Weekly Linkfest #40

Weekly Linkfest #40

LORDY LORDY THE LINKFEST IS 40. I SWEAR IT DOESN’T LOOK A DAY OVER 37.

After getting back from South Korea back in 2015, the wife and I went and got ourselves an apartment (where we lived for a little over a year before buying a house, value investing style). We needed some supplies when moving in, including laundry soap. So we went to Wal-Mart where they had this bad boy on sale for $9.99.

Just marvel at the size of that thing. It could fight off a home invasion on its own, no problem.

That bad boy says 140 uses, but that’s if you fill the cap to capacity each time you do a load of laundry. We didn’t, so we probably got 300-400 loads of laundry. For $10. What a fantastic deal.

A certain personal finance blogger I used to make fun of once made his own laundry detergent. He claimed to cut his laundry costs from $0.30 to $0.03 per load by using his batch of homemade goo. Meanwhile, I just did laundry for three years for just $10 at approximately $0.03 per load by just buying a cheaper brand and not filling the detergent cap/cup up all the way.

We’ve got maybe enough detergent for another month or two left, so I’m hoping to score another container on sale between now and then. Even if I have to pay regular price of around $13 I’m still in pretty cheap laundry territory.

My wife has found a way to make laundry even cheaper — she dries her clothes on a drying rack. I just can’t bring myself to do that, even if it can save me money.

The main takeaway from this, at least from an investing perspective, is that Tide is doomed. There’s no way I’m paying Tide prices for laundry detergent. The Arm & Hammer stuff is about half the price. More people are going to realize this and Tide is going to lose market share.

There’s an argument to buying name brand cookies or chips or even toilet paper. You’re paying for quality and for the prestige of that name. When somebody comes over for the game you serve Doritos, not Great Value brand taco flavored corn triangles. I don’t think that same argument applies to Tide.

Links I liked

1. Let’s start things off with some of my articles at Motley Fool to get them out of the way. Here’s a stock I own that hasn’t missed a dividend since 1833 and an article about SNC-Lavalin, which I think is probably a pretty good value right now. I concluded on Twitter the other day SNC shares were probably worth $50-$55 (they’re $37 today), but I’m not sure if I can pull the trigger. The taint of scandal seems to follow the company wherever it goes.

2. ANOTHER Seeking Alpha calling Brookfield Property Partners their top pick of 2019? Okay, sure. Join the party. These seem to be working — after earnings on Thursday the stock is up nearly 20% for the year and it announced a 5% dividend increase. The stock could do nothing for the rest of the year and I’d be happy with results.

3. Canadian Value Investors has an interesting post about Truet-Hurst, a special situations scenario with a California winemaker likely to go private in the next few months. There’s a reason I loved these kinds of situations as a deep value investor — there’s usually money to be made.

4. Gen Y Money took a closer took at the standard 12-month maternity leave versus the new 18-month option. Naturally these things are about more than just money but it seems pretty clear to me what the best financial choice is.

Fun fact: one of the male employees at my grandparents’ old folks home took six months off when his wife had a child and the old people criticized the hell out of him for it. By far the old ladies were the worst. Don’t let their sweet offers to bake you cookies sway you from the truth — old ladies are the meanest people on the planet. Hitler probably feared his grandmother.

5. Next up is Andrew Hallam, via Asset Builder, with a sad story about the fall of Bitcoin and the many thousands of people it ultimately impacted. One of my co-workers at the grocery store and I used to crack jokes about the price of Bitcoin all the time. “It’s up $500 today! Those people are nuts!” Good times.

6. After Potash merged with Agrium the ticker symbol POT became available. Approximately 4,000 marijuana companies joined the lottery to get the ticker symbol. The winner, a tiny marijuana company with a market cap of under $30 million before it won, saw shares surge 65% after. That whole sector continues to amaze me, and not in a good way either.

7. Think you’re going to beat the market by waiting patiently with your pile of cash and then buying the dips? I used to. Now I know better. Here’s Of Dollars and Data throwing cold water on all your market timing dreams.

Remember, you don’t need to sit on a pile of cash to cherry pick the best opportunities. There are thousands of stocks out there. Surely you can find one or two that’s a decent value today.

8. Want a truly sustainable 10% yield? Dividend Earner has you covered. I took a closer look at the stock he mentioned a few weeks ago and figured I’d do more research on a pullback. The pullback happened but I was not paying attention. Now it’s over. All the sads.

