The New Canadian Investor

Questrade Mutual Funds - Earn Like a Broker

2009-04-17T10:43:00.004-06:00

If you're a Canadian with mutual fund holdings, you might want to consider moving them to Questrade. Why? Trailer fees. Trailer fees are the commission that is paid to your broker for selling the mutual fund to you. This is why most brokers will not charge you for trading mutual funds - they're getting money from the management company. A bit like commission except they are usually an ongoing payment as long as you keep your money there. Obviously, if you are paying to trade mutual funds, and they're pocketing these trailer fees, you're getting ripped off by your broker.

Questrade has a different strategy. They offer a program where they'll deposit the trailer fees into your account, and charge you $9.95 for trades, instead. The headlines number is thet you'll get 1% of your holding's value, but it does vary by fund, as there are different fees and different structures. Since most people own mutual funds as a "fire and forget" type of investment, and probably only review their position annually, if that, paying for trades instead of simply owning them seems like it would be a great deal. Also, until April 30, Questrade is running a promotion where they'll pick up the transfer fees for bringing you funds in from another broker. There's also the potential to win $1000, but since I never win anything, I wouldn't consider that to be a reason to move.

If you're considering the move, you can contact me for a referral, and then you'll get $50 in free trades when you sign up.

The Biggest Mistake

2009-04-15T13:06:00.004-06:00

The biggest mistake most individual investors make is buying high and selling low. I know that this sounds dumb, but I'm surprised how common it is. I have a few coworkers who have proudly announced that they have recently reshuffled their retirement portfolios into GICs (guaranteed investment certificates). Indeed, one of the most vocal proponents of this strategy told me this about 2 months ago, when the market was within spitting distance of its (local?) bottom.

Now, if you believe the market is going to go lower before it goes higher, then cashing out what you've got and sitting until things improve is a decent strategy. But these are people have sworn off the markets permanently. They say they are not going to get back into volatile investments. So they've taken the full loss that the market handed them, and are going to make it back at interest rates that are currently about 2% annually, and might optimistically rise to 6% when the economy improves.

Worse...I don't believe they're out permanently. If they're driven by their emotions in this down market, it seems likely to me that when they look at all the money other investors are making in the next bull market, they will be tempted to get back in...probably again near the peak of the market. And so this kind of emotionally driven investing will continue to compound their losses with each cycle.

I think this is the reason for the popularity of the Buy-and-Hold strategy. It allows people to hold over the long term and so, while they won't see the big gains of people who sell during bull markets and buy during bears, they will at least see the overall long-term up trend in markets. It works if you don't chicken out, just as the contrarian approach works if you have the willpower to buck popular sentiment.

I don't know that I have any advice, other than if you don't like the market's ups and downs, you should get out during the next bull market, not now. For me, I'll continue with my current strategy of keeping my speculative holdings until I'm convinced they're not going anywhere, and keeping my retirement savings in fairly volatile, equity heavy mutual funds...they've actually only lost 25% in the bear market, and stand to gain much more when the bull returns.

Photo by Timothy Valentine, used under the terms of Creative Common By-NC-SA 2.0.

Living Within Your Means, part 1 - Setting up a Tracking System

2009-04-14T23:34:00.002-06:00

The first article in my series on living well, without breaking the bank.

While getting budget in place is very important to getting your finances in order, I think there's an even more important first step. Finding out where you're already spending your money.

There's a number of tools available for this. For the most part, I'm going to discuss Intuit Quicken, as it's the software package that I've been using since I was a teenager. There are however, some other options, some free and some not, and the same principles can be applied to them as well. If you are interested in buying Quicken, the $40 version will do nicely for our purposes, but the $93 version adds better investment management tools - as well as some basic small business tools - if your finances are more complicated than just cash and loans.

The goal in any financial tracking program is to track where your money is being spent based on broad categories, and where your net worth is headed. This information lets you know whether your current spending habits are acceptable, and also gives you a baseline to start on a budget. The simplest approach to tracking spending is to move all your spending onto a credit card that offers a spending report. There may be others, but I am only familiar with CIBC's program...any credit card with them will assign your spending to a category based on what store it goes to, a sample is shown to the right.

This approach has some failings. It does not track any spending that comes directly out of your bank account, and this might cause you to think of cash spending as "not really spending." Indeed, it only tracks a single account, so can make it difficult to tie together your total financial picture. Also, it relies on using a credit card, which can be an expensive option if you ever forget a payment or don't pay the balance.

For these reasons, I prefer the hands-on approach of a separate software program into which you enter every transaction as it happens. This gives you up to the minute data on your financial situation, which can help in making purchasing decisions. It also allows you to track all of your spending. I have discussed Quicken above, the other big commercial player is Microsoft Money - though I discourage that as I've had nothing but problems whenever my grandfather upgrades to a new version - and there are some free options such as Gnucash, Buddi, and Clear Checkbook. Unfortunately, some of the more feature-heavy online providers , like mint.com and Quicken Online, are geared specifically to the American market. I have yet to sample any of the free offerings, though product reviews are now on my to-do list.

Setting up your categories
Once you've picked your software, you need to figure out what categories to track. I suggest keeping the list to a manageable length, but still detailed enough to know where your money is going...if a catch all, misc category represents more than 2-3% of your monthly spending, you're probably not detailed enough. Also, while Quicken encourages you to set up all the details of your paycheck, I'd suggest that uncontrollable expenses like taxes and benefit deductions represent noise that will get in the way of figuring out where the money you actually have control over is going.

The big categories are easy - housing expenses, utilities, groceries. It's the smaller ones that bear some thought. Do you want to track how much you spend on your car, or is it more useful to know how much you spend on all forms transportation. A good software package should allow you to group expenses under a parent heading, so you can get more detail in your reports if you're interested. The end result is the same categories as you'll put into your budget later, so make sure they're relevant.

