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Nelson Smith

Freelance writer. Contrarian investor. Watcher of baseball. Owner of financialuproar.com. At least my mom thinks I'm funny and/or handsome.

Jan 302015
 

"Oh my God, a pink building! I take one." Cecil. Or maybe Basil.

“Oh my God, a pink building! I’ll take one.” Cecil. Or maybe Basil.

(Image credit)

Recently, our BOY PK from Don’t Quit Your Day Job bought an interesting article to my attention, about some Toronto-based homebuyers who got “screwed” buying a pre-sale condo. And by “screwed”, I mean “the builder exercised his legal rights.”

Back in 2011, buddy decided to put down $40,000 on a 1 bedroom (plus den, AKA sex dungeon) condo in downtown Toronto. Construction ground to a halt, apparently because the builder couldn’t get financing. It sounds as though the building is still going up, but will end up being apartments.

The potential buyer interviewed in the story is pissed. He did end up getting his money back plus a bit of interest, but he’s still put out about the whole thing. Although the story never even mentions it, it’s obvious what his beef is. He wanted the opportunity to either flip that condo making a great return on his original $40k, or live in it and enjoy his figurative gloating about predicting the real estate market correctly.

This story illustrates just one danger of buying a pre-sale condo. Here are a couple more.

You must close

Let’s say like the buyer in the story you decide in 2011 that you want to buy a condo for completion in spring of 2015. But in the meantime, some cwazy stuff happens. You know it’s crazy stuff when I spell it cwazy.

It’s nuts to make a house buying decision in 2011 for 2015. You could meet a lovely lady settle for someone who doesn’t retch when they see you without a shirt. You could move to California and become a high powered janitor at Facebook. You could get mercury poisoning from eating too many mackerels from Japan and partially turn into a battery. A lot of stuff can happen in 4 years.

It doesn’t matter what happens, you’re still obligated to close on that contract. When the time comes and you can’t buy the place, the builder has a couple of options.

1. They can keep your deposit. Goodbye, $40,000.

2. They can take you to court and force you to buy it. This usually doesn’t happen because a buyer doesn’t have the ability to close. But if the builder thinks you have the ability to close and you just changed your mind, the builder is able to sue you. And chances are, the builder will win.

The mortgage

Say you put a $40,000 deposit down on a $400,000 condo back in 2011. In this alternate universe, it turns out that Nelson’s prediction of real estate values going down was correct. It’s now worth $360,000. What do you do besides cry alone in a corner?

Au contraire Nelson, you’re missing something. That buyer has already been pre-approved for a mortgage. It’s not ideal, but they’d just move in to the place worth slightly less than what they paid. Hopefully they can sell in a few years because the market CAN’T STAY DOWN FOREVER BABY WHOO!

Uh, no.

When you get a pre-approval from the bank, that’s not even close to a contract. All the lender is saying is that in theory, you’ve been approved for a mortgage worth $x. The bank still needs to approve the property, the down payment, the price you paid for it, and so on. A pre-approval is no more of a contract than your girlfriend promising not to tickle you anymore when she has her fingers crossed.

In the situation outlined above, the buyer would be forced to put down an additional $18,000 to get themselves back into a position where they had 5% down. And since it’s Toronto, they’d be forced to come up with another $10-$15,000 in land transfer taxes, legal fees, and HST for those things. That’s a lot of extra cash to come up with to close on a condo that’s gone down in value.

The downpayment risk

My previous example inadvertently highlighted another huge risk in buying a pre-sale condo. The amount of leverage used is astounding.

A $20,000 deposit can easily control $400,000 in real estate. A leverage ratio of 20-1 is just asking for trouble, especially for someone who doesn’t ever intend on living in the place. Yeah, the bet has done well in a rising market, but we all know of a guy who keeps using his cash to put down a deposit on the next deal. He thinks the market can never go down, and he will get caught with his pants down one day.

Can you imagine someone doing that with stocks? “I have $5,000. Time to buy $100,000 in stocks. Oh dear, the market fell 5%. I have lost all my money.” Just like it doesn’t take long for the stock market to fall 5%, the real estate market can turn on a dime too. But in the meantime, you’ve lost $20,000-$50,000.

If you insist on buying a condo in one of Canada’s main cities (I’d strongly recommend against it), buy something that’s already completed. You’ll have the advantage of going through it and actually touching the damn walls. You’re not taking a huge opportunity risk with your deposit, and you can move into the place in a month or two. And, no GST. Especially at this point in the cycle, it makes no sense to buy a pre-sale condo.

Jan 282015
 
It's the punchline to the joke "how do blondes use a computer?"

It’s the punchline to the joke “how do blondes use a computer?”

Unless you’re the doctor from the moron doctor and dentist story from last week, you probably plan on retiring at some point in the future. Some of you might be interested in doing it at 30, while others are interested in doing it by 70.

I’m thinking as life expectancies continue to go up, most of the people reading this will be working into their 70s. Not necessarily because they have to, but because the average life expectancy will approach 100. Even if you can afford to retire at 60, that’s 40 years of doing nothing but hiking up your pants to your nipples and eating dinner at 4:30.

Although the danger isn’t really there to the general public, I think there’s a real danger among the personal finance geeks among us to over save. We’re obsessed with running out of cash when we’re 90, so instead of saving a decent amount, we want to save enough so just about every variable is dealt with. Having a 98% chance of never running out of money isn’t enough, we want a 100% chance.

So we save and save and then save some more, because that’s what we do. Oh, you maxed out your TFSA? Great, now how about that RRSP? No? Slacker. For most Canadians, maxing out both of those accounts represents about 25% of their gross income. That’s a lot of savings.

If you’re like me and life is sort of a competition on who can accumulate the most, this post probably isn’t for you. We like saving and investing. Not so much for the fringe benefits, but because we like poring over balance sheets and income statements. We’re weird like that. You, not me.

Most people aren’t like us. All they want is to be able to check their investments once a year, notice they’ve (mostly) gone up, and call it a day. These people have an investing problem, and they’re more than happy to pay outrageous mutual fund fees to solve it.

And yet, we tell them “INVEST EVERYTHING YOU CAN OR ELSE YOU MIGHT RUN OUT OF MONEY ALSO I HAVE TO POOP.” We don’t offer a solution to the problem besides telling people to put aside everything they can or else.