9. Pickings are a little slim this week, so allow me to add another link to something I wrote. This is about a small-cap REIT long-time readers might remember I was pretty bullish on a few years ago. I still like it a ton today.

10. And finally, here’s Dale Roberts over at Seeking Alpha on why stocks like Texas Instruments will beat the Verizons of the world in retirement income. If you have a long-term approach, that is.

Stay tuned for next week when we look at useless ETFs, why so many celebrities buy real estate, and much more.

Have a good weekend, everyone.

Don’t Invest in Crypto, Edition 4,185

Don’t Invest in Crypto, Edition 4,185

According to the crack IT team here at Financial Uproar (seven grandmothers at the local assisted living facility), I don’t think I’ve ever really tackled the topic of crypto currency.

Oh wait. I talked about how much it costs to mine Bitcoin like two weeks ago. NICE WORK, MILDRED.

It turns out I also wrote a post asking if Bitcoin is keeping the price of gold down. Maybe!

I won’t bother explaining what crypto currency is at this point, since a) you probably already know and b) even the bulls don’t really grasp the potential. Or so I’ve been told, anyway.

As far as I can tell it exists as a way to extort people out of stuff and not be traced or to buy weird stuff on the dark web like some girl’s virginity. There’s gotta be a way for some enterprising woman to fake that and sell her virginity like five times, btw. Come on ladies, I have confidence in you.

I feel like crypto currency is sorta like your spare tire. Once or twice in your life it’s really useful and the rest of the time you can easily do without it. If your car didn’t come with a spare would you just drive and take your chances? I probably would.

Meanwhile, the crypto market is filled with the kinds of risks that traditional investors don’t have to deal with. Like this next story, which is 100% true.

Meet Gerald Cotten

Up until a couple months ago, Gerald Cotten was just your regular founder and CEO of QuadrigaCX, which was a crypto currency exchange and storage site. There was approximately $200 million worth of assets on the platform, all in imaginary bullshit coins that are always quoted in the price of real currency.

Sorry, slip of the tongue there. Still totally love crypto, guys.

So ol’ Gerry there decides to take a trip to India despite the place smelling like, well, India. He’s having a grand ol’ time helping out at an orphanage when suddenly he dies from complications of Crohn’s Disease. He was only 30 years old.

Gerry’s widow, Jennifer Robinson, starts to deal with his affairs after he dies. One of the first steps is to get everyone’s crypto currency and find a way to return it to them. Without Gerald there’s no QuadrigaCX, which is okay because that’s a dumb name anyway.

There’s a problem. She can’t access any of the accounts because they’re encrypted. She hires a bunch of security experts and they have no luck either. The only person who knew the passwords was Gerry. There’s 200 million dollars worth of crypto currency sitting on a laptop and a bunch of thumb drives with no way to access them.

You might be thinking “geez, Nelson. This sounds like a Mickey Mouse organization.” And you’d be exactly right.

It gets better.

Gerry’s wife was the sole heir of his estate, which was worth more than $9 million. Included in the assets were the family’s home in Nova Scotia, an undeveloped property in another part of Nova Scotia, a large house in Kelowna, a Lexus and a Mini Cooper, an airplane and a 50-foot sailboat. Oh, and he had enough kicking around to give his in-laws $100,000 to help his wife take care of their two rat dogs Chihuahuas.

Cotten signed his will just two weeks before he died.

But wait. There’s more.

QuadrigaCX has been having financial difficulties for months, including CIBC not processing about $26 million worth of payments. Some customers complained it would take weeks to get their money after putting in their sell orders. The company went into bankruptcy protection just weeks after Gerry’s death.

Oh, I’m not done yet.

The region of India where Gerald was is well known for being somewhere you want to go to fake your own death. I’m not the only one with suspicions, either. Quadriga had accounts for 115,000 people. The internet is filled with people accusing Cotten of faking his own debt. This is a big deal.

Hoooooleeeee crap

It is absolutely amazing some guy with his laptop managed to be one of the largest crypto players in Canada. As far as I’m concerned this made it even more likely he faked his own death. Gerald is not a moron.

But at the same time how does anyone look at this situation and say “yep, I’m going to go invest in Bitcoin now?” This shit is crazy, yo.

If Cotten is discovered in India he can be extradited back to Canada. But finding him isn’t enough. They also have to prove he willingly tried to screw people. Meanwhile his wife hides all his assets in crypto and nobody can find the cash.