That's it, that's the tracking system in short. What remains now is to use it. I've made it a habit, that when I come home each day, I'll take any receipts out of my pocket and put them in the system. Takes about 5 minutes, and gives me an up to the minute picture of where I am that allows me to make intelligent spending decisions the next day. In the end, that what it's all about.

Next time: using your categories to make your budget.

The Other Half of Personal Finance

2009-04-13T14:39:00.002-06:00

I have been reflecting a bit lately on what makes a person well off. Compared to many of my peers, it seems like I am well off. They often seem to have regular complaints about having no money, and how I am so lucky to be able to go on holidays and enjoy my life.

But here's the thing. My wife and I have an income that puts us marginally below the median for 2-person families, while many of our friends...I don't know exactly how much they make, but many have at least one engineer in the family, so I doubt they're doing too badly. Additionally, we were later into the housing market, so have a larger mortgage, and have a not insignificant amount of student loans debt.

Yet we seem to be better off. Never carry a balance on credit cards, have money to do the things that we want to do, and - most importantly - on top of all of our monthly expenses, we're still able to put away $720/month into savings...mostly for short term goals like trips, but some for retirement as well.

A lot of people seem to blame their lack of funds on the idea that the government's inflation numbers are goosed to make inflation look lower than it really is. This seems to be why so many people are buying into the story told by shadowstats, despite many of his claims being soundly debunked. How often do we hear that things keep getting more expensive, while wages stay the same? The reality, of course, is that we've never had more disposable income, but it's also never been so easy to dedicate most of it to your bank's bottom line.

I have become convinced that most people's complaints about not being able to make ends meet are due to an inability to track and understand where they spend their money, which leads to owing money on their credit cards, which then creates a vicious circle where it becomes increasingly difficult to get their finances under control. I am constantly disappointed with my lack of self control in spending money, and yet, I can only think of how much worse we'd be if we didn't watch it, and just waited for the bills to arrive to figure out where the money to pay them was going to come from.

So, for the rest of the month, since I really don't have any investing news to discuss, I'll be doing a series on money management. How to turn that modest income into a comfortable, happy, lifestyle.

Gold Stock to Gold Price Ratio

2009-02-24T14:07:00.004-07:00

One of the blogs I follow, World of Wallstreet, in his post Obvious (But Original) Thought About The Gold Stock To Price Of Gold Ratio, showed the graph below, hypothesizing that since stock indices have declined 40%, the fact that the gold stock:gold price ratio is down 40% doesn't mean that they're undervalued. He points to the ratio's September 2000 trough (0.15) as evidence that they may decline further.

It's a good thought, certainly suggesting that in the short term this "reversion to mean" may not pan out the way some people are hoping. That said, I'd like to see a longer term chart - it looks to me like the early end of this chart was also up around the .5 range, and that dropped right up until September 2000. That is - the $HUI:$GOLD trough coincides perfectly with the TSX peak during the tech boom. While the NASDAQ isn't as perfect of an inverse correlation, as it was already off its March 2000 peak, its catastrophic decline also significantly accelerated in September.

The ratio then rose through the recession that followed the tech crash. This suggests to me that the ratio's decline was due to money moving into trendy tech stocks, not an overall stock market decline.

My guess - stocks are leveraged against their underlying resource price, since they have a production cost that's more or less fixed. The fact that they're trailing the recent precious metal recovery suggests that investors are concerned that precious metals may once again decline.

Also, I'd point out that while some of the decline in indices is panic selling, some of it reflects reduced profit from individual companies. But a gold miner's profit is entirely related to the price he gets for gold, so at a minimum their decline relative to the gold price should be lower than the decline of the whole index.

I've never professed to be an expert at this. And I've certainly lost a fair bit of money making bad calls on where things are going. But it still seems to me that precious metals - whether producer stock or bullion - should hold up until financial volatility dies down.

Where to live: Renting vs Owning

2009-01-17T23:15:00.004-07:00

I recently read this article on Smart Money, making the argument that renting a home, and using money saved each year to invest in stocks, was a smarter financial decision than owning a home. He brushes off pro-ownership arguments as clever uses of emotional language "throwing money away," "pride of ownership," and so on, claiming that stripped of emotional considerations, it's actually homeowners that are throwing money away.

His argument basically boils down to stocks having a real return of 7% annually over the long term while houses only match inflation. Factoring in that homeowners have maintenance costs that significantly offset the rent saved by owning, this makes renting the superior financial decision.

This clearly flies in the face of conventional wisdom, and reading his argument, I was unconvinced. So I've spent the last couple of days thinking on it and trying to determine the fallacy in the argument - I was pretty sure it had something to do with the way he threw away inflation - and I think I've nailed it down.

The experiment
So I ran my own analysis using his numbers, but this time adding inflation back into the mix. My world works like this:
- Average annual inflation: 3%
- Average annual stock returns: 10% (7% real return)
- Increase in house prices and rents: 3% (0% real return)
- Each year the homeowner must lay out 2% of the current value of his home in upkeep costs and property taxes.
- annual rent paid is 5% of the current house value
- A 4.3%, 25-year mortgage interest rate (ING Direct's current 5 year fixed rate)
- Any money saved in a given year will be put into the same stock investments regardless of which party saves it
- $1000 in closing costs for purchasing the house.

I looked at the 40 and 50 year time horizons, figuring that these represent the years around retirement, when you are most likely to be interested in your equity.

Results:
Okay, so using these numbers, it turns out that the renter will indeed finish richer. Interestingly, though, the homeowner will have more equity during years 2-6. If homes generate even a modest 1% real return, this homeowner advantage lasts to year 19.

