InvestorsFriend Inc. Newsletter December 21, 2006
Performance
I am totally pumped about the performance of our stock picks this year and in fact every year since this Site started. In the past four years my personal portfolio has returned an extremely satisfying 164%! (An average of almost 28% per year) And the the Strong Buys have done even better returning 238% in the past four years.
If you have not already done so, right now is an excellent time to take action and subscribe to our stock picks. While we update our stock ratings all throughout each year, we do make a special effort to update our stock picks for the start of each new year. Also with RRSP contribution season at hand, you may be looking for investment ideas. Act now, so that you will access to our stock picks for the start of 2007.
The fact that you have subscribed for this newsletter tells me that you are probably someone who has an interest in taking charge of your investment decisions. If so, I believe that our stock rating service will be of great interest to you.
Our Stock picks have performed well again this year. The Strong Buys, the Buys and my own portfolio have each now beaten the Toronto market index each year for seven years straight.
Somewhat incredibly, we achieved this despite choosing to almost ignore the oil and gas sector as well as golds and minerals. (Although the model portfolio has a modest exposure to oil and gas). And I would argue that our stock picks have exhibited relatively low risk.
Our success does not come from making big bets on penny stocks or on commodities. Instead we invest in mostly in profitable stocks that are growing earnings and that have a reasonable chance of out-performing the market.
Some of our big successes in 2006 were… shares in the New York Stock Exchange Group which are up 99%. A tiny Western Canada financial company that is up 60%. Many other picks were up 15 to 30%.
One of the big keys to our success once again this year was the fact that we had extremely few losers. Out of 21 stocks rated in the Buy or Strong Buy range, at the start of 2006, fully 16 are up in price and only 5 are down. And those that were down were only down from a half percent to 12%. One of the best ways to make money is to not lose money. One stock that goes to zero needs 5 stocks going up 20% just to make up for the one total dog. By having very few losers we were able to achieve almost 20% average gains without having to rely on having one or two super-star stocks that went through the roof.
| Year | 2003 | 2004 | 2005 | 2006 (to date) | Compound Avg. Annual Growth per year | Value of $100,000 Invested at Start of 2003 | Total Gain Since Start of 2003 |
| Editor’s Personal Portfolio Return | 40% | 21% | 33% | 17.2% | 27.7% | $264,329 | 164% |
| Average Strong Buy Increase | 79% | 25% | 30% | 16.3% | 35.9% | $337,823 | 238% |
| Average Buy Increase | 46% | 25% | 28% | 20.0% | 29.5% | $279,463 | 179% |
You’re Richer than Your Bank Thinks
At this time of year many people like to calculate their net worth by listing out their assets and liabilities.
The following table is a typical format.
| Assets | Amount | Liabilities | Amount |
| House | $ | Mortgage(s) | $ |
| line of credit(s) | $ | ||
| Car | $ | car loan(s) | $ |
| Student Loan(s) | $ | ||
| Credit card(s) | $ | ||
| Cash and savings | $ | ||
| RRSP | $ | ||
| RESP | $ | ||
| Pension Value | $ | ||
| Furniture | $ | ||
| Clothing | $ | ||
| Total | $ | Total | $ |
| Net Worth | $ |
If a bank asks you to prepare a net worth statement, they will likely agree that all the liabilities indicated should included.
But they may tell you that some of the asset categories that I have listed “don’t count”.
For their purposes, I agree with them. But, you should probably have several different views of your assets and net worth. One view of assets might count only financial assets and major physical assets like a house and cars. Another view might add the RRSP.
This might agree with your bank’s view.
But a bank will probably indicate that the current value of your company pension (if you have one) does not belong on the net worth statement. That’s because you can’t use a pension that you will start receiving some years in the future to repay a loan next year. But it’s still an asset. For the bank’s purposes, a pension may not be part of your net worth. But you know it has value and for your own personal planning purposes, it most definitely does belong on your net worth statement.
And what about furniture and clothing? Your bank will not likely want these listed on a net worth statement. And for the most part I would not include them either. But technically speaking they do form part of your net worth. If you lost all your furniture and cloths it would certainly cost a lot to replace them.
When you want to focus on your financial net worth or your liquid net worth, I would suggest omitting furniture and cloths. But if you want to calculate your “true” net worth than something should be included for these (say 50% of replacement cost).
The bottom line is that when we add in assets that are not relevant to a bank, most of us are richer than our bank thinks. (Unless of course we have lots of loans and credit cards that our bank does not know about — but that’s another story).
Stock Return Market Outlook for 2007
I can’t predict what the average return will be in the Canadian stock market for 2007. But neither can anyone else do so with any accuracy. Here are the returns for the past four years.
| TSX Index Gain | S&P 500 Index Gain | DJIA Index Gain | |
| 2003 | 24% | 26% | 25% |
| 2004 | 13% | 9% | 3% |
| 2005 | 22% | 3% | -1% |
| 2006 (to Dec 19) | 13% | 14% | 16% |
| 4- year Gain | 93% | 62% | 49% |
The past four years have seen strong returns in North American Markets.
These strong stock market gains have been supported by earnings. In fact, the P/E ratios of the major stock market indexes are significantly lower (which is more attractive) than they were was four years ago.
In my view, there is little chance that we will see a major stock market crash – such as a 25% drop. (There may be a bubble in real estate these days, but there is no bubble in the stock market).
However, as an example, the Dow Jones composite is also not priced at a bargain level. My article on the Dow Jones Industrial Index, finds that the DOW is probably somewhat over-valued at this time.
All else being equal I would expect the DOW index in 2007 to return something less than 10% and certainly a negative return is quite possible., particularly if there is a recession in the U.S.
A similar analysis for the TSX would be less meaningful since the TSX is driven to a large degree buy oil and other commodity prices which are very hard to predict.
In any event, no matter what the market does, there will always be plenty of stocks that outperform the market and give positive returns. The trick of course, is to find a reliable way to identify some of those stocks. For seven straight years, InvestorsFriend Inc. has been successful in doing so.
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But, if you are looking for stocks to invest in then why not subscribe now? The cost is just CAN $15 per month or $120 per year. When you think about the potential returns from just one well-researched Stock Pick, you can see why our subscription service has been a truly great investment for our subscribers. Act now, so that you will have access to our stock picks for the start of 2007.
END
Shawn Allen
President
InvestorsFriend Inc.
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