Anyhoo, let’s wrap this up. Am I surprised the crypto world is dealing with something like this? Absolutely not. Nor will I be surprised if they find him at some point in the future. This is nuts and I can’t get enough.

Just How Risky Are Your Utility Stocks, Anyway?

Just How Risky Are Your Utility Stocks, Anyway?

Recently, one of my favorite blogs, Divestor, had a post about the PG&E bankruptcy in California and how this risk is constantly discounted by utility investors.

Essentially, his argument went like this. It turns out that one of the major fires in California this summer was caused by something coming in contact with a PG&E power line. It caused an event hotter than me without a shirt (OOH BABY HE’S STILL GOT IT) and the next thing you know there’s a big-ass fire and houses are being burnt down. And here I am, without marshmallows.

The bastard insurance companies, who just have to blame someone for EVERYTHING, determined PG&E was at fault and are demanding billions in penalties. The company couldn’t afford the payout, so it declared bankruptcy. Which gives me the perfect excuse to use this picture from one of my favorite The Office episodes:

So on the one hand, Divestor has a point, and it doesn’t just apply to power companies either. I own several pipeline companies, and there’s always risk one of those bad boys could go kablammo! TransCanada has nuclear power plants in Ontario, and we all know what can happen if one of those fucks up.

There’s no insuring against these risks, either. It simply costs too much.

If you want to take the pessimist perspective, I have a lot of my capital tied up in these types of risks. Every stock has some sort of risk when you invest in it, but I doubt names like Transcontinental or H&R REIT have the ability to screw up one time and send the stock into bankruptcy protection.

But at the same time I’m not particularly worried about this risk, and I don’t think you should be either. Here’s why, for possibly the first time, I’m disagreeing with Divestor.

Diversification

Let’s take a closer look at the utility portion of my portfolio. I have four power generators that I own, including:

  • Canadian Utilities (TSX:CU)
  • Brookfield Renewable Partners (TSX:BEP.UN)
  • TransAlta Renewables (TSX:RNW)
  • Polaris Infrastructure (TSX:PIF)

Altogether these four stocks represent about 9-10% of my portfolio. Canadian Utilities is by far the largest, with close to a 5% weighting on its own.

Since I’ve diversified my holdings into four different stocks, the worst that can happen is I lose 5% of my portfolio if Canadian Utilities goes to zero. That would be bad. But I’ve already minimized my risk by spreading my utility holdings.

Next is insisting on getting paid dividends. These four stocks combine to offer me more than a 6% yield, and that’s not factoring in my yields on cost (Never factor in yield on cost, by the way. It’s a useless metric.). A 6% yield is no consolation when a stock goes to zero, but at least I’m getting a portion of my money back each year. This also helps mitigate risk.

There’s also a different kind of diversification inside of each of these companies. Canadian Utilities has a lot of operations in Alberta, and so does TransAlta Renewables. But both also have assets outside of Alberta. Brookfield Renewable has assets all over the place. And while Polaris isn’t diversified — it owns one geothermal plant in Nicaragua with plans to build more hydro plants in Peru — there’s no overlap between its operations and my other holdings.

Just how big is this risk, anyway?

I’m just going by memory here, so this list might be woefully incomplete. Still, I think it’s an important exercise.

Just how many utility companies have gone bust from this sort of catastrophic event, anyway?

I can only think of two, at least over the last ten years. There was Tokyo Power in 2011 (which I wrote about on this very blog) after the earthquake/tsunami and then PG&E this year. Note that Tokyo Power didn’t actually go bankrupt, but investors saw a loss of 75% or so, which is close enough to a zero.

If we stretch the definition of a disaster we get a few more names in there. TransAlta (the parent, not Renewables) is in the doghouse because of its dependence on coal. Atlantic Power took on too much debt and was forced to cut its dividend when power prices didn’t cooperate. And so on. There are probably more of these.

But a) those stocks represent a different kind of risk (business execution risk) that doesn’t really apply here. And b) even if one of my stocks falls quite a bit diversification means I’m not screwed.

Besides, there are probably close to a thousand utility stocks around the world, and most just keep on trucking. If one per year screws up and has to declare bankruptcy over it (I think this estimate is still too high, but let’s go with it) then I have a 0.1% chance of disaster. I’d argue probably every stock I could ever invest in has a similar chance of going up in smoke.

