Category Archives: Investing

Money Magic

Casino Illustration

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I enjoy games of chance. I’m particularly fond of casino scenes in movies—tuxedos for men, slinky dresses for women, slow-burning cigarettes, and dry martinis all-around. In real life, casinos are about as alluring as a mud bath. In Europe, for example, you’ll find a casino in every sleepy spa town—massages and “water cures” are meant to give a virtuous sheen to otherwise seedy places. Not a Daniel Craig—or even a  David Niven in sight.

The luck factor is probably one of the reasons I’m interested in stock markets too. There are many other things I’d rather do than actually work for money.  Just pick a winner and off to the races we go! (Of course, it never quite works out that way—darn gravity.)

Sleight-of-hand is not only found in Monte Carlo casinos though. It’s alive and well in many corporations. This past week, quarterly results have started to trickle in. You can get an eyeful of some pretty nifty accounting in their filing reports.

I’ll admit that I’ve tortured myself in many ways: self-doubt, bikini waxes, watching two episodes of Vinyl…but I have yet to savor what is sure to be the retina-frying experience of exhuming a financial statement. When the quarterlies arrive at the door, I immediately deposit them straight into the recycling bin. Warren Buffett may have the patience to pick through financial statements with his mental tweezers; I would rather watch Casino Royale, or paint dry.

Here are a few common sleights-of-hand:

Share buybacks. When corporations buy their own shares it reduces the number of shares outstanding and it makes metrics such as cash-flow-per-share and earnings-per-share look much better than they otherwise would.

Extraordinary items. The “footnotes” section of the annual report is a dumping ground for all kinds of juicy expenses, some of which may be on-going. Items such as restructuring, acquisition, severance, write-downs of impaired assets, and data breaches all have an impact on profitability but are often shooed-away, (“don’t worry your pretty head about these darling”), as non-material.

Lower tax rates. While this is not accounting trickery, per se, by moving a company’s domicile to a low-tax country, such as Ireland, a corporation pays less overall tax. This gives their earnings a rosy hue. But these better looking numbers may have nothing to do with improved earnings through actual growth.

So, how good are today’s corporate earnings for reals?

Some investment brainiacs say that deflation is not out of the question. So, unless you’re James Bond, here’s a hot tip: don’t throw all your chips in.

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Balloon Dress

C Balloon Dress

What’s it going to be—inflation or deflation? Everyone has her own opinion and there’s a good case to be made for either outcome. Governments have been printing money for some time now. According to the recent investment letter from Francis Chou, money printing is growing at an annualized rate of 7.2 percent. Extra low interest rates are causing asset bubbles in real estate and some equities. Fair-to-middling companies with decent dividend yields are in high demand, jacking up their share prices accordingly. Some government bonds carry a negative yield, or, in other words, you pay to invest in them.

On the other hand, you don’t have to be an economist to see that global growth is ticking down. China’s ghost cities, Canada’s woeful oil and gas sector, Brazil’s fiascos, India’s dubious GDP metrics. The U.S. is growing but ever so gingerly. The world is a different place than it was in 2007. It will take some time to absorb the excess supply of commodities. And, then there’s the aging demographics in North America and Europe that could potentially put the brakes on business start-ups, spending and investing. When the inflation rate is less than zero, hello deflation. Deflation is accompanied by high unemployment levels, low prices, and reduced private investment and government spending. Once a region dips into deflation it’s like swimming in a sea of molasses. Japan floundered for a decade.

At a recent lunch hosted by Burgundy Asset Management, I cornered one of their investment honchos and posed the inflation/deflation question. He felt that deflation is the bigger short-term risk. However, others say that, longer term, inflation is not out of the question to absorb all that printed money. (Longer term can mean a decade or more away.)

In his annual letter to shareholders, Chou recounts Sir Winston Churchill’s skirmish with MP Bessie Braddock. During one of Churchill’s benders, Braddock told him, “Winston, you are drunk, and, what’s more, you are disgustingly drunk.” Upon which Churchill replied, “My dear, you are ugly, and what’s more, you are disgustingly ugly. But tomorrow I shall be sober and you will still be disgustingly ugly.” 

