Market Gyrations Creating Value and Opportunity

The last few months of the stock market has been very interesting. The S&P 500 is basically right back where it was in August, 3-4 months ago, around 1400. It's gone as high as 1470s, and fallen as low as 1340s during this period. That is about 130 points, or roughly 10%, around its mid point. It's been one heck of a roller coaster ride

A quick glance at the market might not reveal any interesting opportunities, as we're basically 5% from the highs, and we've been taught to wait for pull backs to buy, right? But it is important to remember the market index is made up of many sectors, and each sector contains many stocks, and all together they make up the index. What have the underlying components of the S&P 500 been doing lately? Let's take a look.

Dividend Growth Portfolio, November 2012 Update

Holidays are comin'. Holiday are comin'
Holidays are comin'. Holiday are comin'
Holidays are comin'. Holiday are comin'
Tis the season
Watch out, look around, somethin's comin', comin' to town (coming to your town)
Doo doo doo doo doo, doo doo doo doo
Doo doo doo doo doo, Always Coca Cola (coming to your town)
Something magic, in the light, can you see it, shining bright (shining bright)
Fa la la la la, la la la, la la
Fa la la la la, la la la, la la (It's always Coca Cola)
Holidays refreshments is what we bring
Tis the season, its always the real thing.

It's only fitting that one of the most iconic brands in the history of mankind always is the creator of one of the Christmas time commercial classics.

The Coca Cola story is one of incredible brand value and awareness. This is the kind of stock long term investors love to own. These investments form the core of your portfolio, and you almost never sell them. They're also the investments you buy when shit hits the fan. They won't be the best values (riskier stocks will fall more) but they will be at valuations typically seen once in a generation (like Coca Cola at a split-adjusted $20-$22 back in 2009)

Anyway, onto business! Here's this month's Dividend Growth Portfolio update.

Happy American Thanksgiving

We've had ours already but its the Americans' turn now. Wishing all the Americans a Happy Thanksgiving. Unfortunately many will have to eat quickly and go to work as many retailers are opening Thanksgiving eve for Black Friday sales.

There are many problems in this world that need to be worked on, but Thanksgiving is a time to reflect on things you are thankful for. It is a time to reflect on the fact that if you live in north america, your life is pretty darn good compared with the rest of the world, even if you are one of the poorest.

Mistakes Will Be Made

Mistakes happen. A good investor knows when he or she has made a mistake, and understands what to do immediately to correct the mistake.

There are many different types of mistakes that can be made when investing. Here are three of the most common:

1. Deviating from 'the plan'
2. Not enough research
3. Ignoring red flags

I had the fortune (or bad fortune...) of experiencing a bout of the first one recently, when I purchased Exelon Corp for my RRSP portfolio. Now you're probably wondering, why is that deviating from 'the plan'? You're a dividend investor, and Exelon pays a handsome 5-6% dividend. Well... that's exactly where the problem lies.

Dividend Growth Portfolio, October 2012 Update

The wheels on my investments go round and round, round and round, round and round.

Finally sold some investments to rotate into ones I felt had better valuation in October. I reinvested part of the proceeds from the sale of Abbott Laboratories back into McDonalds, which promptly got clocked by its earnings call. Although the fact Abbott also got nailed makes me feel a bit better, at least for the 40% that I didnt re-deploy, and left as cash.

Hurricane Sandy! Go Away!

Day 1 of closed markets has come and gone.

Pros:
- lack of open market = very productive at work
- no need to watch Fast Money = 1 hour freed up to catch up on TV shows. I watched latest Homeland and Walking Dead. both very good!!
- less business tweets flooding my twitter from various news sources, but mostly replaced by just as many Sandy tweets ... hahaha

Cons:
- somewhat boring day. is it sad I get my Mon to Fri entertainment from watching investor shows?
- potentially increased volatility down the road. I'm not looking forward to Wednesday, when markets re-open, coinciding with quarter end. We could be getting a lot of pent up volatility
- lack of earnings driven reaction. From the sounds of it, tomorrow earnings will continue to be released, with or without the open market. Some companies have said they will push back earnings, but not all have.

Sandy has made everyone realize how vulnerable humans really are to mother nature. I started thinking about my food supply, and quickly realized if I lost power, there wouldn't be much I could eat, except fruit, instant noodles (uncooked) and some candy. Maybe its time to buy some emergency food supplies like jerky, granola bars, and such...

