Canadian Capitalist

32 responses so far ↓

• 1 The Financial Blogger // May 24, 2007 at 9:53 pm

  I agree with you CC. Investing only in stocks could be cruel and you could end-up losing a lot of money. I also lost 30% of my portfolio in one transaction (see losing money and learn on my blog). It’s painful! I might suggest to invest in a dividend funds and read a lot on financial blogs and magazines before trading stocks.
  FB

• 2 FrugalTrader // May 24, 2007 at 10:31 pm

  Not only that, if you can’t afford to put $5k in your stock trading account, then you can’t afford to trade. People just starting out with low balances should go the index mutual fund route.

• 3 Mike // May 24, 2007 at 11:27 pm

  I agree FT - just go to a bank and buy an index fund. Worry about the MERs when they more $$.

• 4 George // May 24, 2007 at 11:36 pm

  Matthew needs to do a LOT more research before he even thinks of investing in individual stocks. There is no such thing as a “low risk” stock (although some have lower risk than others), and the fact that a stock is trading at a particular value ($5, $10, or whatever) has absolutely no bearing on whether the stock is “risky” or not.

  I ditto the suggestions above. Go to a bank, set up an investing account, and spend a few years putting money into an index fund bit by bit. Once you’ve built up some money there, you might want to consider dabbling in individual stock picking.

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• 6 Dave // May 25, 2007 at 9:54 am

  I agree with George. There is no dollar value to volatility and stocks under $5.00 tend to be even more volatile!

• 7 Mr. Cheap // May 25, 2007 at 10:31 am

  If Matthew really wants to invest in an individual stock, wouldn’t a “buy-and-hold” blue chip be reasonable (say a BRK.B or BMO)? Share price is pretty well meaningly, so don’t try to factor it in to your decision (it like saying what’s better a $2000 GIC or a $1000 GIC… They’re the same, its just that one costs double and provides double the return)

• 8 Mr. Cheap // May 25, 2007 at 10:41 am

  If Matthew wanted the experience of owning individual stock, might not a “buy-and-hold” of BRK.B or a Canadian bank stock be a conservative, reasonable first buy?

  In terms of share price, its pretty much irrelevant. Which is better, a $2000 GIC or a $1000 GIC? (one has double the return of the other at double the price - big diff). If I like the looks of a stock, I’ll buy a certain amount of it (say $5000 worth of BMO) and I don’t really care if that’s 68 shares, 10 shares or 3413 shares (splits and reverse-splits make stock price pretty arbitrary).

• 9 Big Cajun Man // May 25, 2007 at 11:04 am

  CC, glad to see I wasn’t the only one telling friends to buy over inflated stocks (well I never told anyone to buy, but I did say I was holding, and folks interpreted that as a BUY recommendation, so it is THEIR fault in my mind).

  Invest only if you don’t have debt, if you have debt, invest in paying THAT down! –C8j

• 10 FourPillars // May 25, 2007 at 11:20 am

  He should look into the various drip programs with banks etc.
  You have to pay for one share (probably less than $100) and can buy fractional units after that.
  Not very diversified but you can do it with small sums of $.

• 11 FinancialJungle // May 25, 2007 at 12:24 pm

  I’m in the minority. Although I do invest in and advocate index funds, there’s a place for stock investing. The “80% active funds failed to beat index” adage doesn’t apply here, since DIY stock pickers pay no MER. Index funds have to make up for their MERs just to break even with a DIY stock picker.

  My objective for stock investing is not to beat the index, but to tailor the composition to my liking. I like stocks that reward investors with dividends, because they tend to be less volatile than the market, and relatively easy to value. Dividends are tax-efficient, and sometimes you even receive tax refunds. By receiving dividends, you’re encouraged to stop trading, which triggers capital gain tax. Dividend funds are expensive because more than half of the dividends go toward MER.

  If you have $5,000, consider QuesTrade that offers $5/trade and no inactivity fee. A 5 stocks portfolio will cost you 0.5% up-front, and no MER forever. Since Matthew is a young 21-year old student, his greatest asset isn’t his $5,000 portfolio; it is his intelligence and this stock-picking endeavor will add experience under his belt. Losing $5,000 is inconsequential. I lost $32,000 during the tech bubble, and I’m doing just fine. The tech bubble burst helped me become a value investor. If you are going to polish your skill, why not do it when you can afford to lose it all?

