InvestorsFriend Inc. Newsletter
December 27, 2011
Another Year of Beating the
As we close out 2011, my own
portfolio is up 3%. That may not be great but it certainly beats the Toronto
stock exchange index which is down 11%. Meanwhile, the Standard and
Poors 500 index is up 1%.
My own portfolio has done
better than the TSX index in 10 out of the past 12 years. The average out
performance has been 9% per year. My portfolio has returned a cumulative
302% over the past 12 years while the TSX index is up just 41% and the
S&P 500 index is down 17%.
An investment in an equal
amount of each of the Buy or higher rated stocks on this web site from the
start of each of the past 12 years has returned a cumulative 325% and has
beaten the TSX index in 10 out of the last 12 years since the inception of
this web site.
Here is how we have
accomplished these excellent returns:
All these years our basic
approach has never varied. We have applied fundamental analysis to a select
group of companies to identify those which appear to be under-valued.
Almost all of the stocks have been middle to larger size companies. There
have only been a very few penny stocks. There have been (many) financial
companies, pipeline companies, retailers, restaurant chains (including two
large coffee chains), beer brewing companies, software companies, a
property developer, a lumber company, rail roads, telco and cable companies,
and a number of miscellaneous companies.
And, by the way, I call these
"companies" rather than "stocks" for a specific reason.
Those who invest based on fundamentals including earnings and earnings
outlook are necessarily thinking about a company. A company has revenues and
expenses and customers and profits and assets. On the other hand if you
think in terms of investing in "stocks" then you may fall into the
habit of thinking of your stock as just a squiggle or chart on a screen.
Those who invest in stocks may try to guess where the stock's price will go
without even thinking much about the underlying company. That simply is not
For the most part there has
been no mining companies, and few commodity companies of any kind.
The analysis has been 100%
fundamentals based. We have studiously ignored technical analysis and
momentum based approaches. I have not used stop losses in my own portfolio
and we have not recommended their use.
We have not used any
"target" prices. Our "Buys" occasionally turn into
"Sells" when the price has risen a lot or the earnings have
declined. More typically a Buy or Strong Buy later becomes a (lower) Buy or
a Weak Buy / Hold and at that point we have often indicated that we have
sold some or all of our position to move into stocks with higher ratings.
As far as market timing goes,
we don't do a lot of it. But some years we find very few Strong Buys and
other years we find many stocks to rate Strong Buy. My own portfolio has
mostly been fully invested in equities but very occasionally I have held as
much as about 40% in cash. And I have used some margin or borrowed money at
times as well.
As far as dividend stocks or
income, we have not really targeted that although in more recent years we do
include some higher yielding companies on the list.
Our stock picks from the
start of each year and how they did are fully documented on our performance
page. Click each year to see the specific stocks.
But enough of the past; what
will tomorrow bring?
Investments for 2012 and
When it comes to thinking
about companies to invest in for 2012, most investors ask the wrong
questions. They ask, will the market go up? and will this particular stock
The problem with those
questions is that quite simply, nobody knows. There is an infinite number of
things that can happen to the the world economy, the North America economy,
to world and local politics, to a particular company, to interest rates.
With all of these variable it is never possible to know with certainty which
direction a company's stock or even the entire market is going to go over a
short period of time like one year. There is little point in dwelling on questions
that cannot be answered.
Better questions that CAN be
answered are along the lines of: Does the stock market appear to offer good
value at this time? Does company XYZ appear to offer good value?
It's impossible to guarantee
that investing in the market, or in a particular company, will turn out to
be a good investment even over the long term. But it is certainly possible
to do some analysis and conclude whether it appears to be a good
Over a lifetime if you make
good decisions by investing in good companies at reasonable prices, then
things are very likely to work out well for you.
So, Are the Markets
Attractively Prices at This time?
Yes, our analysis suggests that
North American stock markets on average are reasonably priced and likely to
provide a reasonable return over the long term.
What about Individual
We have identified about five
company stocks that we rate in the Strong Buy category heading into the new
year. And we may find a few more by January 1. And in addition to that we
have identified at least six more that we would rate as Buy or higher
We never make any guarantees.
But overall we feel that there are lots of good investment opportunities
available. I certainly feel good about owning my share of profitable
It has been said that in many
endeavors just showing up can be 90% of success. Stocks have been that way
over the years. Yes, there have been plenty of bad years. But history
shows that an investor who simply kept their money in the markets through
good times and bad over the years has made a good return over the years.
There are ALWAYS reasons to fear being invested in stocks. And there are
many people who simply cannot afford the volatility. Perhaps they can't
afford the risk of loss, or perhaps they can't handle it emotionally. Many
people however can afford to take some risks and can learn to
deal with the emotional aspects.
Picking The Best Company
Stocks of All:
Ideally, I would like to analyze
hundreds of stocks and choose those few that appear to offer the very
highest expected returns. Realistically, I can't do that. Instead, I analyze
a group of companies and invest in the best that I can find from that group.