To all the east coast readers, stay safe, wherever you may be in the storm's path.

To Sandy, go away already, so life can go back to normal.

Canadian Government Intervention in M&A Activity

This week we saw 2 major deals blocked by the Canadian government. Is this an ominous sign for the CNOOC Nexen deal?

First, we saw the CRTC block the takeover of Astral Media by Bell, and its parent, BCE. It was a deal that would have, by estimates, resulted in Bell controlling 33-45% of all English speaking content in Canada. The deal was widely expected to be approved by industry watchers, as evidenced by the 16% drop in Astral Media shares when the rejection was announced (ouch...).

In a decision broadly reminiscent of the late 90s actions by the government to block 2 major bank mergers (anyone still remember Paul Martin? lol), the Canadian government has put its foot down yet again to ensure adequate levels of competition and prevent a concentration of market power. Personally I believe the CRTC made the correct call here, as the Herfindahl Index, a measure of competitiveness within an industry, would increase significantly if a single company controlled nearly 50% of the market.

Portfolio Activity

Just a short portfolio update about what's been going on lately.

As my Twitter followers saw, the past two weeks saw increased activity in my Dividend Growth Portfolio (DGP). In the first week of October, I sold Abbott Labs after a healthy run from high 40s to just past 70. Around the same time, I also sold Honeywell, for a small profit.

Dividend Growth Portfolio, September 2012 Update

With the conclusion of September, is the end of Q3
Off in the distance, end of year I see
Summer has departed, winter not yet here.
Dividends keep growing, a few left in the year.

If you recall, in the August update, I mentioned that there were a few companies for which I was expecting dividend hikes by end of the year. Indeed in September, two of them were realized. Both Microsoft and McDonald's raised their dividend by double digit percentages mid month. That just leaves Boeing, Becton, and Emerson to raise in Q4. I believe all three will raise with or shortly after their Q3 earnings reports.

Mortgage Cash Account, An Amazing Tool

A few days ago I said I would go into detail about what a Mortgage Cash Account is. This tool has really been around for some time now, and I think it is one of the best passive saving tools that exist to the average Canadian. My opinion is that it completely changes personal fund allocation rules

Mortgage Cash Account, or MCA, is a liquid and easily accessible virtual (I will explain this term later) account. The term MCA is the one used by Bank of Montreal. It likely exists at other banks as well, but may be called a different name, so don't worry if you haven't heard of it before!

Last Week of Q3, Preparing for 2013

There are only 3 months left in 2012. I'm still patiently waiting for the end of the world. Mayan calendar thing right? Well, if it doesn't happen this year, they will probably just tell us they forgot to carry a 1 somewhere, or got their positive/negative signs mixed up and it was actually 2014 instead. What causes the end of the world anyway? Since you can Google just about anything these days, I figured I'd give it a shot.

Okay.... LOL... WTF???

Anyway, enough end of the world talk.

Majority of average Joes & Janes probably think of the year as spring, summer, fall, winter, or March, July, October, etc. I find that ever since I started investing, I actually start thinking about my year in quarters, and weeks relative to earnings season. Perhaps if I believed the end of the world talk I might think of it as, 12 weeks before end of the world, 10 weeks before end of the world... etc?

QE...Infinity?

Yet another Quantitative Easing program out of the Fed. I'm not really even sure what to make of it.

On one hand, I think the US economy is doing remarkably well compared to other countries and regions. Housing is finally bottoming. Inventories have been worked down to very lean levels, prices have begun to stabilize, and home-builders are reporting solid growth of new orders for the first time since 2006.

On the other hand, jobs remain weak and below rates seen in typical recoveries. There still remains a record number of Americans who are either unemployed, or underemployed.

Bernanke and crew definitely seem unhappy about the second scenario, and looks like that is the primary cause of QE3.

Dividend Growth Portfolio, August 2012 Update

August was a typical month for me. A couple buys here and there, along with a couple intrinsic boosts by companies I own. I added to my previously established Becton (BDX) position and also a new position in a Canadian oil and gas services company, Pason Systems (TSE:PSI). There were also a couple intrinsic boosts in dividends by the Canadian banks. Always happy to see that, especially in this challenging economic  environment.

