Jul 042015
 

Greece is holding a referendum tomorrow, Sunday, on whether or not they want to accept the bailout terms from their creditors. I’m not great at economic forecasts but I feel like the majority will vote yes for better or for worse.

[Edit] The result is out. Greeks voted No, lol. This is why I’m not an economist. [/Edit]

In other news it hasn’t been a very good month for global markets. Both the U.K. FTSE 100 and the French CAC 40 indices are down about 4% for the month of June. But China experienced the most dramatic loss. The Shanghai Stock Exchange Composite Index fell by 25%. Sufferin succotash! 😲 A whole bunch of millionaires in China just lost 1/4 of their wealth in the span of 30 days.

Here in Canada our stock market index dropped 3.5%, not as bad as other countries, but still enough to wipe out any gains it’s accumulated so far in 2015. As a result my net worth is down for the first time in years, lol. This means my portfolio is finally large enough that my change in wealth is determined more by the fluctuations in the market than by my savings rate.

*Side Income:

  • Part-Time Work = $600
  • Dividends = $500
  • Interest = $0
*Discretionary Spending:
  • Fun = $100
  • Debt Interest = $1500

*Net Worth: (MoM)15-06-networthiq_chart

  • Assets: = $897,400 total (-5000)
  • Cash = $2,500 (-2000)
  • Stocks CDN =$93,600 (-1300)
  • Stocks US = $65,100 (-200)
  • RRSP = $51,200 (-1500)
  • MICs = $15,000
  • Home = $259,000
  • Farms = $411,000
  • Debts: = $508,100 total (-4300)
  • Mortgage = $193,500 (-400)
  • Farm Loans = $200,700 (-500)
  • Margin Loan CDN = $29,600 (-1900)
  • Margin Loan US = $25,800 (+100)
  • TD Line of Credit = $26,000  (-1000)
  • CIBC Line of Credit = $10,000
  • HELOC = $18,200
  • RRSP Loans = $4,300 (-600)

*Total Net Worth = $389,300 (-$700 / -0.2%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.80 USD

This is why it’s important to understand our financial decisions. Warren Buffett said “if you understood a business perfectly and the future of the business, you need very little in the way of a margin of safety.”

For example, when I look at my assets listed above I know what purpose each line item plays in my financial plan to reach early retirement. I know why I have $2,500 in cash right now, not more, not less. When I look at any of my investments I know why it’s in my portfolio. As another famous investor Peter Lynch once said, “know what you own, and know why you own it.” 😀

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Oct 192014
 

Overreaction leads to market turmoil

Over the last several weeks investors saw a 10% correction in the Canadian stock market, and a 9% correction in the U.S. Someone with a $100,000 portfolio invested in index funds could have just lost $10,000. Ouch. 😐 Is this market sell off justified or is it simply an overreaction to some recent bad economic news? First, let’s review what those news are.

  • The Canadian dollar has dropped to a 5 year low
  • Germany’s economy is weaker than expected
  • The rest of Europe is still in a mess of unemployment and stagnation
  • Last week the Athens Stock Exchange in Greece tumbled more than 6% in one trading day.
  • ISIS is causing havoc in the Middle East
  • Ebola fears

I currently own shares in the Bank of Nova Scotia (BNS.) It’s one of the largest companies in the country and has been around for over 180 years. Over the last month the price of this stock fell 8%. Instead of asking where the stock will go from here, we should instead be asking does all the recent bad news justify an 8% drop in value for one of the largest banks in Canada? My answer is absolutely not. 😛 It’s important to remember that when we buy a stock we are literally owning a part of that company. This means we, as stakeholders in Scotiabank, are still entitled to split the $6.5 billion profit that the company makes every year, regardless of how the price of BNS shares performs in the short term.

14-10-overreaction

 

A lower loonie will likely spur economic growth and will not hurt Scotiabank’s profitability. Europe’s stalled economy is nothing new and Canadian banks don’t lend that much to Europeans anyway. The media has succeeded in sensationalizing the threat of Ebola in the U.S. Yes it’s a terrible disease, and there’s an outbreak in Africa. But Ebola will not hinder businesses in the U.S. and Canada from continuing to rake in profits. Literally more Americans have been married to Kim Kardashian than have died from Ebola – both a terrible fate. :(

For the intrinsic value of Scotiabank to actually fall by 8% substantial circumstances would need to be met, such as major accounting fraud or a 10% national unemployment rate, that would legitimately jeopardize the company’s ability to make money. The recent news is relatively trivial so an 8% correction of BNS shares seems like an overreaction. Imagine selling our stocks now only to see the markets rebound next month and regain all its losses. 😐

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Mar 132014
 

Some people have a fear of losing money. This prevents them from taking the necessary risk with their investments, like buying stocks, to give the best probability of a long term return. The S&P500 returned 20% over the last 12 months, so anyone who holds American stocks like me have probably done well with their net worth over the last year :) Despite reaching new record highs however, we don’t hear people talking about the stock market too regularly these days because things are going really well. But what if the S&P500 had lost 20% over that same period? I bet it would get a lot more attention wouldn’t it :) Bear markets certainly give the media more to talk about.

14-03-joker lose money

This is because many people can’t stand losing money. In economics the tendency to prefer avoiding a loss rather than making a gain is called loss aversion. This psychological behavior prevents many people from making smart investment decisions.

