Moved (again)

I’ve gotten my own domain name, and moved to

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Market Outlook December 19, 2011

The good news is that the VIX continues to fall. It is now below 25 (a little), and hopefully it will continue to fall below 20. This would mean that the popular outlook is becoming more tempered and less expectant of surprises. That doesn’t mean the market will necessarily improve, but when investors have less uncertainty, they’re more likely to invest. As they do, increased demand tends to push up prices. This, in turn, feeds the perception that markets are a good investment, further feeding the “virtuous cycle.”

We’re not quite there yet, though. Last week was negative for stocks, while it was positive for bonds. Bonds continue to be favoured by the market, with super-low yields and high prices. Stock markets, on the other hand, continue to display negative momentum, and appear more and more undervalued. This week, the stock market appears almost 9% undervalued, while my fair value estimate has remained virtually unchanged.

I was pleasantly surprised this week by the relative performances of gold and real estate stocks. Since selling gold to buy real estate (XRE), I watched closely to see if it appeared to be the right decision. This last week, gold dropped over 5%, while real estate rose 0.33%. You can view the comparison on Google Finance. This week, I will continue to own XRE.

10 years ago

Please excuse this personal indulgence. We will return to our regular programming tomorrow.

I didn’t understand then, and I don’t understand now. There has been a lot of discussion about the events of September 11, 2001. I was in university at the time, at the Université Laval in Quebec City. I heard about it from one of my best friends, who is American. He was shocked, and I think he understand that these were momentous events.

I’ve never been a very empathetic person. I couldn’t understand how 3,000 people dying in a fiery building was different from 3,000 people dying in a famine or one person dying of disease.  From my current vantage point, ten years later, I still think every death is a loss, at the same time as being inevitable (in that every one of us will die at some point). But it was the sheer hatred and murderous destruction that was entirely the result of human action that was despicable. It was the shock of not being able to comprehend how human beings could calmly plot for months to inflict this kind of suffering on fellow human beings.

A couple years later, I was attending a conference in San Diego. Most of the attendees were American, and as I joined them at breakfast one morning, the conversation turned to the presidency of George Bush. I was indifferent to his political stance, but one woman shared her gratitude that he was president during 9/11. That’s just what we needed, she said, someone who was strong and would lead us into a war of vengeance, to pull us all out of the confusion prevailing after the terrorist attacks. I was surprised and dismayed to find out that, in her mind at least, responding to brutality with brutality was right and helpful.

At the time, I didn’t understand the magnitude of the loss experienced by the American people, and by all freedom-loving people in the West. Now that I’m older, I can begin to understand some of the many reasons September 11, 2001 was a tragedy. But I still don’t understand the hatred. I don’t understand why people blame others for situations of poverty, sickness or even just lack of opportunity. I don’t understand envy of freedom, prosperity or health. I don’t understand why human beings neglect the needs of members of their own species, who share the same planets and have the same desires. I don’t understand why people, who are more intelligent than other animals, fight over shiny trinkets, influence and opinions.

That’s why I don’t like to remember the tragedy of 9/11. I remember the heroism. I remember people helping others in need. I remember people saving lives. I remember people working hard and putting forward the best that was in them. After all, that’s what gives me hope for the human race: when we really need it, people are able to set aside their differences and pull together to achieve something noble. It might not happen often, and it might not happen every time, but the potential is there. There is at least some good within most people. So, even though I don’t understand why people cause each other to suffer, I know we also cause each other great joy. I’ve simply made a conscious choice to focus on the good.

Book Review: Free at 45

The book Free at 45: How to Retire Early & Happy is by Tim Stobbs, blogger at Canadian Dream. Tim  generously sent me a review copy of the book. I found it quick and easy to read and I would recommend it to most people. It does a great job of introducing the idea of retiring well before age 65, without getting bogged down in details. The tone is consistently positive, but I don’t feel that the ideas are over-optimistic. Tim includes an appropriate level of realism, which will give anyone considering this course of action plenty to think about.

The basic idea of the book is that it is possible to retire at 45. It doesn’t take a miracle, only planning and dedication. What I really like about the book is that the author starts at a fundamental question that is often overlooked when discussing money: what makes you happy? He attacks the myth that money makes us happy, and suggests that before considering retirement, we ought to find out what makes us happy. He includes some hints and tips for where to look and what to consider, while being respectful of the fact that happiness may be different for each person.

Tim continues by giving an overview of using and avoiding debt, spending less, saving money and investing. The information he shares is well researched and well presented, so that it’s easy to understand. He also recognizes that each topic could be the subject of its own book, and recommends that a reader who needs to focus on a particular area find relevant volumes in the library. There are a couple pieces of advice that I would disagree with, but only as a matter of personal preference. None of it was dangerous or misleading, such as I have seen in other books. Personal finance incorporates at least as much art as science, so it’s important to be aware of personal preference and style.

