight into the overall health of the economy.

Click on the image for a larger view. I have added in a shading to indicate the period when the recession occurred in Canada and how, in turn, the Canadian market responded.

 
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Stock Fishing

I always have a running list of great companies I would buy if they were priced a whole lot differently- my wish list you might say.  Being value investors we all spend a lot of time trying to differentiate between garbage and gold. Usually when I am looking at a company it has hit my screens because it is suddenly cheap - my job is to find out if there is a good reason or a bad reason for this, and invest accordingly. This activity can take some time, days, sometimes even weeks. Some opportunities simply don’t last that long though, they can dry up in a matter of a day, an hour or even mere minutes.

To prevent a great opportunity from slipping through my fingers I often have a running wish list. This list is comprised of high quality companies with great leadership, and solid books, they meet all but one of my criteria to invest- they aren't trading at a discount. The P/E might be too high or the dividend yield is just not where I need it to be.

As an example let’s pull three off my list Visa, Cisco and P&G. In my opinion great companies with great management, great products and a solid sustainable competitive advantage. The reality of it is though that they all sport a P/E that is far too high to merit an entry point- in my opinion. During turbulent days though like last week these stocks drop by impressive rates. At these times my wish list turns on and we buy what we can. On news of the sudden crash I was out having lunch and quickly returned back to my office to file a few trades from my list.

So what do you have on your buying wish list and why?

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Greek Default: A History of Failure

Greece is in a bad state, there is no doubt about it. When a country builds up a billion dollars in debt (some estimates are 30% of GDP) and shows no mechanism to repay there is little good that can be said about the circumstance. Without the assistance of an EU German backed bailout there is a very good chance Greece will be forced to default on its debt. If you were to believe the general media this is tantamount to the outright failure of the nation which can result in nothing short of the entire country descending into chaos and likely taking the rest of Europe and the West with it.

The reality isn’t so grim. If Greece defaults on its debt some country’s and banks (mostly IMF) will loose money, and probably a fair bit of it. Defaulting on debt isn’t a new revelation though it has happened to the majority of countries regardless of size or stature and will likely happen to them again. As Reinhart puts it in his book, This Time is Different: Eight Centuries of Financial Folly:

"Greece’s default on debt reached an almost pandemic reoccurrence at the turn of the century… Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century."

On a local level a default of government debt is disastrous, on a national level painful; on an international level it is nothing more than an inconvenience. Have no doubts about it, if Greece defaults it will likely effect the overall confidence of investors in the west. But a default in Greece should not have any direct and sustained impact to those economies not directly tied to the rise and fall of Greece’s national debt and bond structure.


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Actively Managed ETFs

A few years back the SEC licensed a new class of ETFs called actively managed ETFs. Being a big fan of the ETF area I thought it would be worth saying a few words about this new class.

ETFs are usually passive investments, some of my favorites are those that model an entire market like the S&P 500 or the S&P TSX. These funds emulate the components of the S&P 500/TSX allowing an investor to gain a diversified exposure to the market at a very very low cost or MER. In these traditional ETFs there isn't a fund manager making a decision about which stocks to select which is the chief reason for the low MER.

Actively managed ETFs take it a step further. In an actively managed ETF we insert a fund manager who researches and selects stocks that meet the fund's guiding principals. Here, a fund manager can select from potentially thousands of stocks selecting only those that they believe will yield the highest return for the fund's shareholders.

Sounds like a mutual fund, you might be saying to yourself- and you are right. An actively managed ETF is in many respects very much like a mutual fund, with a few key differences. Mutual funds can't be traded inter-day, all prices and trades are settled at the close of the market and are set based on the net asset value (NAV) of the fund's holdings. This makes a fund's price equal to the sum of its parts. With Actively Managed ETFs the price during the day can potentially float well above the NAV or, theoretically speaking, well below the NAV.
 

There is a second key difference between a mutual fund and an actively managed fund. When a shareholder cashes out of a mutual fund the payout come from the mutual fund company. In the event that a significant number of shareholders sell off a mutual fund it will force the mutual fund company to sell off some of its portfolio in order to become liquid enough to pay the shareholder back. In an actively managed ETF, on the other hand, when an investor decides to sell, they are selling into the open market where another investor can purchase the fund, leaving the fund company completely out of the mix.

