Dec 132017
 

How high can it go?

Back in Sept I blogged about buying some cryptocurrencies, and posted my Ethereum purchase transaction. At that time ETH was trading at $230 US. Today the price is over $700 US. Sweet mother of mammaries! 🙂 And just last month when Bitcoin was trading at $7,300 US I tweeted that the price would climb to $10,000 US, which would be a 37% increase.

Within a month Bitcoin had hit $10,000 US, lol. 😀 Unlike NASA, Bitcoin may not return back to earth once it reaches the moon. 😎 As I’ve written in the past I started to buy Bitcoin, Ethereum, and Litecoin earlier this fall and have been regularly accumulating them. My biggest winner appears to be Litecoin. For example I purchased some when it was $80 CAD. And now each Litecoin is worth over $400 CAD.

However, after the dramatic rise of the cryptocurrency market capitalization during the last 30 days I believe this asset class may be overvalued now. So I have decided to lower my financial risk by moving some money from cryptocurrencies to the stock market.

 

Why I’m Taking Some Profits

Since we are nearing the start of a new year, I want to collect some cash to fund my retirement account. When January comes I will have additional contribution room in both my RRSP and TFSA.  This is why I have decided to divest my cryptocurrency investment. Earlier this week I took some profits by selling roughly a third of my digital currency holdings. Doing this has freed up a few thousand dollars of capital. I can use this new cash (minus capital gains tax) to begin funding my registered investment accounts in the new year. 🙂 As far as I know there is no way to hold cryptocurrencies inside an RRSP.

I’ve used this effective investment method before with my marijuana stock, Canopy Growth Corp (WEED), where I bought 300 shares at $2.55 and sold at $12.10.  But instead of selling all my WEED stocks I kept 200 shares and continue to hold them today. A partial sell of a position like this accomplishes 2 things:

  1. First, it reduces the risk of my initial investment. I’ve already recouped all my money back, plus a tidy gain. Thus, it is now impossible to lose money on this investment as a whole, even if the future value of the stock drops to $0.
  2. And second, if the pot stock continues to climb in price then I stand to make additional money due to my continued long exposure to it. 😉

In other words, there are no bad outcomes here. That’s why I have used the same strategy with my cryptocurrency holdings.

Continue reading »

Dec 052017
 

Yet another month of record highs in the financial markets. I hope everyone had a great November. 🙂  In terms of changes to my balance sheet I’ve added 100 shares of Enbridge stock to my portfolio, creating more passive income for future months. Part of this purchase was financed from a margin loan at 2.3% with IB. Borrowing money at low interest rates to invest in long term appreciating assets was how many people became millionaires in the past.

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $700
  • Freelance = $800
  • Dividends = $700
  • Interest = $400
*Discretionary Spending:
  • Fun = $400
  • Debt Interest = $1300

*Net Worth: (ΔMoM)

  • Assets: = $1,150,700 total (+14,300)
  • Cash = $8,500 (+700)
  • Canadian stocks = $164,200 (+7300)
  • U.S. stocks = $105,800 (+4000)
  • U.K. stocks = $21,100 (unch)
  • RRSP = $91,100 (+1900)
  • Mortgage Funds = $32,000 (+100)
  • P2P Lending = $22,000 (+300)
  • Home = $270,000
  • Farms = $436,000
  • Debts: = $468,700 total (-2,100)
  • Mortgage = $180,900 (-400)
  • Farm Loans = $186,300 (-500)
  • Margin Loans = $58,900 (+1200)
  • TD Line of Credit = $6,700  (-1300)
  • CIBC Line of Credit = $21,000 (-1000)
  • HELOC = $14,900 (-100)

*Total Net Worth = $682,000 (+$16,400 / +2.2%)
All numbers above are in $CDN. 

I’ve been trying to save enough money over the last few months to invest another $8,000 into my Lending Loop account by the end of the year. I’m also currently looking for a new job to increase my cash flow. We’ll see how that goes. 🙂

 

——————————————————————–
Random Useless Fact

At any given time, about 174 quadrillion watts of the sun’s energy is hitting the earth.

 

Nov 292017
 

According to businessman and author Seymour Schulich, investors should ask themselves 5 questions when screening a potential deal. 🙂 Here’s an excerpt from his book, “Get Smarter.”

  1. How much can I make?
  2. How much can I lose?
  3. How do I get my money back?
  4. Who says this deal is any good?
  5. Who else is in the deal?

I think these are good points to remember and I certainly use them before I make any financial decisions.

Normally we want a large margin of safety between how much we can make (upside) and how much we could lose (downside.) If the odds are not at least 75% in our favour then it is better to look elsewhere. To increase our chance of success we must know how to accurately assess the odds, and have the discipline and patience to act only when the odds are heavily in our favour. If our analysis are accurate then we can be certain this strategy will work due to the law of large numbers theory.

