Feb 202017
 

For buy and hold investors, some like to actively pick and choose individual assets to buy, while others prefer to invest in the entire market. But which is a better investment strategy? Similar to a cronut, the answer is simple, but may not be obvious.

passive vs active

Which Investment Style is Better: Passive or Active?

The Cronut is a pastry that combines together a croissant and a doughnut. It was invented by New York City pastry chef Dominique Ansel and is trademarked. You should try one if you ever visit NYC. 🙂 They cost $5 each. But you can also find cronut knockoffs in Mexico that are much cheaper than the real thing, so you don’t peso much. 😄

Anyway, why is this relevant to investing? Because much like a cronut, the better investing strategy between passive and active, is not one or the other, but both. 😀 By combining individually selected assets, and index funds into one single pot, we can create the ultimate investment portfolio. This takes advantage of low-cost index funds, while adding alpha (excess returns) in certain segments of our portfolio. 😉

So how can we implement this? First, we actively pick and choose specific investments in the areas that we have extensive knowledgeable about. Then use the passive investing method to buy index funds for all other asset classes that we have insufficient knowledge about.

For example, I selected individual farms to buy in 2012/2013 because I knew how to look at soil quality, flood risk, earnings potential, etc. Therefore, I knew how to find undervalued land. Historically speaking higher quality farms appreciate faster than lower quality ones so I made sure to only buy farms above a certain quality. Farmland funds however, invest in all quality land. As a result I have outperformed every farmland or agricultural based ETF I could find on the stock market. So within the context of this asset class, passive investing would not have done me any good.

On the other hand, when I decided to get into the United Kingdom stock market last year, I decided to buy a low-cost stock market ETF. European stocks are beyond my comfort zone. I wasn’t about to perform due diligence on all 250 stocks of the FTSE 250 index. So that’s why I invested in a broad market UK index fund instead which contains those 250 individual stocks. 🙂

This is why self knowledge is very important for investors. We should try to use our strengths and specific knowledge to produce better than average outcomes in certain types of industries or asset classes. Then we can aim for average market returns in all other areas that we do not understand. Overall, this should give us a higher investment return than either a completely passive approach (which will give us average market returns), or a completely active approach (which will most likely result in under-performing the market.)

But in order for this combined investment approach to succeed we have to know the limits of our knowledge and capabilities.

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Feb 062017
 

Index investing is a great way to build long term wealth. It’s simple to implement, convenient, and you are guaranteed to make the same returns as the market, minus any fees. But is it right for everyone?

Taking a closer look at Index Investing

How Indexes Are Managed

There’s a common theory that retail investors shouldn’t try to beat the market since it’s almost impossible to do over time. But I’m not sure this is true. The “index” isn’t the holy grail of stock selection. Some folks from the S&P Index Committee sit in a room and decide which stocks to include in their index based on a set of criteria with arbitrary measurements. It would be preferable if prominent investors such as Ray Dalio or Warren Buffett were on this committee, but they aren’t. Lol.

The S&P/TSX Composite index is made up of 250 stocks, chosen by the committee. It’s intriguing how only 250 stocks are selected out of the possible 1500+ on the entire Canadian stock market. The methodology for selecting stocks to be included in an index contains guidelines for minimum weight in the market, price per share, market cap, and sufficient liquidity requirements. The index is reviewed quarterly and all Index Securities that, in the opinion of the Index Committee, do not meet certain requirements are removed. And for the S&P 500 stock market index in the United States, anywhere from 25 to 50 changes are made every year. It’s basically a handful of people getting paid to actively manage a list of stocks that they believe represents the overall equity market.

The Paradox of Index Investing

From what I’ve heard, the whole idea of index investing is to match the market’s performance using a passive methodology. But if picking individual stocks will underperform the market most of the time, according to the mainstream, then how can index investing work if it’s based on a managed list of stocks that is updated every quarter based on the decisions of some individuals on Wall Street? Why are they more qualified to pick stocks for the index than let’s say, personal finance bloggers? 😀

I don’t think it would be hard for a handful of competent value and dividend investors to get together, create their own list of 250 stocks, and then beat the S&P/TSX Composite index. Last year Nelson from Financial Uproar hosted a stock picking contest for personal finance bloggers. There were 14 participants, including myself. Our average investment return for 2016 was 30%. We beat all the major indexes in both Canada and the U.S. Since an index is meant to represent the average of the stock market, then all we had to do to beat the market was to just be better than average. 😉 Easy peasy.

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Jan 262017
 

It finally happened. The Dow index broke 20,000 points for the first time in history. It’s never been so high before. If the stock market was a rapper, it would be Snoop Dog. 😀 With valuations being stretched so much it’s important to be very selective about what investments we buy now. One wrong move and we could accidentally buy a stock that is nearing its peak.

Lowering Investment Risk With Covered Calls

So after looking at my options, 😉 I contributed some money into my TFSA earlier this month and purchased 200 units of BMO’s Covered Call Utilities ETF (ZWU.) This is enough to make it DRIP.