Let's have a quick look at three comparables, an ETF that models the TSX, a large cap TSX mutual fund, and an actively managed Large Cap TSX ETF. These aren't perfect comparisons but when one considers the breakup of the TSX with its limited number of leading companies (compared to other exchanges) the comparison I believe is somewhat valid.

Type	Symbol/Name	MER	When price is set	How fund is traded
ETF	XIU	0.17%	Price fluctuates throughout day	between investors
Mutual Fund	BMO Guardian Canadian Large Cap Eq Mut	2.38%	Price set at end of day	between investor and fund company/ partners
Actively Managed ETF	HAX	0.70% plus 20% of the amount by which the ETF outperforms the S&P/TSX 60 Index	Price fluctuates throughout day	between investors

So how does it all stack up? For my money I would keep my dollars in the basic ETF, my concern is always over minimizing costs, and maintaining control. The lower MER of an ETF is desirable and the broad diversification that they offer in my opinion is far superior to a mutual fund. I am not a fan of mutual funds, so I don't see any real advantages to an actively managed ETF. If there are decisions to be made about what individual funds to buy I would prefer to make the decision myself rather than delegating to a fund manager who's interests and motivations may not align with my own.

That is my two cents- what do you think?

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Fact and Fiction

I have a problem- I hate listening to people hyperbolize returns on investments- especially those specific to real estate investments. Keeping in mind that I think real estate can be an excellent investment when done right- but lets not get carried away with things. Here, let me give you an example.

I received a newsletter the other day from an email list I subscribe to- normally the articles are very informative and give some great insight. This most recent article though was about investing in real estate, the author started out with: “Did you know that throughout time, the richest people in the world have all owned a great deal of real estate? “ I sighed, gross generalizations aside they probably also owned bonds and stocks too- so what?

Our author goes on to show the following graph:

And then make the point that an investment in real-estate in 1963 would net “a 1200% gross profit” today.


I like graphs- big fan. There are a few problems I have with this specific graph though:

• This graph speaks to the average US household, unless you own hundreds of properties scattered across the US you simply will not see these returns (REITs aside- keep in mind our author was talking about direct real-estate investment).
  
  
  
• The other issue I have is that there is no adjustment for inflation on this chart. Looking at the chart it shows an average house worth $25,000 in 1963 dollars, but using an average of 4.3% inflation through these years that amounts to $180,625 in 2010 dollars. Using the 2010 average sell price of $275K this would net you a profit of $94,375 inflation adjusted dollars. Considering that you had to wait 47 years for that return I put that in the ok return pile- not the wow pile. Certainly not the 1200% gross profit our author espouses.
  
  
  
• Lets not forget all the tax you would have paid buying the house(agent fees), holding the house (government), and selling the house (agent fees again).  These too eat into the potential profit.
  
  
  
• My final point, have you ever known a house that didn’t need to be rebuilt or repaired over the course of 47 years- no? Neither have I- their goes the majority of the rest of your profit.

Real estate can be a good investment. Buy a property below market value that doesn’t require lots of work, in a good area, get a renter to pay the mortgage and pay you some returns and enjoy. Don’t get wrapped up in the 1200% gross profit nonsense.

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Is now the time to start looking at US ETF REITs?

Every industry faces periods of rise and periods of decay. The last few years have, not surprisingly, been a period of decay in the REIT Area. But like nuclear stocks after 3 mile island, or banks after the savings and loan scandle, or bonds after the junk bond era, after a sector has been desimated what is often left are the high quality well managed companies that will rise to dominate the sector in the future. Is now the time for REITs?

For those not familiar with REITs they are otherwise known as Real estate invest trusts. The basic rule that governs their operations is that they give 90% of all revenues from a period back to shareholders in the form of a dividend. There are three key classes:

• Equity REITS: Invest in property and gain revenues from collecting rent. 
• Mortgage REITS: Loan money for mortgages or buy and sell mortgage backed securities.
• Hybrid REITS: You guessed it, they do both.

I am not a big fan of Mortgage REITs, in my opinion they partake in the buying and selling of paper. Paper that is difficult if not impossible to assess its true value. For those more in the know these types of investments may make sense. I follow Buffett's advise when it comes to these matters, if you can't understand it then don't buy it.