  Finally, if someone is asking about stock picking, he probably has an interest in the process. It’s not work if you enjoy doing it.

• 12 GIV // May 25, 2007 at 1:28 pm

  BORING!

  Just kidding, CC. Indexing is the way to go for the way to go for most.

• 13 Canadian Capitalist // May 25, 2007 at 2:07 pm

  FJ: I disagree that you should be uninterested in how you are doing relative to the index. It is very relevant because if despite all the efforts you put into stock picking, you are not doing better than a passive portfolio, why even bother?

  Even great stock investors like Buffett say that they get one or two really good ideas per year. What makes you think that Matthew can pick five good stocks?

  When you say that index funds have to make up for their MER just to break even with a stock picker, you are assuming that your average stock picker always does as well or better than the index. This has been proven false in many studies. In fact, when average investors are piling on a trend, you can be pretty sure that it is close to being over.

• 14 Canadian Capitalist // May 25, 2007 at 2:10 pm

  GIV: An investor friend of mine says exactly the same thing about my indexing approach. I’ll be the first to admit that passive investing isn’t very sexy and you can’t brag about a stock you made a killing on at parties. But hey, at least, I don’t have to read annual reports (financials are the worst, they run into hundreds of pages) or ValueLine.

• 15 FinancialJungle.com // May 25, 2007 at 3:06 pm

  CC: My goal isn’t to achieve raw returns, but to achieve risk-adjusted return. No one can manage raw returns, but you can always manage your risks. Stock pickers are often portrayed as offense-centric, but as a value stock picker, my tactic is defense first through margins of safety.

  I disagree that your objective must be beating the index. As a dividend investor, I have 3 parameters to look at:
  1. How much dividend to I get today?
  2. What’s the projected growth?
  3. How likely will the growth deviate?

  I picked up BMO in 3 instances in the past for yield, and I’ll pick up maybe 50 more times in my lifetime. To me, a rough day is a good day. I don’t know what BMO will do, but if it can stay relatively cheap, my next 50 purchases will buy me more shares and more dividends. My goal isn’t to have BMO beat the index, but to buy a high quality stock at cheap valuations. I can archive my financial goals without BMO beating the index.

  I do not expect Matthew to pick the best 5 stocks, but there’re lessons to learn along the way. $5,000 is a drop in a bucket when you compare to his overall wealth which include the intangibles like his intelligence. Students are willing to put all their eggs in one basket by chancing 4 years and $30,000 in one university program, how does that make investing $5,000 in 5 stocks less rational?

  When I hear a newbie question, I don’t like to automatically dumb the investor into the index bucket. Everyone is a newbie at one point, even Warren Buffett. Yes, most investors should just invest passively, but don’t jump the gun. I have a Computing Science degree. Computing science is hard. Value investing is not. The hard part is controlling your emotion, and that can be learned. No one is a natural born value investor. If the newbie enjoys the process and is willing to stay discipline, he too can become a successful stock picker.

• 16 Canadian Capitalist // May 25, 2007 at 5:33 pm

  FJ: Please tell me how you evaluate BMO’s projected earnings or dividend growth. While we are at it, I’d also like to know how its growth will deviate from the past (What past are we talking about? recent past? past 5 years? past 25?).

  I don’t think index investing is dumb, just that successful stock picking is incredibly hard. If it is working for you, all I can say is great! Just don’t assume that others can be successful at it. I’ve learnt the hard way never to assume that I am smarter than the market.

• 17 Canadian Capitalist // May 25, 2007 at 5:37 pm

  FJ: It’s funny you should mention Computing science and value investing. In fact, I am an electrical engineer (close enough) but I hold the opinion that EE is a piece of cake compared to investing

• 18 FinancialJungle // May 25, 2007 at 10:37 pm

  Well, I guess you’re a smarter electrical engineer than I’m a software programmer

  Seriously though, I believe passive investing has its merits, since I have ETFs in my portfolio as well. But before I know what Matthew’s true passions and objectives are, I wouldn’t dismiss stock-picking as a viable vehicle, and I don’t assume he’ll be successful at first.

  BTW, I do assume the market is smarter than I, however I’m more sober than the market.