But, I tried some tweaking of my admittedly simple model. Here's some situations where the homeowner will be wealthier than the renter:
- High inflation. If inflation is equal to the real return on stocks, (7% in my model), the homeowner has an advantage up until year 39. 1% more than stocks' real return, and the advantage lasts the full 50 years that I'm looking at.
- Rent is more than 5% of purchase price. If rent is 6.6% of purchase price, the 50 year mark is in the owner's favour. This represents a 15:1 ratio between rent price and purchase price. I consider this to be the most likely situation, since the 5% used in the article is kind of a bait and switch - he uses long term averages for the maintenance cost relative to purchase price, but only the rent to purchase price achieved during a market peak.

Effect of interest rate
My model wasn't well set up for dealing with changes in interest rates. Notably, I was kind of lazy about setting up the annual payments. Should I feel like revisiting this, version 2 will have better handling of interest rates.

Other factors
There's of course lots of other factors in here. Aside from the emotional decisions - stability, pride of ownership, etc - there's also some variables in terms of people's ability to manage their money. Most people, having made the decision to be lifelong renters, will not figure out what owning a place would have cost them, and then put whatever savings they have over than into an investment account. Most people will wind up increasing their standard of living instead, so some of my assumptions about growth on money saved each year don't translate well in the real world.

Even if stock markets continue to match historical long term averages - which is by no means certain - it's unlikely that average individual investors will exactly match this performance. While index funds make this easier, they have small but still material management fees that over the long term may kill the homeowner's advantage.

Uncertainty
I haven't independently researched the ratios used in the original article, and just accepted them as truth. Logically, I've having trouble with the idea that house prices and rents have both matched inflation, but the ratio between the two has more than doubled.

Conclusion:
The decision to buy or rent is not as clear cut as most Canadians believe. Deciding between the two, even if we stick purely to a financial calculation, requires making a lot of assumptions about how the world is going to behave in the future. The difference between the two can be significant in one model, but making a small change to one of the many variables involved, come out showing the exact opposite.

Myself, I'm still happy to own a home, and don't think I much want to sell in the near future. But this project has, I think, shown that I obsessed too much about home ownership, that delaying home ownership doesn't necessarily put you behind.

Odd Links

2008-12-31T08:19:00.002-07:00

While I continue to have little investing news to update, I did have an odd convergence of interests today, when I discovered that one of my travel photos had been linked from an article about Jack Madoff.

Aside from that, I continue to sit on my stocks. Their value has dropped to the point that I can put them all into a TFSA, which I will be doing on Friday. FR has started to recover, so I'm again feeling optimistic about the future. WEE continues to lag behind, and has pretty much flattened around the 50 cent mark. I'm looking forward to the next financial report, as I think their revenue growth should help the stock price.

Where's the Bottom?

2008-10-06T10:01:00.002-06:00

I've been absolutely pummelled in the past month. My currently holdings have all but collapsed. I'm frustrated, and confused, but I'm not prepared to sell, I guess, since I still think that the companies I own are solid, have a good base of cash to get through the credit crunch, and as a result, are massively undervalued. FR is being discussed by a few analysts as a prime takeover tarket, which would be a relief to me, as it means I should at least get my money back out of it. Overall, as far as I can tell, they're basically victims of a market wide selloff, and that's got me jittery.

I've been expecting a bottom for probably about 3 months, but things just keep getting worse. So there goes my instincts. It's possible that this could be the greatest crash since '29. I have scoffed at this idea for months, as overall things seem to be humming along in the real world - people still have jobs, still pay their bills - not like the 30s, when a quarter of the population was out of work, and those who were employed saw their incomes decline by 42%. But marketwise, things are getting to the point where I'm just a little panicky. I was reading recently that the Japanese exchange had PE ratios in the range of 2 during their crisis in the 90s...that's scary.

But maybe my panick is a good sign. I keep envisioning the emotional charts - where people get the most frustrated at their investments just as things start to turn around. But I'm not over hopeful anymore, I just keep waiting for the other shoe to drop, as it were.

Anyone out there more optimistic?

A Disappointing Update

2008-09-17T10:26:00.000-06:00

I haven't blogged much lately. I've been somewhat depressed and embarassed by my current situation. My current holdings have declined by as much as 50% - currently sitting at 45% - from their book value. Add to that a screw up with my FNX puts - I could have made about $2000, instead I panicked and sold off at a $450 loss. Such is life.

Basically, for the first time since I started, my losses on currently holdings have outstripped my gains on closed positions. I haven't done the math yet - I'm a little scared to - but I figure it must be over $1000 net, which isn't insignificant to me. I've also had some financial interruptions elsewhere, meaning I've had to pull out some cash from my investment funds, making it an even bigger problem, because I'm not in a position to buy more at what I consider to be massively discounted prices.

But I remain optimistic. Wavefront (TSX-V:WEE) recently made an announcement that they now have purchase agreements for 106 tools. Their break even point is estimated to be between 100 and 110 tools, so once the installations are done, they'll be pretty close. Their news release figures all 106 currently on tap should be installed before the end of the calendar year, making 2009 a big year for Wavefront.

First Majestic (TSX:FR) has declined along with the price of silver. Again, a company that is increasing production, and I figure that in the not too distant future, they should be on solid ground even at reduced prices, so it seems again to be a mistake to mark them down to the extent that they have. These two holdings - the only two I currently have - are very different. Wavefront has a patented technology, so they're able to set the price and it doesn't change, it's just a matter of making the sales, which they seem to be doing, albeit slowly. First Majestic produces a commodity, so has no problem making sales, but is at the mercy of the market for how much they can charge.

