Apr 072016
 

Market Bounce

Woohoo! Investors can rejoice as March 2016 was one of the best months for the stock market in recent memory. The S&P 500 and Dow Jones gained 6.9% and 7.1% respectively. Even the commodities-heavy S&P/TSX Composite in Canada managed to end the month 4.9% higher than it started. What do all these numbers mean? Well let’s pretend to be architectural drafters for a moment so we can put things in perspective. A broad North American equity index fund portfolio worth $250,000 would have returned about $15,000 during March. That’s not too shabby at all. 🙂

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I made a couple of new investments in March, such as buying Air Canada bonds in my RRSP, and adding more Antrim MIC units to my existing holding in my TFSA. In other news, as many people already know, earlier this year Suncor reached a $4.2 billion deal to buy out Canadian Oil Sands. My COS shares were finally tendered in March. This means my 123 COS shares were replaced by 34 new SU shares. 🙂 This brings my total Suncor holding to 200 shares, or $7,200 in market value. Wow that’s a high concentration of money in just one stock. Thankgoodness Suncor is a high quality company. 😀

*Side Incomes:

  • Part-Time = $800
  • Freelance = $500
  • Dividends = $600
  • Interest = $200
*Discretionary Spending:
  • Fun = $200
  • Debt Interest = $1300

*Net Worth: (MoM)16-04-stock-fiscal-update-networth

  • Assets: = $948,000 total (+17,400)
  • Cash = $2,500 (-5000)
  • Stocks CDN =$110,100 (+8100)
  • Stocks US = $69,400 (+900)
  • RRSP = $69,100 (+6,300)
  • Mortgage Funds = $22,900 (+7,100)
  • Home = $263,000
  • Farms = $411,000
  • Debts: = $490,300 total (-4,300)
  • Mortgage = $189,600 (-400)
  • Farm Loans = $196,400 (-500)
  • Margin Loan CDN = $28,400 (-100)
  • Margin Loan US = $25,900 (-3,700)
  • TD Line of Credit = $21,000  (-600)
  • CIBC Line of Credit = $11,000 (+1000)
  • HELOC = $18,000

*Total Net Worth = $457,700 (+$21,700 / +4.98%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.77 USD

Thanks to the large gains in the markets my net worth almost increased 5%. Furthermore, it’s another month where I earned over $2,000 from side incomes. 🙂 My dividends and interest payments are getting bigger each quarter! But it’s no big deal. All I did was consistently invest in dividend growth stocks and high interest fixed income securities for the past 7 years.

But is this recent market rally sustainable or is it on borrowed time and we’re past due for a correction? I think it doesn’t hurt to be cautious when stocks are trading beyond their fundamentals, so I’m preparing for a potential pull back by keeping some cash around. My immediate plan for April is to save more money, pay down some debt, and fight any urge to buy a new stock that happens to catch my attention. I realized that I should probably divest away from the stock market a bit as it’s taking up too much of my asset allocation.

I’ve been corresponding with a venture capital firm in the U.S. about investing my money in some start-up companies. 😉 I haven’t decided to do anything with this yet, but I think it’s a worthwhile opportunity to explore. Providing seed money for small businesses can have big payoffs with the right management team and execution, but it is also much riskier than investing in the S&P 500.

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Random Useless Fact:

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Mar 282016
 

Is the Stock Market Overvalued?

My opinion is yes. This post will explain how I came to this conclusion. Thanks to reader Bricks for bringing up this topic.

We’ll be looking at the S&P 500 because it’s a popular index and there’s a lot of data available for it. 🙂 This index basically represents a basket of 500 large publicly traded companies in the United States. We can analyze the following 7 metrics to determine how cheap or expensive the market is. And naturally each of these ratios below can be applied to individual stocks as well. 😉

  1. Trailing P/E ratio
  2. Forward P/E ratio
  3. Forward P/S ratio
  4. Price vs Forward Earnings
  5. Shiller P/E Ratio
  6. Operating Margins
  7. EV / EBITDA ratio

Useful Ratios to Value the Stock Market

1) P/E Ratio – The price to earnings ratio, or sometimes known as the trailing P/E ratio or TTM P/E ratio, is a popular measurement to help determine the valuation of stocks. A low P/E ratio signals a cheap valuation. Historically the P/E ratio of stocks in both Canada and the U.S. hover between 10 to 20 most of the time. However, as of today the P/E ratio of the S&P 500 index is about 22, which signals it is overpriced relative to the norm. (image source)

16-03-valuation-stocks-pe-ratio

2) Forward P/E Ratio – Unlike the trailing P/E ratio, the forward P/E ratio uses projected future earnings. Of course nobody knows how much money companies will make in the future, but this metric provides a sentiment of how profitable the market feels about the next few earnings seasons. According to a FactSet report, the forward P/E ratio of the stock market is 16.5, which is above the long-term average of 14.2. So based on this data stocks are currently about 16% more expensive than what they should be.

