Tag Archives: margin of safety

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.

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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.