So that leaves us with Equity REITs. These REITs employee people who specialize in real estate industry they understand the simple formula (rent - upkeep) > mortgage. With housing prices depressed all across the US those companies that are still alive in this sector are starting to gather steam and acquire great properties. Regardless of what happens over the next few years people will still need properties to rent. Unless you believe that housing prices have a significant way to fall yet this is certainly an interesting sector to examine.

To further diversify there are several ETFs that deal with REITS if we look at each of these compared with the S&P over a two year and five year periods the industry is quite depressed from its highs.

To be clear I am not advising you date the REIT sector, but if you are looking to diversify your portfolio and hold a stock or ETF for 10 years it might be a good time to look at this sector.

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Anticipating a Dividend Increase

I am a big fan of companies that make it a regular habit of dialing up a dividend. This is why I have been such a proponent of the dividend aristocrat group. Nothing perturbs me more though than to buy into a 2% dividend stock that I believe will crank up its rate only to be forced to wait multiple years before seeing that increase. To counteract this here is a simple parachute that can increase your confidence that a rate will increase.

CFO Turnover

In order to be confident that our investigations will be worthwhile it is important to see how long key people stay with the company. If the CFO, CEO and others are spinning through the company like a revolving door then your company has changed or is changing- investigation into it’s past may not indicate likely actions in the future. If however you find that current key positions have been with the company for some time then we can proceed with our investigation.

Investigate previous payout ratios

A payout ratio shows you what percentage of the net income is being paid out to shareholders. These rates can be anywhere from 10% -110% depending on the dividend paying company’s industry and financial condition. Having a low rate doesn’t necessitate a dividend increase, or conversely having what appears to be a higher rate doesn’t mean that an increase won’t happen. The task is to see what that payout ratio was the last few times an increase was done. This information can be found by understanding how the dividend payout ratio is calculated (Dividends / Net Income) and then retrieving the information from previous year's financial statements on morningstar or the company's own investor page.

Bring it together

People are creatures of habit. I have found that if you have the same CFO, CEO and the same payout ratio as the last time a dividend rate was increased you are very likely to see the same again. Conversely if these factors are not present you are very likely to end up disappointed despite what you might think is a fair current payout ratio. Simple but true.

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Only 4 Ratios

if you could only have four ratios to evaluate a company what would they be? This is a fun question that is popular in investing circles. For a laugh I'll take my shot at it, what would you pick?

1) Current Ratio

Current Assets / Current Liabilities

Why?

This ratio keeps track of the company's ability to pay its short term debt. If a company doesn't have safety money to deal with debt then they might not be in business tomorrow and I don't need any of that.

2) Dividend Yield

Annual Dividend Per Share / Price Per Share

Why?

As a buy and hold investor I like to get paid to hold the investments. A nice yield makes for a little reward for patience.

3) Dividend Payout Ratio

Dividends/Net Income

Why?

Getting a great yield now is perfect, but how can you be sure that this dividend won't get canceled as soon as you buy the stock- you don't. One way of keeping an eye on this is to look at the payout ratio. If too much of the income is being eaten up with a dividend then beware that dividend might get cut or at least it sure isn't going to increase in the near future.

4) Dividend Growth Rate

Why?

If a company increases its dividend on a regular basis the returns over the long term can be jaw dropping. The future of a dividend can be more important than the present.

So how about you, if you only had four ratios what would you use?

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Microsoft Pirates

I had a fellow investor tell me one day that they would never buy shares in Microsoft as their software is so widely pirated. I'm not a big fan of Microsoft stock but I've heard that reason given before and it is just silly- let me tell you how it works.

Microsoft widely subsidizes licensing for high schools, universities and colleges. They also provide university bookstores with deeply discounted licenses for their products to sell to students. This puts the product front and center and forces students to learn it or face failing their courses. After four or more years working with the product students in all ranges of study become proficient users. This indoctrinates users into Windows' users. The cost of retraining these people would be tremendous, so the net effect is that it forces future employers to buy Microsoft products.

If you somehow manage to elude Microsoft products through your education then you may end up pirating their software for your home use. Microsoft has a well known anti-piracy group but the reality is that they really don't care as much about single user license violations (they care, just not as much). The focus on piracy is aimed steadily at the big perpetrators of piracy, people who are profiting by selling pirated Microsoft products, or corporations that have multiple license violations. Microsoft doesn't care that much about your 13yr old son with a pirated copy of Microsoft Visio for the same reason that many tool companies give away free tools to recent trade school grads. Once you get use to our tools, why would you want to throw all of them out and relearn a whole new set when it comes time to upgrade or amend your set?

