Allan Meyer's Investment Blog

Inflation: Scarier then you would think.

2011-07-21T11:04:00.000-04:00

The official inflation rate was reported the other day as 3.7%. This in of itself doesn’t sound very worrisome. You were planning on 2% inflation when you did your retirement calculation so how damaging could a little difference of 1.7% be? If you retired today at age 55 and figuring you could live on $4,000 per month or $48,000 per year. According to a recent Actuarial Life Table your life expectancy is another 25 years. But we have seen a lot of studies that show a healthy 65 year old has a better the 35% chance of seeing his/her 95 birthdays. That’s another 40 years from retirement!

What’s the effect of 2% inflation or God forbid 3.7% over those time frames of 25 or 40 years?

To have $48,000 buying power in 25 years at 2% inflation you will need an additional $30,000 of money to over $78,000. At 3.7% you will need $71,000 more or $119,000. That’s the power of that little 1.7% difference over 25 years.

Now figure you are like me and your parents lived into their 90’s. We have to calculate for a 40 year period. That $48,000 buying power will have to grow to over $105,000 at 2% and a staggering $205,000 at 3.7%. I know the 3.7% inflation seems high, but lets check on what the actual inflation has been over the last 40 years. If we apply the actual inflation rate to your $48,000, at age 95 you would have to have $274,943 to equal the same buying power that you had 40 years ago. That means you need another $226,943 for that last year alone.

Let me try putting this another way. Currently you pay $40 for a case of beer. In 25 years, at 2% inflation you will be able to purchase only 14 bottles for your $40. At 3.7% you would only be able to get 10 bottles for the same $40. A pretty sobering calculation.

How much are your coins worth?

2011-04-08T16:42:00.000-04:00

As a youngster I used to save coins. Mainly pennies that I would roll into decades and put them aside. I kept looking for valuable pennies but had no luck. I also saved a few silver $0.50 pieces and the old silver dollars. Those were harder to put aside. I am an old guy at 56 years old, so these are old coins. With the high price of silver or even copper I was wondering if these coins are worth anything. The current pennies have almost no copper content and I don’t think there are any silver coins anymore. I went to check on silver content of my 1944 $0.50 coin as an example. According to the web site http://www.coinnews.net/tools/canadian-silver-coin-calculator/

it is an easy calculation. According to this site, based on a silver price of $39.51 US per ounce this coin is worth $11.35! Wow. Pretty impressive. Of course I only have a few coins but they are worth a lot more then I would have thought.

What about the pennies? I have lots of those, probably hundreds of rolls. Each old penny I have has 2.45 grams of copper content. A roll of pennies has about 4.32 ounces of copper or 4 rolls has 1.08 pounds of copper. At the current copper price of $4.45 per pound the $2.00 face value of coins has a copper content worth over twice that at about $4.80. My heavy box of pennies looks like it is worth better then twice the face value of the coins or about $1.20 for every roll of coins.

How I passed the CFA exam.

2011-04-01T14:31:00.000-04:00

Well I didn’t pass it. At least, not the first time. On my first attempt at level one I studied and went to the exam preparation course in Windsor Ontario. A great course but obviously not good enough because I didn’t pass. I have a degree in Psychology and therefore not a natural for writing the CFA. I had to study the economics and focus on the accounting. While the ethics could be confusing the concepts were straight forward. I had a new young family and it was difficult to take time for studying. My employer Co-operators Investment Counsel was great and they were very supportive and even helped give some study time at work. But I still failed.

On the second attempt I really knuckled down and put in even more hours and went to Windsor again. I paid special attention to the exam writing hints and focused on writing the trial exams. I set up myself up as if I was writing the exam questions and gave myself strict time limits as they suggested. I would go back and mark myself against the answers. As the Windsor teachers suggested, if I did well on a question, above 80%, I would move on to the next area. No need to keep going over the areas you know. I would go back and re-study the area that I was weak in and when I thought I understood the content I would rewrite the exam again under the same time constraints. Sometimes I did this more then twice.

I was so concerned about the second level exam that I started taking food supplements to help my memory skills. But this wasn’t enough. In an effort to remove any doubt I was hypnotized. I did this to improve my memory and remove exam anxiety and generally help in the exam writing. Did it help? I don’t know. I didn’t go under very deep and I have some doubts about its effectiveness.

In September, 1989 I received my designation as a Chartered Financial Analyst, so I must have done something right.

By Allan Meyer, CFA (1989)

Registered Disability Savings Plan: An Update

2011-04-01T13:41:00.000-04:00

I thought I would pass on a little update that I have on the Registered Disability Saving Plan (RDSP). I had read the details of this plan offering and thought what a wonderful opportunity for those in need to get some vary generous assistance from the government for their disability. I know a number of people with disabilities that receive benefits under Canada Pension Plan or get a tax credit. I mistakenly believed that these people would be eligible for the RDSP. To be eligible for the RDSP they will need to get a Disability Tax Credit Certificate. A qualified practitioner has to complete and certify that the person has a severe and prolonged impairment and its effects. Some of the questions are tough. Are you blind? Do you receive life sustaining therapy? Do the effects of your impairment cause you to be markedly restricted in one of the following basic activities of daily living? Speaking. Hearing. Walking. Feeding. Dressing. Mental functions necessary for everyday life. Elimination (bowel or bladder functions).

Not as easy as I had originally thought. On top of this you have to pay the doctor ( around $125) to fill out this form.

Check out the Disability Tax Credit Certificate at the Canada Revenue Agency site. Unfortunately the people that would most benefit from this program are in difficult shape and need considerable assistance and tenacity to complete the gauntlet of forms that are needed. Good luck and persevere.

PS: Just this week TDWaterhouse announced that they will allow the transfer in of RDSP's from other financial institutions.

Labour Sponsored Funds. Ripoff?

2011-03-10T14:42:00.000-05:00

Years ago the Labour Sponsored Funds were the rage. You put the investment in your RSP account and you got your full deduction for tax purpose. To make it even more interesting the Provincial and Federal governments also kicked in further tax breaks so that your total deductions along with your RSP tax break were in the 80% area. Not bad. What could go wrong, you got most of your money back in the form of a refund?

I have a new client that invested in a labour sponsored fund. He invested $5,000 years ago. The stated value of this fund is now $504.13! I enquired what would the charge be if he wanted to cash out (the deferred service charge or DSC) and I was quoted a reasonable $7.00. Not too bad. But the pleasant young gentleman was quick to point out that there was a provincial claw back of $100 and a federal claw back of $394. This would mean charges of $501 against his investment of $504.13, he would net $3.13 on what was originally a $5,000 investment. IF he could liquidate. The company has put a freeze on any redemptions in an effort to let the managers build up the value of the fund. There will be no deferred service charges when the fund matures next year and the claw backs will go away. Hopefully by that time there will still be some money left in the fund and it won’t have been pissed away.