What if we saved a little smarter? What if, instead of focusing on a percentage today, we focus on trying to come up with a set amount 40 years from now and then work backwards from there?

Let’s say you want $1.5 million in today’s dollars for your retirement, and you’re 31 years old. You’re currently wearing a black t-shirt and jeans, and you had a caesar salad with chicken in it for lunch, details which are not important yet were included for some reason. You currently have $50,000 set aside for the years of shuffleboard and jigsaw puzzles, which is set to begin at 65.

First off, we have to figure out the effects of inflation. Based on 2% inflation going forward, I’d have to save 1.96x what I plan to now. So I’m looking at $3 million, give or take.

It’s also prudent to be conservative in figuring out returns, so we’re going to assume 8% going forward, or 6% after inflation.

Punch those numbers into the compound interest dealie, and here’s what we get.

Screen Shot 2015-01-28 at 12.00.10 AM

We’re looking having to save an additional $13,000 per year for retirement in that scenario, which isn’t terrible if you’re a family with two decent incomes. It’s certainly achievable for the PF geeks in the house.

If you’re like most people, saving $13,000 per year is pretty aggressive. What if we used the projections to scale back our retirement projections? Instead of shooting for $3 million, we shoot for $2 million? After all, that’s the equivalent of about $1 million today, which gives a couple $40,000 per year based on a 4% withdrawal rate at today’s dollars. That’s plenty, assuming a relatively conservative lifestyle and a paid off house.

Here’s the results:

Screen Shot 2015-01-28 at 12.04.49 AM

 

That’s much more achievable for a family trying to make it in today’s world of high real estate prices, expensive childcare, and era where both spouses need next-to-new cars for some reason.

From there, you can play with the numbers to further tailor to your individual situation. Many people plan to save more when the kids have moved or the house is paid, as an example. I’d caution against delaying saving too long, since compounding is more powerful when you’re young. But still, it’s an option. So is downsizing when you’re older, or moving to a locale with a cheaper cost of living.

The bottom line? There are more intelligent ways to save for retirement than just throwing every spare dollar into retirement accounts. Don’t over save today just to be sitting on a pile of cash come retirement age. By working backwards and making adjustments along the way, you might end up needing less than you think, leaving more cash available today for buying things like presents for Nelson. Everybody likes that, right?

Jan 262015
 

Well kids, you knew the day would come. I’m leaving you all forever to hunt tigers in the Peruvian jungle. Are there even tigers in that particular jungle? I don’t know. I’m not much of a details guy.

Okay, that’s not true. I’m not leaving you guys. Financial Uproar will continue to be here on Monday, Wednesday, and Friday (sometimes weekends too!), but in a slightly different form than before.

Here’s the deal: there are plenty of people who enjoy coming here for the personal finance stuff, but just can’t stand the value investing stuff. If they bother to read the posts, they’ll only skim them. My lady friend is a perfect example of this. Most of the time she won’t even bother to click through to the actual post from her RSS feed. That stuff doesn’t interest her, so I can’t blame her.

So I set out to do something about that, to create a space where the value investors could go and hang out. Thus, CanadianValueInvesting.com was born.

Although it’s currently lacking in content (just 3 posts, 2 of which originally appeared here), it will be the home of all my value investing stuff going forward. If you’re looking for updates on the Uproar Fund, or any other stocks I’m currently invested in, that’ll be the place to go. I’ll continue to talk about more general stuff on this blog, because everyone needs to learn how to invest. Thus, the stuff here will be more about things like index investing, ETFs, and so on. The borrow to invest portfolio will continue to remain here, since it’s not exactly a value investing thing.

Basically, Financial Uproar will have a more personal finance focus, while CanadianValueInvesting will be a value investing blog. The chuckles will remain here, but CVI will probably be more serious. There will be no set posting schedule over there, but expect something at least once a week.

Anyway, I’d be obliged if you’d check it out, assuming that kind of thing floats your boat. The latest post talked about the latest stock I bought, which you can probably guess if you follow me on the Twitter.

Now let’s talk a little about how the Bank of Canada interest rate cut means practically nothing to the average consumer.

For the market, it sends a huge message. If the central bank is cutting rates, that automatically makes stocks more attractive than bonds. The average bond yield should go down on the news, which is exactly what happened.

But something else happened, especially with the many of the major banks’ prime rate — specifically, nothing. None of the major Canadian lenders have cut their prime rate.

The reason has something to do with what’s called the interest rate spread. As rates go down, there’s less room between the rate the bank borrows at (which is pretty close to the Bank of Canada rate), and the rate it lends the money out at. As rates get closer to zero, so does the spread.

Let’s assume a bank can borrow at 0.75%, and lends the money out at prime minus 0.75%. A bank’s spread in that situation would be 1.25%, assuming prime is the Bank of Canada rate plus 2%.

But in a situation where prime is 5%, the bank’s borrowing cost might only be 2.5%. Remember, GICs get more attractive when rates are higher, giving banks access to that capital to lend out. Assuming the same prime minus 0.75% interest rate, and the bank’s interest spread is 1.75%, not 1.25%. That doesn’t seem like a lot, but for a bank that extra 0.5% on $100 billion or so adds up.

None of the major banks have cut their prime rate. Meaning, the cost of borrowing just went down, but the cost the customer pays hasn’t budged. Rate cuts are supposed to spur consumption. It’s hard to do so when prime-linked interest rates haven’t budged. Nothing changes for the consumer.

How is a rate cut supposed to stimulate housing when prime hasn’t gone down? Sure, fixed rates will go down at some point in the future, and we’re likely looking at some spring mortgage rate sales with a 1.xx% handle, but that doesn’t mean a whole lot. Rates have been cut during almost every housing decline in history. The U.S. Fed cut rates during its housing meltdown too. It didn’t help.

Ultimately, it comes down to this. Is there anybody in Canada who said “borrowing at 1% is just TOO EXPENSIVE! But at 0.75%? OH BOY TIME TO BUY BUY BUY.” I’ve never met anyone like that, and neither have you.