The annualized dividend now sits well over my 2012 goal, but my "real" annual goal (termed 'Whisper Goal' in reference to whisper earnings numbers) is actually around 10% higher than my upper range, so while I'm not quite there yet, I expect to achieve it easily as a few companies typically raise their dividend in Q4, like Mcdonalds, Becton Dickinson, Emerson Electric, Boeing, and Microsoft.

New Purchases
Becton Dickinson - $54.00
Pason Systems - $88.00

Sales
There were no equities divestitures this month.

Intrinsic Dividend Changes
Scotiabank - $4.40 (DRIP reinvested shares)
Scotiabank - $18.16 (quarterly dividend increase of 3.6% from 55 cents to 57 cents)
TD Bank - $5.00 (quarterly dividend increase 6.9% of from 72 cents to 77 cents)

Sleepy Markets

This is how exciting the stock market has been lately. 

I don't really trade stocks that much. I like watching big swings happen and kind of treat it as entertainment, but this market, at least the S&P 500, is putting me to sleep! Up 10 here, down 5 there, up 20 today, down 15 tomorrow.

Future of America, Path to Prosperity

What a nice weekend! I went to my friend's engagement party. The Olympics finally ended. North American farmers finally got some rain, albeit perhaps too late. And Mitt Romney chose Paul Ryan as his VP running mate for the 2012 US elections.

The light at the end of the tunnel just got a little bit brighter.

Going Against the Crowd

My experience in the 5 years that I've been investing money for myself and others is that going against the crowd is the hardest. It can be very easy to get caught up in the hype of a rally, or the pessimism of a sell off. The worst part is, you don't even realize you got caught up in it, until AFTER.

Often, the hardest action to take, is the one that you don't want to take. When the investment you made has gone up 30% in a few months, the overwhelming reflex is to keep riding it higher. Sometimes this is okay, yet other times, it is a big mistake.

The key is to keep a level head, and think about the most difficult action for you to stomach. Sometimes, the most difficult decision is the correct one. It was the right move to buy in February - April 2009 when folks caught holding equities was having nightmares and panic selling, just like it was the right move to sell stocks when the financial crisis began to spread, even while optimists about containing the contagion were everywhere.

A second piece of advice to try to follow is, to consider your decision in the face of macro scenarios. We all know the answers to what if you are right about the specific stock. Well, if you are right, the stock keeps going higher, and you make more profit. If you are wrong, the stock falls and you lose some profit. But as a long only value investor, who is always looking to get in at an attractive level, and believes the world will be a better place tomorrow versus today, it is important to remember that even if I do not make an investment, I am still long many other names in the market via my overall portfolio. The question then becomes, do I want to go from 90% bullish to 95% bullish? I already will have upside exposure if the macro conditions improve, but if they get worse, do I want to be caught adding to my exposure at these overall valuation levels.

I believe the best investor is one that understands multiple aspects of the market, and economics. We don't necessarily need to act, or trade, on the information, but we must know how traders respond to the information, because opportunities don't just arise from your own actions, but the actions of others as well.

Dividend Growth Portfolio, July 2012 Update

July brought some activity in my DGP. New funds entering the portfolio allowed me to add to an existing position, as well as initiate a new position

The annualized dividend is slightly over the top end of my 2012 goal now, an increase of $136.20 over the June 2012 values

New Purchases
JP Morgan - $78.00
Becton Dickinson - $45.00


Sales
There were no equities divestitures this month.

Intrinsic Dividend Changes
Cummins - $13.20 (quarterly dividend increase of 25% from 40 cents to 50 cents)

Global Uncertainty

With Europe in a recession, China slowing down, and US sputtering, the global economy outlook is tepid at best. In environments like this, I recommend sticking to high quality stocks that have strong balance sheets, yield support, and are best of breed in their sector. What do these mean?

Strong Balance Sheet

When the economy hits the gutters, corporate revenues, and thus profits, typically decline for the majority of businesses. In this scenario, it is important that the company is not carrying too much debt, as debt servicing costs remain relatively constant. A company with minimal debt can attack its operating costs and survive the downturn, but a company loaded with debt will be forced to divert a bigger and bigger slice of the shrinking revenue pie towards servicing that debt.


In the worst of scenarios, the company could even declare bankruptcy, which would wipe out shareholders. 


