ScottSemple.com » money

Stay the Course

Scott — Thu, 09 Jul 2009 20:34:45 +0000

I’ve always done my best work when I’ve had to come from behind. You need that sense of urgency. You need that heightened state of anxiety, that state of awareness and focus, to get your creative juices flowing. That’s when you dig deep and find solutions. It’s a condition that plays an important role in business; it’s what creates new products, new ventures, new ways of doing things.

— Jack Stack, author of The Great Game of Business (Full article here)

No related posts.

Did You Buy, Sell, Short or Just Spectate?

Scott — Thu, 09 Apr 2009 05:51:01 +0000

Statistics from a well-known company’s 2008 annual report:

2008 Company Highlights

Earnings were $18.1 billion, the third highest in Company history

Revenues grew 6% to a Company record of $183 billion

Global revenues grew 13%

Infrastructure and Media segments grew operating profit 10%

Total equipment and services backlog grew to $172 billion, an increase of 9%

Services grew 10% with a backlog of $121 billion

Industrial organic revenues grew 8%

Invested $15 billion on the intellectual foundation of the Company, including products, training, marketing, and programming

Filed 2,537 patent applications in 2008, an increase of 8%

Named the 4th most valuable brand in the world by BusinessWeek

Guess what Mr. Market did to the stock price…

No related posts.

The Value of Growth

Scott — Wed, 18 Mar 2009 22:23:43 +0000

…under many commonly encountered strategic situations, growth in sales and even growth in earnings add nothing to a firm’s intrinsic value. This statement seems to contradict an article of faith about a company’s sales and profits—[that] growth is good. However, as we explained earlier, growth on an even economic playing field creates no value. It will be useful to review why. Growth in sales that finds its way to the bottom line (net income) would seem to imply that there is more money available to investors. But growth generally has to be supported by additional assets: more receivables, more inventory, more plant and equipment. These extra assets that are not offset by higher spontaneous liabilities have to be funded by extra investment, whether from retained earnings, new borrowings, or sales of additional shares. That cuts into the amountof cash that can be distributed and thereby reduces the value of the firm. For firms that are not protected by barriers to entry and thus do not enjoy sustainable competitive advantages over their rivals, the new investment produces returns that are just enough to offset the costs of the new investment. The net gain is zero.

— Greenwald et al, Value Investing, p.42

HEADLINE: "Experts: Recession Turning into Depression"

Scott — Wed, 11 Mar 2009 03:32:13 +0000

“WASHINGTON — People are starting to make nervous jokes about pulling their money out of the shaky U.S. banks and stashing it under their mattresses instead.

But the banking crisis is no joke.

It is real — so real it risks turning the emerging recession into the biggest economic nightmare since the Great Depression of the 1930s.

Not since the Great Depression have U.S. banks been so weak as the economy entered a tailspin. Banks are trying to strengthen themselves by cutting back loans to reduce their risks. But that is creating a “credit crunch” that makes the economy even weaker, because the crunch is denying many companies the money they need to conduct to expand their business.”

— From The Seattle Times, published Sunday, December 16th, 1990

Sowing Seeds: The Economy is Irrelevant

Great Gains, Greeted by Yawns

Scott — Tue, 03 Mar 2009 17:49:02 +0000

“Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

— Warren Buffett, in a letter to shareholders for Fiscal 2008

HEADLINE: "Buffett Admits Mistakes"

Scott — Tue, 03 Mar 2009 16:43:15 +0000

Uh, folks… He does that every year in every annual report… I guess it’s true that those who don’t study history are doomed to repeat it. And journalists that can’t read further back than 12 months are doomed to look foolish. Related Posts Did You Buy, Sell, Short or Just Spectate?

Did You Buy, Sell, Short or Just Spectate?

Your Future or Your Present?

Scott — Fri, 06 Feb 2009 04:29:23 +0000

“Once you realize that changing the mount of money you need to live on can dramatically increase your chances of success, you have an important choice to make: How much are you willing to sacrifice for the business?”

“One surefire way to determine if a bootstrapper is going to succeed or not is to check out how she changes her lifestyle when she starts the business. If everything is first-class — the office, the car, the mortgage, the vacations — then my bet is that the entrepreneur is too focused on taking from the business and not nearly focused enough on building it.”

— Seth Godin, The Bootstrapper’s Bible

Bootstrappin’

The Fourth Dimension

Scott — Sun, 28 Dec 2008 00:33:31 +0000

The fourth dimension of any stock investment involves the price-earnings ratio — that is, the current price divided by the earnings per share. In the attempt to appraise whether the price-earnings ratio is in line with a proper valuation for that specific stock, trouble begins to arise. Most investors, including many professionals, who should know better, become confused on this point because they don’t have a clear understanding of what makes the price of the particular stock go up or down by a significant amount.

