Dec 122016
 

A Shift in Focus

Money can’t buy happiness. But it can help us look for it quicker, in a BMW. 😉 In order to maximize our chances to earn more money we have to reassess our investment strategies from time to time and be flexible to changing market conditions. Currently the price to earnings (P/E) multiple for the S&P 500 is around 25 times, compared to 16 times per historical average, suggesting the stock market today is probably overvalued.

If we invert the P/E ratio we would get the earnings yield, which is currently 3.9% for the index. 🙁 This means if we invest in the S&P 500 today, we can expect to make 3.9% return by next year. That doesn’t sound very attractive does it? And it’s not much better for Canadian stocks. The S&P/TSX Composite index has an earnings yield of 4.3%.

This is why I’ve been focusing a lot on fixed income investments over equities in 2016. I can get 7% or 8% on high yield bonds or mortgage investment corporations, with arguably the same or even lower risk than buying stocks. 🙂 I prefer to buy individual junk bonds because ETFs are too mainstream for me. 😉 But if you want to buy a basket of high yield bonds in a neatly packaged fund, Nelson from Financial Uproar wrote an informative post on high yield bonds with some useful ETF suggestions.

Anyway, last week I purchased $5,000 face value of Baytex Energy junk bonds. Here is how I did it using my broker, TD Direct Invest. Other brokerages may have similar procedures.

How to Purchase High Yield Bonds

On the main account page.

 

On the next screen.

On the new pop up screen.

I now hold 3 individual high yield bonds in my retirement account. 

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Aug 112016
 

Sherritt Restructures its Debt

Earlier this year Sherritt International, a Canadian mining company, announced plans to extend its debt maturity by 3 years in order to weather the current commodity downturn. Out of the $720,000,000 debt that will get the extension, $5,000 of it is owned by me. 😀 A couple of years ago I purchased some Sherritt bonds for $5K with the expectation that I would be paid 8% interest rate every year until maturity in 2018, at which point my principal will be returned to me.

But last week I received the following online message from my discount broker.

16-08-sherritt-bond-pushed-back-to-2021 Sherritt Restructures

I always knew this was a potential possibility. Making 8% investment return a year comes with a fair chunk of risk. I can understand the plight of the mining company. I first realized Sherritt was in trouble when the value of my bond dropped 38% last year, and prepared myself or the worst. Sherritt’s profits are tied to the underlying commodity that it’s trying to sell. The price of nickel has dropped to just under $5/pound today, compared to $12/pound 5 years ago.

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Mar 242016
 

Gradual Change

According to the U.S. government, the country only grew 1% in Q4 of 2015. But that’s still better than Canada. Our GDP up here only increased 0.8%.  It doesn’t feel like the economy in either country is going to pick up any time soon. Personally I don’t mind slowing down or even contraction. Slow economic times is a natural part of the market cycle because it helps with the price discovery mechanism and prevents bubbles from becoming too big. But of course politicians want to encourage more growth all the time which means investors have to be smarter and more cautious about where to deploy capital.

One concern that affects everyone in the world is an aging global population. Japan is leading the charge on this one. Many Japanese couples grow fruit trees and live to a ripe old age. According to the World Bank, Japan has the oldest demographic with 26% of its population being age 65 or older. We all know what happened in Japan for the last 20 years. It’s GDP is basically unchanged from 1995 to 2015. Same goes for Japan’s stock market. Any money thrown into the Nikkei 225 index 20 years ago would have produced virtually no gains as of now. The couch potato method of index investing doesn’t always work for everyone.

The percentage of Canadians who are 65 or older is about 17% today. In the U.S. it’s about 15% of the population. We are still a long way off from Japan’s 26%, but it’s worth noting that 17% of Japan’s population was 65 years or older in the late 1990s.

16-03-old-people-meme-technology

I would continue to invest in large, profitable companies. But high quality stocks have been bid up so much that there isn’t much room for them to go higher in the short term based on fundamentals. This is why I look at alternative places to invest as well.