The message sent to the market with the rate cut was important. For people like you and I, it doesn’t mean squat. Even if you have a variable mortgage. Although it seems a little contradictory, I continue to encourage Canadians to pay down debt right now, especially in Alberta. The economy is weakening there. The time to strengthen your financial situation is when times are good, even if rates are low.

Jan 232015
 

Normally when it comes to the world of investing, YOUR BOY Nelly follows a similar pattern.

  1. Finds undervalued stock
  2. Does research, including writing down my thoughts for y’all
  3. Buys some, but also keeps some dry powder just in case it drops more
  4. Patiently twiddles thumbs until it goes up
  5. Sell when it hits the target price

Step 4 is the hard part, since it often takes years before a stock starts to go up. Remember Reitmans, the stock I’ve been talking about since May of 2013? It was basically dead money for a year and a half before surging more than 25% in December alone. The company’s results have continued to just be okay, so I’m not exactly sure why the surge happened. Maybe people are bullish because of oil hitting the skids, giving the ladies more disposable income? I dunno.

The point is that the waiting is supposed to be boring. There really isn’t much you can do in the meantime besides just keeping an eye on it, so you move onto other things, like hopefully reading this blog and clicking on all the ads. Nelly needs to get paid to keep referring to himself in the 3rd person, yo.

Sometimes, things are a little more exciting, like with the case of Aberdeen International (TSX:AAB), a lowly company with a $14M market cap that invests in private and publicly traded securities of precious resource stocks. Shares currently trade at $0.14.

If you’ve been reading this blog for any longer than a couple of minutes, you’ll know those investments are probably very undervalued by the market. You’d be right. The company has a book value of more than $31M, putting the shares at a 55% discount assuming the value of the company’s private investments is what management says.

There’s strike one. Unlike with Jaguar Financial, it’s not so easy to value the assets. With that company, you’re getting BlackBerry shares at less than 40 cents on the dollar, plus an additional 30% of the company’s assets for free. Aberdeen has lots of private investments, which we really don’t know how to value. We’re stuck taking management’s word for it.

Plus, Aberdeen’s management is paid well for a company with such a dismal track record. Since peaking in 2011 at $1.00 per share, 85% of shareholder value has been eroded. That’s not entirely management’s fault because the gold sector has been terrible, but it seems silly to reward these guys with stock options during such a dismal performance.

That’s exactly what’s been going on, at least according to Ryan Morris of Meson Capital, a San Francisco-based hedge fund that specializes in activist investing. According to Morris, Aberdeen International has bought back $9M in shares over the last year and has rewarded them back to management in easy to achieve stock options.

So Morris took a 5% position in the company and immediately started pushing for change.

Management ran more scared than a six-year old in a haunted house. Even though the company was sitting on more than $3 million in cash as of the last filings, management decided it needed to raise an additional $2 million by issuing 10 million shares each attached with a warrant to buy an additional share at 30 cents. Essentially, management issued a bunch of shares that had the effect of destroying a full 3 cents per share of book value.

Management claims it raised cash to do some buyin’ of some undervalued gold stocks. Morris doesn’t buy it, saying that 100% of the shares were purchased either by Aberdeen’s management or by sympathetic parties. Morris contends that the whole reason for the share issue was to put more shares in the hands of senior managers.

It gets better. When Morris got word of the private placement, he claims to have contacted the company on several occasions with a better deal. Management denies this, saying that Morris wanted in on the original deal and when he didn’t get his way, he backdated a tender offer to give the company the better price. According to Aberdeen, the offer was never officially on the table and so they closed it. This is interesting, you’d think they’d wait a couple of days if they were serious about maximizing shareholder value.

Morris has since accumulated enough votes to be able to call a special meeting of shareholders, which takes place February 3rd in Toronto. (If I lived in Toronto, I know what I’d be doing that day) He’s looking to replace the entire board of directors with his own guys, and although he hasn’t said it publicly, I’m assuming he’s going to liquidate Aberdeen’s investments and pay out shareholders. Or maybe he’ll control it and start his own mini Berkshire Hathaway with it.

Morris went on the offensive, creating FreeAberdeen.ca (maybe the .com was taken?) which outlines his problems with the company’s management. Management has fired back with their own document that outlines how awesome they are. Both are pretty entertaining if you’re interested in this kind of stuff.

Now that management know their jobs are on the line, they went ahead and added a very important clause in their employment contracts. The four main guys at Aberdeen International will now get rewarded more than $6 million in payments if shareholders punt the existing board of directors, under something called a “change of control” clause. This is in addition to the more than $13 million in compensation they’ve collected since the beginning of 2011.

There are already rumblings shareholders were getting fed up. During the last shareholders meeting, most directors only received 80-85% of the shares in their favor, which is a pretty big vote of non-confidence. It’s obvious Morris has researched this one carefully.

Even though Morris has been successful in getting the votes of the new shares to not count at the meeting, I’m still avoiding this stock. Upper management already owns 15% of the stock, and who knows how much is owned by parties sympathetic to management. The bad guys only need 35% of the remaining 85% to win, and remember that if somebody doesn’t vote then those shares automatically vote yes. I’m not sure Morris is going to win this fight. If he loses, the last thing I want is to be stuck with the current management team.

Jan 212015
 

Every week, the Globe and Mail features some family in need of financial planning advice.

The submissions are usually pretty straightforward. Retirement questions are common, especially trying to figure out if a couple has enough to make it happen. Younger folks generally ask about buying a house, especially in overvalued markets like Toronto or Vancouver. And so on.

But last week’s submission takes the cake. It is the greatest thing I have ever read. No time for more preamble, there’s a lot of mocking up ahead. (Edit: it has been updated from when I first wrote this)

Eric and Ilsa put lifestyle ahead of financial concerns but it has put them in a bit of a bind. He is 41 and a physician, she is 39 and a dentist.

They have five children, ranging in age from less than a year to 9, all of whom will go to private school. They have substantial earning power – although Ilsa is on mat leave at the moment – but Eric chooses to work for less money than he could.

Ilsa, hey? What is she, a character in Frozen?

Financial Uproar: staying on top of the pop culture references since 1998.

They are living rent free in a relative’s house (they pay taxes, utilities and upkeep) and “regret not having bought a house years ago,” Eric writes in an e-mail. Houses in their Vancouver neighbourhood have doubled in price in the past two years. The house where they live is going up for sale soon, so they need to move quickly.