There remain 4 companies in the entire United States with top tier credit ratings, AAA, which makes them more credit worthy than the US government. They are:
- Exxon Mobil
- Microsoft
- Automatic Data Processing (ADP)
- Johnson & Johnson


There are many other companies with strong balance sheets. It is easy to look for them by filtering with debt/equity ratio.

Low Cost Method to do Foreign Exchange

As Canadians, we really get dinged by our banks. As a bank shareholder, I'm happy about profits, but as a consumer, I really hate paying more than I have to, for no good reason at all.

For example, take a look:

• 1.008 - this is the current spot rate, it would cost $1008 CAD to buy $1000 USD
• 1.0332 - this is the TD bank FX rate
• 1.024 - this is the BMO Investorline FX rate, for up to $10k, it would cost $1024 per 1k USD
• 1.023 - this is the BMO Investorline FX rate, for 10k to 25k
• 1.017 - this is the 25k rate for Investorline

similar situation for the reverse

• 0.992 - it would cost $992 USD to buy $1000 CAD
• 1.0179 - this is the TD bank FX rate
• 1.008 - at Investorline, it would cost me $1008 USD to buy $1000 CAD
• 1.007 - for ~10k to 25k
• 1.001 - for ~25k+

*Note 1: I've only listed the values up to 25k, as most people do not exchange more than that at a time, unless you're laundering drug money. 

*Note 2: There seems to be some rounding error in the Investorline calculator, so the cut off points for USD to CAD are not quite exactly 10k and 25k

Keep reading to see how much the rate differences above can really cost us!

The Big Picture

This chart made me realize how little market sell-offs actually impact my portfolio. It is a chart of the progression of my net worth (assets minus liabilities) since I graduated from university and began working.

The reason there are no liabilities, is because I've expressed my condo mortgage as the net owner equity (estimated market value minus mortgage debt). It helps preserve the scaling frame of reference. If I included the entire property value and mortgage debt, some of the earlier bars would become invisible (due to their small values vs. property value) For privacy reasons, I've removed the numerical indicators on the left, but the chart scale remains a linear one.

Q2 Earnings Season, Weeks 1 and 2

I can't believe its that time of the year again! Time seems to really fly when you start investing.

Alcoa already led off with a decent report this afternoon. Besides the headline numbers (beat on both EPS and revenues), I was encouraged by the comments made by CEO Klaus Kleinfeld about both outlook, and where the demand is coming from. He reiterated both the 7% global aluminum demand growth projections for 2012, as well as the continuance of demand from the aerospace boom. Mr Kleinfeld also noted that inventories were coming down, and price increases are expected to follow.

I believe his comments signal good times ahead for aerospace firms like Boeing, Honeywell, General Electric, United Technologies, etc. I'm expecting them to all beat, especially after the sell off and guidance reductions recently.

Here's a look at the major earnings reports for the next 2 weeks.

2012 First Half Performance Review

Half way thru 2012 now! What better time to reflect on the first half, and do a performance review :)

Luckily for me, I don't have to answer (at least not in the short term) to some boss about my performance. That doesn't mean I shouldn't review my own work so far anyways. I think regular reflection is a way we can improve ourselves. It allows us to look at our successes with a smile, and mistakes thoughtfully.

Without further ado, here's a summary of my 1H2012 results

My First Vehicle Purchase

After 5 years of taking public transit, I finally caved and got a car. 2008 Acura TL-S from Acura dealership. I like to think of it as no more toughin it out on public transit. Let's face it, YRT transit sucks if you want to go anywhere besides the Viva routes.

(not actually my vehicle, but same color/make/year)

I think I could have lasted a couple more years if the Viva drivers didn't go on strike this year for 3 months, but that was the last straw.

While I complain about gas prices as much as the next person (will probably cost ~$100 for a tank of 91 octane), deep down I really don't mind the gas prices. My motto has always been, if you can afford the car, you can afford the gas. While probably not true for very old vehicles (10+ years), Edmunds True Cost to Own estimator agrees and indicates that for most cars under 10 years old, the average annual cost of depreciation is similar to the average annual cost of fuel.

Dividend Growth Portfolio, End of 1st Half Update

As we roll into July, it signifies the end of the 1st half of the year! I typically do a more in depth analysis of my progress this year at this time, so here goes.