As a result, I've been unwilling to sell off at reduced prices, because I sure don't want to be sitting on my cash when the rebound comes. That was my mistake with FNX - I let my fear induced by current price movement to talk me out of my holdings, and as a result missed a big opportunity.

Investment Lessons from the Blackjack Table

2008-08-25T08:40:00.003-06:00

Sometimes, I play blackjack. It's the only type of gambling that I've ever really been interested in, due to the surprisingly small house advantage - I don't have the skill to count cards, yet the odds are still not stacked too high against me. It occurs to me that there are a lot of similarities between blackjack and stock trading.

The main thing, I think, is that odds are in blackjack that at some point in the evening, you'll have more money than you started with. If you walk away from the table at that point, you've won - just not much. On the other hand, if you stick around waiting for the big payout, odds are good that you'll wind up behind, but there's that tantalizing chance that you'll walk away rich.

I sold my Timminco stock for a $400 profit, 9%. This is not the most I could have sold it for, and if TIM can deliver on their promise to make UMG-Si at $10-$15/kg, it could easily turn out that I missed out on $10 000. But, like blackjack, it's probably best with a wild swinging stock like this to walk away while I'm up. There's every possibility that they will be unable to deliver on their promises, in which case the company will only be worth a fraction of its current value.

I've found this to be true in my other speculative holdings. I have a great deal more confidence in the ability of FR and WEE to deliver on their promises...yet in both cases I've let slip chances to make a 10% profit and walk away, and in return, I'm currently sitting down 22% on the two.

So, maybe I'm a wimp...maybe I really don't have the balls of steel that it takes to make the big returns. On the other hand, maybe I'm that smart player who can consistently take small profits and run with them. After all, if I could consistently turn 10% on a trade in about a week, I could generate massive annual gains.

Anyway, for better or worse, TIM is closed, and I'm looking for the next one.

Update:
In the time it took me to write this post, TIM dropped from $16.30, where I sold it, to $15.00...within pennies of my buy point. Am I feeling happy right now? I think so.

Stress Much?

2008-08-12T15:17:00.003-06:00

So my resource intensive portfolio has been melting down of late. FR is now down 23%, WEE down 34%. It's been a pretty nasty couple of weeks.

I keep toying with the idea of selling, but I just feel like these prices are insanely low for these companies, so I'm not prepared to do so. Maybe I'm crazy, but I still think that despite falloff in resource prices, they're still companies with a lot of growth potential. I'm particularly annoyed because these are companies which didn't benefit all that much from price runup, but seem to be taking the full brunt of the downturn in resources.

Anyway, still in them. Don't really want to sell when they're down...not while I'm still confident in their futures.

On another note, I opened a position in Timminco (TSX:TIM) today. TIM makes solar grade silicon, and was a star performer on the TSX last year. This year it had been performing well, but its second quarter earnings missed expectations, and led to a 25% drop in value. While that's cause for worry, I read the earnings information, and it seems like it it's not all that bad. I don't think it fundamentally changes the bright future for the company, which is what its stock price is largely based on. Pretty much the whole drop was in overnight trading, and today it held steady with high volume, so I don't think I'm the only one who smells a deal.

BMO Option Position Closed, WEE Releases Earnings

2008-07-31T16:10:00.006-06:00

Today, I closed my option position in BMO. I had 10 call contracts expiring in August which I'd bought when the price was 0.30, and sold today for 1.65, a 450% profit. After commission, that means I pocketed $1310.10. Not too shabby for such a small risk, but still a bit disappointing given that this time last week had them trading around 2.50. I'd intended to hold until tomorrow, since I expected the stock to peak on its dividend record day, but was just getting to jittery and worried about it.

Whatever, you win some, you lose some, and some...you just win less than you could have.

So that leaves me with the same stock holdings I've had for a while. BMO, FR, WEE. I doubled down on WEE yesterday, buying an additional 500 shares at 1.90.

Today, WEE released their 3rd quarter financials, and I'm not sure what to make of them. From all the news releases recently, I'd expected to see an increase in revenue, and there wasn't much of one. Their losses continue at much the same pace as they've been for the last year. One bright spot was the mention of their PowerWave's performance at boosting oil production. In one field where they are demoing the technology, production is now more than 80 barrels per day higher than when it was installed, and almost double what production forcasts would have expected without the PowerWave. So that bodes well for future sales.

The company remains in a great cash position, thanks to recent equity offerings, and 9 million brought in from exercised warrants this quarter. So there's no concern about the company going under for many years. So, while I was a little disappointed by the quarterly figures, I'm still liking the company as they've got a great technology, and enough money to get the product to market.

The Stock Market Appears to be Broken

2008-07-30T09:12:00.003-06:00

Okay, call me crazy, and I know you will, but something seems wrong here.

Because of the size of the option bet I have on BMO right now, I've been watching its stock performance quite closely. Given its dividend payment on Friday, I'm counting on it to outperform financials this week.

But today, it's acting oddly. Driving me mad, actually. The financial sector is pretty much universally up today, but BMO is not. That, in itself, doesn't really mean anything's broken...just not going the way I planned. But what is broken is that BMO is up about 2% on the NYSE, while being down about 0.3% on the TSX. They are otherwise moving together. This is the same stock, so the difference between the two's performance should represent only change in exchange rate, which is not the case here.

Of course, the two prices aren't linked directly, but are connected in that large institutional investors could buy on one exchange and sell on the other if the gap was big enough to make it worth their while.

Anyway, pissing me off, but what else is new. Still hoping for good performance going into Friday.

Sell or Hold?