Fold, Again

martha stewartMarie Kondo made the bestseller lists again with her recent tome, Spark Joy, a companion piece to her other hit, The Life Changing Magic of Tidying Up. While her first book was an ode to de-cluttering and the fine art of folding, Spark Joy focuses on the intrinsic pleasure, nay, joy, our stuff gives us. She recommends sifting through our closets, cradling each item— salt-stained leather boots, umpteenth black cocktail dress, or lumpy handbag—and asking ourselves: Does this boot/dress/bag still give me joy? If the answer is negative, then we should thank them for their services and give them the boot.

That Kondo has become a publishing superstar tells you she’s tapped into our desire for a less encumbered life. Cleaning out our closets is the first step in getting above the smog-line. Before the holidays I tackled the kitchen cabinets, tossing out old packages of noodles, cans of expired mung beans and editing my burgeoning tea collection, especially those jumbo bags of roiboos that I will never drink.  For the next few days whenever I went into the kitchen I opened the cupboards and felt, yes, joy, at the order I had created.

Hoarding and de-cluttering are the push/pull of our lives. We want to travel lightly but not so lightly that we give up creature comforts. I tossed out a kilo of roiboos but I still travel with my own kettle because I like a proper cup of tea. And I hoard moisturizers and hair styling products like they’re potatoes in a famine reasoning that when Armageddon comes, I’ll greet it with soft skin and frizz-free hair.

Fear is what drives our hoarding behavior. It’s an evolutionary advantage to put aside a little extra for lean times. But the key with anything is to keep things in circulation, not to hoard. We don’t sit all-day to conserve energy. It only grows when we spend it on daily chores and moderate exercise. We don’t feel more love by withholding it, only by giving it. Likewise, we don’t get wealthy by not investing it.

Today, Canadians are holding a record $75 billion dollars in cash accounts. This massive hoarding of cash is in response to the economic shocks of 2008 and, more recently, the rout in global, and especially, Canadian equities. Essentially, the average Canadian has folded in on herself like one of Kondo’s de-cluttering demonstrations. She’s shrunk her investment footprint down to a teensy-tiny size.

Great for closet space in tiny condos, lousy for future returns.

No one enjoys being whipsawed by the markets but by capitulating Canadians are sure to miss out on the inevitable market recovery. As asset prices recover people will start to get excited about investing again. If the past is any predictor of investor behavior, only as prices froth will people feel confident enough to join the party. At this point they will over-pay, lower the potential for gains, and reduce their margin of safety on those investments. Hey-ho.

So, these days, as you contemplate de-cluttering your life of pain-points and you look at your portfolio and mentally hold each ETF, equity or bond, ask yourself whether it still gives you joy. But don’t be too hasty to toss it if the answer is, “No joy. Whatsoever.”

Discarding over-worked winter boots is one thing, forfeiting future returns is quite another.

Cleaning Up

Lucy RicardoOne thing investors did not do this year was clean up. Ill winds from China, Latin America, and other emerging markets more than offset signs of life from the United States, where a flicker of economic growth, albeit tepid, is afoot. And let’s not even talk about small and micro-cap, energy and commodity-related stocks which have been crushed like concord grapes into a messy pulp.

The end of the year is the perfect time to face the tumbleweeds and dust bunnies lurking in your otherwise reasonable portfolio. Tax advisors and wealth managers call it “tax-loss harvesting”. I call it “dredging the channels.”

“Dredging the channels” sounds like the medical practice of bloodletting where live leeches are applied to a patient’s skin to relieve high blood pressure and other health problems. The process of culling underperforming stocks is bloodless but it’s traumatic nevertheless. After all, it’s final proof that your investment was a bonafide dud.

Dredging the channels is part of TCM (traditional Chinese medicine) and is as pleasant to do as it is necessary. It scrapes stale energy (called qi) out of the body. Turbid energy, like household dust or the gunk that ends up on your eyeglasses, is created every day. It can come from a variety of external and internal sources such as pollution, too much sitting, overthinking, or negative thinking, aggressive people, excess noise, and stress. When it isn’t cleared, it builds up a nice, thick coat. Over time this messes with your mood and energy and before you know it, you ain’t got no more pep. Dredging the channels involves stretching and visualization exercises. It is a form of personal housekeeping much like fluffing the silk cushions on your Louis IX fauteuil.