1. Activity Review
First, there was no activity in June, so my annualized dividend remains the same, about $20 short of the full year goal.

New Purchases
There were no new purchases this month


Sales
There were no equities divestitures this month.

Intrinsic Dividend Changes
None

Back from Vacation

Well, I'm finally back from my 2 week vacation in China. My flight was supposed to land at Pearson International (YYZ) in Toronto yesterday, June 21, at 6pm. We ended up getting diverted to Ottawa due to a major storm in Toronto that closed Pearson for a bit. We ended up spending 3 hours in Ottawa sitting on the tarmac, refueling, and waiting to take off. After getting back to Toronto around 10pm, we had to wait another 30 minutes for an available gate, due to the massive backlog. After all was said and done, I got my luggage around 12:45am June 22.

Nothing too exciting happened in China. I mostly spent time with my grandparents. I did get a chance to look around Beijing and from the looks of things, the economy in China is humming along, and inflation is somewhat in control now.

Dividend Growth Portfolio, June 2012 Update

As May comes to a close, it's that time of the month again. It is time for a review of my Dividend Growth Portfolio! Here is the June 2012 update for my Dividend Growth Portfolio.


New Purchases
I made one purchase this month. I added 25 shares to my existing MCD position, which adds $70 to my annual dividend income stream based on current quarterly payments

McDonalds - $70.00


Sales
There were no equities divestitures this month.

Intrinsic Dividend Changes
Bank of Nova Scotia - $4.40 (DRIP reinvested shares)
Intel - $30.30 (quarterly div raised from 21 to 22.5 cents)

Memorial Day Weekend

Last weekend was Victoria Day weekend in Canada. This weekend is Memorial Day weekend in the US! I hope everyone will have an enjoyable weekend and stay away from stocks and finance related things until at least Monday night.

As a Canadian investor who has a lot of exposure to US equities, my schedule tends to revolve more around the US equity markets, which means last weekend wasn't really a long weekend, and this weekend is the long weekend. :)

This week is also Fleet Week in NYC. They should come to Toronto some time. I would definitely go down to harbor front or Toronto island if this came to town!

Nothing too interesting in the stock market lately. Europe is back in the headlines (surprise surprise?). Personally I think Greece is like a cancerous tumor. It needs to be dealt with, and cut off, before it infects others, and the best way to do it is not to keep putting it off, but deal with it swiftly and immediately.

I continue to think the market is giving us a buying opportunity, but this buying opportunity may present better value if something dramatic really happens in Europe.

Make sure to cover all your bases with proper risk management, and continue to buy in increments. I think it will all work out as the US economy provides the stabilizing force for the world.

Facebook IPO

Haven't been watching the market lately with Diablo 3 out last Tuesday. I was able to watch some CNBC last week during lunch and dinner, and everything seemed to be about Facebook IPO.

My suggestion? Stay away!

If I had $100 billion in cash (roughly how much Facebook was worth at the $38 IPO price), I would not go and buy all of Facebook. I would prefer to go buy half of all the railroads in north america (CN, CP, CSX, Union Pacific, KSU, etc, all of them!!), or all of Mcdonalds, or BOTH Boeing and Caterpillar. These companies are what make our economy hum, and play an integral part in a global economy. They make things. They ship things. What does Facebook do? Enable people to slack off at work?

I would not buy FB at 100 billion, which is how much Mcdonalds is worth. I would not buy FB at 50 billion, which is how much Boeing is worth. I wouldn't pay 20 billion for FB, which is how much Cummins is worth.

JPMorgan Bomb

It wouldn't be fair if I didn't talk about JPMorgan's fiasco at all, so let's just go over what's happened since the revelations late last week.

Since the news broke about JPMorgan's $2 billion loss in its CIO (Chief Investment Office) divison, the stock has been taken out to the woodshed and demolished. It is currently down about 12% from when the news broke. The stock sat just under $41 previously, and is currently just under $36.

While $2 billion is not a lot of money when put into the context of how much money the CIO of JPM manages (something in the order of few hundred billion), it leaves investors wondering what else could be going on that we don't know about.

Heads have already begun to roll over the weekend, with many top level managers of the CIO resigning or leaving, being replaced by others. How does this affect us, the average investor?