This misunderstanding has resulted in the loss of billions of dollars by investors who find out later that they own stocks bought at prices that they never should have paid. Even more billions have been lost as investors have sold out, at the wrong time and for the wrong reasons, shares they had every reason to hold and which, if held, would have become extremely profitable as long-range investments.

Still another result is one that, if it happens repeatedly, will seriously impair the ability of deserving corporations to obtain adequate funding, with all that this could mean in a lower standard of living for everyone: Every time individual stocks take sickening plunges, another group of badly burned investors places the blame on the system rather than on their own mistakes or those of their advisors. They conclude that common stocks of any type are not suitable for their savings.

— Philip A. Fisher, Common Stocks & Uncommon Profits (1958)

Locking in Losses: You May Not Want To

Scott — Thu, 18 Dec 2008 01:43:23 +0000

ME: “Is there a mandatory waiting period between selling a stock (with the sole intention of locking in the loss) and then buying it back (if it’s a stock you have long-term faith in)? Know what I mean? Is there a minimum waiting period as far as CRA is concerned?”

ACCOUNTANT: “Yes, there is a minimum waiting period. If a security is sold and then repurchased within 30 days, CRA considers any loss to be “superficial”. Superficial losses cannot be claimed and are, instead, added to the cost base of the security.

Keep in mind that losses on selling securities are, almost always, considered a capital loss. A capital loss cannot be used to offset other sources of income. It can only be used to offset other capital gains. If you have no capital gains in the year of the loss, you may carry forward the capital loss until you do. Capital losses do not expire.”

And then I started thinkin… “All good, but what if you sell and 30 days later the stock or fund is way higher? How to determine if it’s likely to do that?” Depends how much you’ve lost relative to what your tax savings are. So…

At a Marginal Tax Rate of 40%:

A $1,000 investment that locks in a loss at $900 will save you $20 in tax. (A $100 loss at an MTR of 40% generates a capital gains tax savings of $20. (Only 50% of capital gains are taxable.))
A $1,000 that locks in at $800 saves $40 in tax.
…at $700, $60.
…at $600, $80.
…at $500, $100.

So how much risk of appreciation is there in the 30-day window where you don’t own the stock you want?

$20 is 2.2% of $900. Is it likely that your investment could rebound more than 2.2% in 30 days? If so, then the tax savings aren’t worth it, because your cost to re-buy the stock 30 days after selling will be more than $920.
…5% in 30 days?
…8.6% in 30 days?
…13% in 30 days?
…20% in 30 days?

With markets as volatile as they are right now, seems like all of the above are possible. Regardless, the locking in the losses idea only seems low-risk if you’ve lost a significant amount (based on your cost).

Of course, if you’re dumping a crappy investment that you have no intention of buying back in the new year, then I don’t see any reason NOT to dump it and get the tax credit.

Sowing Seeds: Water Your Own Tree, Slowly

Scott — Mon, 15 Dec 2008 18:49:40 +0000

DISCLAIMER: “Sowing Seeds” is a 3-part 4-part series about my uneducated approach to investing. Readers should not take any of this content as a sound recommendation. (I am not a financial professional, nor have I been trained as one.) Be a big boy or girl, and make your own decisions.
First: Part 1, Market Value is Imaginary
Then: Part 2, The Economy is Irrelevant
Finally: Part 3, The Second Best Buzz
Bonus: Part 4, Water Your Own Tree, Slowly

” Yeah, but Semple, how do you DO it? What are the specifics?”

I think investing is a lot like growing fruit trees in Israel. It takes a lot of water. And if you dump all your water on the seedlings at once, or expect to have fruitful trees in six weeks, you will fail. Often miserably.

Trickle irrigation and patience are KEY, and, if absent, I think that either enterprise should be abandoned.

I think it’s best to look at every financial enterprise as a cash flow generator for investments. Whether it’s working for someone else or running your own business, the approach should be the same: 1) maximize your income; 2) minimize your expenses; and 3) plant some trees with the difference. Once the trees are bearing enough fruit, they can become the cash flow generator for — PRIORITY #4 — your lifestyle.

Most people shoot themselves in the foot by putting lifestyle second to maximizing income, ignore minimizing expenses altogether, and then hope that a lottery ticket will save them from their laziness and lack of forethought. Good luck.

Trickle Irrigation & Weed-Pruning

Whether investing $1 or $1,000, I would ask myself the same questions:

What is the time horizon for the investment?;
What portion of my portfolio does it represent?; and
What do I think is acceptable risk in light of a) and b)?