There is another reason why piracy actually fits into the profit model of a business. Buzz. It is well known that retailers often provide products to celebrities. Other companies such as Nike have admitting allowing the theft of their products in sample markets. This is an extremely inexpensive marketing and focus group activity. By getting the product out in front of customers, even if you have to give it away, they are very likely to rejoin the paying fold in the future or encourage others to.

Indoctrination isn't free, but it sure does pay in the long run. If you want to dislike Microsoft stock that is ok, but dislike it for the right reasons.

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dell dddd dumb

Before any investment in a company I try to do business as a consumer with that company. Balance sheets can only tell you so much about the "true" story of a business. When the option came up to buy a new laptop for my wife I thought, Dell stock has been interesting to me for some time, let's give them a go.

Let me tell you, it wasn't pretty. After going through far too many pages and a number of strange web errors on the dell site my order was lodged. Content to write off these bizarre website errors I went over to the track order page. To my surprise I discovered my estimated delivery date for an off the shelf, uncustomized, mass manufactured, laptop was over a month away. I couldn't believe it, I could walk 5 mins from my office to a local computer store and pay the same price for a laptop and walk out that day.

I set about to cancel my order right away. Sent an email, no response. Phoned, and finally after sitting on hold for more time than I would like to admit I was put through to a call center where I was able to cancel my order. I did a bit of reading around the web to see if I was the only one who had encountered this, nope.

I am left wondering, what is dell's sustainable competitive advantage?

• Easy order- nope.
• Great service- nope.
• Great selection- nope.
  
• Fast Delivery - nope.
• Great prices - nope.

Sorry Dell, not going to buy a laptop from you again, and not going to be buying your stock either.

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Pink Slips

A recent mass layoff at my company has given me a fresh perspective on layoffs. Normally, as an investor, we see layoffs as a courageous way to drive profits forward by shaking off some areas of weakness. I have personally invested in companies shortly after a mass layoff if I believe that such changes will benefit the profitability of the business. From a purely financial perspective viewing a company as a machine is an easy thing to catch one’s self doing. However there are some soft costs involved in layoffs to a company culture that I wasn’t really aware of until the week after I witnessed fellow employees walking out the door for the last time:

• The Straw that breaks the Camels back. Employees remaining after a layoff will fear that this is the first of many layoffs- this is only to be expected. This fear will most assuredly drive them to explore other opportunities and possibly accept them. Everyone would rather leave on their terms rather than finding a box on their desk in the morning. The intent of a layoff is to keep your best; unfortunately it can have the opposite effect of driving your best into the arms of a competitor.

• Showing a company’s financial health. If you work at a private company getting a gauge on the overall health of a business is a difficult task. There is no clearer message about health than to see a layoff in action. If employees are already feeling under appreciated or under paid the message “no pay raises in the foreseeable future” will come through loud and clear during a layoff, again driving your best talent to explore other options outside the company.
  
  
• The belt tightening turns into a corset. No one really likes to work in a company doing belt tightening- belt tightening usually means there is a better way to do things and we are going to choose the cheaper way. Anyone with pride in their work will not thrive under this environment and innovation is often stunted.
  
  
• Dad kicks your sibling out of the house. Creating a family atmosphere is critical in getting people to go above and beyond. If you expect employees to take a panicked call from you at 2AM when your servers crash then family is key. When a company does a layoff it shows how that the family dynamic is vulnerable and the trust that both parties share for one another can be broken.
  

What makes a company successful in the long term is its service, innovation, management, and products. All of these do not happen without good people. From a short term perspective layoffs make the company more viable but from a long term perspective it can seriously damage the culture and effect the good people who you need to run the business in the future.

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Check your sources

It has become formulaic that when a movie comes out one of the advertisements will feature reviewers comments like "riveting", or "one of the must see movies of the year" and of course my favorite "an instant classic". The point, obviously, of these reviews is to convince you, based on some other expert's testimony, that you need to see this movie.

Have you noticed though that over the last few years that the font on the source of the quote has gotten smaller and smaller? To the point now that on my 36 inch TV I would need a microscope to make out the author of the quotes in the advertisement for the new Sherlock Holmes movie. The reason for the ever shrinking font is equally simple, there are just so many people calling themselves experts out there that their is always someone at a media agency that will have found something good to say about a terrible movie.