2008-07-25T10:18:00.004-06:00

It's been an emotionally intense week. After last week, when BMO continued to drop and I was worried about whether I'd recover any of the $320 I'd spent on August 48 calls, the stock shot up. Too fast, I would say. By the end of Wednesday, I was almost a full dollar into the money, and my calls were worth around $2500. But I had this target...I expect a peak next Friday, so I held off on selling them.

I'm still deliberating on whether or not that was a mistake. Thursday saw all of Wednesday's gains wiped out, dropping my calls by half their value. Today has been very up and down, the value of BMO has been sidelining, occasionally going down slightly, but generally hovering between $47.50 and $47.80. I have a history of holding onto stocks that have had good gains, only to see all those gains wiped out, ending in a loss. On the other hand, I sold my last option bet for a small ($400) profit, only to see them worth thousands more a week later.

So I'm really torn. I'm still telling myself that next Friday is the day. And if I've still got them, I'll definitely sell them then for whatever I can get. But getting that far without pulling my hair out will be a challenge.

Another Option Bet

2008-07-03T14:26:00.003-06:00

The past month has continued to be fairly dull. I am hanging on to my positions in FR, WEE and BMO. FR and WEE have recovered from my earlier losses and are now hovering around my purchase price (I purchased FR at several different price points, so it is profitable for me at $4.71). BMO did the reverse, and so my portfolio continues be doing little for me.

But with the BMO drop, I saw an opportunity. August 1 is the day of record for the next dividend. At today's value, the $0.70 dividend is the equivalent of 6.5% interest, with lower taxes. So it seems likely that the stock price will recover significantly before August...the last dividend date saw the price spike up to $52. So I bought some August calls, with a strike price of $48. Currently, they're trading for peanuts - I paid $0.30, and they're currently at $0.20, but it seems like a good deal.

I like calls for a few reasons. They magnify the effects of normal market movements, so you can actually make a significant amount of money off of them, with limited downside. For instance, even in the worst case scenario that I hold them to expiry and they never go into the money, the most I can lose is $300. On the other hand, if the price were to repeat the last spike - to $52 - I would take home $4000. Somewhere in between would be fine by me.

It's Bike Month

2008-06-05T10:03:00.003-06:00

I've been a bit delayed in getting my bike out this year - I've been deferring some major maintenance - it's needed a new drive train - on it for a couple years, and since I walk to work, there's not much financial benefit to biking. But I love my bike, and can't go the summer without riding, so I buckled down, spent the money and replaced my chain and gears the DIY way, and it now works better than it has in years.

And not it's got me thinking about bikes as an investment. Well...owning a bike is an investment to start with, particularly when it's an alternative to recurring fuel or transit costs. But with gas prices on the upward march, and increased concern about climate change, might there be some buying opportunities in the bike sector.

So I've been searching for bike related companies. This seems to have lead to a bit of difficulty. It seems like most manufacturers and dedicated retailers are privately owned. The ones that are publicly traded tend to do bikes as one of many things...and in a general economic downturn, I'm not sure that making or selling consumer products is generally a good place to be looking.

Shimano, which dominates the parts industry, is publicly traded, but only on the Tokyo exchange. While I'm not restricting myself to Canadian companies in this search, I'm actually not even sure my broker is set up for trading in Japan.

Bah...frustration.

Anyone know of any publicly traded bike manufacturers in North America?

Profit and Loss

2008-05-16T09:38:00.002-06:00

By many measures, my portfolio is a risky one. My relatively small investment fund means that I can't reasonably hold enough securities to have a truly diversified portfolio. Of the stocks that I do hold, 2 of the three are young companies with no history of profit. And I have been seeing some decline in both of them.

But good news on that front. One of my largest holdings, First Majestic Silver Corp (TSX:FR) reported its first quarter earnings today. One million dollars.

The price reaction seems positive so far, finally breaking through the 4.22 resistance where it has been peaking lately. This also means that my performance since I started this blog has moved into positive territory by about $200 (representing a 2% gain). Time will tell whether it can maintain this momentum, but I now feel like my confidence that this company would rebound was well placed.

Ooops. Read the Manual.

2008-05-15T14:39:00.004-06:00

Interesting. I made a mistake when I was picking stocks to watch with regards to deciding whether swing trading was right for me. My mistake was that while I found to stocks (TSX:DWI and TSX:IGM) that were showing trends, neither was in the buy (or short) zone in between the 10 and 30 day moving averages. Good thing I'm just watching and not buying.

Now, both of them are in the process of pullbacks, moving in the opposite direction of the trends I identified in my last post. Which is good, actually kind of confirms the system. Now what I have to look for is for the pullback to bottom, and hopefully reverse within trading zone. I think I may need to come to a better understanding of ADX before looking to actually trade using the swing trading system, as I am at a loss for why the ADX is going up for DWI and down for IGM. According to swing-trade-stocks.com this would mean that the uptrend for DWI is strengthening and the downtrend for IGM weakening, but I'm just not clear on why.

Lots of factors to figure out.

A Decision

2008-05-12T14:38:00.001-06:00

Dull as it is, I've decided to stick with my current holdings. I think once I do decide to sell, I might try out the swing trading stategy I discussed on Friday, but before I jump in with both feet, I'll keep a watch on a few stocks that I would consider based on that strategy.

The two that I'm watching are Dragonwave (TSX:DWI), and IGM Financial (TSX:IGM). I guess it's clear by now that I'm very focused on the Canadian market. I've concluded that I don't really want to be taking any currency risk at this point in time.

I picked those two from a few that came up use stockchart's stock scanner. DWI showed up as an uptrend, while IGM was showing as a down trend. Of the options, they were the two that seemed to exhibit the patterns that I would be looking for in a swing strategy.