  On your question regarding BMO, I look at historical earning growth and make a conservative estimate to give myself a margin of safety. I also look at historical earning and dividend yield ranges and see where we’re at today. Before anyone say “past performance isn’t indicative of future return”, this clinch was written in the context of stock performance, not fundamentals. Let’s face it. Neither of us know if which will which will appreciate faster: BMO vs the market. So why worry about something that we cannot control? Instead, BMO gives you a 4% yield, while the market has 1.65%. Dividends are more certain than capital gains, and that’s why when you buy dividend paying stocks, you cut your risks without giving up your expected return. I don’t claim to know everything. Far from it. But, I have role models, and I’m seeing good results by simply mimicking their processes.

  I wouldn’t trade my existing portfolio for a 100% ETFs portfolio. My portfolio has over 3% total yield, while XIU has only 1.65%. You can’t reliably count on capital gain to fund your retirement especially with a concentrated and volatile index like the TSX, but you can depend on your dividend yield and dividend increases. Can you believe my dividend focused stock portfolio has less volatility than the TSX? It’s not that difficult to imagine, because there are studies that show dividend paying stocks trumps.

  You mentioned successful stock picking is incredibly hard, but so is blogging. I’m sure you put a lot of energy and love into http://www.CanadianCapitalist.com before it became one of the most popular personal financial blogs in Canada. Stock picking is the same thing. You can’t just quit after the first try. You’re supposed to fail at first. You learn from your mistakes, polish your process and try again. If you work at it and enjoy the process, there’s no reason why you can’t succeed. To the best of my knowledge, there’re no studies that show private DIY investors under-perform the market. Where would they legally get the data from anyway? We have data for mutual funds, but they’re not the same comparison. I’m willing to wager that there’re many low-profile private investors who by pass the MERs, and simply buy and hold good quality stocks when they’re cheap.

  Very sorry for the long post, and thank you for reading this far. I will give you this. Yes, most investors should stick with cheap index funds and ETF.

• 19 Canadian Capitalist // May 26, 2007 at 12:16 pm

  FJ: I don’t know what we are arguing about when you agree that most investors should stick with a passive portfolio. We’ll have to disagree about how easy stock picking is and how easy it is to develop a process. In my opinion, it is incredibly hard and very few are (or will become) good at it however much time and energy they spend on it.

• 20 KS // May 27, 2007 at 12:30 am

  Well said FJ, and you are right before we know what Matthew’s true passions and objectives are, we shouldn’t dismiss stock-picking as a viable vehicle. The ETF option is still there and perhaps it might be a good start. But eventually a long-term value investing dividend strategy is the way to go.

  My own investing career (spanning more than 15yrs) first started with GICs, then Mutual Funds, then ETFs, and then value investing on my own. And going off on my own has provided the greatest returns with minimal risk and less time and effort on my part. I do not check my stocks on a daily basis, I do not panic at market drops, and I do not spend hours and hours pouring over financial data.

  Read anyone one of these books, and they will tell you to invest on your own and avoid MERs:

  - The Investment Zoo, Stephan Jarislowsky
  - Stop Working, Derek Foster
  - The Warren Buffett Way, Robert Hagstrom
  - The New Buffettology, Mary Buffett
  - The Dividend Connection, Geraldine Weiss
  - The Dividend Investor, Harvey Knowles

  Stock picking or investing as I like to call it does not have to be rocket science. It may feel like rocket science when you are in the dark about how to select undervalued quality companies. The key is to define “quality” and “undervalue”.

  In my opinion here are the key elements to being a succesful investor:
  - education, understand what is value investing and apply it to dividend paying stocks
  - have the patience to ride out market downturns
  - have the discipline to stick to the strategy and not to follow the latest investing fads
  - have a long-term (+10yrs) outlook

  I will leave you with the following three quotes:

  “Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability. Then you own those shares forever.” -Warren Buffett

  “Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.” -Peter Lynch

  “Focus on ‘value’ stocks. Studies have shown that buying companies when they’re cheap (when the market value of the company is only slightly higher than the value of the assets on its books) generates much greater returns than buying more expensive fast-growing ‘growth’ companies. Buffett seems to know this, because he routinely buys companies when they are unloved and their stocks are relatively cheap.”
  -Matt Krantz, USA Today, “Invest Like Warren Buffett”

  I also hold a Computer Science degree and I can truly say that investing is a lot easier.

• 21 Canadian Capitalist // May 27, 2007 at 6:23 pm

  KS: I’ll admit that dividend investing is a decent strategy that has worked very well in the recent past. I am not convinced that it will continue to do so always (In fact, I am convinced that there will be long stretches where it won’t work and shake out the “recent converts”. That’s the only way it will continue to work in the future).