This month, in addition to my regular physical housekeeping, I’ve added the rather difficult task of dredging the “losers” in my portfolio. Normally I’m a loyal type but when the market gives you lemons, well…. So I’m booking the losses to offset my realized capital gains to lower my overall taxes (lemonade). This strategy only works in non-registered accounts and you must wait 30 days after the trade to re-purchase the same stock, should you wish to do so. If you re-purchase it sooner, you cannot claim the loss.

No one invests to lose money. However, there’s a gift embedded in every loss. This year the market has been generous with lessons. Here’s what the 2015 market gave me along with the lumps of coal:

Don’t buy into the “story”. I put some of my hard-earned money into concept stocks that have potential but no actual earnings and weak cash-flow. When the markets turn, (as they have this year), these types of companies are the first ones to get battered.

Earnings (see above). Yeah, they should have some.

The fine print. There’s no sense partnering with a company—and, as a shareholder you are a business partner—unless you have a good grasp on how the business is doing. So read their financial statements. How many shares are outstanding? Are there special warrants? What kind of burn-rate does the company have? Do insiders own a significant number of shares?

Value traps. In the quest for income, it’s tempting to grab high-dividend-paying stocks. But all is not what it seems. This year, several energy-related companies with healthy dividend payouts, reduced or cut them entirely. High dividends in a troubled sector spell T.R.O.U.B.L.E. Instead, look for dividend growers, those with growing earnings-per-share (EPS) and reasonable valuations.

Ah, valuations (see above). Yes, Dorothy, asset prices are inflated. The more you pay for something, the lower the probability you’ll make a good profit when it comes time to sell. Warren Buffett calls this the margin of safety. Create a wish-list of good companies and pounce when they go on sale.

Easy money. Ain’t no such thing. Newsletter writers, BNN stock pickers, investment gurus etc. Whether you work with an advisor or are a do-it-yourself-type or a combination of both, take the time to write a personal investment statement. This will help you to tune out as much of the noise in the financial media as possible. Sometimes the hardest part of being an investor is to sit on your hands and not trade.

Mood Board

Last week my quarterly investment statement arrived. I flipped to the last page and there in italicized mouse-type was the tally. Given the recent lacklustre performance of the markets, I was not surprised by the soggy number.

It’s foolish to expect investments to only go up. Pundits will even say that for accumulators a down market is a boon. Your favourite mangoes now sell for 75-cents a piece instead of a dollar. But emotionally it’s a downer. And, like a bout of melancholy, the sluggish stock market invites introspection, not only about mundane things like asset allocation, but also about the hazards of tying one’s personal worth, or at least daily mood, to the vagaries of global finance.

I have an unproved theory that people who are prone to melancholia may be better equipped to withstand the ups-and-downs of the market than those who feel compelled to be commercially, relentlessly cheery. Melancholics don’t expect the world to always be filled with unicorns and cotton candy. Thus down market days are not exactly welcomed but nevertheless accepted  as old friends bringing sad news.

In her recent essay in The New York Times, Laren Stover writes about melancholy perfumes and how “rainy” scents can be matched to our wistful moods. Given our society’s current fascination with happiness, (judging by the raft of books on the subject), it’s not easy to find one of these gems. One has to reach back to some of the Guerlain classics from the early 20th century like L’Heure Bleue, Jicky, and Mitsouko (my favourite), as well as some new-ish ones from niche “noses” Serge Lutens (Iris Silver Mist) and Frédérick Malle (En Passant). Stover neglects to mention Guerlain’s Après L’Ondée, literally, “After the rain shower”, a green fragrance with top notes of aniseed and rose and heart notes of violet and hawthorn.

Some years ago I took a perfumery workshop in Grasse, the heart of France’s fragrance industry. Each member of our small group had her own station equipped with a miniature “fragrance organ” of different essential oils. Our guide, a charming older gentleman who had worked for leading French perfumeries, gave us some basic instructions and off we went.