My own business is my primary investment. Before getting into anything else, I first safeguard our working capital in fixed income investments like GICs and low-risk money market funds. After that, I focus on investments that I want to hold for ten years or more. That leads to equities and exchange-traded index funds (ETFs) — never any other kind of fund. (More on that in a bit.)

I suppose it’s possible to think in shorter terms — one year, five years, etc — but I don’t have the expertise to make short-term predictions, and even then, after watching the stock market for the past year, I don’t think anyone does. It seems like better luck could be had at a casino.

1) As mentioned, I only keep fixed income investments (cash and GICs) for the dollars we need to run the company. A portion is Canadian and a portion is US. Usually we exchange some USD for CAD, and anything left is in US. The surplus USD is then ear-marked for long-term and goes into equities and exchange-traded, whole-market index funds.

2) I use an online brokerage and do all the trades myself for $9.95 per transaction. (This is important because it cuts out a lot of unnecessary fees and commissions that come from using a broker or from non-exchange-traded funds: high management expense ratios (MERs), higher transaction costs, etc.) Especially important is that it gives broad access to ETFs, which most brokers are reluctant to trade in because they make less money on them.

3) It’s worth noting that I would never use a broker to make trades. It’s kind of like asking a salesman for Toyota if Honda makes good cars. Or as Buffett likes to say, “It’s like asking your barber if you need a haircut.” They have no intrinsic motivation to be objective, quite the opposite. The more you trade, the more brokers make. But frequent trading underperforms over the long-term. Also, they are paid more on certain funds, usually with high MERs, so they will naturally try to sell those first. (That said, I have hired a broker on occasion, but only on an hourly basis when I have specific questions. I would do so again.)

4) You can buy index funds from RBC, TD, etc, but in general their fee structures are high: MERs between 2-3%. (May not sound like much, but over the long-term the opportunity cost adds up.) Also, they take their 3% whether the fund goes up or down, which, I think, is wrong. Worst of all, there usually isn’t a separate line item for their fees, it’s just included in gains and losses. Something weird about that if you ask me.

5) The best indexes to buy are ETFs (exchange-traded funds), because they have the lowest management fees. For example, my lowest MER charges 0.07% per year; that’s 30-40x cheaper than typical funds. If you want to experiment with that, ask your broker what he or she thinks of funds like iShares or Vanguard ETFs. Chances are that your broker wouldn’t make much money if you moved in that direction, so the reception to the idea will likely be luke warm.

6) If I had no interest in reading financial reports or investigating the stock market, I would put everything into a few total-market ETF indexes and buy more at regular intervals (monthly, quarterly or annually). On average, the S&P has averaged 7% per year. Not bad for a hassle-free investment with the lowest expenses. For Canadian dollars, there are iShares (www.ishares.ca) which have MERs ranging from 0.23% to 0.55%. For US dollars, Vanguard ETFs are highly recommended and super cheap with MERs as low as 0.07% per year.

7) The one exception may be, if you have some USD, to buy some Berkshire Hathaway shares. I like to think of Berkshire Hathaway as a mutual fund run by Buffett. And these days, they are 30-some% off their 52-week high. (The inverse means that if they match their 52-week high in the future, they will have gained 40-50%.) No guarantee they’re going to go up, of course, but history tends to repeat itself with Buffett. There are two types of BRK: A shares for circa $104,000 each (yikes) and B shares for $3,499 each. (Buffett doesn’t believe in stock splits, thus the huge price tag. Class A shares started out at $19 each 43 years ago…) The only bad thing is that Buffett doesn’t pay dividends, because he thinks he can do better with the money than his shareholders can.
Real estate… This is something I’m just starting to look into, mostly because I want to cash flow permanent rock climbing, and to do it soon. The upside is that real estate can produce cash flow right now, not ten years from now like stocks. And the cash flow is quite high relative to equity invested, but the evils of leverage have to be in play. Loans are harder to get these days though, and interest rates are not as good as six months ago.

9) One thing to consider is that the stock market tends to lead everything else. The decline started a year ago, but Joe Public just heard about it last month. The same will happen on the upswing. People will still be whining about this myth called the economy after the stock market is raging again. It’s kind of a hoaky method, but I like to use magazine covers as a gauge. A year ago, walking through an airport, you couldn’t find a cover that said anything but, “Stock market all-time high! It’ll never go down!” That’ll be one of my future tip-offs that we’re about to have another crash. Today, if you walk through an airport book store, it’s, “The end is near! Doom and gloom!” Plus every ad you see in the paper is pushing low-yield cash investments. Is that a sign of a turn-around? A buy signal?

10) So back to real estate… I suspect it’s gonna get even cheaper, because it lags the stock market. However, I have no idea how to be sure or how to call the bottom. Another way to approach it may be, “What’s the sweetest deal around these days?” Buffett says equities.