Scientists have done experiments where they give monkeys a single banana each. Predictably the monkeys would appear satisfied :) The scientists then gave two bananas each to another group of monkeys and then took one banana away. Note that these monkeys still ended up with a free banana each, but they become noticeably angry and agitated at the scientists, as if they had just been robbed. So sometimes  1 ≠ (2-1).

In terms of behavioral finance,  we’re not that much different from monkeys. We feel pretty good about getting a $20 discount on a new pair of shoes, but we feel a whole lot worse if we realize we lost $10 because it had accidentally fallen out of our pocket. But learning how to process and react to losing money correctly is important to understanding the financial system. In fact Canadians who describe themselves as more knowledgeable investors are more likely to have experienced a major loss.

Here’s an easy experiment to find out if you are risk adverse. Pick a stock to follow and imagine you own it. Record how much it has increased or decreased after each day, and your feelings about it. Over time if you notice that you feel emotionally stronger toward losses than gains of the same magnitude then this means you have a lower risk tolerance for investing, which is fine. You simply value capital preservation more than potentially larger gains. Just be aware that the time when we should be taking on the most risk is when we’re young. If our investments fail at least we would still gain valuable knowledge and experience, which we probably can’t afford to do when we’re old and crusty 😛

To me a dollar lost has the same emotional intensity as that from a dollar gained :) I don’t get upset if I lose on a stock trade because I know I can just as easily make it back next time. I can also sleep well at night during a recession because I know bear markets don’t last forever. Thinking about losses logically can make us more happy 😀

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Random Useless Fact: While sitting in front of your computer, lift your right foot and make clockwise circles.
While doing that, take your right hand and draw the number 6 in the air.
For some people, your foot will change direction all by itself. Try it :)

Feb 232014
 

It’s so easy to make money in the market these days 😀 If you bought the Dow Jones index 18 months ago, your investments would be up 30% today!

But the chart below may be a strong signal that these good times will likely be ending very soon! *gulp* 😯 The darker green line indicates the Dow stock market index today and its performance over the last 18 months. As you can see it’s mostly good news 😀 But the lighter cyan line above represents the same index, also over an 18 month period, but 85 years ago.

14-02-dowjonescompare

As you can see the 2 lines are very similar so far 😉  There’s probably something fundamentally the same within the different periods of time that’s driving this synchronicity 😕 It was right around this time of year back in 1929 when the market had a major correction, and by summer of 1929 the Dow had lost 20% of it’s value from the peak in early January. Does this mean the Dow will do the same this year in 2014? A 20% correction is not that rare for the stock market, and if the Dow continues to follow the historical trend set 85 years ago then maybe it’s time to sell some positions and lock in the profits. I mean, look at how eerily similar the 2 charts are 😐

If you believe we are in for a downturn then maybe add more bonds, like XBB, to your portfolio as a bit of protection. But if you think the charts lining up is purely coincidental then carry on with your stock investing. Personally I have no idea what to think about this data so I’m going to sit on the fence and hold all my long positions, and will not buy any new stocks until April.

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Random Useless Fact: Most foreign students only seem smart because all the dumb ones stay in their home countries. #NoOffence

Dec 112012
 

One myth about investing in the stock market or any other market where prices fluctuate is that it’s risky. But people who know how to value a stock understand that it doesn’t have to be risky if they buy the right stocks at the right time. Volatility and risk aren’t always correlated. Some companies with steady growth such as Enbridge have been pretty stable over the years.

Enbridge stock chart, volatility and risk

That’s not to say ENB is a good buy today because whether a stock is reasonably valued or not is another topic. But here’s a look now at Caterpillar below, who manufactures construction equipment, heavy machinery, etc.. Notice how the stock is more volatile over the same period as Enbridge.

Caterpillar stock chart, Volatility and Risk

But that doesn’t necessarily mean CAT is a riskier stock than ENB.  CAT is a more cyclical company so its Beta is suppose to be higher. What makes a company safe to invest in for myself is a positive trend of earnings growth, dividend growth, and industry expansion. Both companies have had stable dividend growth over the last decade meaning managers are confident about their company’s future performance. Both companies have also increased their profits over the years. Pipeline companies are looking to expand their pipes across Canada, and In Alberta alone the government has forecast there will be 114,000 jobs in the construction industry over the next decade (o.O) ENB and CAT are both in growing industries with growing demand for their products/services.  Stocks can vary in risk depending on what kind of business they are, but volatility doesn’t necessarily mean risk. It just means at some point in time, there might be  a good opportunity to buy the stock at a great value 😉

Here’s what the Oracle had to say on the subject….

“Volatility does not measure risk. Past volatility is not a measure of risk. It’s nice math, but it’s wrong. If a farm in Nebraska used to sell for $2,000 per acre, and now it sells for $600 per acre, investment theory would say that the beta of farms has gone up, and than they are more risky than before. If you tell that to people, they’ll say that that’s crazy. But farms don’t trade daily the way stocks do. Since stock prices jiggle around, finance professors have translated that into these investment theories. It can be risky to be in some businesses. Risk is not knowing what you’re doing. If you know who you’re dealing with, and know the price you should pay, then you’re not dealing with a lot of risk. We have invested in a lot of sectors that have high betas. The development of beta has been useful to people who want careers in teaching.”
– Warren Buffett

Beta – The measure of volatility. Higher beta = bigger fluctuations in price. The overall market has a Beta of 1. If a stock is said to have a Beta of 1.5 then that means it will be 50% more volatile than the market.