16-03-valuation-stocks-forward-ps-ratio

3) Forward P/S Ratio – The price to sales ratio compares the total market value to revenue. It usually moves in the same direction as the P/E ratio but can provide a smoother, more accurate depiction of the market’s valuation (see yellow line in chart above.) This ratio is currently over 1.6x for the S&P 500, which suggests the market is overpriced, even compared to 2008 levels.

4) Price Change vs Forward Earnings Change– The price of the stock market is mainly determined by its future profitability. But recently the price has diverged away from future expected earnings which suggests stock prices are too high.

16-03-valuation-stocks-price-vs-earnings-eps

Notice what happened after the last time price diverged higher from the forward expected EPS in 2006 and 2007. 🙁

According to John Butters, senior earnings analyst at FactSet, for the first quarter of 2016 it appears 92 companies have issued negative EPS (earnings per share) guidance and only 26 companies have issued positive EPS guidance. This depicts a rather bearish outlook. However, stock prices have not come down nearly enough to reflect these estimates. 😕

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Jan 042016
 

No Santa Clause Rally

The economy is struggling. The bad news is my net worth dropped a little in the last month of the year. But the good news is it still managed to climb higher overall in 2015, so that’s a relief. 🙂

*Side Incomes:

  • Part-Time Work = $1100
  • Dividends = $600
  • Interest = $200
*Discretionary Spending:
  • Fun = $900 (holiday shopping)
  • Debt Interest = $1400

*Net Worth: (MoM)15-11-networthiq_chart

  • Assets: = $922,400 total (-1,000)
  • Cash = $3,500 (+1000)
  • Stocks CDN =$97,700 (-4100)
  • Stocks US = $72,700 (+800)
  • RRSP = $62,700 (+1300)
  • MICs = $15,800
  • Home = $259,000
  • Farms = $411,000
  • Debts: = $501,900 total (-100)
  • Mortgage = $190,900 (-400)
  • Farm Loans = $197,900 (-400)
  • Margin Loan CDN = $30,500
  • Margin Loan US = $30,800 (+1800)
  • TD Line of Credit = $23,000  (-500)
  • CIBC Line of Credit = $10,000
  • HELOC = $18,200
  • RRSP Loans = $600 (-600)

*Total Net Worth = $420,500 (-$900 / -0.21%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.72 USD

Using OPM To Get Ahead Financially

It’s easy for the rich to make more money because they already have a lot of productive financial assets. Since I don’t have that level of wealth yet I choose to use other people’s money (OPM) in order to acquire those same productive assets for myself, without having to save a huge amount of money first. This allows me to potentially shorten the number of years it would take to become a millionaire.

Since using OPM is risky, I only buy assets that have a high probability of generating long-term, profitable gains. Most loans will be paid back using regularly scheduled payments so the debt will eventually take care of itself. 😀 Since this blog finally has some history we can see how effective this leverage strategy can be. Below is a look at my net worth over the past 6 years. Feel free to dig through the blog archives for more info.

Dec 2015Dec 2014Dec 2013Dec 2012Dec 2011Dec 2010
Assets$922,400$837,400$742,500$497,500$317,900$279,200
Debts$501,900$517,800$533,600$357,200$215,600$216,300
Net Worth$420,000$319,600$208,900$140,300$102,300$62,900

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The basic premise is that whenever I purchase a new investment using debt, an equal amount of value is added to both my Assets and Debts. However, simply through the passage of time the nominal value of my new asset grows while my debt naturally shrinks. 🙂 It’s only over 10+ years that the magic can really shine, but even in a 6 year window we can already tell it’s working. Time in the market will beat any attempts at timing the market. 😀

This plan works best in a low interest rate environment like in Canada today. In terms of managing debt, I pay about $16,000 a year of interest on my $502K total debt load. My passive income from my invests can easily cover that. Over time as my debt balance slowly falls, the annual cost to service my debt will decrease too! Not only that, my passive investment income is expected to increase every year thanks to the compounding effects of DRIPs and the dividend growth stocks in my portfolio. When the Prime lending rate climbs back up to 4% I may change my plan, but I have no immediate reason to deleverage. 😉 I monitor interest rates twice a year.

Breaking Down my $100,000 Net Worth Growth in 2015

I’m a bit surprised by how much my net worth has grown. After all, the stock market didn’t even perform that well. But then again, I don’t invest like a couch potato and throw everything in index funds. 😛

Real estate, farmland, and mortgage funds all had positive returns in 2015. Lucky for me about 75% of all my assets are invested in these 3 categories. 😀 Even though my Canadian stocks are slightly down, my overall investment portfolio still performed very well. Phew. The biggest winner last year was actually the U.S. dollar! The rise of the U.S. currency alone added $15,000 to my wealth because I calculate my net worth in $CDN. Let’s break down the $100,000 increase. All numbers below are rough estimates.