The difficulty I have with technical strategies is that technical patterns are easy to see in hindsight, but are, at best a guessing game while they develop. Patterns with opposing meaning can appear very similar before they complete.

So, I'm not risking any money on it, but if the stocks perform as I'd expect them to, I'll definitely try swing trading on live trades next.

Finding a Strategy

2008-05-09T16:21:00.003-06:00

When I started on stocks, I had intended to trade them regularly in order to lock in profits and move on to the next opportunity. It hasn't really worked out that way. Currently, I'm hovering around the point where I break even since I started this blog. I believe I'm up slightly due to the BMO dividend, but I haven't recieved it yet.

So today, I started reading a bit. At first, I was mainly interested in how to read candle charts, as that had not been well explained in my class. But the website that I linked also discussed one type of trading strategy - swing trading - which makes a lot of sense to me.

Essentially the strategy revolves around identifying stocks that are in an uptrend (or downtrend for shorting purposes), and buying during "swings" in the trend...slight corrections in the middle of a larger trend.

So, I took at look at the technical strategy outlined there, and compared it to my own current holdings. While the news is optimistic on two TSX:BMO and, I think, TSX-V:WEE, it's a little less so on TSX:FR. Indeed, the chart seems to show that its recent recovery could just be the first swing in a downtrend.

So I'm left with a dilemma. I still think that FR is a solid company, and will come back, but I might potentially make more money if I were to cut my losses and try to catch a stock that is actually moving up right now.

There's conflicting emotions, too. (Anyone who can trade stocks completely on technical aspects must have balls of steel.) On the one hand, I am tired of holding on to the same three stocks hoping for good things to happen. But on the other, I am hesitant to sell stocks that I am optimistic about just because they've hit a rough patch.

Markets are closed for the weekend now, so I've got a few days to mull those thoughts over. It's really a decision between finding and sticking to a strategy, whether that be the buy and hold stocks with good fundamentals, or frequent technical trading. We'll see how I feel about it on Monday.

A Better Day

2008-04-02T15:02:00.000-06:00

Finally, an upswing. After a depressing 4 days, watching with fear as my investments just seemed to dry up, I'm seeing some positive numbers again. First Majestic (TSX:FR), the silver mining company that was my first buy in the stock world, has been pummelled ever since the announcement of a new private placement. I bought initially for $5.10, and doubled my position at $4.67. Yesterday, it had closed down to $4.20. At that price, I was considering buying even more of it, but hesitated since it would have all been on margin, and I wasn't comfortable with that. It's bounced a little today, and I remain confident in the company. Its behaviour the past week seems to be following the price of silver and other commodities, which I think is unreasonable, as their production has been climbing so quickly.

Other news - I made my first dabbling into options. It had been my intention when I bought BMO shares to use them to bring in a bit of extra cash by selling covered calls on them at prices that would see a profit. My break-even point on BMO is $46.95, so today, when it was trading in the high $47 range, I decided to sell some July calls with a strike price of $52. After commision, it netted me $125. So, worst case scenario is that they get exercised, and I turn a 13.4% profit in less than 3 months, more if I get my dividend...best case scenario, of course, is that the price holds a little under $52 until they expire, and I get extra money for nothing.

So, currently, I'm down roughly $100 since I started trading. While I'm hardly pleased with that result, I am learning quick, and have high hopes.

Update - Picking a Brokerage

2008-04-02T13:32:00.004-06:00

The first thing I did when I started this blog about a month ago was to go through and pick a discount broker. I ended up going with Questrade, and, despite opening the account being a painfully slow process, I've been pleased with them.

Yesterday, they announced a change to their commission structure. And it's a good thing. Under the old system, you had to pick between either the 1c/share ($4.95 min) plan, or the $9.95 flat rate plan. You could only change on the first of a month. While this was still a great deal, there were some problems with it. The big one was that if I, as someone who normally makes small trades, were to find a 10c penny stock that I wanted to buy 10 000 shares of, I'd end up paying $100 in commission on it.

Some, my girlfriend for instance, might think that dissuading me from reckless behaviour is a good thing, but I like choices are better. The people at Questrade seem to agree with me, and they changed to a single fee structure: 1c per share, $4.95 minimum, $9.95 maximum. Options commission remains at $9.95+$1/contract. It's simple, it's cheap, and it should suit almost everybody. I'm impressed.

Fighting the Emotional Response

2008-03-28T15:50:00.004-06:00

I think one of the easiest traps to get into in this game is to watch your money fluctuate daily. On the one hand, you need to keep track of how things are performing, but on the other, it's an emotional roller coaster as things bounce up and down and all around.

In short, this week I wiped out my previous gains, and then some. I had made $600 on Wavefront (TSX-V:WEE) last week, when I sold for $3.18 a stock that I'd bought for $2.10. Since this appears to be a company with great growth potential for the future, I bought back in at $2.90. Now it's $2.70. I also jumped on to Bank of Montreal (TSX:BMO), a stock I've been considering for a while. Unfortunately, while waiting for my account with Questrade to open, I missed out on some of its best bargains, and the price has backed off a good 5% from where I bought it. And lastly, my holdings in First Majestic (TSX:FR) continue to languish, and despite a small rally, I'm still down a couple hundred dollars on them.

So the problem I'm having is this - I'm confident in all of these companies. I believe they're great long term holdings. But in the short term, I'm watching my market value wither, and I can't help that gut response "sell...it'll be cheaper later." I think there are times to sell losers - when there's reason to believe that the market is near the top of a cycle, or if new information is comes out that doesn't look good. But this isn't one of those situations. The market is at least mid-way down, and I personally think it's closer to the bottom than that, so selling even stock that largely moves with the index - BMO - seems to pose an equal risk to holding.