One rule that I have followed, almost without exception, is that I invest in
only what I have analyzed.
By the end of March 2012 we
will be updating our articles that analyse the overall value of the Dow
Jones Industrial Average, the S&P 500 and the Toronto stock index. This
update will incorporate the 2011 earnings. We will also update our Article
that lists a broad range of exchange traded funds and provides an indication
of which funds and sectors appear top offer good value based on their
dividends and P/E ratios. This analysis is provided free of charge. This ETF
article alone provides sufficient information from which to choose a
diversified low-cost portfolio.
We would also like to add
more companies to our list. There are many promising and interesting
companies to look at. Not only might we find some good investments, but we
enjoy learning about different businesses and how they operate and make
money (or not).
Get Our Stock Picks for
If you are interested in
knowing which stocks we are buying and why and if you not already a
subscriber to our Stock Analysis service you can access our stock picks by
subscribing for as little as one month for just $13 per month or at our
Boxing Day Special reduced rate of $100 per
year. Click for more
details of how to subscribe.
It is well known that house
prices in the United States are down dramatically from their peak values.
According to the latest Case-Shiller home price index, (released just today)
the average house price in the United States has declined 32% since peaking
in July 2006. But that does not tell the whole story. Houses in Dallas Texas
are only down 8% since mid-2006. But those in Los Vegas are down an average
of a whopping 61%. Florida is down an average of 50%, and there would
certainly be some homes down much more than that.
Meanwhile, in Canada the
Teranet index shows that the average house across the country has increased
in value by close to 40% since mid-2006. In Vancouver the average gain was
House prices in Canada are
now substantially higher than those in the United States. Roughly speaking,
it's not unusual for house prices in Canada to be double those in comparable
sized cities in the U.S. (But it varies greatly depending which cities are
compared in various parts of each country.)
That disparity will not last indefinitely.
It seems to me that house prices in Canada are vulnerable to a decline. It
may take higher interest rates or higher unemployment to trigger a decline,
but before too long a decline is quite possible.
Meanwhile house prices in the
United States are probably at or close to a bottom and will likely be rising
over the next few years.
Many younger Canadians with
huge mortgages are at risk financially if interest rates rise. It might be prudent
for homeowners with large mortgages to lock in their interest rate for 10
years or more. Unfortunately, for unknown reasons, Canadians simply do not
have access to reasonable interest rates when it comes to locking in for 10
or more years. And if Canadians do lock-in for 10 years or more, they an
face massive penalties if they need to get out of the mortgage. Such
penalties usually do not apply in the Unites States.
I high-lighted the problem in
a recent email to some journalists
In (last week's news from the United States I see:
“WASHINGTON (AP) -- The average rate on the 30-year fixed
mortgage fell to a record 3.91 percent this week, the third time this year
that rates have hit new lows.”
Meanwhile in Canada the posted mortgage rates for longer fixed terms
5-year fixed 5.29% but 4.09% special deal (so similar to U.S. 30-year
10-year fixed 6.75% but 5.45% special deal (39% higher than U.S. 30-year
25-year fixed 8.75% (call for special deal) I
called and the mortgage specialist was not aware what the special deal
might be and had never heard of anyone locking in for 30 years. The
posted rate is more than double the U.S. 30-year fixed rate.
Americans can get 3.9% locked in for 30-years (with
the ability to refinance or pay-off without any interest rate
differential) while Royal Bank’s posted rate is 8.75% for 25 years (and
massive interest rate differentials could apply if you pay it off early).
Money is the ULTIMATE GLOBAL commodity and yet
Canadians pay more than 100% higher interest rates than Americans for a
25-year locked in term . In both cases on government insured housing
loans. And yet our government interest rate is 2.50% versus a higher 2.98%
in the USA. Something is vastly wrong here.
I don’t think this has to do with any lack of
Canadian bank competition, it has to do with the fact that the Canadian
banks presumably cannot access 30-year deposit/investor money through
securitizations but the American banks can. Yet our banks have CMHC
insured mortgages, so what is the problem in getting the low cost investor
Whatever is the reason that Canadians cannot get
an affordable locked in rate for 30 or even 10 years (affordable being the key
word), we need this. Now.
Interest rates are about the lowest in the history
Investors are willing to lock in and lend money to
the Canadian government for 30 years at 2.50%.
It is an urgent matter of national financial
security that we find a way to give our homeowners 30-year locked in rates at
something affordable (under 5% and maybe as low as the 3.9% that Americans can
Investors will likely accept some kind of early
pay-off features as well. They accept it in the U.S. so why not in Canada?
(with CMHC/government guarantees)
Many home owners are at serious financial risk if
interest rates rise.
Furthermore, why not take advantage of idiot
investors willing to lend for 30 years at rates as low as 2.5%?
Seriously, this is the opportunity of a lifetime
for Canadians to lock in at the lowest interest rates in history. (If only
affordable rates were made available like they are in the USA)