I had meant to post this blog a few months ago, but here is an interesting follow-up or conclusion to this blog. Please see the web address or URL below from the Globe and Mail.

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/fund-watch/axis-investment-fund-bites-the-dust/article1686592/

Basically the fund has had disasterious results and they have now frozen the fund so that you can't get your money out. This fund is an embarassment. I would counsel investors to watch their investments closely and avoid locking their money up for long periods of time.

How long would $100,000 last?

2011-02-02T13:59:00.000-05:00

This is a follow up blog to my comments about the returns from the Toronto Stock Market. The last blog commented on investing over a 10 year period and how the gains fluctuated.

In this blog I looked at taking a $100,000 portfolio and investing it in the TSE but taking out $5,000 per year in inflation adjusted dollars. This looked at 10 year periods with actual market results and matching inflation rates with those returns. The idea is to see how long $5,000 in real buying power could be taken from the portfolio before it would be used up. Inflation of 3% doesn’t seem like very much but a 55 year old who retires could see his buying power of that $5,000 cut in half by the age of 79. So I wanted to adjust the $5,000 for inflation.

Take the $100,000 invested in the stock market in 1955 and take out $5,000 each year. The market was up 11.7% that year and inflation was only 1.4%. According to my calculations you would have had $106,689 at the end of the year. I continued this on to see when the money would run out. You could have continued to take out $5,000 in inflation adjusted dollars till 1997. The original $5,000 would have grown to payments of $31,994 by 1997. Your original $100,000 would have been fully used up after 42 years. Someone retiring at age 55 could have maintained the payments till age 97.

If the same exercise was done just 10 years later in 1965 the same $100,000 would have lasted till 1991 or 26 years. The original $5,000 payments in 1965 would have grown to $24,563 by 1991 when they would have been all used up. The 55 year old retiree would see his funds exhausted around his life expectancy at age 81. This is quite a bit shorter then in the previous example. The shortening in the time frame was due to higher inflation and poor stock markets.

Toronto Stock Market Returns (2)

2011-01-27T17:05:00.000-05:00

As I previously blogged, there hasn’t been a 10 year period where the Toronto Stock Market had negative returns. But there were some big drops along the way. Now this index has changed and morphed over the years with additions and deletions and name changes to companies and the index itself. At one time there were almost 300 companies in the index. It is now called the S&P/TSX Composite Index with a lot fewer then 300 stocks previously. Suffice it to say it is dynamic.

While the results have been positive over every 10 year period since 1955 I wonder how many investors would have the nerve to stay invested for the full 10 year period. As I mentioned previously, the poorest returning period yielded a portfolio that grew from $100,000 to $139,731. Not great but not bad. The best performing period saw a portfolio that grew to $450,677. The average of all the 10 year periods was $261,980. The most recent period saw a gain well below average, it was up to $174,811. There was a wild ride to get to this number with a drop of almost $60,000 to $118,950 before it started moving back up. Would you have stayed invested for the move back up? I know of some investors would couldn’t stomach it.

Safety & Value Portfolio Dec 31, 2010

2011-01-26T15:18:00.000-05:00

Sorry for the small type but it is difficult to bring the portfolio into the blog. I trust that you can magnify the screen to see it better. This portfolio was started with $100,000 on January 1, 2010 and you can see the ending value at the top middle of this sheet, at $127,192.23. This portfolio has a higher yield then the S&P/TSX, lower debt-equity and a lower Price -to-earnings ratio and had better returns in 2010. Not bad. Since the end of 2010 we have sold Thomson Creek and Ithaca Energy positions and replaced them with Breakwater Resources and Bell Aliant. This is a real money portfolio with trading costs reflected in the value of the portfolio. Wish us success going forward. I will try and update this portfolio on a quarterly basis to show the changes and the valuation.

Quarterly Review

2011-01-18T10:43:00.000-05:00

January, 2011

Toronto stocks performed well last year with the S&PTSX index posting a gain of 14.5, this followed a gain of 30.7% in 2009. This is well ahead of the 6.6% average over the last 10 years and the 8.9% for the last 25 years. US stocks also performed well with a gain of 11.0% for the Dow Jones in 2010 after a gain of 18.8% in 2009.
History tells us that the stock market performance for the first two years coming out of a recession induced stock market decline usually provides the best market performance of the business cycle. If that pattern holds again this time we might expect stock market performance in 2011 to be less than it was in 2010. However, both the economic recovery and the stock market recovery have been slow thus far which could extend the stronger performance phase of the recovery through 2011.

While the western economies struggle with recovery (large deficits, heavy public debt, stubborn unemployment and the near collapse of their financial systems) the emerging economies are doing well and China and India are at risk of over heating. Over the shorter term, economists agree that Canada’s economy will be pretty decent in 2011. Unemployment in the U.S. remains stubbornly high but has shown some signs of easing recently from 9.7% to 9.4%.

“The World in 2050” an HSBC report states that globally over the next 40 years average annual growth at about 3%, assuming the world avoids an energy shock, trade war or major armed conflict, an outlook Karen Ward HSBC economist, admits is “rather rosy”. Demographics will play a huge roll in the economic reversal of certain countries. Canada could maintain its relative place in economic order in 40 years rather then slipping as is expected of most European countries .

We expect that bonds will give low returns of 3-5% as bond prices remain under pressure. Dividend yields on stocks are attractive by comparison and could see increases over this year.

The CIBC World Markets strategist is forecasting the interest rates should remain fairly stable, and the S&P 500 climbing another 7-9%, oil will hover around $90 and gold could strengthen to $1,580 and the Canadian dollar should stay within a few cents of the U.S. dollar. We are constructive on the valuations for the Canadian stock market this year but we would not rule out a correction of 5-10% somewhere during the year. However we expect to end the year with a gain in the area of the long term average, 8.9%.

The Uranium industry has attracted increasing investor interest in recent months. The spot price of Uranium has risen from about $40 (US) per pound early in 2010 to a recent high of $65 per pound and the future demand for the commodity seems to be building steadily. Uranium, primarily used to fuel nuclear reactors to generate electricity. The technology for building and operating Nuclear reactors is well developed. They are clean burning, low carbon producers and their number is expected to expand quite rapidly over the next decade.