Europe is Back...

"Not this shit again..."

That seems to be the common thinking among investors and traders alike these days.

Mixed in with all the mediocre US numbers that came out during the last few weeks, Europe seems to be in the headlines again. This past weekend both the incumbent Greek and French governments were toppled, ushering in new left wing socialist governments in both countries. Funny enough, both socialist leaders have been harking about stopping the austerity measures, and spending their way out of this problem.

In the short term, I expect markets to continue to be choppy. I think from a long term perspective, mid yield stocks continue to be appealing compared with bonds or bond replacements (high yield stocks). If we've learned anything from the Europe crisis in 2011, it was that the most hammered sectors will be financials and banks. 

That being said, I continue to believe banks present some of the most attractive long term value in the stock market. Just be prepared for some extreme volatility in the short term.

One thing I've learned in the 5 years that I have been investing is that the best times to buy, are typically the times when things look so bad, you start questioning yourself whether you should buy. 

Earthquake at Green Mountain and more

This is why I stay away from companies involved in scandals with medium to high probability of financial fraud. The hilarious thing is GMCR was also a high octane growth stock with stratospheric valuations. Put those 2 together and you have a recipe for waking up to a 45% drop in stock price.

Traders will probably start piling into the stock looking for an oversold bounce, but as a conservative investor, I don't touch any stock that has a material probability of going to 0, and I believe Green Mountain is in that boat.

Earnings Period Volatility

As earnings season continues, the volatility in specific names continues.

Looking at the broad market, the S&P has been stuck between 1350 and 1400 for some time now, but we've had some pretty large moves in individual names. During these earnings period weeks, its important to not act too quickly, as often you will end up regretting it later.

For example, let's take everyone's beloved Apple (AAPL). Apple reported stellar numbers after the close on April 24. The stock proceeded to open $50 or about 10% higher the next day. If you had bought Apple on the pop on April 25th, you'd be down about 5% as of today.

Apple in particular is dangerous here, because from a technical sense, the stock is broken. While the valuation of the stock is not excessive by any means, the stock simply feels tired. The day to day price action on Apple feels very weak. On broad up days, the stock tries to rally and fizzles. On down days, Apple often ends up closing near its day's lows. This is evidence of a weakening stock. I'm not saying Apple will crash here, but that a correction is underway, and even a great earnings did not stop the correction from continuing.

Dividend Growth Portfolio, May 2012 Update

As April comes to a close, it's that time of the month again. It is time for a review of my Dividend Growth Portfolio! Here is the May 2012 update for my Dividend Growth Portfolio.


New Purchases
There were no new purchases this month.


Sales
There were no equities divestitures this month.

Intrinsic Dividend Changes
Exxon Mobil - $50.00 (quarterly dividend raised from 47 to 57 cents)
Johnson & Johnson - $28.80 (quarterly div raised from 57 to 61 cents)

Incoming Dividend Hikes

I'm expecting dividend hikes from Dow behemoths Johnson and Johnson (JNJ) and Exxon Mobil (XOM) before the end of the week. In 2011 both companies raised their dividend around this time in April.

Most likely Exxon's dividend hike will be in tandem with its earnings release on Thursday, and J&J's dividend hike will be in tandem with its annual shareholder meeting, also on Thursday.

Market Turmoil

As the bad news continues to pour out of nearly every corner of the world, I believe we may be seeing a ray of light. China is finally stabilizing.

This morning we received the latest Germany PMI numbers, coming in at a shockingly low 46.3, the lowest since July 2009. The print didn't give us much to grasp at, with output, new orders, and employment, all coming in lower. Could this be a sign that the disease from the European periphery is finally spreading to the heart and soul of Europe?

Why Beat Yourself Up

I feel a lot of investors (and traders as well to some extent), sub-consciously take the more difficult road. Maybe for some, inflicting pain or making things difficult on one self is satisfyingly rewarding, but I've never been fond of doing things the difficult way when a simpler method is right in front of you.

I often have people asking me about some no-name stock, and what I think about the prospects of being able to flip it for a few bucks, or whether I think it will be worth a lot more.

More Buying Today

I made a decision a while back in the year (in January) when evaluating my shopping list to open a position for my managed portfolio in JNJ if the price dips under $64.

