Jul 272020
 

Stock picking vs index investing

There’s a common belief that attempting to outperform the stock market is futile. A thread on the r/investing subreddit asked if anyone can beat the market. Here are some direct replies from the community:

  • “I know I am statistically extremely unlikely to beat the market, and if I do beat it, it’s through luck, not skill.”
  • “The only way you can really beat the market is to hold a highly concentrated portfolio and hit it big in 1 stock”
  • “As a retail investor, if I beat the market picking individual stocks, it was mostly from luck.”

Even an investopedia.com article suggests that successful stock pickers like Warren Buffett may have just been “exceptionally lucky.” It appears the online investing community is generally against the idea of individual stock picking. This short comment from the forums of RedFlagDeals sums it up well.

But allow me to go against the grain and push back a little. 😎 I believe you canΒ beat the market if you have the right decision making process. πŸ™‚ My net worth today is largely built on my stock picking history.

Internet consensus: Amateur investors can’t beat the market over time. That’s why you should just buy index funds and forget about stock picking.

Me:Β 

beating the index

12.87% is the annual rate of return on my TFSA portfolio over the last 9.5 years according to TD portfolio statistics. It’s one of my oldest investment accounts. As readers will know I share all my stock holdings publicly for accountability reasons.

It appears the couch potato method of index investing is very popular with netizens. In the subreddit, r/PersonalFinanceCanada even the moderators have admitted that, “the general consensus on PFC is that people should look for low-cost, passive index investments.”

Don’t get me wrong. The Canadian couch potato aggressive portfolio performed quite well over the last 10 years. I’m just saying maybe there are better investment strategies out there. πŸ™‚

Source: https://edrempel.com/outperform/

 

Why index investing isn’t all that passive

Index funds may appear to be passive, but they are actually more actively managed than most realize. This is something the index investing community doesn’t like to admit because it undermines the strategy’s reputation of being objective, hands off, and untainted by human biases.

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Jun 292020
 

Transaction codes

Over the years I have seen many different types of activities in my bank accounts. But sometimes I don’t know what the transaction codes mean. And I’m left scratching my head as to what I’m being paid or charged for.

transaction codes can be difficult to understand sometimes.

So to make life easier I’ve compiled a list of account actions with the different abbreviations and what they represent. Most of these transaction codes will apply to TD Canada Trust and Direct Investing accounts. I don’t know if other institutions use the same bank codes but they will probably look similar. πŸ™‚

Use Ctrl+F to find a specific code.

  • ACCT BAL REBATE – Account balance rebate
  • BUY – Buying a security.
  • COB DIS CREDIT – Cost of Borrowing credit for over charging
  • CONVER – A security in the portfolio underwent a corporate action in which it was exchanged for another security.
  • CSHLIEU – Cash was awarded for partial shares in a corporate action in which shares of a new security were exchanged or when a split has taken place.
  • CXLSELL – Original sell trade was cancelled due to a system error.
  • CXLBUY – Original buy trade was cancelled due to a system error.
  • CXLDIV – Dividend payout was cancelled due to a system error.
  • CXLINT or CXLINTBND – Interest paid on a bond was cancelled due to a system error.
  • CXLINTCRD – Interest received for cash held in a portfolio was cancelled due to a system error.
  • CXLINTDEB – Interest paid on a margin loan was cancelled due to a system error.
  • DIV – A dividend was paid.
  • DIVFRG – Foreign dividend earned.
  • DIVSPL – A stock held in your portfolio split or new shares have been added to the portfolio.
  • DRIP – Shares or units bought using the dividend re-investment plan
  • EXCH – Exchange of securities.
  • FEE Fee or carrying charge applied.
  • INT –Β  Interest on a security has been paid.
  • INTBND – Interest has been paid on a bond in the portfolio.
  • INTCRD – Interest was received for cash held in your portfolio.
  • INTUS – Interest earned in US dollars.
  • INTDEB – Interest was paid on a margin loan.
  • LQD – A liquidation of a security has taken place.
  • MERGER – Company merged with another company and has a new ticker symbol. Both symbols will be listed.
  • NRT – Non-resident tax.
  • PRNCPL – Security has been redeemed for cash.
  • REDEEM – Security has been redeemed for cash.
  • REVSPLT – A stock in your portfolio experienced a reverse split.
  • SELL – A security in the portfolio was sold.
  • SEND E-TFR – Sending an E-Transfer to someone.
  • SHORT COVER – Closing of a short position by covering the short.
  • SHORT SELL – A short position was opened and stocks were short sold.
  • SPNOFF – A spinoff of a parent company has taken place. Look for shares of a new security.
  • STK EX – The ticker symbol, CUSIP, or the company name changed for a security that was in your portfolio.
  • TENDER – A security has been redeemed for cash.
  • TXPDDV – Tax paid dividend. A cash transfer that can include dividends, interest, capital gains distribution or return of capital where no additional taxes will be paid by you. This is common for Canadian ETFs or income trusts.
  • TSF FR – Transfer from.
  • TFR-IN – Transfer into an account.
  • TFROUT – Transfer out from account.
  • WBD – Β Transfer in of money from another account – usually the description will include TSF FR (account number.)
  • WHTX02 – Withholding tax from a U.S. stock or other security.

