Published on
January 31, 2008 in
Finance.
Compound growth is one of those phenomenon that most people understand yet fail to apply to their investment strategies from an income perspective. When investing for dividends the key is not to get the company with the highest yield, the key is to buy a company which can continuously grow their dividend rate year after year.
Let’s examine the following case:
Firstly, you have to identify an industry will long term potential for growth and within the industry pick a company with a good record of steady growth and superior management as measure by margins and return on equity. In this Example I will pick the Energy Industry and my Company pick is EnCana which in 2002 had a dividend yield of 1.5% ($0.05 /quarter) at a price of 13$ per share. At today it pays ($0.40/quarter) or equivalent of a 12.3% yield on your original capital not including any capital gains.
This is the equivalent of an 800% pay raise in just 6 years; can you get that from any job?
Lets Say you invested in bonds in 2003 your yield was around %4, today in 2008 your yield is still just 4%. While Encana yield grew from 1.5% to 12.3%.
When investing in “Dividend Growth” you create the turbo equivalent of a laddered bond where rates reset at higher rates every year.
Dividend Growth for long term investors will provide above market returns in the long run and will beat 95% percent of mutual funds, yet it is such a simple and easy technique.
Published on
January 30, 2008 in
Finance.
When it comes to the cost of trading most investors only think of the direct costs, also known as the commissions. However there is another more important indirect cost know as the bid/ask spread premium.
This is especially important when investing in illiquid stocks or products. On an illiquid company or product, the bid/ask spread can cost as much as 10% of the purchase price. However usually the Bid/Ask spread on most stocks and ETF’s are never greater than 0.10%. Large spreads can also appear in liquid stocks and ETF’s, when the underling security has a high beta (a.k.a volatility).
Definitions:
Bid Price : The price a buyer is willing to pay for a security.
Ask Price :The price a seller is willing to accept for a security, also known as the offer price.
When buying and selling a stock, CEF or ETF one solution is to put a limit order on the security to protect yourself if the spread is wide. Last Friday for example, on the TSX, I’ve noticed that an individual bought an ETF at a 58% premium since there was no liquidity, so the closest ask was at such at such large premium. If this individual took just 10 seconds to put the limit order he would have saved lots of money.
While one usually will not face large spreads, being aware of this is critical if ever you encounter a situation where you want to buy or sell an illiquid product.
Published on
January 30, 2008 in
Finance.
As I have been researching computer based trading systems i’ve been studying the techniques and practices of other computer based trading systems. Until recently I have not realized that such a huge percentage of daily volume is purely computer based trades. These include everything from arbitragers, quant hedge funds to limit/stop orders. There is a positive correlation between volatility in the financial markets and the percentage of all trades which are program based on any given week. If you want to see the weekly program trading reports you can visit the NYSE website.
To see the weekly statistics released by the NYSE visit:
http://www.nyse.com/marketinfo/datalib/1152267398806.html
Published on
January 25, 2008 in
Finance.
We often hear on that inflation runs at 2% or there about, but are these figures accurate? Fundamentally inflation is the increase in the supply of money an it is not an increase in prices. However inflation is usually always lower than money supply growth rates, why is that the case? The reason is that the economy growth often absorbs the new money supply. So to get the real rate inflation use the following equation:
Inflation = ((Total Year Two M1,M2,M3 Money Supply – Total Year One M1,M2,M3 Money Supply) / (Total Year One M1,M2,M3 Money Supply)) – Year 2 Real GDP Growth Rate
When compared to Government statistic these inflation figures are more accurate for various reasons. Government inflation figures exclude energy and food (as if we do not drive or eat). And Government figures are hedonically adjusted, meaning when prices go up the weight in the index goes down and when prices go down their weighting increases and hence do not measure the same standard of living over the years.