  • $16K – Net debt repayment. I paid down some higher interest debt.
  • $38K – Farmland appreciation. I adjusted my farm’s price by a conservative +10% for 2015.
  • $5K – Apartment appreciation. Inflation rate was 2% in 2014 so I adjusted my home’s value in 2015 by the same amount.
  • $15K – Currency fluctuation. The CDN$ went from $0.85 USD in Jan to $0.72 USD by Dec, an 18% devaluation.
  • $23K – New investments. Buying new stocks & bonds using personal savings.
  • $3K – Investment portfolio appreciation. Small increase thanks to fixed income assets and huge gains from tech giants like Alphabet and Amazon.com. Technology was one of the few sectors that outperformed last year. By the way, does anyone like computer jokes? I certainly don’t. Not one bit.
  • Total = $100K

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Dec 212015
 

Maximizing Utility

Earning money is a learned skill. If we put in the time and effort, we can learn to increase our earning potential. But making money is only half the battle.

An equally important aspect of personal finance is spending money. 🙂 Some people may not realize it, but spending is a learned skill as well. This means we can learn to become better shoppers. Knowing where to look for deals, buying in bulk, and eating with the seasons will naturally help us save. But if we buy an expensive blazer on sale and only wear it once, then are we really saving money, or are we spending our earnings on something we don’t really want to keep? ?

This is why part of being a skilled spender is understanding how much utility we’ll get out of our purchase. Utility refers to the total satisfaction received from consuming a good or service. For example I normally wouldn’t pay for a donut. ? In fact, even if it was free I probably still donut want one. I’m just not a big fan of the hole thing. ? But I’ll gladly pay for a Hershey’s Cookies ‘n’ Creme. That’s my favourite chocolate bar!? So to maximize my utility I would pick a Hershey’s over a donut given those two choices, even though the Hershey’s is likely more expensive. In other words, the value of my purchase comes from how much enjoyment it gives me, – not from what I paid for it. 😉

Consumers who understand this correlation between their spending and utility are smart. 🙂 They tend to be excellent spenders since they don’t waste their hard-earned income on rubbish that doesn’t give them much fulfillment. Economists even have a unit of measuring enjoyment or utility, called Utils. 😀 At the end of the day it’s not about maximizing savings, but it’s rather about maximizing happiness. 🙂 Instead of looking for deals on pricing, we should be looking for bargains on satisfaction. 😀

My $1,500 Gift

I noticed I had some money sitting around. So after considering what brings me enjoyment and satisfaction, I’ve decided this year for Christmas to buy myself some new stocks in my tax deferred account. 🙂 So last week I purchased 20 shares of media company Viacom Inc (VIAB,) and 10 shares of the well-known retailer, Wal-Mart (WMT.) The total cost came to about $1,500 USD, rounded to the nearest hundred. This will be my last investment of the year.
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Nov 052015
 

The Marijuana Industry – Getting High on Potential Returns

Have you ever thought about investing in marijuana? More and more investors are noticing the high market potential of cannabis. 😀 It’s easy to see why. Data suggests that the budding marijuana industry is one of the fastest-growing in North America. In 2013, the total revenue of the legal pot industry in the U.S. totaled $1.5 billion. By 2014, revenue jumped to $2.7 billion. It’s expected to reach $3.5 billion this year, and then up to $4.5 billion in 2016.

Those aren’t particularly large numbers. By comparison, the beer industry in the U.S. is about $100 billion a year. But the weed industry has a lot more potential for growth. Nearly half of the states in America have already legalized marijuana for medical use. And a handful of them even approved it for recreational use. 🙂

15-11-marijuana-legalization-states-us

The problem with investing in pot companies in the past was simply that the market wasn’t big enough, and the industry’s future was too uncertain. Banks and venture capitalists were reluctant to financially back cannabis companies due to legal issues and the high-risk nature of a largely unregulated substance. 🙁

However, ever since Colorado and Washington legalized the recreational use of pot in 2012, there has been a great amount of pressure for more states to do the same. Next year voters in at least 7 more states will consider the decriminalization of marijuana.

Funding for marijuana start-ups now is more abundant compared to a few years ago. Dooma Wendschuh is an entrepreneur who makes distilled marijuana extracts. At an investor summit in Denver earlier this year, Wendschuh says he was “besieged by millions of dollars” worth of unsolicited offers to invest in his company. A quick look at his profit margins will explain why. He produces the extracts for only $2, and sells them for $35. “If you make it, it will sell. It’s unreal,” Wendschuh explains. The industry is slowly losing its stigma and is becoming a more legitimate market for a wider range of investors and financiers. 🙂

Investing in Pot

What got me interested in this market was Justin Trudeau’s victory last month in the election. I’m not just blowing smoke here. His Liberal Party campaigned on the promise to legalize cannabis on a federal level. Since he has a majority government I’m expecting policy changes to get passed through parliament relatively quickly. The federal and provincial governments will have to work together on new marijuana legislation, so I guess you can call it a joint venture.

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