 

Keep in mind that these banking codes may be different than what will ultimately appear on your year-end tax slip. Sometimes banks and brokerages use default designations for convenience and may vary from the tax documents they send to you and the CRA. Whether you are using WebBroker or another online service make sure to ask a representative if you are unsure of any activities in your account.

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Mar 302020
 

This financial crisis appears to be getting worse by the day. The economy is stalled and millions of workers have lost their jobs. πŸ™ Did you hear about the man who was fired at a coffee factory? They say he had no filter. 😎 But there is a silver lining here. As the stock market sinks the dividend yields rise. πŸ™‚

Value investing with dividend stocks

Warren Buffett bought 4.3 million shares of Suncor (TSE:SU) last quarter when the stock was trading at roughly $40/share. Today TSE:SU is trading at just $16/share. Buffett is a value investor who only buys profitable companies that have promising growth prospects. Anyone buying SU today would be getting in at a 60% discount compared to what Buffett paid in late 2019. I don’t give stock tips, but I’m just sayin’. πŸ˜‰

Similar to Buffett I’ve been on the lookout for bargains lately. I purchased many dividend growth stocks throughout this month. In today’s post I will disclose which stocks I bought, why I bought them, and how I have grown my forward dividend income by $7,200 per year. Wowzers! πŸ˜€

dividend investing pays off

 

Narrowing down my options

There are thousands of stocks and ETFs out there. So how did I choose? Well first, I determined which type of investment account to use. This will ensure maximum tax savings. I don’t have much contribution room remaining in my TFSA and RRSP. So most of my new purchases will be in a fully taxable account. This means looking at securities that pay eligible dividends which can benefit from the Canadian dividend tax credit.

I personally like to buy and hold companies that consistently increase their dividends over time. These are known as dividend growth stocks.

 

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Mar 232020
 

Temperament is everything

Investors can often get in their own way. It can be hard to stomach a bear market. But it’s especially important at challenging times like these to keep our emotions in check, or else we could make mistakes and lose our shirts.

There are three types of investors during a stock market crash – those who sell, those who do nothing, and those who buy more. Which type are you? If you don’t already know then this can be an expensive time to find out. We learn the most about our investment behaviors when the market is tanking, not when it’s rising.

The global influenza pandemics of the 1950s and 1960s killed more than 1 million people each time. But eventually the world moved on and financial markets recovered. It’s a bit counterintuitive, but profits are made when you buy, not when you sell. This is because the price you pay for an investment is the main factor that will determine your future profit.