  Passive investing need not be an all-or-nothing proposition. You could have a mostly passive portfolio and be invested in a handful of stocks. However, I wish I had started out with a passive portfolio, instead of picking such winning stocks as JDS and Nortel. It is so easy to pick a wrong stock and violate Mr. Buffett’s rule #1: Never lose your capital.

• 22 Wolf Stone // May 27, 2007 at 7:29 pm

  i just want to say 1 thing…to Matthew…finding low-risk stocks for under $5 is virtually impossible. I usually invest in micro cap companies but have found that most companies i invest in are super risky and volatile. When a stock is under $5 they usually dont have any visible earnings…which is what makes them more risky compared to companies that have steady cashflow. I know there are exceptions to this statement…but stocks trading under $5 being risky are the norm.

• 23 Canadian Capitalist // May 27, 2007 at 10:35 pm

  KS, FJ: Here is a comment on this very topic from Steady Hand blog:

  “Dividend-paying stocks are the way to go…you can’t lose.”

  Certainly this strategy has been successful so far this decade, but it truly has changed from being an investment strategy to conventional wisdom. That tends to take away the appeal and significantly reduce the opportunity for above-average returns.

• 24 FinancialJungle // May 28, 2007 at 1:01 am

  Buffett’s rule #1 is one of those overused cliches that have no practical applications. Not even passive investing can guarantee principal protection.

  I too lost money in JDS when I first ventured into stock picking, but JDS was neither under-valued nor paying dividends. Imagine in your everday life you quit at the first sign of hardship, then you’ll never accomplish anything. No one is a natural-born guru. You’re supposed to fail at first. You learn from your mistakes, and then you stop buying concept stocks like JDS and Nortel.

  Dividend investing is a conventional wisdom? I doubt it. The market is stuck in a perpetual PMS. It is too emotional to follow the decipline of dividend and value investing. On the contrary, passive investing IS a conventional wisdom. As ETFs and closet index funds become more pervasive, the market exibits more herd mentalities making passive investing riskier than ever before. It wasn’t too long ago when passive investors lost 50% in the TSX and S&P500, and over 80% in NASDAQ.

• 25 Canadian Capitalist // May 28, 2007 at 7:56 am

  Buffett’s Rule #1 says “don’t lose your capital”. It doesn’t say your investments will never go down in value. With individual stocks it is so easy to lose everything (I am talking about a stock here, not a portfolio. Matthew has enough capital to buy one, maybe two stocks).

  Okay, you picked JDS, realized it was a mistake and then picked value stocks. So, what will you do when the performance of value investing stinks? If you answer, I’ll stick to the strategy because I know it works, congratulations! You’ll likely have good performance as an investor. However, for most people, I know the answer: they’ll look for a new strategy!

  I don’t understand your comment about passive investors losing 50%. Of course, investors will hold investments they wish they’d never heard of. At times, some holdings will perform well and some will truly suck. Other times, the roles will be reversed. Its even more so for stock investors.

• 26 Mr. Cheap // May 28, 2007 at 11:23 am

  Its funny, I have a CS degree too, seems to be a lot of us nerds here.

  CC: You say “I’ll admit that dividend investing is a decent strategy that has worked very well in the recent past. I am not convinced that it will continue to do so always (In fact, I am convinced that there will be long stretches where it won’t work and shake out the “recent converts”. That’s the only way it will continue to work in the future).”

  I’m honestly interested (not trying to debate you, I want to learn) in what possibility can you imagine that dividend investing won’t work? Is it just that it gets so popular that dividend prices are pushed up and the yields are pitiful, or do you imagine that established companies that have long histories of dividend payments are going to stop paying or lowering dividends? Or something else entirely? Was there a time in the not-so-recent past where dividend investing didn’t work? What was the environment that lead to that?

  I agree with the value of index investing (real estate, index investing and blue-chip dividends are the three avenues I’m currently pursuing for acquiring wealth) but dividends seem to outperform index investing right now.

• 27 Canadian Capitalist // May 28, 2007 at 12:09 pm

  Its healthy to have a debate. In fact, the stock market is a place to register differing opinions by putting up money, not just words. A stock you just bought was sold by someone who probably has an opposing view point.