Analyst downgrading/upgrading of stocks is the same. I have one stock in my portfolio with 40 analyst following it. Analysts like movie reviewers come in a varying degrees of credibility, so why would you buy or sell based off a change in view one may have of a stock in your portfolio? There are some analysts who's opinions I respect having listened to their questions to management on calls and having an understanding of their fund's investment philosophy. I treat their opinions like those of an acquaintance who tells me about a good movie they recently watched, it doesn't mean I will watch it, but I respect their opinions enough to hear them out- the others are just noise.

It never fails to perplex me how aggressive a stock price can move when an analyst recommends a sell or buy on a company's stock. By the way Sherlock Holmes was not "riveting".

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Patience

The largest struggle I have as an investor is not researching companies, or finding and analyzing data, or even pricing a stock; it is having the patience to do all of these things properly.

Patience serves as a protection against wrongs as clothes do against cold. For if you put on more clothes as the cold increases, it will have no power to hurt you. So in like manner you must grow in patience when you meet with great wrongs, and they will then be powerless to vex your mind.

Leonardo da Vinci

Recently I have struggled with this. Having found a good company to invest in and having arrived at what I believe to be a fair price I placed a GTC order. As the days turned into weeks this trade hung on the line never reaching my desired price. In lamenting this fact I found myself at my computer with the mouse over the cancel button on the order with all the intention of canceling my current order and increasing my bid to a price more inline with the current market price for no other reason than that I lacked patience.

Two days later and I am still waiting but the stock has already dropped 9%. I'm calling this 9% a reward for being stubborn. I hope all of you are stronger in this regard than I am and find these challenges a breeze, but for those who don't I hope we can all learn to take a little bit more time to read the financials, price the company, and patiently await an investment to come back to where we know it should be.

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CenturyLink Stock Review

CenturyTel, Inc., together with its subsidiaries, is an integrated communications company engaged primarily in providing an array of communications services, including local and long distance voice, Internet access and broadband services. The Company operates in 25 states located within the continental United States.

Why We Are Reviewing

• is currently sporting an 8% dividend.
• CenturyLink is a dividend aristocrat.
• is soon to be a member of the fortune 500.

What I like about their story

CTL is a telco, most investors tune out at that point as the overwhelming consensus is that VOIP has, or will kill, the traditional phone. Centurylink appears aware of this reality and has taken a few steps to remain a healthy business:

• Use great service and an preexisting relationship as a means of turning their existing phone customers into package consumers of phone, high speed internet, and television services.
• Building a substantial backbone network to support data traffic allowing them to profit by delivering an end to end solution to customers.
• Use the revenues from phone to build a warchests that has been used to purchase companies in vulnerable positions.

The Ratios

P/E: ideal less than 10, current 12.15
Book Value: ideal greater than 0, current greater than 0
Price/Book Ratio: ideal less than 1.5, current 1.12
Current Ratio: ideal more than 2, current .68
EPS Growth rate: ideal greater than 15% over 5yrs, current 8.62
Earnings: Positive in the past 10yrs, current yes

Comments

P/E is solid as is price to book, EPS is low, Current is likely low as a result of most recent acquisition.

The Fundementals

Positives

Negatives

has over the last ten years kept a historically high cash position. historically has kept both short term and long term debt consistent and under control. Accounts payable average 1.6% of total liabilities and equity. Total Liabilities have decreased year on year in 6 of the previous 10 years showing an conservative approach to management. There has been an active stock buyback indicating a concern for shareholder equity. COGS is decreasing as an overall percentage indicating a push towards cost savings and systematic improvements. Gross Profit has increased as an overall percentage of revenue.

Balance sheet is heavy with intangibles. Other long Term liabilities have steadily grown. Net income has decreased year on year in 6 of the previous 10.

Insider Trading

Healthy insider trading can indicate the executive's belief in the health of the business and can indicate an undervalued stock.

In this case we see nothing but a history of selling, it appears that as soon as any of the exec get bonus stock they sell shortly there after.

Consumer Perception

CTL is well regarded in the industry receiving a number of awards for customer service and satisfaction. CTL makes an effort to be socially aware at the local level involving itself in community fund raising, food drives and a united way partner program. All of this ultimately helps to increase its perception as a local business.

