We’re Moving!

Hi everyone, 

While starting out on this blog, I’ve been learning a lot about how it all works.  I have set up my own website, and I’m making a break from this one.

If you’ve been following or reading this blog, please update your favourites to my new website at:

http://creativelypaid.com

See you soon!

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Think Macro, Invest Micro

When investing, it is important to acknowledge the context of the world around us. This sounds disingenuous, very massive, and admittedly it probably isn’t easy. However the most successful investors employ this very well.

In a previous post, I talked about how I like to invest in companies I like, treating it as a vote with my money on the companies I think make the world a better place. Using this philosophy, I choose the companies well in advance of a potential purchase. This article is about evaluating the timing of the purchase (or sale).

Watching Large Market Trends

There’s an old adage that says a rising tide floats all ships (or something like that anyways). And a lowering tide lowers all ships. Stocks are very much like this. Large trends affect overall sectors all the time. To see this ebb and flow is probably not an easy skill at all, particularly for amateurs. But, profits are available even for armchair investors.

A great and obvious example is the aftermath of the financial crisis. Great stocks were really cheap for a while, like TD Bank. Real estate is another great example. You may not have been able to buy a house, but a REIT or something related to real estate might have been. At the bottom of the crash, you could get a condo for 30k in Vegas – that’s cheap enough to put on a credit card.

By observing the macro environment, you can decide when to invest in a sector of the economy. This is the timing. By keeping an eye on each company you like, you can decide which one is at a good share price. The parallel is like a Boxing Day sale for stocks.

If you are short on time, and you haven’t figured out a stock to buy, you can also just pour money into an index for the given sector you like, or the market overall in one of the SP500 indexes like SPY. This is a great way to mitigate risk if you don’t have time to fully understand all the good companies to choose from. However, like my good friend V says, it’s less interesting and definitlely less cool to take that road. Supporting a company with a direct investment is a commitment to make your money count for something.

Is the solar energy sector a rising tide?

Some interesting ideas that I’m thinking about right now is in the world of energy. Solar power has been depressed for a long time. A lot of momentum has been built lately in this space and the market has gained. Looking at TAN, the index has doubled. When reviewing which stocks to own, I must admit I was influenced by Warren Buffet’s investment in Sunpower. First Solar is also exciting since Elon Musk is involved, and he’s a smart guy.  I like solar in general as a vote for our future since I believe in the risks of climate change. To switch from fossil fuels it’s either nuclear or sun.  Since there has been a lot of discussion about solar lately, and big investors are getting involved, the tide is rising.

Add to an Existing Position – Buy Low!

Another aspect of how to win big in this strategy is to move money around between existing investments.  Assuming you have a well-diversified portfolio, you might sell some shares in Company A, and simply add to your position in Company B.  Basically, doubling down on a company you think is priced at a discount because of some external factor.

Of course, it’s hard to predict the future when big changes are out there.  When the market causes your favorite company to tank in share price, it’s hard to think of this as good news as a way to buy more of it.  My advice is to stick to understanding the principles behind what makes your stock picks great, and ask if the principles still hold.  Then, even while the market may be pushing the share price lower, you can get excited about the idea of buying low!  Just like the supermarket putting your shampoo on sale.

Portfolio Choice: TD Bank

I have owned shares in TD for the last year or so now.  As part of my newly regular update on the stocks I continue to own, I provide my quick analysis for why I think TD is a good one to own.  This is of course my opinion.

Company Overview

TD Bank (stock ticker: TD on the NYSE) is one of the “Big 5” Canadian banks, the 2nd largest bank in Canada, and the 6th largest bank in North America.  Over the years, TD has enjoyed a consistent and conservative regulatory environment in Canada that prevented it from making the mistakes made in Iceland, Europe, and of course as we all know, the United States (there are too many links for the US financial crisis).  Consequently, TD has enjoyed fairly steady, conservative growth.  Indeed, the Canadian banking industry overall was on a path to deregulation which from 2001 onward allowed it to expand into other lines of business such as Insurance, and investment in foreign countries such as the US and Latin America.  The Canadian Government was considering further deregulation in 2007-8 just before the financial crisis, as a matter of prudence, since the US and Europe were enjoying wild gains before the crash.  Luckily that didn’t happen.