 

How to buy into the dip

If panic selling is not a good idea, then what can we do? Here are a few common strategies to consider:

  • Rebalance approach
    Although most securities are down, government bonds and other fixed income funds like (VSB.TO) have gained. Sell some of these low risk assets to buy beaten down stocks. But do it gradually. This also helps to rebalance your portfolio to your previous asset allocation.
  • Gradual nibble approach
    This requires you to have some cash saved up first. Every time the market falls by 10%, you put more money into the markets. Start with 20% of your cash balance. Go up to 30% of your remaining balance the next time. Then 40%, etc. This ensures that each additional time you buy, you are picking up stocks at lower prices.
  • Wait for a bottom approach
    Sit on the sidelines and wait for a sustained rally using technical analysis. Save and accumulate cash in the meantime. Store this cash in a high interest savings account or short term bond fund so it can be liquidated relatively quickly. Once market momentum starts going up again use 75% of the cash to buy stocks on the rise. Gradually buy more with the remaining 25% over time.

I don’t know which method works the best. But here’s what I’m doing:

As posted in my latest net worth update, I had about $150,000 in cash at the beginning of March – a very fortunate position to be in. πŸ™‚ I’ve already spent about $80,000 of that buying into this bear market over the last few weeks. My most recent stock purchases were Suncor (SU.TO), Pembina Pipeline (PPL.TO), Canadian National Railway (CNR.TO), and Fortis Inc (FTS.TO). I’m buying even as prices continue to fall because the stock market is down 32% from its high so far. Historically 32% is the low point of the average bear market. Although stocks could fall further, investing about half of my cash savings now guarantees I don’t miss out on the upswing in case we are already close to the bottom.

I plan to deploy another $50,000 into the market after technical indicators improve. There are two primary signals I’m interested in.

  • I’m waiting for the 10 day moving average to reverse direction from down to up.
  • I’m looking for the MACD signal to improve.

These indicators can be applied to individual stocks, sectors, or entire indices. For example, below is the S&P/TSX index. We can see it is not yet time to buy.

TSX drops 32% in just a few weeks

A new bull market should start once we see price momentum swing up. πŸ™‚ But this is speculation. Even after a short term bounce, there could be more downside before things actually start to turn around.

 

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Mar 162020
 

Opportunity for the well prepared

Well it’s finally happened. The record breaking 11 year long bull market has come to a screeching halt as stocks tumbled more than 30% in the fastest pace ever recorded. Last Thursday the TSX dropped 12% in a single day, the most in recorded history. But this should come as no surprise if you’re an avid reader of this blog. We saw this coming miles away. πŸ˜€

I began warning fellow investors two years ago explaining the early signs of an economic downturn. But since there were no red flags I didn’t expect an immediate market correction. Here’s an excerpt from that 2018 post.

Playing a strong defense game

So how did I prepare? Well last summer in 2019 I shared my thoughts on which asset classes would likely perform relatively well in a low interest rate environment. I wrote that adding defensive investments would make a lot of sense going into 2020.

So I had called out bonds, real estate, and precious metalsΒ as good assets to have, at least in the short to medium term. This is partly why I started to look for a rental apartment to purchase last fall.

Finally I warned readers several months ago of 10 signs that an economic downturn was just around the corner. My suggestion was not to sell everything and wait for the crash to happen, but instead to rebalance and reduce market risk. Here’s the final paragraph from that post.

planning ahead can protect the downside

Which brings us to the present. Both Canadian and U.S. stock markets are down about 20% year to date. Oof. πŸ™

It’s a good thing we had time to prepare for this downturn since the signs were plenty and hard to miss.

So let’s see how my prediction and planning paid off so far. πŸ™‚

  • As of writing this post gold is up 7.5% so far this year in $CAD.
  • Bonds have done well. The iShares Canadian Universe Bond ETF (XBB.TO) has returned +2% year to date.
  • Real estate is on the rise. We can use the Canadian Apartment Properties REIT (CAR.UN) as a proxy for residential real estate in Canada. This REIT has gone up 4% year to date. Personally, my new real estate purchase is earning me 6.25% a year in net rental income, after all expenses. Furthermore, the median rent price in the city of my new condo is up 15% this year. πŸ™‚

As I said last year, governments will go deeper into debt, print more money, and all of this will benefit holders of bonds, precious metals, and real estate. Owning these types of assets – which I have about $500K in right now – will add stability to a portfolio during a major stock market correction. The key is to use economic data to align my investments in order to limit downside risks. πŸ™‚

 

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