Stock Expectations

This company is not going to bust out and show massive stock appreciation. Based on some fundementals and a good story it may be undervalued. Simply put I expect that over the course of the next few years CTL will continue to grow its TV and internet business and with an ongoing focus on its shareholders will continue to pay a solid dividend.

Disclosure
At the time of writing stock has not yet been purchased in this business.

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The Year that was

As the year winds down in these final weeks I have had opportunity to think back on the year that was. For some I know this has been a terrible year, for myself it has financially been one of the best. While we do publish a fair number of stock reviews throughout the year only a limited few actually translate into actual recommended buys, but almost everything we touched this year turned to gold.

We started the year with a buyout of Puget Power (PSD) that netted a nice return, then on to a quick buy and sell of Ford (F) that provided a fabulous return. Then on with Methanex (MX) whose 6% dividend and 62% increase in share price has been quite enjoyable. Our next big move was into Brystol Myers (BMY) who also promises us a nice 6% and whose shares have increased 37% since our posted article.

While others have done better I feel good about the risk and return garnered in these trades.

Loose, but don't loose the lesson

The year was not completely full of winners; our early positions in the small unknown NSEC before the credit crunch really kicked into high gear are still haunting us with a 30% loss. When the company cut it's dividend the share price dropped off the wall and has only recently somewhat rebounded. In this case the mistake was twofold, too small of a company, and it had too little liquid cash onhand to support the dark days of the credit crunch. The lack of cash caused the cut of the dividend and the small nature of the business turned a leak into a mass exodus.

If you can't decide then don't

This has been probably one of the quietest years for shear buys and sells. It has been hard to keep the finger off the trigger with some of the ridiculous prices that have been available for quality companies. With the constant appearance of books chock full of intangibles assets though finding the true value of a company has been laborious and kept me on the sidelines. While I hope to close out the year with a one more buys I've been more than happy to put the money to work in more reliable places while awaiting the perfect opportunity.

Best of the season to you, hoping your new year will be profitable and rewarding.

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Google maps for property assessment

Having been on a recent trip to the southern US I was awestruck with the prices of property there. Being out of my element in a new city I simply wasn't comfortable with the idea of investing though. With proper preparation trips of this type can be quite rewarding and one of your best tools is often overlooked- Google Maps.

With a simple browse of an area in Google maps you can learn all of the following:

• How far away is the local hospital, school, police station, prison, garbage dump, shopping mall. All of these can increase or dramatically decrease your long term value.
  
  
• What is the wealth of the area- do you see cars in people's yards, do the roofs look old, are there pools, does your neighbour have a garbage dump running in his back yard?
  
  
• What is the zoning like? Are newer houses quite close together indicating you will likely be able to demo and build two houses on a lot in the near future.
  
  
• Is there any major road development occurring? How do you think things will develop based on how they are currently setup? Will a house be demolished and a new road collected to your quite street? Or maybe a street widening to turn your two lane into a four lane.
  
  
• Where are the major roads? Are they close to the house? Roads tend to get more busy rather than less over time leading to poor air quality, busy streets and an overall negative environment.
  
  
• What types of businesses are nearby? If you see dump trucks parked in back lots this is a bad sign. Greenhouses down the street means 24/7 lights and the constant sound of trucks.
  

Take it all in and Happy hunting!

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The Less Lazy Investor

Warren Buffett has been asked a number of times to provide advice for the lazy long term investor- ie. the investor who doesn't want to spend a lot of time researching companies but wants to profit over the long run. His recommended solution is a market index fund. I would speculate that the two reasons he recommends this route are:

1. Studies have shown that a phenomenally high percentage of mutual funds can't beat the general market, so why go that route?
   
   
2. The MER, or management costs of these type of vehicle are very low compared to mutual funds.
   

Other solutions for the lazy long term investor have been suggested such as greenblatt's methodology, dogs of the dow and the list goes on.

Defining The Less Lazy Investor

I think some of these are great solutions for the "truly" lazy investor. I have come to realize that there is no black and white, their is instead a spectrum with many things. The same hold true with the lazy investor, there are some lazy investors who want to do absolutely nothing, while their are others willing to partake in some research- they just don't have 30 hours a week to look at companies. I often hear from these investors; they want recommendations of where they should be spending their limited time.