Currently, there are approximately 438 nuclear power plants in operation in 30 countries around the world and many countries are looking to increase their capacity significantly. For example, China plans to increase from 11 reactors currently to 188 by 2020, India from 19 to 83 and Russia from 32 to 54. Other countries such as Canada, Japan, Korea, the US and most European countries are also looking to add to their capacity.

Annual worldwide consumption of uranium is estimated at 180 million pounds versus annual worldwide mining production of about 128 million pounds. In recent years, the shortfall has been covered by Uranium taken from decommissioned weapons in Eastern Europe and by selling from strategic stockpiles in the West. These sources now seem close to running out.

Mine production of uranium needs to increase to meet demand. Uranium mining companies, capable of increasing production should see fairly strong gains in revenue, cash flow and earnings over the next few years.

I find that people are passionate in their views, whether it is about gold, inflation/deflation or oil prices. As Tom Bradley of Steadyhand investments reminds us “As investors we’re not here to be proven right on our theories, but rather to generate attractive returns. It is important to make the fundamental call, but it’s more important to profit from it by getting the valuation right.”

Sorry about this table that follows but it doesn't come out well in this format, but there is a lot of good information on it.

Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 % Change

2005 2006 2007 2008 2009 2010 2009-2010

Stock Market Indices

S&P/TSX Comp. 11,272 12,908 13,833 8,988 11,746 13,443 14.45

Dow Jones 10,718 12,463 13,265 8,776 10,428 11,578 11.02

S&P 500 1,248 1,418 1,468 903 1,115 1,258 12.78

Nasdaq 2,205 2,415 2,652 1,577 2,269 2,653 16.91

Commodities

Gold - US $ 518.90 638.00 833.90 884.30 1,096.20 1,421.40 29.67

Crude Oil - US $ 61.04 61.05 96.00 44.60 79.36 91.38 15.15

Natural Gas - US $ 11.23 6.30 7.46 7.17 5.82 4.23 -27.32

Currencies

Euro in Cdn $ 1.38 1.54 1.44 1.70 1.50 1.33 -11.21

Pound In Cdn $ 2.00 2.28 1.96 1.79 1.69 1.55 -8.30

US Dollar in Cdn $ 1.16 1.17 0.99 1.22 1.05 0.99 -4.97

Interest Rates

Cdn Prime rate 5.00 6.00 6.00 3.50 2.25 3.00 33.33

US Prime rate 7.25 8.25 7.25 3.25 3.25 3.25 0.00

Cdn 10 yr bond 3.98 4.08 4.00 2.67 3.62 3.13 -13.54

US 10 yr bond 4.39 4.70 4.25 2.21 3.38 3.29 -2.52

What do we expect from the stock market for 2011? (2)

2010-12-16T09:16:00.000-05:00

As we said the market is trading for around 19 times trailing earnings but what level of forward earnings is the market at?

Based on the 2 estimates of top down and bottom up of $800 to $850 we get the market trading at 16.6 times to 15.7 times depending on who’s estimate you want to use. Analysts are expecting some pretty spectacular growth in earnings compared to 2010. So far in 2010 we have earnings grow by 15% versus 2009 but the big change is in 2011 when earnings are expected to grow by over 27%. WOW! The Material sector of the market had a great year in 2010 with earnings growth of 71% and 2011 is expected to be about 56% better then 2010. Financials are expected to have growth of about 23%. Pretty impressive.

It seems that we are in line for another good year in 2011 with 10% rise in the market likely and 15% is not out of line. We could even justify a rise of 20% in the S&P/TSX Composite based on analysts estimates and trading at 20 times those earnings.

We have had 2 good years so far and I would never rule out a down year but we normally get markets moving up 3 out of 4 years, but rarely up 3 years and down 1 year. The market is too smart or we are too dumb for that.

So far the outlook looks promising for 2011 but keep any eye out for the unexpected like North Korea, terrorist activity or solar flares. Who knows?

What do we expect from the stock market for 2011?

2010-12-14T14:17:00.000-05:00

Being the analytical type and a CFA you could expect that I would be trying to figure out what the market is going to do.

The stock market usually trades in a range of multiple to earnings. The multiple is usually around 15-20 times earnings. In the tech boom you saw some stocks trading for well over 100 times earnings, if they had earnings. Well beyond any reasonable valuation metrics. Another questions you should ask is whether you want to value earnings based on trailing earnings (earnings that have been reported) or projected earnings (estimates of what they might earn). Probably some combination of both makes some sense. What is the market expected to earn going forward? There are 2 methods, top down or bottom up. Top down is the economist or strategists estimate of what they think the various sectors will earn. Bottom up is the various analyst estimates brought together and combined to give a number for the whole market. The strategists have a better track record then analysts. Analysts tend to be too optimistic and make frequent changes to their estimates.

One number that is open to very little discussion is what the market is trading at based on trailing earnings. The S&P/TSX Composite is currently trading at 19.2 reported earnings with only 2 weeks left for this year. Will the market trade at this multiple of 2011 earnings? Maybe.

One strategist has indicated that he thinks the reported earnings for the S&P/TSX Composite will be $796 for 2011. I have rounded it up to $800 since no one is that good. We have analysts estimates for the same index at $846. For the sake of simplicity we have rounded that to $850 and also they aren’t that good. If we apply a multiple of 19 times for the strategists number we get a value on the market of 15,200 by the end of 2011. We could easily see the market trading at 20 times the analyst’s estimate (they could be right for a change) and get a market level around 17,000.

Toronto Stock Market Returns

2010-12-02T15:14:00.000-05:00

I was doing some work on the market returns for the Toronto stock market. The index was composed in 1956, so it is not possible to get returns for an index before that. In the U.S. they have indexes that go back for longer periods of time. There has been a lot of volatility over the decades and I was wondering how an investor in the index would have done over a 10 year period. Would they have lost money? The good news is that an investor that bought and held the index for a 10 year period would not have lost money. Now the range of returns would have changed dramatically. If you had taken $100,000 and left it for 10 years you could have seen a difference of $300,000 depending on the 10 year period you were invested in. The period from 1965 to 1975 was the worst period with the compounded return of $139,731. The 10 year period from 1977 was a wonderful period to be invested with your $100,000 growing to $439,070. Just eyeballing the returns it appears that the best time to invest is after a major drop in the market. In 1974 the market was down -27% followed by a positive 18% the following year. In 1957 the market dropped over -21% and then up 27% the following year. Even our crash of 2008 of -33% was followed by a gain of 35%. Will the market continue to move higher and give us returns like 1975-1985? Only time will tell.

