Tag Archives: money

Foreboding part III.

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In Foreboding part I I said that I felt a big wave may be coming towards the financial markets.

In Foreboding part II I explained a few ways that I am rebalancing my portfolio and taking a more conservative approach right now.

After the last two articles, I thought the question on many readers mind might be why I feel there is trouble ahead for the economy.

What worries me.

Canadian real estate is now the third most overvalued in the world. Seventy percent of Canadians own real estate, are deep in debt and have little or no other savings. If the real estate bubble bursts here, our economy is in big trouble.

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I am currently reading a book called “The End Of Growth” by Jeff Rubin who was the former chief economist at CIBC World Markets. In the book he explains how cheap oil drives economies.

“Guess what oil prices were doing in 2008 when the world fell into the deepest recession since the 1930s? From trading around $30 a barrel in 2004, oil prices marched steadily higher before hitting a peak of $147 a barrel in the summer of 2008.”

“When oil prices go up, so does inflation.”

“A fivefold bump in interest rates was the last straw for the massively leveraged US housing market. Higher rates popped the speculative housing bubble, which brought down not only several prominent Wall Street investment banks but also the entire global economy.”

There is no reason to expect we will have cheap oil in the future.

But what really keeps me up at night…

Foreboding part II.

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As you know from reading this blog, most investors do the opposite of what they should do. They buy high and sell low.

When real estate prices are at their peak, twice as many people are buying real estate. When stock prices crash, people sell all their stocks instead of buying great companies at a discount.

Through my actor’s union I have an RRSP which lets me choose from a limited list of funds with fancy names like the “conservative continuum”, the “balanced continuum” “or the “aggressive continuum”. Each fund is really just a mix of bonds and stocks. The more the fund is invested in bonds, the more “conservative” it is. The more the fund is invested in stocks, the more “aggressive” it is.

Every time there is a market crash I hear my fellow actors say “RRSP’s suck! I’m cashing mine in and taking all the money out!”. So they bought high and are now selling low and triggering a tax bill.

When the market crashed in 2008 I did the opposite. I moved all my mutual funds into the 100% all stock “aggressive continuum” which was down over 27%. It went up over 22% the next year, over 12% in 2010 and then lost 4.73% in 2011. Last year it went up another 12.68%.

As Warren Buffet says, “Be fearful when others are greedy and greedy when others are fearful”. 

I never give specific investment advice and am just using the previous example to illustrate how important it is to rebalance your portfolio. Right now I have just rebalanced mine.

Since I sense there is a storm brewing in the financial markets, I sold 50% of my aggressive, all stock mutual fund and moved the funds into a conservative, all bond mutual fund. Even if we don’t have another market crash, I’m happy to take half my money off the table after the big run up this fund has had recently.

I’m not worried about my dividend paying stocks that I hold in my DRIPs. I have researched these stocks and they continued to pay dividends through every past financial crisis. Since I plan on holding these stocks for life, I will just continue to reinvest the dividends and buy more shares at a great discount if there is another crash.

Below are two great articles about the current financial markets with specific advice on how to protect your money.

Fear, greed & risk

Keeping the Dividend Faith

A better way to buy a condo?

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If you want to make money by investing in condos, there may be a better way.

Macquarie Capital Markets Canada did a comparison between investing in apartment REITs versus condos. They compared returns from investing in a Calgary condo to the Alberta focused Boardwalk REIT. Then they compared returns from investing in a Toronto condo to eastern Canada-focused CAP REIT.

In both cases they found the REIT investment came out ahead consistently in recent years.

REITs pool the investment money from many people then buy apartment buildings (or shopping malls depending on the REIT) and distribute 90% of the profits to shareholders in the form of monthly distributions. It’s a way to profit from real estate without having to pay a down-payment, closing fees, monthly maintenance fees or deal with tenants.

Lessons from Telsa Motors.

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Many people are afraid to have anything to do with the stock market. They all know someone who lost money buying stocks, or read stories of market crashes and are glad they never invested any money.

One of the main reason people lose money in the stock market is that they just can’t stop buying high and selling low. When it comes to real estate and stocks, most people are only interested in buying when the price has been driven up.

Shorting a stock.

When someone thinks a stock is a good buy and will continue to go up, they are said to be “long”. When someone thinks a stock is too over priced and will fall soon, they will often “short” that stock.