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Feb 082016
 

Mortgage Investment Corporations Returns in 2015

The Toronto Stock Exchange lost about 9% last year. But one group of investments that performed well in 2015 were mortgage investment corporations (MIC.) In the beginning of 2015 I held three different MICs. Since I didn’t add any new positions throughout the year it’s easy to calculate my total annual returns from them. Let’s take a look at the results. 🙂

Liquid’s MIC returns in 2015:

  • Antrim Mortgage Fund: +4.5% return (on $10,300 invested)
  • Atrium Mortgage Investment Corp (AI): +8.2% return (on $2,100 invested)
  • Timbercreek Mortgage Investment Corp (TMC): -0.6% return (on $2,600 invested)

Total returns = 461 + 172 + (-16) = $617

Overall Return on investment = $617 ÷ $15,000 = 4.1% return

The chart below shows the unit price of my AI and TMC investments compared to the S&P/TSX index, throughout 2015. It does not include dividends or interest.

16-02-tmc-ai-performance-vs-tsx

MIC Analysis

My total return for holding $15K in MICs last year earned me 4.1%. This rate of return was lower than the historical average of 5% to 8% one would normally expect from a basket of mortgage based investments. I believe a number of negative factors played into this outcome.

  1. Our economy in 2015 was weaker than economists had expected. The price of oil lost around half its value. As a result, the Canadian economy fell into a recession because it’s very dependent on strong oil prices to grow.
  2. Another reason is because the Bank of Canada cut interest rates not once, but twice in 2015. Lower rates are bad for mortgage lenders like MICs because they make less money if borrowers pay less interest on their loans.
  3. Furthermore the annual account fee I paid to my trustee lowered my Antrim Mortgage Fund return by 1.3%.
  4. The last reason is because one of my holdings, Timbercreek (TMC) severely under-performed other MICs. I don’t know if 2015 was just a bad year for the stock or if the drop is due to something more substantial.

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Dec 302014
 

Financially speaking this has been the best year for me so far. Here’s a 2014 year end review and some updates about what’s been going on in my personal life.

Braces Removed

Earlier this year I decided to get braces for financial reasons. According to my research people with very straight teeth make more money than the average person. The total cost was $2,000 but I think this will turn out to be a great investment in the long run. So here’s an update. A couple of weeks ago I got them removed!

14-12-braces-food

My teeth look great and I’m more confident about my smile 😀 which, according to science, should help me earn more money. 😉 The only issue now is I have to wear a retainer pretty much all the time which makes me sound kind of funny when I talk lol.

Stock Markets Climb

Last year in 2013 the U.S. stock markets gained 30% so many investors decided to sit out in 2014 because they thought stock prices were overvalued. But the Dow in the U.S. gained 9% this year, and up here in Canada the TSX gained about 7%. These 2014 gains are on par with average historical stock market returns. This just goes to show that we should not try to predict future market performance using information from the previous year.

Buy stocks for the profitable companies they represent. For example, I posted my analysis for Dollarama, and explained with logical reasoning why this recession-proof business should outperform going forward. I also blogged about investing in Time Warner, and 21st Century Fox and discussed why these are excellent long term investments.

Today, Dollarama shares are up 34% from when I bought them. Both Time Warner and Fox shares have also returned double digits from my purchase price. No wonder my net worth has been growing like a weed. 🙂 It’s no big deal really. I’m not a stock picking wiz or anything. 🙄 Investing simply works for anyone who follows the basic principles of buying great companies at decent valuations! 😀

Oil Price Slump

Unfortunately, not everything is up this year. The one area of my portfolio that suffered lower prices was oil companies. Luckily I’m well diversified so the impact wasn’t that bad. The important thing is to hold onto large cap energy producers like Suncor and Canadian Natural Resources. Despite the oversupply of oil in the world Suncor shares are still worth more today, $37/share, than when I purchased it last year at $28/share. Large companies don’t get hurt as much when the sector in general underperforms.

Tim Hortons Resolution

Many of you have asked me what I plan to do with my 20 shares of Tim Hortons now that Burger King is buying them. There are usually a few options for shareholders when their company is being taken over. My 3 options, specifically in this case, are:

  1. Cash Tender – To receive $88.50 CAD for each common share of Tim Horton Incorporated tendered.
  2. Stock Tender – To receive approximately 3.0879 common shares of Holdings (to be renamed later) for each common share of Tim Horton Incorporated tendered.
  3. Cash & Stock Tender (Default Option) – To receive $65.50 CAD plus approximately 0.8025 of a common share of Holdings (to be renamed later) for each common share of Tim Hortons Incorporated tendered.

I am going with the default option number 3. I purchased Tim Hortons share for about $50 each back in 2013. Option 3 basically gives me an immediate 30% return on my investment, plus I’ll receive shares in the new holding company, which is a nice bonus. 🙂 I also don’t have to worry about taxes because the transition will take place in my Tax Free Savings Account.

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