Quarterly Review

2010-11-18T14:50:00.000-05:00

The strong gains in revenues, earnings and cash flows by many companies, are finally starting to be reflected a little by better stock market prices. Toronto stocks gained 9.51% in the latest three months and are now up 5.3% for the first nine months of 2010. US stocks have done even better, with the Dow Jones posting a strong gain of 10.1% for the latest quarter and 3.4% for the first nine months of the year. Although the US stock market ended the month with a dip, the overall performance of 8.8% for the month was enough to cap the best September in seven decades.

Yet in the same period gold surged to a new all time high of over $1,300 an ounce. Gold is the province of pessimists, driven by fears that unprecedented efforts to pump money into the economy will end badly, igniting inflation and crippling currencies. Then there is the bond market which continues to draw investors, driving bond prices higher and yields lower. Bonds thrive in an environment of low growth and muted inflation, suggesting investor’s aren’t worried about a major upsurge in prices. We think the bond market is correct and we look for continued growth but at a plodding rate with inflation fears more likely to give way to deflation concerns.

The recession is over according to assessments by both the National Bureau of Economic Research in the US and the Paris based Organization for Economic Co-operation and Development. Officially, the recession started in December, 2007 and lasted 18 months until June, 2009, making it the longest recession in the post war period. While the official organizations are saying the recession is over they are also saying that the economic recovery will probably be slow.

Bank of Canada governor, Mark Carney has indicated that Canadian’s should brace for months of modest economic growth. We have probably seen the last of interest rate increases from the Bank of Canada, at least for the rest of this year. This likely means that we won’t see much higher mortgage rates due to interest rate increases from the Bank of Canada.

“If a family is expecting to earn a high single digit return to fund retirement, or a similar result from their personal account to pay for college, there will not be enough in the piggy bank at time’s end to pay the bills. There is not 8% there for pension funds. There are no stocks for the long run at 12% returns. And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living.” Bill Gross bond manager of PIMCO the largest bond manager in the US.

For once I agree with our Finance Minister Jim Flaherty. “This is not the time of booming economic growth, this is a time of modest economic growth, and there needs to be some adjustment of expectations. We are not going to see the boom times we saw before.”

A recent study, conducted co-operatively at several US universities, showed that the sentiment of the general investing public, either positive or negative, was usually fairly accurate at predicting near term stock market direction but usually wrong and inversely associated with longer term stock market performance.

Shrewd investors often view times of uncertainty as times of opportunity. The well known professional investor John Templeton once noted that “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”. Right now we appear to be in the second phase of his cycle, “grow on skepticism”.

What do you think?

2010-10-21T16:22:00.000-04:00

I need an unbiased opinion, pls. share your thoughts.

Scenario: An 82-year-old couple, influenced by memories of 'the' recession are concerned about the years to come. The wife is in reasonably good health (cardiac pacemaker, still very mentally competent), the husband is significantly incapacitated (requires bilateral knee replacement and requires bypass surgery, is visibly physically impaired.)

They have just agreed to an annuity of approx. $460,000 so they feel comfortable just recently moving to …….. (about $4,500/month). I'm not sure but I think they'll get about $1,050 each per month from the annuity which will be part of their $4,500/month cost of ………, and the rest they'll take from their savings.

Pls. share your opinion, as I think this couple has been preyed upon: would you suggest such a financial decision to a client?

At first blush this seems like a bad decision. I know there are a lot of factors and guarantees that go into this decision, like longevity, inflation and market volatility BUT this locks them into a very low rate of return of 2.7% and they will not be able to get at the $460,000 (principle amount) should they ever need to. I would not recommend this to my clients. What will this couple do once their savings run out? They will not be able to access the $460,000. Is their any inflation adjustment.
Please tell this couple I would be happy to give them a second opinion on their options. This sounds like a life insurance product sold by a life agent.
The guarantee is a joke. At $1,050 per month for 10 years, they will get 27% ($126,000/$460,000) of their own money back. At $1,050 per month it will take 36 years to get their own money back. They will need to live to 118 years old to get their own money back! More information is needed to be able to judge this annuity but it has a bad smell about it.

2010-10-04T11:43:00.000-04:00

I have attached a list of the securities that are held in our Safety&Value Portfolio. This portfolio was back tested to see how it would have done over the last 10 years. The test showed good results but... I decided to commit some real money ($100,000) to be managed according to guidelines that have been outlined in earlier blogs. So far this year the portfolio is up 8.8% after trading costs. The 3 month performance was 14.2%, 6 months performance was 9.6%, and 9 month performance was 8.8%. For comparison the TSX/S&P was up 5.3% for the same 9 month period.
Stay tuned for future updates.

2010-09-24T13:46:00.000-04:00

Registered Disability Savings Plan (RDSP)

I am frustrated. I have finally found the closest thing to the government giving money away and I have been stymied. The Registered Disability Savings Plan (RDSP) was set up a couple of years ago as a savings plan intended to help people with disabilities save for their retirement. Think of it like a RSP but on steroids, for people with disabilities. Instead of saving taxes on your contribution, like you would get with an RSP, the government contributes (gives) along side your contribution AND in a big way. For example on the first $500 contributed the government grants $3 for each $1 contributed, and $2 for each $1 on the next $1,000.For example I finally have a person that contributed $500 to an RDSP, they will get $1,500 from the government into their plan so that they will have $2,000. If that person can find another $1,000 this year they will get another $2,000 from the government. This means for a total contribution of $1,500 from the disabled person, the government will contribute another $3,500 for a total of $5,000. This can be done every year! $500 becomes $2,000 and $1,500 becomes $5,000.
There are a few financial institutions that are helping to facilitate like the Bank of Montreal and TD Canada Trust and Invesco Trimark.
If you want to take advantage of the RDSP you must be eligible for the Disability Tax Credit, under age 60, valid Social Insurance Number, and a resident of Canada.

2010-08-26T16:02:00.000-04:00

The CFA exam, the hardest in the world!

The Chartered Financial Analyst designation is the hardest exam in the world. Let’s start with the facts.
To start with this is the equivalent of a graduate degree, you need to have a degree already to qualify to sit the exam.
This is the only exam that is written around the world on the same day, first Saturday in June, in English. So much for regional disparities.
There are 3 separate levels, with Level 1 exam that is offered in June and December. The other levels are written once a year. If you are sick or have a headache, you can come back next year. The exam is 6 hours long, broken up for lunch and a little panic attack. The exam covers such diverse areas as Ethics (do lawyers cover this area?), Fixed Income Securities, Equity Analysis, Portfolio Management, Wealth Planning and Quantitative Analysis.
Of the 111,731 candidates from 160 countries that wrote the exam, failure rate is an eye popping 58% for the first year. The 2nd year was even worse with a 61% failure rate and 3rd year was a bit better with a failure rate of 54%.
Once you have passed the exams you don’t get your full designation until you have completed 4 years in the industry.
Regulators around the world recognize the value of the CFA charter and grant exemptions from licensing exams for investment advisers. There are 88,890 CFA charter holders in 136 countries around the world.
So next June when the summer sun is starting to shine think about all those poor souls hunched over writing the CFA exam

Quarterly Review

2010-07-23T11:49:00.000-04:00

Wickham Investment Counsel Inc.