So let’s wrap it up

Just diversify and you don’t have to spend much time worrying about this stuff. There’s also the argument that maybe you should sell a utility as soon as it cuts the dividend, a move that would have avoided some of the PG&E pain.

Either way, I’m not losing much sleep over this. The only thing I’m losing sleep over is my damn cat deciding she’d like attention at 6am.

Nelson’s Stock Watch List: February Edition

Nelson’s Stock Watch List: February Edition

Let’s do this thaaaaaang.

Not only do I look like Matthew McConaughey but I sound like him too! What are the odds?

Genworth Mortgage Insurance

Genworth MI Canada (TSX:MIC) is in the mortgage default insurance business. You know how Buffett is always telling y’all to buy wonderful businesses? This fits the bill.

The borrower pays up to 4% for the insurance that protects the bank in case they default on their mortgage. Default rates nationally have historically been well under 1% (more like 0.2%) and Genworth gets to invest the premium in the meantime. Genworth regularly does 50% net profit margins. It’s an amazing business.

It’s not all sunshine and blow jobs though. Mortgage growth is expected to be pretty tepid in 2019, and there’s always the risk of the Toronto/Vancouver housing markets blowing up. I don’t believe such a thing happens, but the risk is there. The good news is Genworth is well protected if certain markets go down the toilet. And even after the recent run-up it’s still attractively priced at less than 9x forward earnings and right around book value.

This is one of these stocks I avoided for years because I was worried about housing. I could have bought it five years ago and  compounded my money at 9-11% (depending on whether I reinvested dividends). So I’ll do the next best thing and buy some in February.

Northwest Healthcare REIT

Northwest Healthcare REIT (TSX:NWH.UN) owns medical office buildings, hospitals, and seniors living facilities in Canada, Germany, the Netherlands, Brazil, and Australia/New Zealand.

There are a few things I like about this company. It basically has limitless growth potential, including the potential to crack the U.S. market at some point. Management is doing a good job expanding in a way that actually increases the bottom line, something a lot of REITs aren’t very good at. And it can get higher cap rates by focusing on different markets. The Brazil hospital division is a good example.

But I’m not a big fan of the latest Australian acquisition, which saw it acquire 11 properties at a 5% cap rate. And the stock already trades at a premium to book value, which is never something you really want to see for a REIT.

Shares pay a 7.4% yield.

Cineplex

I already own this one and I’m down a little bit from my purchase price.

Cineplex Inc. (TSX:CGX) has a dominant position in Canada’s movie theater market, owning about 80% of the sector. Despite Netflix and other streaming services gaining in popularity, Canadians are still going to the movies and they’re still stuffing their faces with that delicious popcorn. Oh baby. If I had one of those popcorn machines I would be 400 pounds and die a happy man.

There are some negatives. Cineplex is in the process of installing those recliner seats in its theaters, which will cost a significant chunk of money. And it’s dependent on Hollywood continuing to put out good movies. 2017 was a terrible year, but the traditional movie industry redeemed itself last year. And 2019 will have the latest Star Wars movie, which will put some asses in seats.

Cineplex has consistently grown by 5-10% a year, and I think it keeps that up.

Canadian National Railway

Canadian National Railway (TSX:CNR) is one of those businesses I wish I understood better five years ago. I missed out back then but I don’t think I will again.

CNR transports most of the stuff that feeds our economy. It has tracks through every major Canadian city and even through Minneapolis and Chicago in the United States, all the way down to the gulf coast. When you have that kind of network it’s super easy to pass on price increases to your customers.

And CNR has a very comfortable duopoly position with CP Rail here in Canada, which should ensure steady profits for each.

CNR shares aren’t exactly cheap today (17x forward earnings) but I like the business enough to look past that. And with the big recent dividend increase shares are close to a 2% yield. I’m going to expect big dividend increases going forward, too. And the company also has a nice share buyback program.

SNC-Lavalin

I have to add SNC-Lavalin (TSX:SNC) to the watch list. After all, it’s down 20% in the last month alone.

One analyst says its ownership in Highway 407 (that’s a toll road going through the middle of Toronto) is worth about $30 per share with the rest of the business making up a measly $6 a share. But there’s a lot to not like about the engineering/construction business, never mind the fact SNC always seems to get into trouble with various governments.

The good news is the business is growing, albeit at a lumpy pace. The company has a robust pipeline of both domestic and international work. It has a nice current yield (3.1%) and more than a decade of consistent dividend growth behind it. And a toll road going through Canada’s largest city is a hell of an asset. And if you look over the last decade the $35 level has been a great time to buy. It turns out SNC fucks up a lot.

