InvestorsFriend Inc. Newsletter December 11, 2004
Welcome New subscribers
Greetings to the many recent new subscribers to this free newsletter. I recently started advertising on Google and many of you found the Site that way. In addition to this newsletter, you will find a large amount of unique and useful insight and information under the Articles link above.
Performance
The performance of my Stock Picks (technically InvestorsFriend Inc.’s) has been very good. 2004 will mark five straight years of beating the TSX index. Cumulatively, the Strong Buys are up 245% and the TSX is up 6% in the last five years. The average out-performance has been 27% per year. I don’t expect to keep up that much out-performance, but I do think I can continue to outperform. In 2004, the out-performance was 15.3%. And that occurred despite the fact that none of the Strong Buys were in the areas of oil, gas, metals, golds etc. that did so well for the TSX index this year.
Up until now, the “Strong Buys” selected at the start of 2004 have been available only to paid subscribers to our stock research. Given that the year is almost over, I am now revealing these 2004 picks to you. One point to note is that all five of the “Strong Buys” increased in price (as at Dec. 11). These five companies were generally a good bet at the start of 2004, they had upside potential and as a group, they probably did not have that much down-side risk. Additionally, four of the six “Buys” rose in price and the biggest loss was 11%. The stock that fell 11% was AGF, but in our model portfolio we sold AGF at a small profit way back on Feb 5. The model portfolio, available to paid subscribers only, is currently up 23.6% in 2004. The model portfolio had gains in 10 out of 12 stocks and the two losses were very minor. This is indicative of a stable, lower-risk portfolio.
In the next few weeks, I will update my ratings (available to paid subscribers) and introduce a new model portfolio for 2005. Maybe some of the 2004 Strong Buys will carry over. You can find out by subscribing.
One Up On Wall Street
In his famous 1989 book, Peter Lynch, indicated that investors could be “One Up On Wall Street” simply by looking around to notice which businesses were doing well and what the hot new products were.
In that vein, it is interesting to consider which Canadian businesses might look like good prospects. It’s interesting to think about where you spend your money and which companies are probably making a profit.
I have mentioned Tim Hortons, you would have to be blind not to notice that they look like a pretty profitable operation.
Near my house a new shopping area went in and two large expensive looking bank branches went in. Nearby there is a third. These are expensive looking free-standing buildings. That’s not proof that banks are making money but it suggests they might be doing okay.
Canadian Tire and Costco are examples of retailers that appear to doing well. In contrast, I went into a Zellers Express in Rocky Mountain House and it looked like a tired old “five-and-dime” or something. Not my idea of a money maker.
Casual dining outfits like Boston Pizza and many others appear to be doing well and constantly building new stores.
Loblaws always looks prosperous.
When I travel by air the ticket prices are half of what they were a few years ago and I doubt if many of their costs have come down. Not my idea of a money-making industry.
I have a cell phone. I only pay $35 per month, but it occurs to me that the company has almost no direct incremental costs to serve me. Depending on how much the phone company paid to advertise to get me as a customer and how much it subsidized the cost of my phone, this could be a very profitable business for them. Once the fixed costs of the network are covered incremental cell phone customers may be very profitable.
Car insurance rates are reportedly through the roof. Meanwhile, many people are afraid to report any smaller accidents. Might this industry be a good investment? (Depends how much they are paying out to accident victims.)
Now a prosperous company is not necessarily a great investment if the stock is already too high. That’s where some detailed fundamental analysis comes in. But as a general rule, it is easier to make money in the long term in a prosperous industry than it is in a struggling industry. So the general idea is to start with companies that look prosperous and then investigate further.
Investing in Initial Public Offerings (IPOs)
The financial newspapers often speak about investing in Initial Public Offerings (IPOs). However many investors do not understand the difference between investing in an IPO and simply buying shares on the market. In addition many investors don’t know where to go to buy an IPO.
I recently bought 100 shares in the IPO of ING Canada. I thought I should share some basic knowledge and some new things that I learned through this investment.
An IPO is by definition the first or initial time that a company is issuing shares to the public at large where they can be traded on a stock exchange. Therefore, almost by definition, these tend to be small or even extremely tiny companies. The (usually) small size of most IPO companies leads to this generally being a higher risk area of investment.
The proceeds from an IPO go to the company (with some exceptions where the current owners are selling some shares). In contrast when investors buy shares day-to-day in the market none of the, money goes to the company, it goes to the investor who sells the shares.
IPO shares are marketed and sold by through stock brokers. In the case of smaller companies, there may only be one brokerage firm that is selling the shares. In the case of larger IPOs, there is a syndicate of several brokerage firms all selling the IPO shares.
Investors can only buy shares of an IPO from the particular brokerage firm(s) that is (are) offering that particular IPO. Investors who are particularly interested in investing in IPOs often set up investment accounts at several different brokerage firms so that they will have access to more IPOs. Investors who are with just one brokerage can register with their broker to be advised about new IPO issues, that their particular brokerage has available from time-to-time. This includes discount brokerages like TD Waterhouse.