Quarterly Review July, 2010

Toronto stocks declined by almost 4% so far this year, as measured by the S&P/TSX index. In the United States, the Dow Jones was down 6.2% in the first half, and the S&P 500 was down 7.5%. The drop in the market in the second quarter wiped out the gains that all these markets saw in the first quarter.

The economic rebound owed more to inventory restocking and deferred purchases following the dramatic economic slowdown in the Fall of 2008 rather then real sustained growth. The scale and duration of the 2009 rally in stock prices, is more a testament to the power of monetary authorities then to economic growth or bargained priced stocks.
Now the markets appear to be going back and forth from optimism to fear. In the second quarter fear won, as investors voted with the bears. Concerns that the governments around the world will withdraw stimulus packages too early, stalling out the recovery, are reflected in stock prices. There are fears that some European countries will go bankrupt, despite about $800 billion that have been pledged to deal with the problem! Yet some 80% of companies in the S&P 500 reported better then expected earning. Before these companies reported, analysts were be chastised for being too optimistic by some of these same bear forecasters.

Headline trends show high volatility but the underlying trends are positive and strong. Bear market trends and recessions usually last from as little as six months to as long as eighteen months, or more while Bull market trends and periods of economic expansion tend to last from three to five years, or longer. The latest recession probably ended in the third quarter (July-August-September) of 2009 and the recovery should continue for at least three to five years with the unevenness of a few bumps and potholes along the way.

GDP growth is not the only measure of improving economies. Industrial output is also showing very strong gains in many countries, retail sales numbers have been good and rating agencies such as Standard & Poors have been upgrading their credit ratings on many companies because their earnings and cash flows are improving. Also, the recent G20 summit in Toronto set some guidelines for governments to reduce debt and increase world trade that should be positive for world economic growth over the longer term.

One of the most significant news events in recent months is undoubtedly the BP oil spill in the Gulf of Mexico. Crude oil began flowing into the water on April 20th when a fire and an explosion resulted in a break in the production system that is still spewing oil into the Gulf waters at an estimated rate of 35,000 to 60,000 barrels a day. As a result of this spill and BP’s inability to halt the flow, offshore oil production and drilling new offshore wells anywhere in the world, are facing increasingly tougher and expensive regulations.

Problems emanating form the BP oil spill seem certain to lead to a decrease in worldwide offshore oil production. In 2009, global oil production dropped by two million barrels a day or about 2.6%, the largest drop since 1982. It appears that the world’s ability to produce oil is declining just at a time when the world will want to increase oil consumption to support rising economic growth, especially in emerging economies like China and India. The imbalance of oil production and consumption should lead to higher prices for oil in the months and years ahead.

Oil & Gas stocks should produce very good investment returns over the next few years!

The drop in stock prices has created some very attractive investment opportunities, for those wanting to make the commitment. Research in Motion (RIM) is the cheapest it has ever been, on a price-to-earnings basis. With no debt and almost $2.5 billion of cash, the company has started to buy back its own shares. This can usually been viewed as a positive sign, but in today’s markets we will have to wait and see.

Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Jun. 30 % Change
2005 2006 2007 2008 2009 2010 Dec - Jun
Stock Market Indices
S&P/TSX Comp. 11,272 12,908 13,833 8,988 11,746 11,294 -3.85
Dow Jones 10,718 12,463 13,265 8,776 10,428 9,774 -6.27
S&P 500 1,248 1,418 1,468 903 1,115 1,031 -7.57
Nasdaq 2,205 2,415 2,652 1,577 2,269 2,109 -7.05

Commodities
Gold - US $ 518.90 638.00 833.90 884.30 1,096.20 1,245.90 13.66
Crude Oil - US $ 61.04 61.05 96.00 44.60 79.36 75.63 -4.70
Natural Gas - US $ 11.23 6.30 7.46 7.17 5.82 4.53 -22.16

Currencies
Euro in Cdn $ 1.38 1.54 1.44 1.70 1.50 1.30 -13.10
Pound In Cdn $ 2.00 2.28 1.96 1.79 1.69 1.59 -6.30
US Dollar in Cdn $ 1.16 1.17 0.99 1.22 1.05 1.06 1.34

Interest Rates
Cdn Prime rate 5.00 6.00 6.00 3.50 2.25 2.50 11.11
US Prime rate 7.25 8.25 7.25 3.25 3.25 3.25 0.00
Cdn 10 yr bond 3.98 4.08 4.00 2.67 3.62 3.09 -14.64
US 10 yr bond 4.39 4.70 4.25 2.21 3.38 2.94 -12.89
Sorry about the way this table looks. Very frustrating trying to make it look good.

Magna Multiple Voting Shares

2010-06-25T11:23:00.000-04:00

Okay let me add my 2 cents regarding the buyout of Frank Stronach’s control position. I admire what Frank has accomplished, he has created a world class auto parts company and he has done all the heavy lifting. I have visited his operations and been granted an audience to Frank. He has set up one of the financially strongest, most innovative companies in North America. Magna has come though the automotive implosion in wonderful shape. Magna shares trade around $73.00 at the time of this writing and have $12.76 of cash per share on the balance sheet and no debt. The share trade for about 13 times consensus earnings for the coming fiscal year, not bad but well below what the competition trade for. Through the use of multiple voting shares Frank has guaranteed his control over Magna. While I do not agree with multiple voting shares (and most investors, especially Americans, don’t like them) I understand that this is a method for a founder to continue to control his “baby”. Over the years Frank has taken this control position and used it to go on flights of fancy (too numerous to mention here) and to pay himself huge advisory fees on top of his large salary. I don’t like this and this has kept me from investing in Magna, therefore I have voted against his ownership style by not owning the stock.
Now that Frank has decided that he would like to sell his multiple voting shares and give up control of Magna I don’t think he should get a premium for this position. Frank should be satisfied to be in the same position as the rest of the shareholders and from the valuation lift that he will get from the multiple voting shares being abolished. How much does this man need? His greed seems to know no bounds. If Frank is not prepared to convert his multiple voting shares into regular shares I say that he should take his multiple voting position with him to his grave and we will deal with the next generation. This is a great case study about the injurious effect of multiple voting shares. Inflated salary, special compensation package, race tracks, restaurant ownership and now a premium buy out. I say enough is enough.