Today, I made the purchase in the mid to high 63s. The JNJ earnings were decent. Not spectacular, but better than people expected. International sales were quite good, led by Remicade, and management continues to expect $5.10s in earnings for FY2012.

Using a $5 earnings target for FY2012 and $64 price, JNJ is priced at just under 12.8x PE. A pretty attractive price for a world class business. Compared to 15x-20x for other consumer staples and defensives, I think JNJ should give investors a pretty good forward return at these valuations. JNJ also offers a 3.5-3.6% dividend yield, that should be raised in the next 2 weeks by 5-10%.

I didn't buy a lot, as I think the market could still correct down to 1340-1360, but I established an initial position.

Correction Underway

Its become pretty obvious a market correction is underway now.  The S&P 500 has pulled back from 1420 to 1370 in about a week and a half. The Canadian based TSX continues to consolidate and bounce around 12000. As someone who mostly invests, and sometimes trades, how do we play this from each aspect?

As a long term investor, I prefer to look at things from 3 different perspectives: fundamentals, macro, and technical.

Equity vs Debt

There are two ways a business can fund its operations (and thus, two ways someone can invest in the operations of a business). The first is debt, and the second is equity.



What is debt?


Debt is an obligation owed by one entity to another. When a business issues debt, it is borrowing assets from the lender now, and entering an agreement to repay the original assets at a future time, plus interest.

Thus, when we lend capital to a business, we are giving the business our money now, and in exchange, we will be paid back the same sum in the future (debt maturity), plus interest payments while the debt is outstanding. This is investing in the debt of a business.

Cash Is Not As Risk Free As People Think

TFSA is one of the best investment vehicles that exist in Canada. Contributions are made with after-tax money, but capital gains and income from investments inside a TFSA are completely tax free.

The TFSA program was started in 2009, and that was the year I started mine. Unfortunately, in what otherwise would have been a fantastic year to invest, I kept my TFSA in an interest bearing account for the first year. I remember I happily placed my $5k inside an ING TFSA account with a few months left in 2008, as there was a special offer at the time.

It turns out that would be one of the biggest mistakes I made in the last 4 years. While I didn't lose any money, I also missed out on opportunities in 2009. I probably could have transferred the account to an investment one, but the inter-institutional transfer would have been a hassle and potentially costly.

Good Ol' USA, Best House in a Bad Neighborhood

As the data continues to come out for February and March, we're continuing to see strength in the USA. This morning we saw two more pieces of information that give us some insight into the state of the US economy. One of the advantage of living on the east coast is you get to see these events live, observe market reactions as they happen, and make pre-market decisions based on them. Something you cant do while living in the west...unless you want to get up at 5am.

First at 8am was the ICSC Retail Store Sales report, which showed a 3.8% w/w increase and a 4.2% y/y increase. While some parts of this was likely due to warm weather and holidays, the trend in retail sales over the last half a year has been remarkable. As most investors know, consumer spending in general is one of the key drivers of GDP, and retail sales is a big component of consumer spending.


Around 10am this morning, we got the March ISM New York Report on Business, which showed 67.4 vs 63.1 in February. The report says "March marked the fifth straight month that the Current Business Conditions index grew faster than the prior month, unprecedented in the survey's 19-year history"

There are now more indicators telling us there is a storm brewing across the Atlantic as well, and not just in the debt troubled nations of the Mediterranean.

Dividend Growth Portfolio, April 2012 Update

As March wraps up, its time to do a monthly review of my Dividend Growth Portfolio.
Here is the April 2012 update for my Dividend Growth Portfolio.


New Purchases
There were no new purchases this month.


Sales
There were no equities divestitures this month.

Intrinsic Dividend Changes
Scotiabank - $26.76 (quarterly dividend raised from 52 to 55 cents)
JPMorgan Chase - $27 (quarterly dividend raised from 25 to 30 cents)

Core Positions in a Portfolio, Part 2

...continued from Part 1 

Secular Trends

Now that our portfolio contains some defensive minded equities, let's take a look at the second important anchor group, businesses which benefit from secular trends.

Simply put, secular trends are long term tailwinds for businesses taking part in those trends. These tailwinds could be due to a variety of factors, such as, changes in the way we live, or a global emergence, or simply generational trends. For example, two secular trends that have already occurred and shaped the modern day society as we know it are the mass production and adoption of cars in the early 1900s, and the internet revolution of the 1990s. The first made automobiles affordable to the masses, and drastically improved the mobility of the middle class. The second altered the landscape of information exchange and continues to shape modern society in areas such as schooling, media, social, and business.