A covered call is an options strategy which generates income for investors, even in a bear market. We basically sell a call option on a stock that we already own. In doing so, we receive some money called a premium. 🙂

Related post: How to write a covered call (buy/write options) 

Option strategies have slightly different risk considerations than owning a stock directly. For covered calls, we always get to keep the premium. But if the stock goes above the strike price, we have capped the gains we can make. Call options can reduce our risk because if the stock falls, then at least we’re getting paid to wait until it climbs back up.

This is why covered call strategies work best on low volatility stocks that are not expected to move up or down a lot. Essentially we want the stock to remain steady, or grow slowly. But most of the profit should be made from the juicy premiums. 🙂 I do not believe utility and telecom stocks can continue to grow at double digit rates, given how expensive their valuations are.

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Dec 152016
 
How to invest in the united kingdom

The United Kingdom has a long history of innovation and creativity. The television, programmable computer, telephone, Mini, and even Calculus are all British inventions. The British government was the first to create a revolutionary missile called the civil servant – it doesn’t work, and it’s nearly impossible to fire.😄 The U.K. also gave us David Beckham, Adele, The Beatles, Emily Blunt, and Christian Bale (heh). By the way, if you ignore the looks, wealth, charisma, and success, then there’s no real difference between me and Christian Bale. 😉

England is such a fascinating country and I’ve always wanted to invest there. But I’ve never found the right opportunity to do so, until now. 😉 With a cheapened currency and rising government bond yields, the U.K. is looking relatively attractive for foreign investors. So a few days ago I invested £11,000 in the U.K. stock market! I think the British would approve of my decision. 🙂

London, England is home to the world’s largest global financial center. Despite the rainy weather, its enduring popularity and rich history make London one of the most sought after cities to live in.

In today’s post we will explore why Great Britain may be a good place to invest in, how to do it, and what we can expect in the years to come. 🙂

Top 3 Reasons to Invest in the United Kingdom

Keep in mind these are my personal reasons and may not apply to everyone else’s situation.

  1. Geographical diversification. Back in 2014, the United States stock market represented 36% of the world’s total stock market cap. But according to the Wall Street Journal, it has recently climbed past 40% after Trump won the U.S. election.But this trend cannot go on forever because the U.S. doesn’t have special privileges regarding innovation, profit growth, or stock market returns. Nearly all of my financial assets are in North America. Investing in the U.K. gives my portfolio some international exposure.
  2. Cheap Pound Sterling. The British Pound (GBP) has recently become one of the most undervalued major currencies in the world. A couple of months ago the Pound fell to a 31 year low compared to the USD. So during my entire life so far, there has never been a better time to buy the Pound Sterling than this year. 🙂
  3. Decent historical returns. Here’s a look at how the FTSE performed over the last 25 years, compared to the Russell 3000 in the U.S. It’s nothing spectacular, but a 200% return in 2.5 decades isn’t bad. 🙂

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Nov 212016
 

Why I Sold 100 shares of Canopy Growth Corp (CGC)

About a year ago I wrote about buying 300 shares of Canopy Growth Corp (CGC:TSE). It is a federally regulated cannabis producer. It caught my attention last year when it became the first marijuana grower in North America to graduate from a venture exchange to be listed on a major exchange (the TSX.) This strengthens the sector and is expected to bring Canopy Growth to international institutional investors. 😀

Last year the company was making about $5 million in revenue, but now it’s making closer to $20 million a year. This figure still falls short compared to the sales of most other TSX listed stocks but it goes to show how quickly this company has grown. The share price more than quadrupled from $2.50 in last November to over $10.00 today. 🙂 Woohoo! This calls for a…

16-11-high-five-is-high

Clearly investors are euphoric over this stock. Canopy Growth has the first mover’s advantage and it’s the largest player of its kind in the budding pot industry. But as a long term investor, I can’t just blindly buy into the hype. I also have to consider the sustainability of the stock’s growth over a long period of time, and Canopy Growth’s track record is currently too narrow for me to get an accurate assessment. I recently reviewed my position in CGC, and decided the stock is now overvalued by 50% compared to its fundamentals. So last week I sold 1/3rd of my holdings in it at $12.10 per share.

16-11-sell-canopy-growth-corp-100-shares

Back when I purchased this stock at $2.55/share the price was still worth the risk. But the CGC’s valuation today is a lot higher. The stock is currently trading at a 2018 forward price-to-earnings (P/E) ratio of 448 times. This kind of multiple isn’t unheard of for small and fast growing companies, but a lot of things in the future will have to go right for Canopy Growth to justify it’s currently market capitalization of $1.5 billion. It would be great if the U.S. were to follow Canada and legalize recreational marijuana usage at the federal level, but that could still be decades away if it happens at all. The current shares are factoring in a market that is much larger than what exists today.

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