To review so far, we have a doctor and dentist who are living rent free in a relative’s house, which is about to go up for sale. Sounds like a pretty sweet arrangement to me. What’s the problem again?

Last fall, they bought a building lot for $1.1-million and are planning to build a house large enough for their family and a live-in nanny.

Here we go.

But with a combined income of $360,000 ($450,000 when Ilsa returns to work) and an $800,000 mortgage, can they afford the builder’s $1-million price tag? Who will lend them the money?

If only there was an option to, I dunno, NOT build a million dollar house.

If only.

If only.

“Two professionals should be able to afford a modest house, but we can’t get the numbers to work and would appreciate some help,” Eric writes.

LOL. Modest.

They’re prepared to spend $2 million on a house (remember, the lot was $1.1 million) and they’re using the word modest? Okay, fine. Vancouver’s real estate is nuts. You can still get a pretty decent house for $2 million that’s already completed, but hey, these people need their dream home. Or something.

He earns $200,000 a year working one day a week in a medical clinic. But his real love is teaching, which he does one day a week at a university; this earns him $100,000 a year.

He works two days a week.

“I think I found a solution to your money problems.” — everyone who isn’t a moron.

“I have no pension whatsoever, but like my parents, colleagues and mentors, I love my work and plan to keep going well into my 80s, so retiring is not a big concern, just living,” Eric writes.

“I love my work so much that I drag my ass into it TWICE every week.”

Am I the only guy who would bust my ass doing the medical stuff for like a decade and just retire? The guy’s looking at earnings potential of a million bucks a year, not even including his wife’s income.

A financial planner had a few pieces of advice for the cash-strapped doctors, which surprisingly didn’t just consist of him bashing his head against his desk for 20 minutes.

Eric and Ilsa’s expenses are likely the highest they will be and they have not yet seen the long-term benefit of their education and the income it will generate for the rest of their lives, Mr. MacKenzie says.

They currently make $360,000 per year and one spouse is on maternity leave. I’d say they’re seeing some pretty damn good benefits RIGHT THE HELL NOW.

“It is financially possible for them to do the things that are important to them, although by doing so, they will run a cash flow deficit of $50,000 a year until the children leave home,” Mr. MacKenzie says.

I like how the planner just throws that out there. “Hey, you can keep going on your current path. No biggie, you’ll just go backwards $50k a year, probably forever. NBD.”

Over time, their annual deficits will add up to more than $1-million in additional debt. They can build their home, but they have to make a choice. Either Eric works one more day a week in the clinic, or they run up substantially more debt.

OH NOES ERIC MIGHT HAVE TO WORK THREE DAYS A WEEK WON’T SOMEBODY THINK OF THE CHILDREN LIKE MAYBE THE NANNY.

By the way, out of ten possible working days per week, this couple currently works two of them and have a full-time nanny. Yep. Makes total sense.

Eric and Ilsa are fortunate because their parents are willing to put a home equity line of credit on their own home to extend them the $1-million they need to build, and to finance their annual deficit, the planner notes.

This isn’t even a first world problem. It’s a 1% world problem.

I get emails from real people with real problems. And this jackass can’t reign in his spending enough to build a freaking dream home in one of Canada’s most expensive cities? What a stunning lack of self-awareness.

“However, there is a danger in accumulating so much debt because things don’t always work out as expected,” the planner says. “In this case, it is unwise especially when the cash flow problem could be easily solved,” Mr. MacKenzie says.

(Files that statement under the “no shit” category)

“If Eric is willing to work one more day a week in the clinic, they can live within their means and still afford to build the new home using a HELOC with the parents’ home as security,” Mr. MacKenzie says. He would be bringing in $500,000 a year. Once Ilsa returns to work part-time, she hopes to make $150,000 a year. Their first priority once the house is built should be to pay off the mortgage.

Two doctors working part-time with the earning potential to earn $650,000 before tax are feeling pinched.  Wow.

I know his clients aren’t anywhere close to savvy, but hot damn does this planner sound dense. “Duh, you work more. More money is good. Less is bad. Duh.” I bet he charges people $100/hour for that advice, and they gladly pay it.

But Ilsa and Eric face a more immediate risk.

DUN DUN DUN

From their financial situation, I’m betting it’s being able to feed and clothe themselves. If all the restaurants close, they’re screwed!

With five children and a big debt load, they have neither life nor disability insurance. Their long-term financial security is dependent mainly on Eric’s high earning power.

Oh.

That’s actually true. Eric should get his ass some life insurance.

Let’s take a closer look at Eric and Ilsa’s financial picture. First, their assets.

Assets: Cash in bank $6,000; his RRSP $180,000; residential building lot $1.1-million. Total: $1,286,000

For a guy who said about 500 words ago that he doesn’t want to retire, he sure is preparing for it.

Liabilities: Mortgage $800,000 at 2.6 per cent

BAHAHAHAHAHAHAHAHAHA They don’t even own the building lot. They’re gonna owe $2 million by the time they’ve built that house.

Monthly disbursements: Mortgage $3,800; property tax (both properties) $1,000; utilities $490; insurance $90; maintenance, garden $190; transportation $800; groceries $2,000; clothing $520; children’s activities $1,000; tuition $5,400; summer camp $600; child care $2,800; gifts, charitable $320; vacation, travel $2,000; dining, entertainment $200; sports, hobbies $200; miscellaneous (furniture, toys) $400; health insurance $50; cellphones $220; telecom, Internet $80; RRSP $3,000; professional associations $6,000. Total: $31,160

There’s so much hilarity in there I barely know where to begin. $7,200 per year for summer camp? $24,000 per year in groceries? $190 per month for somebody to take care of the garden at the place they don’t even own? $5,400 per month for tuition? My God, imagine what would happen if your kids went to (shudder) public school? That’s where they smoke marijuana and beat the kids with rulers.

I’ve met some doctors over the years who are incredibly good at their specialized field and make an assload of money, but have no idea about spending it. It’s probably a big reason why most end up working until their 80s — they can’t afford not to. It just goes to show that if you spend a decade in school getting a very specific skill, you’ll probably lack in other areas. That’s just common sense.