Advice for the Less Lazy Investor

For the what I am calling the "less" lazy long term investor I would recommend something slightly more involved than a market index fund. The less lazy investor should instead spend their limited time performing analysis of companies listed on Standard and Poor's Dividend Aristocrat List. In order to be listed here a company must meet a series of criteria:

• Market Capitalization. The security must have a market capitalization of at least C$ 300 million at the time of the review.
• Universe. A company must be a constituent of the S&P Canada BMI.
• Listing. The company’s security must be a common stock or an income trust listed on the Toronto Stock Exchange. In the event that a company has more than one class of common shares listed, the more liquid class will be used.
• Dividends. A security must have increased ordinary cash dividends every year for at least five consecutive years. Only ordinary dividend payments are considered. The 12-month period ending November 30 and all dividend ex-dates are used for the dividend analysis. The index is weighted by indicated annual dividend yield. To prevent the index from being concentrated in only a few names, the methodology incorporates limits in index weights so that no individual stock represents more than 8% and no income trust represents more than 5%. In aggregate, income trusts are capped at 30% of the index weight. The index is maintained by the S&P/TSX Canadian Index Committee. Comprised of four members from Standard & Poor’s and three members from the Toronto Stock Exchange (TSX), the Index Committee meets on a monthly and as needed, basis for review.
  

Sustained Dividends for the Lazy Long Term Investor

By selecting this index or investing directly in companies from this list the less lazy investor has garnered a margin of safety. Selecting companies on this list promises to give the investor, at minimum, a company that in the past has cared about its dividend. The odds have it that these companies will continue to care in the future which can be a huge benefit to the long term investor. By only doing research against these companies the less lazy investor has substantially improved their odds of profiting over the long run.

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RSP Home Owner Tax Trick

I don't mind paying taxes but if there is ever an opportunity to pay less I am certainly interested. When my wife and I bought our home we had amassed a nest egg in RSPs. We cashed in the RSP funds as part of the first time home buyer's plan.

This plan allows anyone who has not legally owned a home in the last five years to cash out $20,000 of RSPs for each person on title without enduring the regular taxation hit of withdrawing funds from an RSP- assuming you are willing to refuel your RSP back to its initial value over the course of 15 years. While this is certainly a help if you are coming up short on a down payment, it can also come in handy if you just want a nice tax advantage.

Let me Explain
By cashing out the $20,000 per person you are obliged to refuel your RSP fund to the sum of $1400 per year. Any funds beyond this amount contributed yearly to an RSP can be demarcated as a “new” RSP contribution, or can be routed towards next year's required payment.

So here is where the nice twist comes
After retrieving your first time home buyer's $20K, invest all of the sum immediately back into an RSP. Let me walk you through, When you put the initial $20,000 into your RSP you get a tax advantage as the RSP fund reduces your taxable income. Now you direct the $20,000 for the first time homeowner plan and put it into a new RSP and voila your taxable income goes down again. You have, in effect, had the same $20,000 reduced from your taxable income twice. If you want to double this process again put your spouse on title and you can increase the first time home buyer's to $40K.

As with any tax tip I would suggest you speak with your accountant or financial consultant.

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Investing in Private and Public Companies

From time to time I am asked if I would like to invest in someone's private business. Usually the answer is no. The startling percentage of small businesses that fail creates an unacceptable imbalanced between risk and reward. Every once in a while though I am intrigued by the idea and will go on to request a look at the company's financial statements.

There is an important lesson I have learned though from looking at these private company documents. This lesson extends beyond private companies to investing in general. Private and public companies have very different intents, and as such will use all of the legal leniency in their financial statements to achieve these intents.

Private companies will focus all of their might at keeping taxable income down. Public companies have exactly the opposite intent, show investors consistent growth in income.

There are a wealth of perfectly legal ways for either public or private companies to achieve these means. I certainly don't mean to make it sound malicious- it is just businesses. As a result you as an investor should take a Socratic approach to analyzing all financial statements- question everything. Ask the questions where does the money come from, where does it go, and if you don't like the answers keep digging.

I had the opportunity to watch a bit of Michael Moore's recent movie about Capitalism. There was one startling scene in which Michael asked people on wall street to define derivatives. The people he asked bumbled and sputtered and where unable to really explain it with any vigor and yet were likely buying these very financial vehicles. While I accept Michael has an agenda, the whole thing reminds me that you as an investor have a responsibility to dig deep before investing a dollar in any venture. The picture is rarely as clear as it is painted.

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