I am registered to receive notification of equity IPOs from TD Waterhouse. I believe that TD tends to offer only larger IPOs and they tend to offer only a few each month.
The ING Canada Inc. IPO was well publicized in the financial press. At about $1 billion this is apparently the largest IPO in four years. This is interesting in that the total market value of all the stocks on the TSX is $1508 billion (as of Nov 30, 2004), and yet an offering of around $1 billion turns out to be the largest in four years.
The ING IPO was oversubscribed. I received a call from TD Waterhouse and I placed an “order” for 400 shares. My understanding is that the the brokerages took orders for these shares for a very short period of time (probably significantly less than 1 hour). I was only filled for 100 shares.
In future, if I want shares in a popular IPO like this I may have to “order” more shares than I really want, although that is risky because I might get them all.
The ING IPO appears to have been successful since it was oversubscribed and the shares rose 11% on the first trading day. Now, I wish I had obtained the full 400 shares that I wanted…
I believe that IPOs of larger stable companies like ING tend to be good investments. However, there are risks. In this case I was subscribing to buy up to 400 shares and the price was estimated to be $22 to $25. In fact the price turned out to be $26. So… I was signing a bit of a blank cheque. Technically, I believe I was entitled to cancel my order within about 48 hours. However, I understand that the brokerage would then likely have refused to let me participate in future IPOs. I normally never buy stocks without doing a lot of analysis up-front. In this case I was familiar with the industry and I basically decided to trust the that the IPO was being made at a fair price.
If you decide to invest in IPOs, it is probably a good idea to start small. In this case it may also be beneficial to use a full-service broker rather than a self-service discount broker, since the full-service broker may be able to offer good advice. But remember in an IPO, the brokers are trying to sell the shares and they may not have your best interest in mind.
Investor Scams and Near-Scams
lately I have seen a lot of advertisements for high-priced courses to learn options trading, chart-based trading and currency trading. There are also lots of high-priced courses and software for day-trading. All of these things are extraordinarily dangerous to your wealth, in my opinion.
Options and currency trading are extremely volatile and difficult to understand. I seriously doubt that there are very many investors who have both the ability or the time to understand options well enough to trade them. Without an extraordinary amount of time and effort, trading options is like playing with fire, any money is likely to get burned. Now there are a few safe options strategies involving covered calls but I suspect that these courses are going to encourage a lot more risky behavior and these courses are primarily simply after your money, I suspect. Certain technical (chart-based) trading strategies may at least be safer than options but again I doubt that there are very many investors who would have the ability and the time and the temperament to be good at this type of day-trading, which requires lighting fast action and the ability to accept and take losses without hesitation.
Stash Cash for a Crash?
In my view the economy is pretty strong, earnings are good and the stock market is unlikely to crash. However, a huge terrorist attack in the U.S. is not out of the question and would certainly cause a major pull-back in the markets. Those with cash to invest might be in a position to scoop up bargains. So… it might not be a bad idea to keep some investments in money market funds in order to take advantage of any market correction. This strategy would sacrifice some return in the more likely event that no crash occurs. Younger investors who are at the stage where each year’s contribution is 10% or more of their portfolio would not have as much reason to hold cash. The reason is that these investors would be able to take advantage of lower prices in their annual contributions to their investment accounts, in the event that the market crashed and stayed down. Investors who are living off their investments should probably keep some money in money-market funds to protect against a fall in stocks and to have funds available to take advantage of bargains.
Avoid Long Term bonds?
Standard asset allocation theory would suggest keeping a fairly significant amount of a portfolio in longer-term government and high-grade corporate bonds. However, we know that interest rates are at an historically low level and that higher interest rates would automatically cause huge declines in the the current value of long-term bonds. Stocks would also be hit hard. In my view, long-term bonds don’t provide all that much diversification for a stock portfolio since they both move the same way if interest rates rise. Further, with interest rates being so low, there must be some considerable risk that they could rise. So rather than accepting a 5% yield in a long-term bond (which subjects me to the risk of a large capital loss if rates rise), I would probably prefer to be satisfied with less than 2% in a short-term bond to avoid the interest rate risk.
Currency Risk of investing in the U.S.
I have recently seen much of the financial community advising that investors should avoid going into U.S. stocks because of the currency risk of the recently rising Canadian dollar. Now I said recently that many Canadian investors who plan to ultimately spend their investment returns in Canada may not need much U.S. exposure and might want to avoid the currency risk. But to suggest that the risk of a Canadian dollar rise is higher now than it has been over the past 10 year seems ridiculous. When our dollar was in the 60’s there was clearly more risk that it would rise sharply than there is now. I have only a small amount of U.S. investments, but I feel that right now the currency could go either up or down. It seems ridiculous that advisors who counseled getting into U.S. investments when our dollar was 63 cents should now counsel against it when our dollar is over 80 cents.
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