InvestorsFriend Newsletter October 2, 2004
Canadian Exchange Traded Funds
My main focus is on picking individual stocks to invest in. However, Exchange
Traded Funds are an excellent way to quickly move money into the market or into
a particular segment of the market. My new article on
Canadian Exchange Traded Funds
explains advantages and disadvantages of Exchange Traded Funds. It also provides
the trading symbols for the main Canadian Exchange Traded Funds. In addition it
provides the P/E ratio, earnings yield and dividend yield so that investors can
get an idea of the attractiveness of each segment based on fundamentals.
Performance
Performance of my stock picks has continued to
be excellent. The 79% gain on the Strong Buys in 2003 looks almost too high to
be credible. (But long-time readers know it is absolutely correct) I'm not sure
I will ever have another year like that. However, I have beaten the market five
years running. This year the Strong Buys are up 15.2%, the model portfolio is up
15.0% and my own total portfolio is up a respectable 9.7%. I'm hopeful that
performance will accelerate in the last three months of the year.
Readers of this newsletter can subscribe to my
stock picks for $10.00 per month. If you subscribe and are not satisfied with
the analysis provided, I will refund the $10.00 if requested within 21 days of
subscribing.
Attractiveness of the Overall U.S. Stock Market at this time
Two recent articles were added to the Site that dealt with the overall
attractiveness of the U.S. Market at its recent level based on its earnings
level. These articles have been posted to the Home page of the Site for several
weeks but some readers of this newsletter may not have seen them. Click
the links to view these important articles.
is the Dow Jones
Industrial Average a Good Investment?
Is the S&P 500 Index
a Good Investment Now?
How to Lose Money Though Trading
I've noticed a lot of advertisements lately for trading products and services
that I believe most people would lose money on if they tried it. Some of these
have appeared on ROB tv. Many others are touted in free seminars.
In general, I believe that only a tiny percentage of investors have the
knowledge, skills and temperament to make money in any kind of frequent trading
program. Most investors getting involved with this kind of trading are going to
lose money. Trading generally involves momentum plays where traders buy things
with no clue and little care about the true value and simply hope to quickly
sell for a higher price.
Foreign exchange trading is an example. This is being marketed to the mass
market. The fact is that the great majority of investors can barely understand
the math involved. This is a zero sum game where for every winner there is a
loser. The typical investor brings absolutely nothing to the table in this game.
The experts are generally going to make money at the expense of uninformed
amateurs enticed into this game.
One company is offering the ability to short stocks for just a 5% margin
requirement based on Contracts For Difference (CFDs). This is very scary for two
reasons. With this kind a leverage, a $2000 trade represents $40,000 in
principal. If the stock that was shorted doubled then $40,000 would be lost!.
Another reason that sounds very scary is that there may not be any
"clearinghouse" guaranteeing each trade. That means if you did make money you
might have to rely on the individual trader on the other side of the trade
actually coming through to pay your gain.
Investors should be extremely wary about any of these schemes. Many investors
will lose a lot of money and I suspect very few will make money in these areas.
Gold is No Inflation Hedge
In my mind, the idea that Gold is a good inflation hedge is absolutely
laughable. (It may turn out to be a good investment but it is definitely not the
best inflation hedge). Hedging against inflation involves protecting your
purchasing power so that your $10,000 today will continue to purchase at least
the same amount of goods and services in the future, despite any inflation. In
Canada we have an almost perfect inflation hedge available and it is the real
return bond offered by the Canadian Government. The return directly increases
with Canadian Inflation. The return is quite low, but your purchasing power
within Canada is guaranteed to be maintained. If you also want to protect your
purchasing power in terms of U.S. goods and services then you can buy the
America real return bond.
Meanwhile, gold in the past 30 years has first sky-rocketed to about $800
U.S. and then fallen to the $200 U.S. range for a number of years and then
recently climbed above $400. Given the pattern of U.S. inflation in those years
it should be pretty clear that the amount of goods and services that could be
purchased with an ounce of gold has varied all over the map. Gold has shown no
correlation to U.S. or Canadian inflation and therefore has been pretty well
useless to Americans and Canadians as an inflation hedge. Certainly it is not
the best inflation hedge when the Real Return Bond is available.
Sports and Capitalism
It occurs to me that any budding capitalist can lean a lot from Sports.
A lot of people don't like to admit it, but success in our capitalist system
is largely about competition. That means there are winners and losers. Talented
and successful people in every field of endeavor tend to be rewarded with higher
pay and status. Some people get to live in huge houses and others are on the
Street. Free competitive capitalism definitely creates the "most pie" but many
people view the sharing of the pie as unfair. In Canada it's not politically
correct to admit that we live in a largely capitalist, multi-tiered society. In
fact, unions and many other customs have muted the affects of capitalism to
create a more equal society. Canadians cling to the notion of equal medicare and
basic education for all. Strangely, it's okay to have unequal access to food,
clothing, shelter, transportation and a thousand other things, but equal access
to health care is held sacrosanct. The reality is that the wealthier and more
successful Canadians already have access to better health care even if it means
seeking treatment in the United States. Canadians experience a large degree of
capitalism but then mostly pretend it's not there. We know that there are in
fact great disparities within our society but we pretend that there is a great
middle class where people are pretty well equal. It's a badge of honour to call
yourself an "Ordinary Canadian". It's not quite socially acceptable to view
yourself as being unusually successful.
In Sports we suffer from no such delusions. My son is involved in minor
hockey. When he started at 6 years old all the players were randomly assigned to
teams and were considered equal. I was a bit shocked when as a 7 year-old he had
to undergo an evaluation. There were at least 3 tiers of teams. Suddenly I had
to kick it up a notch and ensure he got enrolled in a hockey camp prior to
evaluations. Enrolling in extra skating lessons during the season was also
almost a given. I realized that even at this young age, hockey was about
competition. My son is now 9 and just completed a rather intensive process of
evaluation that lasted 3 weeks and that really got started with a hockey camp in
late August. Now these 9 and 10 year olds have all been evaluated and slotted
into teams. There are about 10 different levels of teams. At this age all the
kids know exactly where they fit on the talent continuum. They all know which
kids are on the elite teams on down to the lower levels. They know who made
double A, who single A, who made the various B teams from B1 through B6 and who
made the various C teams. It can be harsh and hurtful in some cases, but in
hockey as in most sports it's made very clear who has the most talent and
ability and who is at a lower level. Everyone has fun and competes at their own
level but there is no mistaking the "survival-of-the-fittest" nature of sport.
People involved in sports know that this kind of tiering is necessary in order
to promote the development of the best payers.
In reality, business and life is probably a lot more like Sports than it is
like the socialist utopia of medicare and "ordinary Canadian" that exists in our
politically correct media.
As an investor, I want to Win. I want to identify and invest in top-notch
companies ran by the most talented and ethical managers. I can't afford to
pretend that life is fair or equal. As a society, I don't think we can pretend
life is or should be fair and equal. If we want to produce the most pie then we
have to allow competition to work its magic. Of course, I also think there has
to be some limits, I don't want to see anyone go hungry. But if we go too far
towards promoting equality we may all go hungry as there will less incentive to
work hard and produce.
I believe that capitalism should take more lessons form Sports. If a business
is lagging then just like an athlete would, it should seek coaching and also
seek to copy the techniques of more successful businesses. Businesses should
also be more honest about ranking themselves against competitors and admitting
that they have things to learn from competitors.
END
October 2, 2004
The InvestorsFriend,
Shawn Allen
President, InvestorsFriend inc.