How we get our money back should be considered before making any deal. There are two parts to this: liquidity, and exit strategy. A rental property is not very liquid, but a publicly traded REIT that holds rental properties usually is. As for exit strategy, we need to come up with a systematic plan to sell the investment and commit to it. This prevents us from trading on emotions. One stock I bought this year is Royal Bank (RY.TO.) It has a growing dividend year after year, and trades at a decent valuation with a P/E ratio of 13.6. I plan to exit my position in this stock either when I retire, or if RY cuts its dividend by more than 35%. Those are my only conditions. So if there’s market correction and the stock price falls 50% I will continue to hold it. This way, I don’t sell prematurely and miss out on future gains.

I look at reports and opinions by stock analysts to determine if other people think the investment has potential. One good source for this is stockchase.com. It curates professional opinions about any company on the market. Here’s a blurb for RY.

As for who else is in the deal, I look at how many institutional investors are holding the investment. These are large pension funds and endowment funds that have to scrutinize all possible aspects of a security before buying it. According to Google Finance, Royal Bank has 53% institutional investor ownership. That’s pretty high so I am more confident that RY is a good long term investment.

There are tons of potential assets we can buy. But by asking ourselves these five questions we can screen our options and narrow down our options which makes the process a lot easier. 🙂

 

——————————————————————–
Random Useless Fact

The world’s largest broccoli are grown in the United States.

Nov 242017
 

For long term investors, earning 5% to 7% annual return (after tax) is a suitable target to aim for. But this is difficult to pull off today. The current expected returns of the financial markets are extremely low by historical standards. Traditional asset classes such as stocks and bonds are generally overvalued now.

Stock Market Expected Return = 3.2%

The Shiller P/E ratio is currently about 31 for the S&P 500 stock market index. This is much higher than the historical average ratio of 16. The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years.  The inverse of the ratio (1/31) is how much the market is expected to earn for investors going forward.

Bond Market Expected Return = 2.3%

Here are some popular bond ETFs.

  • BMO Aggregate Bond Index ETF (ZAG) – Weighted Average Yield to Maturity = 2.34%
  • Canadian Aggregate Bond Index ETF (VAB) – Weighted Average Yield to Maturity = 2.28%
  • iShares Core Canadian Universe Bond Index ETF (XBB) – Weighted Average Yield to Maturity = 2.35%

As we can see, all their Avg YTMs are below 3%. The 10 year Canadian government bond is paying only 1.9% as of writing this post. 🙁

As a long term investor I don’t see the point of buying a bond that pays less than 2% interest when the Bank of Canada openly declared it wants to erode the Canadian dollar’s value by 2% a year. That effectively creates a projected negative real return on investment, 😮 ouch. This is why I stay away from ETFs like these which primarily hold low yielding government bonds. These funds aren’t necessarily bad investments. I’m just saying they’re not for me. We can find slightly higher yields in U.S. bonds, but not much better.

Continue reading »

Nov 162017
 

Why Do Governments Target 2% Inflation?

The Bank of Canada maintains an inflation rate target of 2%. The official websites of Central Banks in the U.S., in Europe, and in Japan all appear to target this magical number when deciding how to conduct their monetary policies. But why? Inflation isn’t necessarily a good thing. There are ways to grow the economy and generate prosperity without increasing the cost of goods and services. But inflation does provide the government with two major advantages!

Governments tend to target 2% inflation rate

1. Taxation by Inflation

In the book, The Greatest Con, author Irwin Schiff explains that, “inflation is the government’s silent partner,” because it allows the government to earn more tax revenue, without officially increasing tax rates. For example, a mechanic who made $40,000/yr in the 1980s could be making $80,000/yr doing the same work today due to inflation. If his cost of living also doubled then this looks fine on the surface. However, an $80,000 income is subject to a higher tax bracket than $40,000. Since his marginal tax rate went up, the mechanic will pay a larger proportion of his earned income to taxes today than in the past. This is how federal income tax rates can remain the same, but workers end up paying more tax over time.

2. Eroding the Value of Debt

Inflation reduces the value of money. Let’s say we owe $100 to a friend and inflation is at 2%. We can pay back the $100 after a year. But by then its value would only be $98. Just about every major country in the world owes debt. The U.S. owes about $20 trillion. At 2% inflation, the value of this huge liability would fall by $400 billion a year. That’s a lot of debt to be forgiven. 🙂 The typical investor who buys fixed income funds would likely have government bonds in their portfolios. Unfortunately as a result of inflation, the bond holders (savers) get the short end of the stick while the government (borrower) becomes better off.

“As inflation shrinks the value of currency, it increases the relative value of equity investment. Thus, inflation is a process by which purchasing power is shifted from the middle and lower classes, who have their savings in fixed dollar investments, to the upper classes, who have the bulk of their wealth in equities.” ~Irwin Schiff

Continue reading »