But at the same time, Eric and Ilsa are especially bad. It’s not just that they’re bad with their money, but the lack of self-awareness is what really gets me. They’re looking to build a $2 million house in one of Canada’s ritziest neighborhoods, and say stupid things like it’s a “modest house.” Piss off, it is not. The average house in Vancouver costs more than $1 million, but certainly not $2 million.

I’m not begrudging anyone’s success, and Eric and Ilsa should be able to afford a $2 million home. It’s not that hard, especially after taking a serious look at their spending. But enough with the ‘woe is me’ stuff. That’s what pisses people off, and rightfully so.

Jan 192015
 

Because hey, we haven’t done one of these in a while.

I’ve had a busy last few weeks, heading back from Korea to Canada to see the family, take care of a few things, and mostly to skirt Korean immigration laws. FINE KOREA I’LL LEAVE WHEN YOU WANT ME TO GEEZ. It’s a good think you have the power to punish me.

If you ever have the longing desire to feel wanted, go back home after being gone for a few months, especially if you still have lots of friends there. I was back for three weeks and just about every evening was filled with something. I felt more wanted than the only woman at a comic book convention. It was nice, but a little overwhelming.

I’m glad to be back in the land of kimchi and nobody knowing my name. Ah, anonymity. In Korea, nobody knows I’m a big deal on the internet.

Song I like and therefore you should too 

STUPID SONG THAT’S CATCHY AS ALL HELL.

I heard this song listening to one of the stations on the plane, and immediately was hooked. It hasn’t left my head since. Excusing the video that makes my small town hetrosexual upbringing uncomfortable, I’d recommend it.

Whatever, at least it isn’t by Nikki Minaj.

The Office quote

Michael: Times have changed a little. And even though we’re still a family here at Dunder-Mifflin, families grow. And at some point, the daddy can’t take a bath with the kids anymore. I am Upper Management. And it would be inappropriate for me to take a bath with Pam. As much as I might want to.

Pam: He said WHAT?

What you might have missed

I met up with friend of the blog Paula from Afford Anything for a nice buffet lunch last week, because we are both personal finance bloggers interested in getting the best bang for our buck. At least one of us had a nice time, and I’m not just talking about the approximately 92 plates of food I ingested.

What’s more impressive is now four out of the seven ladies on this creepy-ass list have agreed to meet me in person, while only one spurned my advances. (See if you can guess who the rejector was in the comments. It’ll be the opposite of fun.) And out of those four, one of them actually puts up with me on a daily basis.

Who would have thought creepily hitting on women on the internet would actually work?

Nelson’s so funny

I spent a lot of time in airports this week, after narrowly missing my connection from San Francisco to Seoul. I was stuck in San Fran for the day, which mostly just involved me going to a hotel and napping/watching Modern Family. I am a terribly boring person.

Seriously, do you think the people monitoring United’s Twitter account care that you’re 3 hours late getting home to your dog? God, that must be the worst job in the world, feigning interest in your stupid problems.

The more you know

You didn’t think I could mail in these link dumps any more than I already do, but you’d be wrong. Here’s where I plagiarize some interesting factoid I find on Wikipedia and pass it off as my own writing, playing you all for suckers in the process.

/laughs like an evil maniac

/starts coughing hysterically

Heil Honey I’m Home! is a British sitcom, written by Geoff Atkinson and produced in 1990, that was cancelled after one episode aired. It centres on fictionalised versions of Adolf Hitler and Eva Braun, who live next door to a Jewish couple, Arny and Rosa Goldenstein. The show spoofs elements of mid-20th century American sitcoms and is driven by Hitler’s inability to get along with his neighbours. It caused controversy when aired and has been called “perhaps the world’s most tasteless situation comedy.”

It’s on Youtube, and it’s delightfully terrible.

Kevin O’Leary’s stock pick

 kevin-olearyEach week current BNN personality and Shark Tank investor Kevin O’Leary is kind enough to give us his favorite stock pick. 

This week, my stock pick is the greatest hangover food in the world, McDonald’s. The stock is cheap, pays daddy a dividend, and God knows I’ve eaten there 52 times this year after my wife kicks me out for barely being able to keep my tongue in my mouth around Amanda Lang.

Terrible business, this story about Amanda and some uh, transgressions when it came to reporting. Basically, it came out that she squashed a critical story on Royal Bank without bothering to disclose to her staffers that she was doing some paid work for them at events. Or that she was in a relationship with one of the company’s board members.

I wanted to straighten this out for Amanda, so I tracked down the writer who brought all this to light and he agreed to meet me at his house. After enjoying a fine bottle from O’Leary’s vineyard, he still wouldn’t agree to retract the story. So I did what any reasonable man would do in that situation — I murdered his dog and drank its blood.

Babe loosely related to finance

Here’s one of the results you get when you Google “babe.” Not surprisingly, the pig and baseball player are far down the list.

some-chick-to-objectify

She has a name, but you probably don’t care with it is.

Time for links

I’m not sure I’ve featured MoneyGeek before, but if you like my blog you’ll definitely like his — assuming you’re not just here for the dick jokes and pictures of anonymous babes. He has a whole category called “say no to dividend investing” and has been known to make fun of those who invest just in dividend paying stocks. Anyhoo, here are some of his thoughts on dividend investing and whether it’ll work over the long-term.

Don’t Quit Your Day Job took a closer look at the stocks picked for the stock picking contest. Like a lot of the other entries, he’s betting on oil.

Most personal finance blogs came out with a list of the writer’s goals for 2015. As per usual, Sandi Martin from Spring Personal Finance did things a little better, giving folks an easy theme to follow in 2015. I’m really not doing that post justice. Go click now.

I wrote a post about Calgary’s real estate market over at LowestRates.ca. Without a pretty big rebound in oil prices, it could get ugly.

Over at Sustainable Personal Finance, I wrote about how you probably shouldn’t be trying to pick individual stocks. We all like indexing, so let’s take it farther. Instead of getting married to a special lady, instead choose to have about 3,000 girlfriends. The bad news? Everyone else has 3,000 girlfriends too, and you’re likely to get somebody’s sloppy 2,582nds.