Vote against the payment to Frank.

Chartered Financial Analysts (CFA) Exam

2010-06-04T14:54:00.000-04:00

Tomorrow all across the world thousands of people will sit down for 6 hours and write one of the most grueling exams of their lives.
The first Saturday of June is exam day for men and women that want to get their Chartered Financial Analysts Designation. This is the gold standard for the investment industry and is becoming the ante that is needed for entry to this industry. This exam is written once a year (Level 1 is also written in December) and so if you are not feeling well or get hit by a car you can always come back next year. No exceptions! Pretty harsh but to make it fair for people around the world they have to be. The exam is set in English regardless of the country you work in or write it in. Canada was quick to embrace this designation and has one of the highest levels of Chartered Financial Analysts (CFA) outside of the United States.
This is no piece of cake. There are a lot of highly educated people from some pretty impressive backgrounds that attempt and fail this test. A lot of graduates from Economic programs and Master of Business Administration write this test. The failure rate for the first year is over 50%! I am not sure but I wonder if it’s the Ethics part of the exam that trips them up. The exam tests candidates knowledge of a variety of areas like Fixed Income Securities, Equity Analysis, and Quantitative Analysis for example in addition to the Ethics.
My associate, Sean is writing this exam and I know what he is going through. You get to the point where you can’t seem to hold any more information and you just want to get it over with. But when you go over the practice exams you realize that there is one more concept that you need to clarify and so you study some more.
Good luck to all of you that write the exam.

Safety&Value (5)

2010-05-20T14:44:00.000-04:00

Sorry for the style of this posting but as you can tell this is not my strong suit. The picture above gives you our Safety&Value Portfolio as it looks on May 19, 2010. I undertake to keep you informed as we make changes to this portfolio and on a quarterly basis we will provide performance statistics.

Safety&Value Portfolio (4)

2010-05-11T16:16:00.000-04:00

The previous blog dealt with the back test on the portfolio and I thought it was pretty impressive, but a lot of back tests are. What would it be like to run real money according to this high quality discipline? For an institutional investor like myself it is tough. We tend to second guess the model. Even though I have included the factors that I believe are important it is difficult to give the decision making over to a “blackbox”. I am a very fundamentally oriented investor and I like to kick the tires of my investments. Even though I use charts to help with entry and exit points on my investments I don’t consider myself a chartist. I couldn’t help but look at the chart on the securities recommended and have an opinion to buy or not buy.

I decided to properly test the Safety&Value Portfolio with a real life portfolio. I committed $100,000 to be invested according to the portfolio starting January 1, 2010. I set up an account at Penson Canada where trades are done for $10 or 2 cents per share, which ever is greater. I would purchase 30 securities as recommended by the model. I allowed myself the ability to over ride the model for one security selection. That is I would veto one buy from the list and then I would have to buy the next highest rated stock.

As expected by comparison to the market the portfolio is much smaller based on Market Float and Trading volume. We have a much lower debt-to-equity ratio of 0.28:1 versus the markets 0.56:1 Our price-to-earnings ratio is only 11.4 times versus the markets 16.1 times. We have very good earnings momentum (13.1) for the last reported quarter versus the market (-11.9). While we have good earnings growth based on the previous years growth, we lag behind the market on forward looking earnings growth measures.
The next blog will show the portfolio, if anyone is interested.

Safety and Value Portfolio, the stats

2010-05-06T15:34:00.000-04:00

Safety and Value Portfolio

CPMS tested our Safety and Value portfolio back ten years. We set up the back test based on $1 million and 30 stocks equally weighted with a monthly rebalancing. The stocks had to be over $200 million in market capitalization and have a debt to equity of less then 1.5:1. We compared the portfolio to the S&P/TSX Composite Total Return Index.

The portfolio had some good returns but more on that later. For the statisticians out there. The Alpha of the portfolio is 0.83 and Beta is 0.57 Pearson correlation coefficient (r) is .67 turnover is 97.4% standard error 3.13 and tstat is 3.53, Sharpe’s measure is0.74 versus the market of 0.18 and Treynor’s measure is 19.12. These comparisons were to the S&P/TSX.
Okay enough of the statistical stuff but it is important to note that this is a lower risk high quality portfolio based on these statistics. The turnover is higher then I would like but we have some good sell disciplines in place.

We did a back test with a start date of February 1998 till December 2009. The performance for this period was impressive. Since inception this portfolio was up 14.2% versus the market, our benchmark of 6.5% for a net out performance of 7.7% Our portfolio benefited from not taking the big drop that the market had in the tech meltdown. The Safety and Value Portfolio had good performance over 10, 5, 3 and 1 year.
Safety&Value S&P/TSX Difference
10 year 16.7% 5.6% 11.1%
5 year 9.1% 7.6% 1.5%
3 year 3.7% -0.2% 4.0%
1 year 36.0% 35.0% 1.0%
(sorry for the way this looks)
I think it is interesting to note the performance over the last year and the last 3 years, during one of the biggest market drops and recovery in my lifetime. This portfolio peforms during all types of markets.

The Safety&Value Portfolio had 10 out of 11 years of positive performance versus the markets 8. The Safety&Value Portfolio had 30 out of 47 (63.8%) quarters of positive performance versus 31 (66%) for the market, on a monthly basis we had 94 out of 142 months with positive returns versus the markets 87 months (61%).

More on the next blog.

Safety and Value Portfolio (2)

2010-05-06T15:30:00.000-04:00

We know what we are looking for but how do you go through hundreds of companies and compare their reported earnings and rank them. Fortunately there is a company that helps us.

We use CPMS (Computer Portfolio Management System) to clean up the numbers that the companies report. This is an expensive but valuable service. They clean up reported numbers on over 600 Canadian companies and put them in a form so that we can screen them. Due to the Generally Accepted Account Protocol (GAAP) companies have a lot of discretion on their “reported” numbers. Two companies can both report earnings of $1.00 but once you back out extraordinary items and unusual gains the numbers could be $0.80 and $1.20. This is where CPMS adds value.

We went through the literally hundreds if not thousands of various ratios and numbers that their system produces. Great system but not perfect, so we made some changes to formulas so that it suited us. We had to rework the free cash flow calculation so that it was what we wanted. With help from CPMS they suggested other factors that should help give us performance on top of our safety and value focus. Their research showed that when a company reports a positive earnings surprise it usually goes up in price. My own experience confirms this view. Also companies that have positive earnings momentum do well and also when analysts are increasing their estimates. No surprises here.