Below are the inflation rate for the last few years when calculated appropriately:
2003-2004 : 5.2%
2004-2005 : 5.5%
2005-2006 : 6.0%
To get the M1, M2, M3 money supply figures in Canada visit:
http://www40.statcan.ca/l01/cst01/econ07.htm
To get the Canadian GDP Growth rates visit:
http://www.canadianeconomy.gc.ca/english/economy/#top
Published on
January 24, 2008 in
Finance.
All performance figures are since inception.
Tarik.ca Fundamentals Canadian Equity Fund (Since Dec 18, 2007) : 2.83%
Tarik.ca Technical Program Trading System (Since Jan 18, 2008) : 19.65%
Tarik.ca Strategic High-Yield Fixed Income Fund (Since Dec 20, 2007) : 12.99%
The Performance of Market Indices are as of December 18, 2007
S&P/TSX Composite Index : -2.13%
S&P/TSX SmallCap Index : -2.50%
S&P/TSX Income Trust Index : -2.40%
Dow Jones Industrial (USD) : -5.58%
Nasdaq (USD) : -8.57%
FTSE All World ex-US (USD) : -6.26%
Scotia Bank Universe Bond Index : 1.47%
Visit the Model Portfolios page for more information regarding the individual funds.
Published on
January 18, 2008 in
Finance.
The Tarik.ca Technical Program Trading System, is a computerized program trading system which will use technical analysis (a.k.a. what academia calls “financial voodoo”) to evaluate the merit of such systems and their potential returns. The system seeks not only to beat the S&P/TSX Composite Index but it seeks absolute returns. The system will use Stochastic Oscillators, Parabolic SAR, RSI and William %R in combination to increase accuracy of market timing. The system is an alternating long/short technical computer trading system which will trade in and out of leveraged Canadian listed ETFs in order to achieve Hedge Fund like results. These leveraged ETFs will be from the BetaPro family including the : Energy, Gold, Financial, TSX 60,Crude Oil and Natural Gas ETFs. Commissions and Margin costs will not be included in the calculation of returns. Signals to buy and sell will be generated after market close, because of this buy and sell orders will use the market open price of the next trading day to proceed with the transaction.
To see more information on the three experimental funds which I manage visit the page entitled Model Portfolios these include:
1) Tarik.ca Fundamentals Canadian Equity Fund
2) Tarik.ca Technical Program Trading System
3) Tarik.ca Strategic High-Yield Fixed Income Fund
Published on
January 18, 2008 in
Finance.
Since the peak in 2007 the Dow Jones transportation index has fallen more than 23%. Record high fuel prices have squeezed margins by transportation firms in to the lowest levels in year especially in the airline and in the trucking industry. Air Canada has fallen 48% in the last year while Fedex has fallen 25%. Railways which are much more fuel efficient have fallen only about 10%. Today’s diesel railroads are roughly eight times more energy-efficient than heavy diesel trucks. Railroads carried 27.8% of the ton-miles with 220,000 barrels/day while trucks carried 32.1% of the ton-miles with 2,070,000 b/day (2002 data). This fact was one of the main reasons why Warren Buffet has increased his investments in the railway companies last year. If oil prices go higher it will eventually lead to greater profits to the railway companies, as transportation switches away from trucking and airlines to the railways.
Canadian National Railway (TSE:CNR) specifically presents good value. If has margins of 24% and a return on equity of 20% much higher than industry averages. Canadian National Railway is also attractively priced at 12x P/E and 2x P/B , which is very low for a company who has higher than average industry profitability, while still experiencing growth.
On the other hand I believe the airline industry is facing a tidal wave of bankruptcies and consolidation over the coming decade, as energy prices continue to rise and as rail and sea become a preferred method of transport. Furthermore, inflationary and other economic pressures will most likely continue to hurt consumers over the years to come. This will also dampen the demand for the airlines for travel purposes on the part of consumers.
Published on
January 16, 2008 in
Finance.