I have watched TD Bank for a long time now, from before they started investing in the US, or opened up their Insurance business, and have always had a “good feeling” with my experiences this bank.  It may be because my favourite colour is green.  In the past decade, they have notably increased their focus on Customer Service by leading the banks in extending bank hours, opening more branches in neighbourhoods, and also investing early in their website for an online banking experience (apparently they were the first bank in N. America to do so, according to wikipedia).  Notably, they have been consistently recognized for top customer service by JD Power, a third party auditor.  This bank reminds me a lot of the strategic focus employed by TELUS, a company I posted about here.  Perhaps it is because Mr. Darren Entwistle is on the board for TD Bank that this is not a coincidence.

Taken from their website here, TD is made of 4 main lines of business:

  • Canadian Personal and Commercial Banking including TD Canada Trust and TD Auto Finance Canada
  • Wealth and Insurance including TD Wealth, TD Ameritrade, and TD Insurance
  • Wholesale Banking including TD Securities
  • U.S. Personal and Commercial Banking including TD Bank, America’s Most Convenient Bank and TD Auto Finance U.S.

In the US, TD has been expanding along the East Coast, purchasing BankNorth in 2004 (as per wikipedia), and expanding that footprint by buying failed banks after the crisis, in other states.

Overall, TD has done really well in the past 10 years, outpacing the S&P500.  Looking at the last 5 years since the market crash however, is not quite as exciting a story, see the image below.  But, it’s keeping pace on the average, so still good.  Plus, I’m not sure if these charts reflect adjusted gains from events like dividends, which is highly relevant.  I’m still figuring this charting thing out.

TDChart-2008-2013
(chart courtesy of http://www.freestockcharts.com)

Why I like TD

I’m not sure if this makes them an outlier, but when reviewing TD’s history of growth and acquisitions, the company has a calm history of patiently waiting for the right moments to enter into new markets, or acquire a competitor.  In particular, their US growth strategy was well done as they took advantage of the cheap deals to expand their footprint.  Another example is their decision to buy back TD Waterhouse at a third of the price they sold it for, in 1999.

I also really like that they were one of the first banks to embrace new technology with their PC banking platform in 1996, and in 1999 had a pretty decent website.  Canadian business in general is known to be very conservative relative to technology (many of my friends still swear by their Blackberry!), so TD is a bit refreshing in that they are early adopters.

TD Bank differentiates itself by its customer satisfaction rankings.  It has ranked highest in customer satisfaction 8 years in a row.   To that end, a recent personal example, I was able to attend a free seminar on Options trading the other day, run by TD at a downtown branch.  It was very informative and completely for education on the topic, instead of a sales job, which in honesty is what I expected.

It also is a top employer in Canada, as measured by Aon Hewitt.  This one for me is what I watch for.  How a company treats its employees is critical for me as an investor.  There is a balance between delivering share value to investors, and treating your team well.  Like Stephen Covey’s favourite parable, don’t kill the goose for the golden eggs.  Treat the employees well and the company will do well, and hence my share price.

A History of Returns and Growth

TD had the highest total Shareholder Returns (TSR) among Big Five Canadian Banks for the 3, 5 and 10 year time periods (although it tied for first at the 3yr mark), according to TD’s annual report.  That’s not bad, and I believe this speaks to their relentless focus on customer experience.  It will be fun to watch this in the next 5 years if they can match it.  While growing their share price, they are also raising dividends, with 2 increases per year since 2011.

Looking to the US, TD is also pursuing a growth strategy for the US market, as they opened up their 1300th store in 2012. They are currently have the 11th largest store network in the US, up from 0 in 2004.  Not bad in less than a decade.   Their TD Ameritrade business is also pulling in record profits.  As their growth strategy continues, I would expect their other lines of business to benefit.