CPMS also asked about our sell discipline and we incorporated it in to the model. Selling is one of the more difficult things to do, so it was a welcome conduct to incorporate into the model. We also wanted to make sure that we had at least 2 analysts covering the stock and that it had a minimum market capitalization of at least $200 million.

We took these factors and gave them a “weight” and ran a back test to see how they did. The Safety and Value factors had a weight of about 80% (yeah, we are kind of cautious) and just over 20% weighting for the performance factors.

Safety and Value Portfolio

2010-04-27T14:23:00.000-04:00

We have struggled over a long period of time to come up with the perfect valuation tool. Unfortunately, their isn’t one. We did develop a number of factors that we thought were important to help us in choosing stocks that had a high degree of safety and value. We describe value in a number of ways. One of them is cash flow and free cash flow to enterprise value.

Cash flow is probably the most important valuation tool I use for making my investment choices. It is a fundamental factor owners of companies use when they are looking at their business. One of the reasons I like it, is it is less likely to be corrupted by accounting shenanigans, not that it can’t be done, it is just a lot harder to do. Once you strip out the cash that an owner needs to spend to keep his business running in good shape, stuff like maintenance, you are left with free cash flow.

We wanted to see how companies looked based on free cash flow by comparison to enterprise value. For the enterprise value calculation I took the number of shares times the share price and added any debt to this amount and subtracted any cash they had on their balance sheet. For the free cash flow calculation we also add back any interest payments and then put this number over total enterprise value.

We screen stocks based on free cash flow along with a lot of other factors and then we rank them to see which are the most attractive from a Safety and Value standpoint. For a Safety factor we prefer companies that have low debt to equity ratios with a maximum value of 1.5:1. From a safety standpoint, no debt is good. We also like to see good interest coverage, that is that earnings before interest and taxes and depreciation divided by interest payments. The higher the number the better.

Low price to earnings shares are also preferred in our system as they usually carry lower risk of disappointing.

We also like to have shares that are priced at a low multiple to book value or a discount.
Dividend paying shares are also preferred for a variety of reasons of safety and it can also help total returns.

More on this topic in future blogs.

Quarterly Review

2010-04-20T14:21:00.000-04:00

Toronto stocks gained a modest 2.5% in the first three months of 2010, as measured by the S&P/TSX index at 12,037.73 on March 31st versus 11,746.11 at year end. In the US, the Dow Jones also posted a modest gain of 4.1%, moving from 10,428.05 at year end to 10,856.63 at March 31st. The modest performance of stock markets in the first quarter and the accepted connection between stock market trends and economic trends suggest that economic growth in the months ahead could be slower than the 5% plus, that we saw in the fourth quarter of 2009.

Markets are being driven by the sweep of suddenly robust global economic indicators. While stocks aren’t quite there yet, many markets are now back to pre-Lehman levels in the fall of 2008, amid signs that the U.S. recovery is finally self-sustaining.

You may have heard about some countries that are at risk of “bankruptcy”, the PIIGS (Portugal, Ireland, Italy, Greece and Spain). While this is of concern, especially in the Euro Zone, failure of one of these countries is not expected to have a significant effect on the world economy. Over the years there has been a number of sovereign debt defaults (Germany, for example after the first World War).

The Central Bank in Canada has a pretty simple job. That job is to achieve and maintain 2% inflation. To do this the Central Bank sets a bank target interest rate. It can lower rates to stimulate the economy and increase them, or tighten them, to slow it down. Against this back drop the Central Bank also has to consider a few other factors.
The Canadian dollar at par applies downward pressure on inflation, as imports become cheaper. Further, it makes it more difficult for Canadian exports to sell its goods abroad.
According to the chief economist at CIBC, the Bank of Canada may rely on the strong currency to help it tighten monetary policy, in conjunction with higher interest rates. As a result the bank might not have to raise rates as much and as far as would otherwise be the case.

It is generally accepted that interest rates have to increase from their current low levels (Prime is at 2.5%, 5 year bonds are 3%, and 30 year bonds are 4%). A recent study by UBS AG indicates that stocks perform in line with their long term averages (about 8-10%) even during a period of increasing interest rates. “A hiking cycle is not on its own enough to derail equity markets.”

One major motivation for institutional investors to stock up on oil is fear that the U.S. dollar is set for a long decline. In contrast to the U.S. dollar, oil is a truly liquid currency – one that the Fed can’t inflate away. We are constructive on oil prices, especially over the long term, but natural gas is a different story. New drilling techniques, into previously inhospitable formations has opened up a flood of natural gas onto the market. This has depressed the price of natural gas below expected levels, especially when compared to oil prices.

The link between stock market and economic trends is not usually coincident. We have noted several times in the past that stock market trends usually lead economic trends by three to nine months. This connection was proven out again last year when stock markets started a very strong recovery move early in March and we started to see positive economic trends in the third and fourth quarters.

Share Buy Back

2010-04-09T16:11:00.000-04:00

There was a note the other day about BCE buying back shares, or doing an issuer bid. This is an interesting way of reducing the number of shares outstanding and increasing the earnings per share. There are a number of things that can be done with excess cash so that it can be used to increase shareholder value. Some of them are to put the money back into growth of the company, increase the dividend or do a share buyback.
A share buyback signals to the market that management feels the shares are undervalued and this is one of the best investments they can make.

I also noticed an article that mentioned that a lot of companies that said they were doing share buybacks only did this to offset some of the options that they were granting. This has the net effect of leaving the shares outstanding the same.

I did some research looking at over 600 companies in Canada to see who has less shares outstanding now versus 1 year ago. There are only 14 companies that have bought back more then 5% of their shares. BCE has repurchased about 5 million of its shares, but this come out to only about 3%. I was surprised to see that Roger Communication (RCI.B) had bought back over 50 million shares or over 7% of its outstanding shares.

BUT the winner in this report was little Danier Leather (DL) that has repurchased a staggering 27% of its shares over the last year. The shares are trading for around $6.50, they have no debt and they had about $4.86 cash per share and working capital of $7.33 per share and a book value of $10.48 (with no good will!). Very small company but something interesting is going on. It deserves some more research, unfortunately it doesn’t look like any analysts are covering it currently.