And WEE and FR could be poised for a breakout year. WEE's technology is now market ready, and they made a major sale to a Texas oil company last week, so I see no reason to believe more won't be on their heels. FR's production is way up, and it would not be unreasonable to expect them to start posting profits this year. There's a Warren Buffett quote to the effect that stocks are the only thing that people start buying as they get more expensive. I'd rather be in now than wait for the next announcement.

So, I fight the emotional response. It doesn't make sense to sell solid companies just because they're declining in the short term. But it's sure a tough urge to fight.

Ups and Downs

2008-03-19T12:43:00.002-06:00

I have concluded that markets are psychotic. I suppose this was obvious before, but this is the first time I've had money in more volatile investments where it becomes really obvious.

So, my three holdings up to today were First Majestic Silver (FR), Wavefront Energy (WEE), and iShares Gold Index Fund (XGD). Yesterday, the market was expecting the US Fed to cut interest rates by 100 basis points, and it only did 75. This seems to have caused some kind of major overcorrection in gold prices, and XGD has dropped significantly over the past couple of days. FR has been going downwards ever since it made a private placement a couple weeks ago, and today dropped below 4.60.

On the flip side, WEE announced a major sale of its technology to a Texas oil company, and went from 2.59 at open to 3.56 at its peak today. It's now bouncing between 3.22 and 3.30. While this one was great for me - it hit my sell price of 3.18 around noon and leaving me with a $600 profit on a $1600 investment - in just two weeks - I think that perhaps this is my greatest confirmation of market psychosis. None of the news releases that I found seemed to indicate the value of the deal, but I'm having a hard time picturing it increasing the company's worth by 50%. More if you note that it also posted some hefty gains yesterday.

So here's what I'm trying to figure out - when do you bail on a losing investment. I'm still confident that FR will come back once the market's had a chance to digest 8.5 million shares, but XGD I'm iffy on. I bought it based on some discussions that while gold was in record dollar territory, it was a long way off its inflation adjusted highs. However, because gold is so high, I'm not confident that holding it will come back if I hold onto it in the longer term.

I'm having a hard time pegging exactly what makes gold tick. I would have thought a rate drop of 0.75% would have been good news for gold. But it's dropped a lot in the wake of it. So I've got some reading to do, and if I actually have any readers, would appreciate anyone's thoughts on where gold is going from here.

Banks? Good Value?

2008-03-14T14:37:00.005-06:00

I'm currently thinking that, despite all the market turmoil at the moment, that it really might not be such a bad time to be starting out in the investment world. I mean, the market has fallen significantly, so there should be some good buys around, if only I can accurately gauge when things are near the bottom.

So I'm looking at the banks, which have been very hard hit by this credit crisis. Bank of Montreal (TSX.BMO) is off 45% from its 52 week high, as is CIBC (TSX.CM). The much better performing ScotiaBank (TSX.BNS) and Toronto Dominion (TSX.TD) are down around 20% from their highs. Price-Earnings ratios for most are in the 10-12 range - CIBC is the exception, with a PE of 22. The historical average for PE is 16, so it's looking to me like there just might be a bargain to be had. Nothing I've read has suggested that these banks might be going under, so when the recovery comes, they should go up quite a bit. Right?

The problem with using PE to base your buying decisions is that it relies on earnings remaining fairly constant. Right now, the professionals seem to be saying that bank earnings are unpredictable, and it would be a good idea to instead look at price-book value ratio. One article I was reading suggested that they're still overvalued using this ratio, when compared to other market troughs.

So I'm not sure what to think. I'm waiting until I get an account open with a lower-cost broker - I decided on Questrade - before I buy anything else, since the TD Waterhouse commissions really hurt potential profits, and do nothing but increase the pain on losses. But I think that if the banks seem to have flattened out by the time that's complete next week, that I'll buy into one of them, I'm currently leaning towards BMO, but I need to look into it further.

On Private Placements and Warrants

2008-03-06T11:49:00.005-07:00

Well, just last week I started buying into some stocks, two specifically, both ones that had been discussed in my investment class, and, after I'd done some more research, appeared to be good buys. One is First Majestic Silver Corp (TSX:FR), a small silver mining company that is rapidly developing mines in Mexico. The other is Wavefront Energy and Environmental Services (TSX-V:WEE), a company that has developped a patented technology for better distributing fluid injected underground - the major upshot of which is being able to extract significantly more oil from depleted wells.

Yesterday, both of them made announcements that had to do with private placements, and warrants, so now seems as good a time as any to share what I've learned about those.

What is a private placement?
Since this blog is about being a beginner in the investment world, and I'm expecting any readers (should there be any) to also be beginners, some explanation is in order.

Essentially what happens is that new shares are created and sold to raise capital. It's not a public offering, you have to be invited to get in on it, and usually that only happens to people and companies with deep pockets. Additionally, most private placements include warrants.

So, then, what's a warrant?
A warrant is a type of options, and from the holder's perspective is a lot like a call. They allow the warrant holder to buy a share at a fixed price for a fixed amount of time. The difference - aside from warrants being free as part of a placement - is usually the length of time, and the source of the shares. When you buy a call on the options market, usually the longest ones expire in 6 months, while warrants are typically good for 1-3 years. Then, when you exercise a call, you are just buying existing shares from someone else, and they lose money on the deal, whereas if you exercise a warrant, new shares are created by the company and sold to you...meaning that even though you're probably buying them at below market value, the company still raises extra capital when they're exercised.

Some warrants are traded on the markets as well.

Make sense?