March Market Update: S&P 500 Breakout?

Mid March was an interesting time for the stock market. We were finally able to cleanly break through previous highs of 2011 around 1370 on the S&P 500. As I type this now, we are sitting at a comfortable 1412.52.

This is a significant step because we saw a similar event in 2010, when markets swooned from May until September.  When the April 2010 highs of 1220 were finally retaken and exceeded later in the year, the S&P 500 marched without abandon to 1345 (10%) before a correction occurred.

Am I saying we will move 10% from 1370 to 1500 this time? No, but there is certainly the possibility. I think we may have already seen the minor correction in early March, when the market dipped as low as 1340 from 1375 before rebounding.

Core Positions in a Portfolio, Part 1

Core positions, or core investments, are critical to the long term success of any portfolio. In difficult times, when the stock market drops 1000 points in a single day, they help maintain your sanity, conviction, and steer your portfolio through choppy waters.

For a person who is just beginning to take control of their own portfolio, deciding on which investments will make up the core of  your portfolio will be the first major decision. As a young investor, these investments should be that ones that help you begin your journey. If you are an older investor, these investments will form the backbone of your portfolio. In both cases, in the long run, the investments and businesses need to be ones that you can trust in, and believe in.

How do we construct this core then? How do we decide which investments will make it into this list?

Making Your Money Work For You

"'Every gold piece you save is a slave to work for you. Every copper it earns is its child that also can earn for you"

As outlined in an earlier article, the 3rd and final step to financial freedom is allowing your money to work for you. The biggest question many people have will be, how? How do I make my money work for me? To find the answer to this question, you need to understand the fundamental purpose of money in society.

Getting Started, Part 3

continuation from Getting Started, Part 2


Registered Retirement Savings Plan (RRSP)

The RRSP is the center of Canadian retirement planning. This program was introduced in 1957 and is a very popular program in Canada.

The general idea behind the RRSP is to defer taxation from peak earnings years, where marginal tax rate is high, to retirement years, where marginal tax rate could be lower. It is important to note that the RRSP does not reduce your taxes, it simply defers them to what we hope is a time period where our marginal tax rates are lower (retirement) than originally (when we make the contributions).

Looking Back at 2011 Decisions

I was just reviewing my transactions in 2011 and early 2012, and reminiscing about mistakes, missed opportunities, well timed transactions, and such. Fortunately, hindsight is 20/20, so here are some good, bad, and unmade decisions from the past year


Bank of Nova Scotia

- I bought 35 shares above 57 in late April. turns out this was near the top of last year's range. I probably got a bit overzealous on this one
- I bought another 40 shares in mid August at 50. this turned out to be a pretty decent purchase, as the stock has moved up since then. I could have gotten it at a better price a few months later (48), but 50 is not bad.
- Grade: C

Know Your Investments

One of the most important aspects of investing is to "know your investments", but what does this phrase actually mean?

I like to think of investing not as the buying and selling of stocks, mutual funds, bonds, etc, but as being long term part owners of a business. In this way, the phrase 'knowing your investments', becomes, 'knowing your business'. All of a sudden, the sentence has a whole different meaning.

Getting Started, Part 2

So we've finally gotten off our butts and decided to take action, and start down our path to financial freedom. There must be a thousand questions you want to ask. Now what? What do I do? What do I buy?

Why not begin by going over the different types of accounts you can use to invest with.

Today, I'll go over the best investment vehicle account in Canada, the Tax Free Savings Account (TFSA)

Dividend Growth Portfolio, March 2012

Before I go into depth for the Portfolio Series, I will outline my personal dividend growth portfolio.

The purpose is mainly to use as reference and to track the income growth of this portfolio. The goal of the portfolio is to build an asset base that will produce an increasing stream of income which out paces inflation.

Getting Started

The most important, and often most difficult, step of the path to financial freedom, is getting started. Fear of the unknown is often enough to persuade people to stay put, avoid change, and keep going down the same path.

So, how do we get started on our own paths to financial freedom?
The goal can be broken down into various stages, or tasks.