Interesting Tidbit when Buying Bonds

2010-02-04T14:12:00.000-05:00

A funny thing happened the other day. I was trying to purchase some bonds for one of my clients. Along with the price of the bond you have to pay the “accrued interest”, that is the coupon times the number of days since the last interest payment. Most bonds pay interest twice a year. For our example they pay at the end of December and June. If I was purchasing a bond on January 27, 2010 that had a 10% coupon I would expect to pay the price of the bond, plus accrued interest for 27 days. On a $10,000 bond with a 10% coupon I would expect to receive $500 at the end of December and June. So I would pay accrued interest of $1,000 divided by 365 times the number of days (27). Or $1,000 / 365 * 27 days = $2.739726 * 27 = $73.97
On December 20th if you buy a bond you would pay accrued interest for the 173 days, since the end of June. In the above example you would pay accrued interest of $1,000/365*173= $473.97. Since there are 11 days left in the year most people would expect to receive 11 days of interest at $1,000/ 365*11 = $30.14. In fact they would receive $500 at the end of December minus the accrued interest they paid of $473.97 or the net amount $26.03. Why does this discrepancy happen? It is a generally accepted convention in the industry in which accrued interest is calculated based on the number of days since the last payment. Since the calendar year of 365 days is not evenly spaced between the first and second half, you can get discrepancies.
The brokers could easily determine the number of days in the period since the last payment and calculate the accrued interest based on that number. For example in the above example since $500 would be paid at the end of December but it has 184 days in the second half versus 181 in the first part of the year. So Interest would accrue at the rate of $2.76 per day for the first half of the year and $2.72 for the second half of the year. Not a lot of difference but the more exact way of doing it. With all the computing power out there this is a snap to do.

As I read this over I see how complicated this idea and the terminology can be. Sorry for that.

Quarterly Review

2010-02-02T16:14:00.000-05:00

Stock markets around the world staged a remarkable recovery in 2009, after the collapse of 2008. The Canadian market (Toronto’s S&P/TSX index) put in a respectable 30.7% return, leading the Dow Jones 18.8%. Some of the markets around the world had even larger recoveries but in most cases they were from even steeper drops, the previous year.

It appears that the recovery in economic activity has taken root but this recovery needs lots of tender loving care. According to Deutsche Bank “we are in a recovery but it is fragile”. According to them some of the reasons for this recovery are; employment gains are expected in the first quarter of 2010, China continues to experience growth, inventories need to be rebuilt, corporate spending is expected to increase and U.S. housing is expected to continue to recover.

Sovereign debt (debt of countries) has increased dramatically. This was necessary to bring the various economies out of what could have been a depression. They did the right thing. Now the tricky part will be to start paying down this debt rather then to leave this debt-monster to lurk around. Canada is in the fortunate position of having reduced its debt leading up to the economic crisis of 2008. Canada’s debt-to-GDP(Gross Domestic Product) is expected to rise from the 25% area to about 35%. In international terms this makes us look absolutely virtuous. It appears that the Conservative government will tackle the debt problem with vigor. Other countries, like the U.S., have been saddled with debt levels that could have dire consequences.

We expect interest rates to rise and to rein in fiscal policy. The risk is that policy makers may decide to go to early and could cause a “double dip” recession or they could hold off and see inflation get more solidly embedded. We think the policy makers will risk a little inflation rather than more recession.

Bill Gross, manager of PIMCO, one of the largest bond funds in the U.S., has said that Canada has escaped from most of problems of the economic crisis. He has picked Canada as one of his top areas to invest in. Gross mentions that opportunities outside North America may be key to generating solid returns going forward.
Agriculture and Oil & Gas, are two of the business sectors that should perform very well as the world moves out of recession into recovery. Many people around the world, especially in large, strong economic growth countries such as the BRIC group (Brazil, Russia, India and China) have populations demanding more and better food, more energy and a higher standard of living in general. Better agricultural practices and more energy consumption (Oil & Gas) will be vital.

While interest rates are very low, the yield curve for bonds is relatively steep. This can be interpreted as being bullish for the economy and therefore for the stock market. With increased demand for money interest rates will start to rise and the prices for bonds and other fixed income investments will decline.

Earnings are expected to recover in the last quarter of 2009. In the fourth quarter of 2008 the earnings for the S&P 500 was only $5.62. For the same period for 2009, expectations are for earnings to come in between $15.80 and $17!

We don’t want to suggest there are no risks going forward but there are a number of positive signs and the market valuations are reasonable. We continue to watch for any cracks in our forecasts or for changes to fundamentals.

Buying Gold

2009-12-22T15:32:00.001-05:00

One of my clients, Jane, said she wanted to invest in gold. I asked if she wanted to buy shares in gold companies. This type of investment could be expected to have a high return if gold continued to move higher. Further discussion indicated a concern with the financial system and she didn’t think that pieces of paper that indicated ownership in a company was the investment she wanted. Also there wasn’t any guarantee that the shares would move higher with the price of gold, in fact I had seen a situation in 1987 where the price of gold moved up and the share price of gold companies moved down!

I said that there are various investments, like Exchange Traded Funds (ETFs) that give you direct exposure to the price of gold, so that if gold goes up by 10% your investment should mirror that performance. You can even get ETFs that give you leveraged plays on the price of gold. This was not exactly what my client wanted, they are more worried about a coming apocalypse and they wanted to hold a security that has historically held its value in calamitous times. Jane has a vision of the stock markets falling apart and she wanted to be able to hold her investment in her hands rather than have a journal entry indicating she owned thirty ounces of gold.

What was the best way of owning gold? You can buy gold in gold bars (weighing 400 ounces or 25 pounds), in coins or even in slivers. Since Jane indicated that she wanted to own about $30,000 worth of gold or about 25 ounces in Canadian dollars I suggested that gold coins from the Royal Canadian Mint would be appropriate. The coins are 99.99% pure and are minted in one ounce coins, the same measurement that gold is priced in. If Jane was right and she ever needed to use her gold stash it would be easier to sell or trade one coin than a gold bar. Also the Canadian gold coin is recognized for its purity and weight versus other numismatic coins. I mentioned to Jane that she would need to have a secure place to store them, safe from theft and fire. She mentioned a safety deposit box at a bank. This would add additional cost to the investment. If she kept them at home her insurance policy would need to be amended to cover the possibility of fire or theft, since there is a limitation on home insurance policies. She might want to buy a safe.

Where can you buy gold coins? In Canada, ScotiaMocatta dominates the trade in gold bullion. ScotiaMocatta is a subsidiary of Scotia Bank and they indicated that coins could be purchased at the main branch in my city, Hamilton. I found out that indeed gold coins could be purchased in line with the quoted gold price for a small transaction cost of $5 and 8% sales tax. The banker indicated that the sales slip/certificates should be retained as it would be needed if the coins were to be sold back to the bank. I was thinking that this would not likely be a problem for Jane since she probably figured that she would be trading a gold coin for a pig or cow.

Allan Meyer, CFA