Future Prospects

I like TD Bank because of its focus to Customer Experience, similar to the successful strategy employed by TELUS Communications Inc, another pick.  They are also a regular in the top-employer list within Canada.  When I searched the US side of the bank for similar recognitions, there were many to review there as well.  Lastly, TD has a strong commitment to the environment with recycling, paper reduction, efficient energy use, etc.

The Canadian banking industry seems to be a fairly mature market, so I would look to the US to find the interesting discussion around growth.  TD seems to be employing it’s successful model used in Canada in its expansion in the US, by using store fronts as a great place to engage customers in banking products and services.  They are expanding rapidy, with 1300 “stores” in less than 10 years, or 130 stores a year, or 10 stores a month, on average.  Each store is an opportunity to sell not only banking solutions, but wealth management and insurance solutions as well.  If they can achieve this while also maintaining strong focus to delivering excellent customer experience, they will continue to gain marketshare.  And let’s face it, the US market is a lot bigger than Canada’s, so this is exciting.

The insurance business is the one area of TD which I don’t understand too well.  I know that insurance serves the likes of Warren Buffett well, since Berkshire has a large insurance component to their business. But we see the risks associated with the business as well after significant weather related events dented TD’s bottom line in 2013.  I’ll have to read more about that piece, and if anyone has any comments to share about it, I’d welcome it.

One thing to note, before I sign off, it’s interesting seeing TD’s flat growth over the past few years as the SP500 has gained (see the chart image above).  Whether this means they are poised for another jump in share price value or not, I’m not sure.  The decision for me to stay invested or not is due to being an investor vs. a speculator.  I’m in for the long haul on the reasons stated above.  Also, I have read some chatter that the S&P500 this year (2013) has only really gained on rises in pe ratio, which means that the market has driven up share prices high, unsupported by actual earnings.  In other words, the market may be due for a sell-off.  TD’s PE ratio has also climbed in the last half of this year but is not wild compared to it’s 5 year average.  Hard to say what the immediate future holds, but for a 5-year investment, TD all the way.

I have gotten to know this company well over the past several years, and I will continue to monitor their success in the news, and in my own portfolio!  

Portfolio Choice: TELUS Communications Inc.

I have been trading shares in TELUS for several years now.  As part of my newly regular update on the stocks I continue to own, I provide my quick analysis for why I think TELUS is a good one to own.  This is of course my opinion.

Company Overview

TELUS Communications Inc. (ticker: TU) is a telecom company based in Western Canada, out of Vancouver, BC.  Its base of operations in its wireline business is in the provinces of British Columbia and Alberta, Canada.  It is also a national wireless carrier, and owns 2 brands in this space: TELUS and Koodo (the discount brand).  Their wireline and wireless services drive most of their CAD $9b in annual revenue.  The company has been investing heavily in getting more services into the home (ie: vertical integration) with their launch of their Optik TV, and they continue to invest heavily in building out their network.  They spend about CAD $2.1b annually on their capital program.  Recently, TELUS has been involved in investing in building solutions for the health care industry and electronic health records.

History of Shareholder Return

TELUS has been a solid investment for it’s shareholders over the years, since 2000.  Looking at Google’s charting comparison with the S&P 500, TELUS beats the market by a considerable margin. The company has had a history of consistent dividend increases, and share buy backs.  As a utility, it affords a decent amount of protection to investors looking for a safe bet in the event of economic downturn.  It has a current dividend yield of around 3.8%, paying out 34 cents a share quarterly, as of the writing of this article.

Consistent leadership, customers first, and culture

The current CEO, Darren Entwistle, is a compelling leader.  I have had the opportunity to hear him speak on several occasions, and I am always impressed.  Here is a video on his argument for TELUS to be involved in solving problems for health care.  Mr Entwistle took the reigns in 2000, and has been steering the ship for over 13 years now.  Mr. Canfield, was a past CEO for TELUS / BC Tel, and continues to support the direction of the company.  Consistent leadership.  Mr Entwistle foregoes his salary, and instead is paid in shares only, a confidence booster for any investor.

TELUS’ leadership have defined a unique culture built on consistent strategic imperatives, values and messaging, which has not changed since 2000.  TELUS claims they are the only telco in the world that has been able to do that.  This consistency has many benefits, since the 50,000 employees working there can then be consistently aligned in their approach to their work each day.