I already knew the fragrance I wanted to create: the olfactory expression of looking out a window on a rainy day in London, a good book and a tray of strong black tea (with milk) on the nearby table. It was to be a wisp of a scent composed of bergamot, chypre, licorice, lavender, lemony rose de mai, and a dash of iris root for that powdery, flinty touch.

My little masterpiece was coming along nicely, one tender drop at a time. As we were all novices, the instructor was free with praise. Until he came to me. He took one sniff and immediately reached for the aldehydes to “brighten” the scent. It was the equivalent of a burst of fluorescent bulbs where previously there had only been soft candlelight. I’m sure he meant well but I think he couldn’t imagine that I wouldn’t want an “up” scent.

This is like a lot of investors. We imagine that the market can only go up, up, up. When it pauses or reverses, panic sets in. You could say that quantitative easing, the US government’s program of printing money to buy bonds, was the financial equivalent of dosing perfumes with aldehydes, synthetic compounds that juice a scent giving it sparkle and fizz like popped Champagne. (The 1980s blockbuster fragrance Giorgio Beverly Hills is the Frankenstein of aldehydes.) Come December, when U.S. interest rates are likely to go up, equity markets may wilt like meadow flowers under a cool, steady rain.

When this happens it will be good to remember that there’s a season for everything. Much of the recent market froth was related to abnormally low interest rates, highly-leveraged trades and speculation. When the bubble bursts—and it will—say ‘Ciao, Giorgio Beverly Hills’ and ‘Bonjour, L’Heure Bleu’.

Ghost Story


lp-haunted-isles-leeds-invertimgThe ghosts of Proust are those brittle couture-clad creatures that haunt the salons of fine hotels where they sip ballet pink Champagne. Perpetually enrobed in an air of melancholy, they climb the spiral staircase to the sacred solitude of their tiny perfect rooms. Drawing the papal purple velvet curtains they turn away from the the noise and the ill-mannered hordes and take to their beds. What else is there to do? As their heavy eyelids close on yet another day, the ghost damask wallpaper shimmers like a spectre.

Oh, the horror of imperfection. If only everyone behaved well and all the flowers were arranged just so life would be so much sweeter. Those who expect perfection and cannot tolerate anything less, suffer.

Take French fashion designer Yves Saint-Laurent. As his lover and business partner Pierre Bergé once said, “Yves was born with a nervous breakdown.”  Saint-Laurent would often retreat to their chateau in Normandy to sketch new collections and to recover from the excesses of Parisian night life. One afternoon Saint-Laurent returned to the chateau and noticed that the housekeeper had placed a bouquet of flowers in the dining room. It pained him to see the uninspired arrangement. He took a pair of nail scissors and painstakingly snipped the tops off each stem, a hundred tiny decapitations. Then he took to his room for the rest of the day.

Just as it’s unrealistic to expect perfection from our housekeepers—and even our fashion designers, after all Saint-Laurent was a great designer but not always a good one—it’s equally juvenile to expect that markets will behave the way we wish them to. As the industry mantra goes: past performance does not predict future returns. Yet many investors mentally latch onto past success and expect history to repeat itself.

After the crash in 2008 it took several years for the markets to regain momentum after which they went on a tear. Investors regularly boasted of 15-percent and up returns. DIY investors felt like geniuses and portfolio managers behaved like kings of the universe. But the wheel turns…These days it’s unlikely our quarterly reports show anything like those stellar returns. Where did all those investing geniuses go, I wonder?

According to John Bogle, the famous value investor and founder of Vanguard, we’ll be facing a tough decade ahead. His math is simple but hard to refute.

He divides total return into investment return and speculative return. Investment return is approximately 2-percent. That is the average dividend yield on U.S. equities. Corporate earnings growth adds another 6-percent for an 8-percent return. Pretty good so far.

Speculative return is how the market values a company’s earnings growth (price/earnings). Right now the P/E ratio is 20 but the historical average is 15. A lower P/E means lower stock prices, unless earnings skyrocket. So, based on Bogle’s back-of-the-napkin calculations, that 8-percent investment return plus a negative speculative return of, say, 3-percent, leaves us with an average return of 5-percent before inflation and before portfolio management fees. Throw in a couple of ghosts-in-the-machine like hedge funds, high-frequency traders and massive short-trades and things can get pretty hairy, pretty fast. (Hello Valeant!)