And what happenned yesterday?
Yesterday, First Majestic announced that they were entering into a private placement with several underwrites, including CIBC World Markets, Blackmont Capital, Cormark Securities, and GMP Securities. They will sell those two companies a total of 8.5 million shares at $5.35 per share. One warrant will be issued for every 2 shares, with a strike price of $7, and good for 2 years. Before this announcement, FR had been trading at $5.65...great news for me as I'd bought it last week for $5.10.

So what's it mean...basically it seems to mean that I'm not rich enough to make the serious money. More specifically, what it means in the short term is that the stock will likely decline...that's a lot of extra shares out there diluting the value of the company. I'm not sure how low it will go, it opened this moring at $5.14, and has hovered around there for a few hours so far. Only one trade was below my own buy in, at $5.07, so I may be alright. Also, the effects of warrants are interesting. In my class, we've looked at a couple of stocks with outstanding warrants, and what seems to happen is that the big players who hold the warrants start shorting the stock when it hits their strike price, causing the stock to drop, because they have insurance that they won't lose money on the deal if other trading manages to counteract the short. Since the strike price is $7, this would still be a significant profit for me, so I'm not all that hard done by. However, when I got into FR, I was expecting it to be a quick turnaround...maybe a month or so, as it was significantly undervalued and looked poised for a breakout. Now I'm expecting to have to hold for several months to see the gains I wanted.

With Wavefront, the event was almost the exact opposite. Wavefront had previously concluded a private placement, and has outstanding warrants as a result. Their announcement was that because their 20 day, volume weighted average closing price was above $1.50/share, all warrants - which had previously had expiry dates of either Dec. 24, 2008, or January 31, 2009 - had to be exercised within 30 days.

I'm new at this, so exactly what this one means required a bit of research. Essentially, it's a good thing, because removes the warrants from circulation, which, as previously discussed, allows big players to play with the stock price with no risk. Share dilution - the new shares created when existing warrants are exercised - already shows up on the financial statements, so the share price should already be taking into account the existence of these shares. So, the effect of this should be negligible or good. And today's results seem to confirm my understanding, as the stock is continuing to slowly increase.

On the chart below, you can see the overnight effects of this news:

Picking a Discount Broker

2008-03-05T23:18:00.014-07:00

I've been a TD customer since I was a child, and have had a discount brokerage account with TD Waterhouse since I first bought mutual funds 7 years ago. Until now, I'd only ever used that account to trade in TD mutual funds, and saw no commission. Now that I'm branching out, I've quickly realised that for investors with less than $50k, and fewer than 30 trades last quarter, it costs a wopping $29 per trade. Since I'm starting out small with trades around $2000, that means my stocks have to go up 3% just for me to break even, clearly not an acceptable situation.

So I'm in the market for a new broker. As it turns out, picking a broker is like picking a long distance plan - everyone has a completely different fee structure, so you have to guess at your useage in order to pick the cheapest. I've laid out the prices I expect to pay as a beginner in the spreadsheet below. For other types of investors, there's also a summary over at the Stingy Investor.

If you find the spreadsheet confusing, you're not the only one. It's my attempt to present the complicated fee structures as consistently as possible. Basically, unless you meet the discount threshold, you will never pay less than the minimum trade cost.

Price isn't everything, research tools are also important, so I'm going to have to give some thought to that as well, before making a decision

Types of Investors

2008-03-01T12:54:00.003-07:00

From what I understand, there's three broad groups of investors in the market:

Long-term Investors -
These sorts look at the fundamentals of a holding and buy for the long term, weathering out the ups and downs in order to see long term gains. Most consumers seem to long term investors, and it's certainly the mentality that's pushed by the financial services industry. The good thing is that over long periods of time, stocks and other investments do rise, so for things like retirement funds, long-term investing does work.

The downside is that because long-term investors hold on through the down cycle, they have to see higher returns on the up side in order to arrive at the same place as others. In recessions, markets usually lose around 30% of their value, and have lost as much as 50%, so when things recover, long term investors need to see a gain of 42%, and as much as 100% just to get back where they started. Another problem, particularly with small individual investors, is the panic psychology...many of us, and I include myself here, will panic when we've lost 10%-20%, and end up selling off, and then missing the recovery. This has been one of my biggest problems in my past dealings with mutual funds, and something I'm hoping to avoid going forward.

Traders -
Traders keep an active watch on the market, look for bargains, and then sell when they've seen the return they're looking for. Some traders also look for overpriced stocks to sell short, and again, cover them when they've seen their target return. From what I know, this involves taking into account the fundamentals of a company, as well as technical analysis on how it's trading. I'll discuss what I've learned about analysis in another post.

Speculators -
These are your high risk, high reward types. There's a lot of grey space between trading and speculation, but basically what makes a speculator different is that they completely discount the fundamentals of a company, and focus entirely on short term movements in the market.

Myself, I'm aiming to be more of a trader than anything else. Shorter term profits, hopefully, but still keep track of the fundamentals of a company, so if it doesn't go up as expected, I can confidently hang on until it does.

The Back Story

2008-02-29T11:36:00.004-07:00

I have long felt that I'm under educated when it comes to investing and managing my savings. I have some vague understanding of stocks and mutual funds, but couldn't tell you how to judge a good buy from a bad one. As a result, I have had mixed results with the mutual funds I've held in the past, tending to lose money almost as often as I profit.

So, when my grandparents gave me a large gift for my 25th birthday, I finally decided it was time to do something about it. My first step was to sign up for an investment course. I decided to skip out on the free seminars provided by the banks, figuring that they exist to push their own products, and signed up for a course offered by the University of Alberta called "The Art and Science of Investing." I'm now halfway done the course, and have received far more information than I would have thought possible in 6 2-hour sessions.

Now it's time to put some of this new knowledge into practice. I'm starting this blog to share what I learn, keep myself motivated, and hopefully help other beginners.