A big story this week was Target closing down its stores in Canada, because apparently sales suffer when you don’t have any products on the shelves. Here’s why I think Hudson’s Bay Company could be a beneficiary of Target’s crapitude.

I also wrote about a couple of stocks people don’t really talk about much, Boardwalk REIT and Canadian Western Bank. Will the weakness in oil cause these two Alberta-centric companies to post poor results?

That’s about it. Have a good week, everyone.

 

Jan 152015
 

As they say, history often repeats itself. Hitler is literally being born again as you read this. Try and act surprised in about 40 years.

A lot people turn to historical trends when it comes to solving problems. At work, you talk to the old crusty guy who was around back when Agnes was typing up crap on a typewriter. When faced with all sorts of problems, folks under 40 ask their parents because apparently they know it all. Even new parents consult books written by doctors and other baby-type people to tell them what the hell to do with a slobbering cry/puke/crap bucket.

But when it comes to using history for a guide, nothing beats the average dividend growth investor.

I won’t spend time ragging on dividends. I’ve already done that. I’ll just say that your investing life will be much more interesting if you open yourself up to new stocks that don’t pay a dividend. If getting paid each quarter no longer matters, then you can focus on the important things — like the quality of the business and how much the market values it.

There’s a group of stocks called the Dividend Aristocrats. They’re a group of approximately 50 U.S. listed companies that have raised dividends for at least 25 consecutive years. As you can imagine, they’re considered to be the cream of the investing crop. Most investors would rather invest in companies that are consistently good, not in beaten-up small-caps. It’s just human nature.

And so they invest in the Aristocrats.

I don’t want to rag on the Aristocrats either. Studies have shown that the current set of Aristocrats have outperformed the S&P 500 by about 2% over the last 25 years, which is about as good as a mere mortal can do in the investing world.

So why am I not suggesting that you sell the farm and put all the cash into Coca-Cola? Because of two little words — hindsight bias.

Biases can be detrimental to your finances. We tend to think the stuff we’ve done is the best, even if the actual case is debatable. Somebody might think paying off 0% interest is a good deal, while others who are better at math wouldn’t put such a high priority on paying off free money.

We also tend to think whatever way we’ve picked to invest is the best. I think a value method is the best, while some of you reading this might think indexing is best. I know there’s at least one guy who feels the need to point it out in the comments. Dividend growth investors are probably going to think their way is the best.

So what do we do? We seek out evidence that supports our theory.

Which is why backtesting your portfolio is so useless. I’ve read dozens of articles that look at the results of a dividend growth strategy over certain periods of time. And surprise, surprise, they all tend to outperform the S&P 500. Most magically exclude former dividend growth stars like Pfizer, BP, and pretty much every financial from from any backtesting, which then “proves” that dividend growth investing is superior.

Anyone with a brain can figure out the problem with that logic. It’s easy to pick a portfolio of winners after the fact. That’s like me asserting that the 2014 San Antonio Spurs were a good basketball team 62 seconds after they beat the Heat in the finals. My assertion after the fact isn’t very meaningful.

That’s exactly what investors are doing when they do a backtest of a portfolio when they already know the result. They’re not looking for hard evidence of whether their portfolio will work in the future, they’re just looking for some sort of justification that they’re right.

Figuring out that the last group of dividend aristocrats outperformed the market isn’t that hard. Figuring out that Wal-Mart was going to be the biggest retailer in the world back in 1985? That would have been much harder. It’s easy to pick winning stocks if you already know they’re winners. But will they really stay winners?

In 1985, K-Mart was the dominant discount retailer in the U.S., while Sears still controlled the more upscale market. Wal-Mart had 1,200 stores (compared to 7,100 today) and Target had 226. Who would you have bet on to be the most dominant discounter in 30 years — Wal-Mart with 1,200 stores, or Kmart with 2,050?

The thing the dividend investors won’t tell you is that the Aristocrats list is constantly changing. The current list is the best of the best because all the crap has been dropped out. As current companies struggle and get dropped from the list, good companies get elevated to the top.

Essentially, by saying Dividend Aristocrats outperform the market, all you’re saying is that good companies outperform poor ones. True, but that doesn’t really help us find good companies now, does it? Over time, most Aristocrats tend to stumble.

Backtesting for value strategies is a much safer practice. It’s easy to blindly pick all the stocks that traded under book value and see where they stood a year later. There are still issues with it, but that has more to do with screening. There’s no way to account for a company like Hudson Bay which technically doesn’t trade under book value, but in reality is trading at a big discount to intrinsic value.

Anyway, don’t just backtest your strategy. It’s not very useful. Give a company credit for what it has done in the past, but then focus your attention on the future of the business. That’s infinitely more helpful than looking at the performance in the past.

Jan 132015
 

Because I’ve already pissed off debt bloggers, The Simple Dollar, index investors, my girlfriend 18 times today, 52% of the population of Winnipeg, Manitoba, and everyone’s ears when I belt out You Belong With Me by Taylor Swift, why not include life insurance agents on the list?

You know the expression “everything looks like a nail when all you have is a hammer?” That’s exactly how folks who sell life insurance are. I’ve met some of these people and they’re all generally pretty nice, but the fact remains that they’re all obviously pretty biased. If somebody is interested in insurance, I’m pretty sure their local life insurance agent isn’t going to talk them out of it.

I, on the other hand, tend only to be biased in other ways. So allow me to figure out what groups of people need insurance and which ones don’t.

Children

Ah, children. When they’re not crapping their pants, butchering perfectly good sports and plays, and generally annoying the crap out of each other in the backseat, I suppose they’re okay. I don’t have any (that can be proven anyway), so I’m pretty meh about the kids. Maybe that’ll change when I have one that resembles me.

Should you buy life insurance for your kids? I’m leaning towards no, for a couple of reasons. First off, kids are liabilities. We all get upset when kids die (and rightfully so, even I’m not that big of a monster), but from a financial standpoint, most parents who don’t have junior in the fields plowing like an Amish are in a better financial position without that mouth to feed.

Plus, most standard benefit plans include some sort of death benefit in the unlikely scenario junior kicks it. That’s usually enough to cover a funeral, and most employers will give grieving parents time off with pay.