To mix my holiday metaphors, to avoid a fright upon finding a lump of coal in your retirement stocking, consider factoring a lower real return, somewhere between 1-to-4-percent, into your nest-egg calculations. Many companies today are priced for perfection but they could hit a snag.Don’t let your fantasy of perfect get in the way of a perfectly nice arrangement. Save a bit more, (or spend a bit less), as insurance against a decade of fair-to-middling market returns.

But, darlings, whatever you do, never skimp on pink Champagne.

Ringo, Ringo

Chanel Comet Ring

Chanel Comet Ring

Dear Readers, you may have been wondering where I’ve gotten to. No new posts since the end of August? Come on girl!

Well there’s been this-and-that. Among other busyness, I got my certificate in Advanced Investment Strategies and, yes, it was as thrilling as it sounds.

The other night we saw Ringo Starr and his All-Star Band. Frankly, it could have gone either way but I gotta say, it was a rollicking good time. This man is enjoying himself so much you just have to clap along.

The former Beatle’s life is a good reminder to never underestimate  anyone, including oneself. By any measure his early life was shambolic.  A crummy Dad, poverty, severe ill health, illiteracy,  violence, lousy jobs, and a cold, damp, coal blighted climate with only two seasons: “July and Winter”. And yet, with a little luck and a lot of grit, Ringo crossed the wide chasm from have-not to mega-have.

Given his upbringing it should come as no surprise that Starr has some strong opinions about money and investing. As he told Forbes magazine, “…I always bought the house. I always felt good about that. I mean it took a long time till we made enough  money that I could buy a house. I have a business acquaintance who keeps saying “Cash is king,” and just because of where I come from, I like to have some cash. That’s all. Those are the two sort of rules I have.”

Starr’s a great drummer but what about his investing savvy? Anyone who’s come from a turbulent background will be drawn to the apparent security that owning land provides. As long as you can manage to keep the lights on, there’s no one to toss you and your belongings on the street. And, when all else fails, you can rent or sell it to put a few shillings in your pocket.

Some people consider real estate a kind of bond proxy in that it generates a predictable stream of income in the form of rents paid/saved. And, like a bond, its market value varies depending on interest rates, economic growth, and investor sentiment. But where a bond will mature and pay out its face value, a house never “matures”. You can keep it forever.

There are other differences as well. Like precious metals and other commodities, investing in real estate comes with many additional costs. Gold bars need to be transported, insured and stored, while real estate needs to be maintained and insured. It’s not portable and is heavily influenced by, not only the macro environment but also the micro, in other words, what is going on in the immediate neighborhood. Each gold bar is pretty much like the other, yet each property is unique with its own quirks.

Cash is Starr’s second investment pillar. But cash alone, e.g. stacks of bills hidden under the mattress or in a storage locker à la Walter White in Breaking Bad, is not really a smart move. For one thing, inflation erodes its value. The best way to think about cash is as a market hedge. If the stock market melts, those who have “kept their powder dry” can use it as an opportunity to buy depressed securities. It also provides a cushion during panics; you can live on your cash instead of being forced to sell assets to pay your living expenses. For this reason, in retirement, it’s good to have at least two years’ worth of basic expenses socked away in short-term GICs or actual cash.

Starr doesn’t mention other asset classes like equities, art, hedge funds, private equity etc. Cash and real estate alone are not a well-diversified portfolio for the average person, although if you have enough of each, you’re pretty much bullet proof. With a net worth north of $400 million, Starr’s well able to diversify.

Judging by his recent concert here his biggest assets are not the real estate holdings or the wads of cash—although they help. At 75, Starr is upbeat, funny, whippet-thin, fit, happily in love with his wife, surrounded by great talents and good friends, and is doing exactly what he wants to do whether it’s making music, painting, writing, acting or petting the dog.

Baby, he’s a rich man.

Peace & Love Ringo!