Newsletter October 2, 2004

InvestorsFriend Inc. 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 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.


October 2, 2004
The InvestorsFriend

Shawn Allen
InvestorsFriend inc.