Shorting stocks is too complicated for me, but basically it works like this. Instead of buying low and selling high, someone who shorts a stock will borrow shares to sell today (at what they figure is a high price) and then have to buy shares later (when they hope the price has dropped) to “cover their short position”.

Someone long hopes to buy low and then sell high.

Someone short hopes to sell high and then buy low.

Short covering driving up shares of Tesla Motors.

What’s happening today with Telsa Motors is a text-book example of how people behave irrationally and lose money in the stock market.

The stock has doubled in price in the last month. It’s gone up 50% in the past week alone. It’s now more over valued than 98% of U.S. stocks with a price-to-earnings ratio above 227. According to Thomson Reuters, Tesla Motors is 30 times over valued compared to auto makers GM, Ford and Porsche.

What’s driving the price up? The company recently beat earnings estimates by bringing in a first-quarter net income of $11.2 million (a year earlier they reported a loss of $89.9 million).

Another big factor driving the stock price higher is that it was one of the most heavily shorted stocks. Many investors who shorted the stock are now being forced to cover their short position by buying shares (to pay back the ones they borrowed) at this higher price.

This high volume of shares being purchased to cover short positions is creating more demand for the stock and pushing the price higher.

Did we learn nothing in 2008?

Diversity.

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A friend emailed me the other day because she had watched a show about the retirement crisis in the States and she wanted my opinion.

Click here to watch: The Retirement Gamble.

The show seemed to have two main themes:

  1. People knew nothing about investing.
  2. People were losing money in the stock market.

The first one is very easy to fix. Read.

If you are reading this blog, you probably don’t have this problem, but many people I meet who don’t know anything about investing also tell me they have never read a single book on the subject. All the information is free at the library, but still people don’t bother.

If your work offers you an RRSP or a 401K and you don’t understand how it works there has never been an easier time to get the information you need. Spend 15 minutes a night googling the subject and you will have all the information you need.

The second one is also easy. Diversify.

On the “Retirement Crisis” program, they showed a couple that had $1.5 million invested in high-tech internet company stocks. The stocks were going up in value by as much as $30k a day. Then in the year 2000 the market crashed and they were left with $500k.

They said they didn’t know it was a bubble. They were earning $30k a day. That seemed sustainable to them???

Next it showed a single mom who in 1999 used 100% of her money to buy stock in the computer company she worked for, Comdisco. Well, you can guess the rest… sobbing, tears…

Never put all your eggs in one basket.

To me diversity is the #1 way to protect your money. There all kinds of rules of thumb about how much to invest in what based on your age, but just keep it simple and don’t put all your eggs in one basket.

Try to diversify your investments between different countries and asset classes.

  • U.S. based stocks, mutual funds or ETFs.
  • Canadian based stocks, mutual funds or ETFs.
  • International based stocks, mutual funds or ETFs.
  • The home you live in, a rental property, or a Real Estate Investment Trust (REIT).
  • Gold, silver, or any precious metal (a good hedge against inflation).
  • Your small business.
  • Classic cars, fine art, vintage wine (what’s your hobby?)

CBC casting “any race except caucasian”.

 

 

 

Stop investing. Zombies are taking over the world!

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In BC where I live, the savings rate is negative 8%. The average Canadian household’s debt to disposable income is 165%. We owe $477 billion in consumer credit debt (up 5.5% on an annual basis).

65% of Canadians have an RRSP and only 47% have opened a TFSA (even though you could currently shelter $25,500 worth of investments from taxes by opening one). Of the people who have opened a TFSA, 80% of the holdings are in a savings account of some kind (which actually lose money since the interest rate they pay is less than inflation).

So why is it that people aren’t saving and investing for the future? Well, if you believe pop culture, there is no future. Here is the plot of the latest offerings from Hollywood…

Oblivion – Tom Cruise is sent back to earth to extract vital resources after it’s surface is devastated after decades of war.

After Earth – One thousand years after cataclysmic events forced humanity’s escape from Earth, Will Smith crash-lands on the now unfamiliar and dangerous planet.

Pacific Rim - When legions of monstrous creatures started rising from the sea, a war began that would take millions of lives and consume humanity’s resources.