  Let’s take RY as an example: in five years between 2002 and 2007, dividends have gone up from $0.19 to $0.46 or at a rate of almost 20% annually. The same stock increased dividends from $0.0625 to $0.085 between 1982 and 1996, or a 15-year stretch in which dividends increased or an annualized 2%. Inflation averaged 2.3% in the first period and 3.5% in the second. In other words, dividends from this common stock did not even keep pace with inflation in one time period.

  A couple of things can happen to dividend-growth investing: (1) dividends may not grow that much in real terms for a significant stretch of time (2) investors realize that markets under priced dividend-growth in the past, so they start bidding up the price such that the advantage disappears (remember that these days the fundamental indexing folks are also chasing dividends).

• 28 KS // May 28, 2007 at 12:23 pm

  I just read the orignal post again and Matthew is looking for stock selling for less than $5. In that case I agree with WolfStone, generally stocks under $5 will be very risky. Matthew would be better off with purchasing index mutual funds or ETFs for the moment.

  CC, you said:
  “Okay, you picked JDS, realized it was a mistake and then picked value stocks. So, what will you do when the performance of value investing stinks? If you answer, I’ll stick to the strategy because I know it works, congratulations! You’ll likely have good performance as an investor. However, for most people, I know the answer: they’ll look for a new strategy!”

  The same could be true for people holding ETF’s or index mutual funds. If the markets tank, most people will panic and sell their holdings in an attempt to salvage some of their money, and start looking for a new strategy.

  Whether you follow a dividend strategy, value investing strategy, or ETF strategy the key is to have the patience and discipline to stick to a strategy.

  CC, you said:
  “Certainly this strategy has been successful so far this decade, but it truly has changed from being an investment strategy to conventional wisdom. That tends to take away the appeal and significantly reduce the opportunity for above-average returns.”

  If you read:
  - The Dividend Connection, Geraldine Weiss, or
  - The Dividend Investor, Harvey Knowles, or
  - checkout http://www.dividendgrowth.ca

  you will see that the dividend strategy has worked for more than 75 years (that’s as far back as the records go). Tom Connolly (from http://www.dividendgrowth.ca) has been doing this for more than 26 yrs and you can see his results. Geraldine Weiss has been writting about this stuff for more than 40 years (www.iqtrends.com). The dividend strategy has worked for more than just a decade.

  Going back further Benjamin Graham first wrote about value investing in 1934. I follow a value investing approach with a focus on dividend paying stocks.

  As far as everyone jumping on the value-investing dividend-investing bandwagon, Warren Buffett had this to say about it in a speech he gave at the Columbia Business School on May 17, 1984:

  “I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years I’ve practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It’s likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.”

• 29 Canadian Capitalist // May 28, 2007 at 12:54 pm

  KS: I am not saying dividend investing or value investing doesn’t work, just that they don’t work at all times. I am also not claiming that passive investing is the only way. All I am saying is that passive investing is suitable for the vast majority of people and that very few will be successful in using other strategies. We’ll have to disagree on how easy stock picking is. In my opinion, it is very difficult due to various behavioral traps people fall into.

  BTW, the entire second comment is by SteadyHand’s Tom Bradley. The comment doesn’t imply that dividend investing doesn’t work. It simply says that if you start dividend investing today, it may under perform in the future because it has been very successful in the recent past.

• 30 Canadian Capitalist // May 28, 2007 at 12:59 pm

  FWIW, I am not a member of the Flat Earth Society (as Mr. Buffett likes to describe believers of the EMH). I’ll readily accept that markets are manic-depressive and skilled investors (yes, even mutual fund managers) can take advantage of market inefficiencies. I simply think that it is not as easy to exploit inefficiencies as some people (including Mr. Buffett himself) make out to be.

• 31 telly // May 29, 2007 at 4:38 pm

  Ah, the old indexing vs. stock picking debate…admittedly, this is one of the reasons I enjoy the financialwebring so much.

  Just wanted to chime in and say thanks for the healthy debate. I don’t have much to add except that I am an indexer (in our RRSPs) but hope to delve into dividend stocks once my husband’s RRSP is maxed out (we have lots of catching up to do!)

  And btw, you can add one more to the nerd readers…engineer here as well.

• 32 Financial Jungle - » Blog Update: Carnival, Canadian Capitalist and Writing Tip // May 31, 2007 at 11:49 am

  [...] Canadian Capitalist is a passive-investing advocate, whom I enjoyed a healthy debate with on passive versus dividend investing just a few days ago. If you’re looking for unbiased opinions on personal finance from a [...]

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