There are sections on planning, government programs and future value calculations. These are important in understanding how to estimate when you may be able to retire, given your savings rate, return, inflation and spending. It’s good to understand how the various programs work and what benefits can be expected. It’s also good to get a view of what sources of income will be available over time. Especially when planning to retire early, there are likely to be many stages of income and expenses.

One subject that is much too often overlooked is risk. Tim addresses a variety of risks and suggests putting in place at least two backup plans. He suggests what some of those backup plans might be, including having a contingency fund, selling investments, selling your house or taking a loan against it, or taking part-time work. In the end, life is nothing if not uncertain, so while it’s wise to have a plan, it’s important to remember that things won’t go exactly as planned.

Tim wraps up by thinking about problems that might crop up during the transition to retirement. This is where having a firm idea of what produces happiness for you will help to make your retirement an enjoyable one. And I really liked the suggestion to take a month or a couple months of unpaid leave while working, to get a taste of what retirement might feel like. It will also give you a chance to evaluate whether or not your plans are realistic and acceptable to you.

The book is a well written overview of the many things a person should consider when they are planning their retirement. It’s original in suggesting that by starting early and planning well, retirement could occur much earlier than most people believe. While it’s not long on detail, it does a great job of tying together the different pieces that all need to be working in order to move you in the right direction.

Market Outlook June 13, 2011

What a negative week for equity markets. The TSX 50 day moving average is at 13,721 and the 200 day moving average is at 13,258. It closed this week below either of those at 13,084. This is not a positive development. However, looking at summer 2007 or summer 2010, the same thing happened and didn’t necessarily translate into a downtrend. In each of those years, the summer months were weak and volatile, but not particularly negative.

Market momentum continues to favour gold over equities. Having owned gold over the last week didn’t avoid losses, but the gold price dropped about half as much as stock prices. This coming week, I will continue to own gold. In fact, the stock market momentum has dropped to the point that even bonds have better momentum. It appears to be time to take protective action.

Looking only at the stock market, its valuation appears cheaper than any time over the past year. The outlook is uncertain, which is why money has been flowing out of the market and into other investments. This has brought down prices to a point where they may seem more attractive to investors. I know that many of my stocks have fallen to levels that I haven’t seen in months and likely since last year. I didn’t ever want to see them back at these levels, but since I’m investing for income, I will continue to own them and will even consider buying more.

Stock Research Tools

I will introduce the tools that I use in researching stocks. Nothing I can do will guarantee success, but my hope is to avoid the largest, most obvious risks. I gather as much information as is practical, and then make my decision of whether or not a stock is worth buying and, if so, what price I would like to sell it at.

I start at I am able to find the share price, book value per share, market cap, dividend, current yield, P/E, debt/equity ratio and payout ratio (or dividend coverage). I look for companies that have a small to medium cap size (under $1 billion), positive earnings and pay some income with a reasonable (under 90%) payout ratio. I also require a low debt-equity ratio, under 1.00 except for REITs (under 2.00).

If a company looks attractive, I will then continue on to Google Finance, where I look at the stock price history. I look for the high point, the low point and the recent trend. I also look up the company on to find out what professional investors have said about the company in public. This is a good way to find out if there is respect for current management, or worry about upcoming difficulties or changes that may not be reflected in past financial documents.

In further research, I look at the prior three annual reports and the most recent quarterly (or annual) report. I look for trends in dividend coverage, debt and operating earnings. I try to understand how much ongoing investment (cap-ex spending) is required to keep the business running. I look for the dependability of management in performing on their past promises. I also look for management’s ownership in the company, either in equity incentives or required ownership or a control block.

I look for insider activity at SEDI. If there is little or no activity, it is meaningless, but if there is large regular buying or selling, it is a hint on the confidence of management, the people who understand the company the best. I keep in mind that this may on reflect opportunities to exercise options or an unrelated need for cash.

Finally, I choose a price below which I am comfortable buying and a price above which I feel it would be prudent to sell. I lay out the risks that I see, which should help me sell when conditions deteriorate, as opposed to reaching a successful sale price.

Market Outlook June 6, 2011

Last week, I put my money where my mouth is and bought the gold ETF. This week, gold (IGT) continues to present better momentum than the other asset classes. This coincides well with a market correction, since gold has risen while stocks have fallen. If you are thinking of hedging your portfolio against stock market volatility, gold appears very attractive for this week.

If you are looking only at stocks, bonds and cash, stocks still appear to have a slight advantage. This implies that a major correction doesn’t appear likely yet. At the same time, it’s looking more probable. The market adage “sell in May and go away” is starting to sound very reasonable again for this year, much as it was last year.

Earnings reports seem fine, but the economic outlook is suddenly uncertain again. As the stock market valuation drops, it becomes more attractive. But picking the bottom is extremely difficult. At least if you’re investing regularly, you aren’t likely to be overpaying this week.