World War Z – Brad Pitt is in a race against time to stop the Zombie pandemic that is toppling armies and governments, and threatening to decimate humanity itself.

And my person favourite is the movie Elysium that I was lucky enough to work on when they shot in Vancouver. This one should be a favourite with the Occupy Wall Street crowd. In the movie the rich one percenters live on a pristine man-made space station and the rest live on an overpopulated, ruined Earth.

I find it ironic that Matt Damon plays the poor everyman who is a victim of “the privileged”. Matt Damon went to Harvard University, reportedly earns $24 million a year and lives in a 8,890 square foot mansion worth a reported $15 million. The film was shot in Canada and Mexico to avoid paying taxes.

 

 

 

Money making robots.

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What if you could buy a robot who would go off to work every day and give you the paycheck? What if this robot got regular raises at work so every year you got more income from this robot? And what if, once you bought this robot, there were no ongoing maintenance costs?

To make it even better, lets say the government taxed robot income lower than human income. Now imagine upon your death, you could give this robot to your kids where it would continue to earn increasing income and need no maintenance.

These robots exist. I own thousands of them. I bought them directly from the company that makes them. The price of the robots go up and down, but I don’t really focus too much on that, I just collect as many as I can and get excited when they mail me their paycheck every month.

The robots I’m talking about are shares of dividend paying stocks.

Let’s take a look at one “Robot” I own as an example. The company Fortis has increased its dividend for 39 consecutive years which is the longest record of any public corporation in Canada. Fortis sells gas, electricity and natural gas in Canada, two Caribbean countries, Belize and Upstate New York. It also own hotels and commercial real estate in Canada.

Ten years ago shares of Fortis were selling for about $15 and today as I write this they are trading for $33.82. The more exciting thing to me though is that ten years ago the annual dividend was $0.50 a share and today it is $1.24.

This means that anyone who bought a “robot” (a share of the company) 10 years ago paid $15 for it and is getting over 8% of their purchase price back in cash every year.

If you bought a share of the company 20 years ago, they cost $7.16 and today you would be getting over 17% back in cash dividends every year!

I am not making a stock recommendation and suggesting you run out and buy Fortis stock. I am suggesting though that you focus your investing on companies that have a long history of increasing their dividends.

Now back to collecting my robot army…

Click here to view Fortis Inc.’s dividend history.

 

Fear is sexy.

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I haven’t written anything in a while because I have been too busy with work. I have been reading every day though and one story jumped out at me that I think sums up the reason people are so confused when it comes to saving and investing.

Three weeks ago I saw headlines popping up online that said things like, “The risky move Mila Kunis makes with her money” and “Mila Kunis rotates from cash to stocks”.

The fact that it’s news when an actress decides to buy shares in a company and the headline is splashed across yahoo with the same excitement as the latest school shooting should tell us two things.

  1. People fear owing real businesses (stocks) and love real estate.
  2. People buy high and sell low.

If Mila Kunis had bought a house at 2006 it wouldn’t have made headlines even though she would have been recklessly buying in an over-inflated market which would soon lose almost half its value.

In 2009 when the stock market was low and there were great, solid companies selling at discount prices and paying high dividends, Mila Kunis thought is was best to avoid the stock market and keep her money safely in the banks (where it would lose value due to inflation).

Since 2009 many stocks have doubled in price and we are in the middle of a bull market (markets rising). Historically the stock market averages a return of around 7%. I own 3 mutual funds through my actors union. In the past year they have all returned between 11% – 13%. Almost double the average expected return.

Click here to read: Mila Kunis rotates from cash to stocks

To be continued…

Canadian house prices to remain flat for 10 years.

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TD Bank has added it’s voice to the chorus of people predicting Canadian real estate will remain flat or fall in price over the next 10 years.

Yahoo finance reports:

“The “special report” from one of Canada’s largest banks makes the case that gains in housing prices have been exceptionally strong over the last 10 years, even when accounting for a sharp drop during the 2008-09 recession. But now is the time for a bit of a payback.”

Read the full article here: Canadian house prices to remain flat over 10 years, predicts TD bank

To understand how overpriced real estate is in Vancouver, I find it useful to compare the price of homes here to those in other cities.

Click here to see the only “house” selling for $400k in Vancouver right now.

And below is what $400k will get you in another U.S. town.