Honorable mentions

Royal Bank (TSX:RY) and Toronto-Dominion (TSX:TD): I feel like I gotta own these things, y’know?

Inter Pipeline (TSX:IPL): It’s still pretty cheap and I like its diversification into polypropelyne (not sure if that’s the right spelling but screw it). I already own a couple hundred shares.

TransCanada (TSX:TRP): Still relatively cheap and yields 5%. And I like the pipeline business a lot here. Fine, don’t build any pipelines. I’ll just enjoy the profits from the existing infrastructure.

Molson Coors (TSX:TPX.B): Beer is a fantastic business and I can buy this stock for a big discount versus its peers.

And that’s about it, kids. Any stocks you’re looking at this month?

Reminder: ETF Costs Can Really Add Up

Reminder: ETF Costs Can Really Add Up

So last week I treated y’all with a post about a real-life portfolio I’m going to be building for some people. I asked for your help deciding on investments and, for the most part, everyone delivered. I got some really good ideas from the peanut gallery. Yeah, that’s right. Peanut gallery. It’s not an insult. I like peanuts.

Some people suggested I go the ETF route, which I’m not going to do for a number of reasons. I’m confident in my ability to pick good stocks. It’s an intellectual exercise for me to try and beat the market. Besides, I have problems with the way many Canadian ETFs are set up and I’m not the biggest fan of U.S. stocks right now.

Still, some of y’all suggested it, even though I outlined why in the actual post.

One commenter even went as far as suggesting various ETFs I should buy. One choice was XBAL, an ishares product that uses ETFs to create its own balanced fund.

Now I really have nothing against XBAL or any other ETF for passive investors, folks who have no interest in learning about the ins and outs of investing. It comes with a very reasonable 0.18% management fee, which is a hell of a lot less than what an equivalent mutual fund charges.

But it’s also a hell of a lot more expensive than setting up a buy, hold, and forget portfolio. How much more? Let’s take a closer look.

ETF costs can add up

(Edit: I originally got the math wrong on this. The numbers have been corrected)

Let’s run the numbers based on a $250,000 portfolio, a $500,000 portfolio, and a $1 million portfolio.

We’ll start with $250k. That much cash invested in XBAL would cost an investor $45 $450 in fees each year.

$500,000 would mean double the fees, at $90 $900 per year. And $1 million would double the fees again, to $180 $1,800 per year.

Now let’s look at a portfolio with 25 names in it. Qtrade charges $6.95 per trade, meaning it would cost $173.75 to get the portfolio in place. Then we’d have to reinvest dividends, say 4 times a year. That’s an additonal $27.80 in fees, which puts us at $201.55 in fees for year one.

We’ve already crushed the ETF route at fees even at only $250,000 invested.

But what about year two? The buy and hold portfolio would only have $27.80 in fees while the $500,000 portfolio in ETFs would charge an additional $900. You’re looking at about $230 in fees over two years for the buy-and-hold portfolio versus $1,800 for XBAL.

Even at $250,000 invested you’ve beaten ETF fees by the end of year one, and that’s not even counting the cost needed to buy these ETFs in the first place. Some online brokerages don’t charge for ETFs. Others charge for specific ETFs. It’s all very confusing, just like my gender.

The point is this. Say in 10 years your ETF portfolio doubles in size from $500,000 to $1 million. You’re looking at well over $1,000 $10,000 in fees versus a buy and hold investor who just reinvests dividends four times a year, who would pay about $400.

Okay Nelson this doesn’t actually matter, does it?

Look, I’m the first to admit none of this really matters. $900/year for a balanced portfolio of $500,000 is a damn reasonable fee.

But a simple buy-and-hold portfolio with minimal turnover will always beat an ETF on fees, especially over a few decades. The secret is not fucking it up by making constant adjustments. This will be tricky for me, since I sometimes uncover great companies in my research. And I do want to add a U.S. component to the portfolio in a few years.

I also, foolishly perhaps, think my portfolio might be able to beat the underlying indexes. Especially the TSX Composite, which has a big mining and energy weighting.

What I’m saying is I think a portfolio of ETFs is a pretty good choice. And when it comes to investing, doing pretty good can still get you rich. I’m going to try and do a little better, and hopefully I can do more than save a few fees in the process.