Saying all that, I can see the point in having it. The last thing a parent wants to worry about in that situation is money. A small life insurance premium on their kids will ensure a grieving parent won’t have to go back to work early or anything like that. I’d be more inclined to self-insure against something like that happening, but I can see the logic in a small policy. It’s not like it costs much to insure a 4-year old.

Single guys/gals/guys who used to be gals/seriously just pick a gender, God

If you’re single with no dependents, there’s very little need for life insurance. From a financial perspective, nobody really cares if you kick it. Also, nobody is coming to your funeral.

Life insurance agents will try and scare you into getting it just in case you develop some sort of ailment in the future. Sure, that happens sometimes, but not often enough for you to get too concerned. If you’re a healthy 20-year old, chances are you’ll be a healthy 30-year old. Besides, if you develop some sort of issue, chances are you can still get insurance in the future. It’ll just be more expensive. After all, they insure people who willingly suck on cancer sticks.

I particularly enjoy the “you might get sick and be unable to get insurance in the future” argument. Not content enough to insure someone’s life, insurance folks also want to insure against the possibility of getting a debilitating disease. I’m honestly surprised insurance agents don’t walk around wrapped in bubble wrap while breathing through a surgical mask.

Married folks

This is when it gets a little more complicated. If you’re just recently married but don’t have kids, you might need life insurance.

If your wife/husband can support themselves without your help, then life insurance is a unnecessary expense. If you keel over, she can just go on without you, picking a new man that satisfies her every need better than your sorry ass ever could.

But what if you have a mortgage that requires two incomes to carry? Although we could debate the intelligence of that decision in the first place, it’s probably best not to leave your lady with a debt she has no hope of paying off on her own. In that situation, I’d look into getting a policy worth at least some of the mortgage. There’s no need to look into replacing income with the proceeds of the life insurance yet, because the point is to pay down the mortgage. Chances are your significant squeeze will be fine financially once the big loan is taken care of.

Married folks with kids

Unless you’re richer than Veronica Lodge, you will need life insurance if you have a family.

Even if you live on one income, it still makes sense for both spouses to have it. If your wife kicks it, suddenly you’ve lost your free babysitter. (I’m assuming the lady stays home with the kids because sexist) Replacing years worth of income is important in this scenario. It’s up to you to decide how much, but I’d say most folks should have half a million or so.

Retirees

We’ve all seen the ads for life insurance for retirees. “Don’t burden your children by forcing them to pay for your funeral. Burden them by being an annoying old child who constantly needs help accessing the g.d. internet GOD GRANDPA ARE YOU RETARDED SERIOUSLY?

If you don’t have enough in savings to cover your own funeral, you’ve got bigger problems. I suggest plenty of delicious cans of cat food.

Jan 082015
 

Oh hey, it’s the Financial Uproar fund of FUN. Are you all literally grinning like this guy right now?

WHAT IN THE HELL IS WRONG WITH THAT MAN'S FACE?

WHAT IN THE HELL IS WRONG WITH THAT MAN’S FACE? (Source)

Okay, maybe not.

When we last visited the Uproar Fund, the value of it had declined approximately 1%, on account of it only having three positions and being approximately 75% cash. That’s slowly changing, as you’ll see. I’m rapidly getting to the point where the fund only has 60% cash. It’s so exciting.

Let’s go through each holding individually, taking a closer look at each individually. The results are as of December 31st closing prices.

Reitmans

Purchase price: $6.295
Dividends received: $0.15

Current Price: $7.71
Result: +24.8%

OH BABY NOW WE’RE TALKING.

Reitmans announced it was closing all of its Smart Set banner stores back in November, either shutting them completely or switching them over to another one of the company’s brands. Smart Set is a chain for younger women, and it consistently hasn’t done as well as the rest. People make fun of my Reitmans shares because the stores aren’t filled with cool clothes. They have no idea of how right they are.

The company also came out with earnings in December, which were good. Sales were up a bit (excluding closed stores), and so were gross margins. Earnings came in at $0.20 per share, compared to $0.09 last year. Not bad, considering that wasn’t even the holiday quarter. Plus, low gas prices obviously help. What’s a more discretionary item than women’s clothes?

Danier Leather

Purchase price: $9.11
Dividends received: N/A

Current price: $6.00
Result: -34.1%

Well, at least Reitmans went up.

Danier comes out with earnings in about three weeks, and if I don’t see some sort of improvement, I’m going to punt the stock from the fund.

I viewed it as sort of a slow motion take private transaction. They’d be a break-even (but cash flow positive) company for a few years, and then use the cash to buy back shares. Eventually the founding family would just take the company private, pissed off at the lack of respect the market was giving it.

Instead, the company has pissed away a good chunk of its cash by reporting some truly terrible results lately. I’m afraid that they’re going to be one of the victims of Canada’s retail crunch.

MRRM

Purchase price: $3.1988
Dividends received: N/A

Current price: $3.50
Total gain: 9.4%

Ah, micro-cap MRRM. It went up from $3.00 to $3.50 one day on 100 shares of volume. Thank you, whoever did that. You are truly doing the Lord’s work.

There’s not much to say about the company that I haven’t before. Still waiting for it to pay out all the money it currently invests for some reason. If you strip away that cash, it’s stupid cheap. You’re paying something like 6x earnings ex-cash for a company trading at less than half of book value.

Penn West

Purchase price: $3.275
Dividends received: $0.07

Current price: $2.43
Total gain -23.6%

Penn West is the 2nd biggest holding in the fund. I purchased 1,000 shares at $4.10 in late November, and an additional 1,000 at $2.45 on the 31st of December. I got a $0.14 dividend for the first 1,000, hence why I counted it at $0.07.

Penn West will soar when oil recovers; It’s just a matter of it actually happening. Based on the value of the assets, it’s stupid cheap. Tangible book value is $11.11 per share, debt is a manageable issue (at least for now), and there are some pretty sharp dudes in charge. Insiders have bought something like 400,000 shares at the same time I was. These are all good things.

We just need oil to recover. Can you guys go bomb Iraq or something?

Summary

Stock Amount invested Amount now
RET.A $12,590 $15,720
DL $5,466 $3,600
MRRM $5,758 $6,300
PWT $6,550 $5,000

Totals

The total amount invested so far has been $30,364. The total amount of securities is 30,620, for a return of approximately 1% on the amount invested. Add in the almost 70% cash, and we’re basically looking at a flat quarter.