With Oil prices rising and with global demand for energy increasing investing in nuclear power is a strategic move, and that’s exactly what happened. From lows around 15$/pound a few years ago, uranium has increased to 90$/pound, while reaching a high near 140$/pound in 2007. And when considering that uranium purchases is a very small percentage of running a nuclear plant, you soon realize prices can go much higher.
Investing in Uranium can be quite tricky. The market is primarily composed of one major producer (i.e. Cameco), with less than a handful of mid sized producers (i.e. Uranium One, Denison Mines) and many small exploration companies.
With prices of uranium currently high you would think that any of the main producers would do well now. The problem with investing in Uranium, is that currently all the producers face multiple problem from flooding in mines, to acid problems to environmental problems and lawsuits.
So what’s the alternative?
What one can do however is to invest in physical uranium. This does not mean you should store some the radioactive material in your house.
The Uranium Participation Corp (TSE:U) is a closed-end-fund which holds physical uranium in trust. When Uranium was hot in April the fund was trading at a 50% premium to net asset value. However as uranium prices has cooled down the fund is now trading at net asset value, making this a good entry point. By investing in the commodity itself you can avoid the problems which the uranium companies are currently facing while getting exposure to the macro developments in the energy and uranium markets.
Published on
January 15, 2008 in
Finance.
1) Get a Brokerage with low commission fees (e.g. Interactive Brokers, there is no reason you should pay more than 0.01$ per share). Furthermore, trade only liquid stocks and products with low bid/ask spread.
2) Once you build a profit greater than 1% on any trade, immediately initiate a stop order which covers your cost and commission, to protect you if the trend reverse. Ideally you should eventually put a trailing stop, which sells the stock if it falls more than a certain percentage the highest closing price.
3) Don’t let your mind fool you to try to average down your purchase by buying additional share. Averaging down has been shown to be physiological phenomenon which occurs as one tries to compensate for a loss. If the trend is down, the trend will usually remain to continue down until the trend reverses. If a trade goes against you sell it. You don’t have to marry your investments.
4) If you are losing money, the first step is to admit it. If you do not admit them, accept your error and analyze where you went wrong you will not be able to learn from your mistakes.
5) Don’t lose money. Don’t let emotions play with you. Use Stop Loses. Don’t average down. Just remember there are always other opportunities. Until you find one there is nothing wrong with sitting in cash.
Published on
January 14, 2008 in
Finance.
Over the last few years the ETF industry has grown significantly, from the first ETF tracking the TSE 300 launched in 1990. Worldwide there is currently $600 Billion in over 500 ETFs. In the last two year we have seen the emergence of leveraged ETFs as well as the emergence of commodity based ETFs.
BetaPro, a Canadian leveraged ETF provider will become the first ETF company in the world to offer a series of leveraged commodities ETFs, which is an impressive feat for a small Canadian company. For the first time in history retail investors will have the ability to mimic what futures traders have been doing for decades. When the Gold Bullion ETF (NYSE:GLD) was released in the US, it opened up the previously difficult to access gold market to retail investors and fund companies. The cash inflows into the Gold Bullion ETF (NYSE:GLD) has been responsible for a large proportion in the increase in the price of gold, and now the ETF is the 8th largest holder of gold in the world ahead of China. I believe the cash inflow into these new and other commodity ETFs will bring the democratization of direct commodity investing to investors and can possibly help accelerate commodities such as oil and natural gas to higher highs as high inflows into the funds bid up prices.
The new commodity ETFs which will come out in about 1 month are:
• Horizons BetaPro NYMEX® Natural Gas Bull Plus ETF
• Horizons BetaPro NYMEX® Natural Gas Bear Plus ETF
• Horizons BetaPro NYMEX® Crude Oil Bull Plus ETF
• Horizons BetaPro NYMEX® Crude Oil Bear Plus ETF
• Horizons BetaPro COMEX® Gold Bullion Bull Plus ETF
• Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF
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