Kind of a meh verdict, but that’s okay. It’s still a mostly cash portfolio. I’ll be more apt to compare the results to the indexes when it’s fully invested.

Bonus! New Uproar Fund stock

This stock isn’t much of a surprise to those who follow the blog. It’s Hudson’s Bay Company. I won’t talk much about it, since I’ve already said a bunch of words about it.

I picked up 200 shares of the company at $22.99 on Tuesday afternoon during the carnage. I’m of the belief that the real estate alone is worth about $40 per share, and the retail business itself is worth about $20 per share. The target price is a little conservative based on the sum of the parts, but it pays to be conservative. I’m looking to sell at $50 per share, which is more than 100% above my purchase price.

Jan 052015
 

For the last 4 years, I’ve hosted some of the best personal finance/investing blogs (and Financial Uproar) for a little stock picking contest. I once promised chips to the winner, but like that ever happened. So instead they get a ridiculously terrible prize, like a slightly used tube of Aim Toothpaste, specifically the one I keep around to clean my headlights.

We had our first lady winner of the contest last year, once and for all proving to all the men’s rights advocates that it’s officially no longer a man’s world. Next thing we all know women will be voting and wearing skirts that stop above the knee. OVER MY DEAD BODY.

This year I opened the contest up a little more, inviting some readers in on the action, as well as finding some new bloggers. There are almost 20 entries this year, so let’s get the ball rolling. I’ll list everyone else’s picks (with a little detail, if it was provided) and then go into a little detail about my own.

Save. Spend. Splurge.

Penn West
Pengrowth
Enercare
Dollarama

(“Boring stuff this year” she says. Not sure I’d count two mid-tier oil producers as boring, but I’m not about to argue with the defending champion.)

My Own Advisor

National Bank
Canadian Oil Sands
Baytex Energy
Kinder Morgan

Freedom 35 Blog

BlackBerry
Avigilon
Belmond Ltd.
Silver Wheaton

Money Propeller

Baytex Energy
Crescent Point
Suncor
iShares Capped Energy ETF

(Somebody is going all in on energy)

Holy Potato

Atlantic Power
Capstone Infrastructure
Penn West
Lightstream Resources

(Get used to Penn West. It’s a popular pick this year.)

Avrex Money

Encana
Michael Kors
Manpower Group
Logitech

(Andrew picked Logitech because it’s the company that made his computer mouse. I mention this because I’m sure it will trounce his other picks he put thought into)

Don’t Quit Your Day Job

Valero Energy
Methanex Corporation
Trinity Industries
Credit Acceptance Corp

Boomer and Echo

Goldman Sachs
Chevron
Travelers Insurance
AT&T

(After finishing in last place in 2014, Robb went boring this year. It’s the My Own Advisor strategy.)

Vanessa’s Money

Russia ETF (RSX)
Russia Small-Cap ETF (RSXJ)
S&P 500 ETF (SPY)
Suncor

(In Soviet Russia, Russia ETF picks you!)

101 Centavos

Iron Mountain
Sturm, Ruger and Company
Kinder Morgan
Cameco

(Sturm, Ruger, and Company sells guns. Officially the most badass pick since Sustainable PF won the contest with medical marijuana in 2012)

My Pennies My Thoughts

PrairieSky Royalty
Costco
Mastercard
Pitney Bowes

Blog reader Jeff

Surge Energy
Capstone Infrastructure
Element Financial
Domtar

Blog reader Ben

Oaktree Capital
Unilever
Black Diamond Group
Tesla

Blog reader Doug

Lightstream Resources
Hudson Bay Company
Baytex Energy
Knight Therapeutics

And now… what you’ve all been waiting for…

Pictures of scantily clad ladies!

No, wait. That’s not right. It’s Nelson’s stock picks. I get more space because I own this blog. Finally, ownership pays off.

Village Farms

I originally wrote about Village Farms here.

I thought Village Farms was cheap at $1.10 per share, but didn’t pull the trigger on it. One of my readers pointed out that there might be selling pressure from an insider who said he was going to sell a bunch of shares, and I wasn’t really bullish on the price of tomatoes. I pledged to wait until the stock fell below $1 per share.

And it did just that. Shares closed the year at $0.85 each. I don’t own this in real life yet, but that’s due to laziness and being busy over the holidays more than anything. By the time you read this my order for shares will be in.

Hudson Bay Company

And there are more words about Hudson Bay here.

You can read the linked to piece for more details, but I think Hudson Bay is stupid cheap because the market isn’t valuing its real estate. The now ex-CEO (and current Chairman) has been pledging for months that the company is about to spin out the stores into a REIT, which I think shoots the stock an easy 30% higher immediately. The retail results are pretty good too, especially in the U.S.

Disclaimer: I own this one.

FP Newspapers

And it’s another stock I’ve already wrote about.

OH HEY, CHANNELING MY INNER BUFFETT FROM LIKE THE 70s.

When I looked at the owner of the Winnipeg Free Press the stock traded at $4 per share. I liked the name but preached patience, thinking the stock would fall when the dividend inevitably got cut. It was paying a nickel per share per month, and I figured a cut to four cents.

I got the general call right, but I was surprised by the depth of the dividend cut, going all the way down to $0.08 per quarter. But still, it’s an 11% yield, and earnings should be enough to cover it. There are also a few possible catalysts, but mostly it’s just a contrarian play on an industry that nobody likes.

Don’t own any of this one yet, but I’m not opposed to buying it at these levels.

Penn West

Words about Penn West.

Only three of us picking Penn West. Not bad!

I thought Penn West was cheap at $4.10, when I bought shares for the first time for the Uproar Fund. I averaged down last week, picking up another 1,000 shares at $2.45. I think it’s ripe for a takeover from one of the majors, who could swoop in and offer $5 per share for it and snatch it up. Book value is $11.11 per share, and at least I got one last big dividend before it got cut to $0.03 per share.

I wasn’t sure about picking it because so many others have it, but it’s too cheap to ignore.

And there you have it. Feel free to mock any and all picks in the comments. Trash talk is also encouraged.