The company’s top priority for 2011, 2012, and onward is “putting customers first”, as Mr. Entwistle outlines in his letter to the shareholders here.  This focus is already demonstrating significant gains in the market, as discussed in the Financial Post here.

What I really like is their “Give where we live” program, for charitable giving.  They are recognized globally for their charitable contributions, and were the first Canadian company to achieve this honour.

They also have been recognized for their Annual Report, in the Annual Report on Annual Reports.  Take a look at those results – consistently in the top 10 with a couple exceptions.  Making their annual report clear and easy to understand supports transparent communication – a good sign.

In Canada, they are in the top 10 of admired cultures.  The company’s engagement score, as measured by third party Aon Hewitt, is at 81% as of 2012, which is a best-in-class engagement score.

Here’s an interview with the CEO in 2012 that summarizes all of this.

Future Prospects

As an investment for the future, TELUS is a clear winner for me.  It has a culture that is unique, and this is not something anyone else can easily duplicate.  It is clear that TELUS’ competitors are currently not making the same investments in customer and employee engagement focus, and they are well behind.  I believe this is what will give TELUS a serious competitive edge in the coming years that would make Malcolm Gladwell blush.

TELUS continues to invest heavily for the future, with it’s CAD $2.1b capital spend, which will ensure it stays current in delivering bandwidth to its customers.  TELUS continues to enjoy the benefits of premium pricing in the marketplace, with a favourable ARPU to its competitors that is industry leading.  TELUS is also winning in the battle for TV subscribers, stealing considerable marketshare away from Shaw, the local cable co.

I also like that TELUS has taken on health care as not only a lucrative business problem to solve, but also one that has important social benefits to Canadians.  Some people might argue that this might be a Peter Lynch diworsification, and it may still be.  However, I remain optimistic and excited about what TELUS can deliver in this space.  TELUS is now the largest provider of electronic health care records in Canada.

I have gotten to know this company well over the past several years, and I will continue to monitor their success in the news, and in my own portfolio!

Financial Summary: November 2013

Biggest impact to my net income in November was reduced revenue from my short term rental.  Had a buddy come and stay with me for a while and didn’t charge him rent.  My car insurance came due as well ($1300), and shopping for Christmas is creeping in there too.

Earned my small monthly dividend from PSEC of 45.40, up from 45 last month due to the DRIP I have on this one.  I buy about 3 shares each month due to re-investment.

My stock portfolio is up 3.49% overall, about $2100 in unrealized gains.

Not reflected here, I have a loan I’m paying off in December which will free up about $500 in cashflow, not to mention allow me to get a mortgage which I am going to need for a property I am looking at.

Financial Summary for November

Creative P&L Nov
Revenues Short Term Rental Property 128
Long Term Rental Property 1200
Stock Dividends 45
Interest / Other 2
1375
Expenses
Discretionary 2954
Non-Discretionary 2614
5568
Net Income   -4193

Break-out of Discretionary Expenses

Discretionary Expenses
Home  0
Food & Dining 483.64
Auto & Transport 1735.86
Travel & Entertainment 148.28
Health, Fitness, Personal Care -71.51
Gifts & Donations 263.55
Shopping 167.08
Cash 200
Bus. Services, Fees & Misc 27.45
2954.35

Choosing a Stock Is Like Voting With Your Money

With the age of the internet and online trading, it is interesting to see how much of the dialogue around investing is about math and ROI and whether a company chart implies a reason to buy or sell.  I am often lost when discussions veer into technical aspects of a stocks valuation, such as PE ratios, and such.  I’m sure it is important and relevant, but I don’t have a PhD in finance, and I don’t want one.

What is often lost in the articles I read is what the company is about.  For a lot of folks, this is not important because short term trades can generate quicker gains.  If you are day trading, the stock is only part of a mathematical game, with little interest to the business behind the stock ticker.  But I am now less interested in playing that game.  Instead, I want to learn about what the company is doing to make the world a better place with their product.  I want to know what makes them an outlier to their competition.  In this way, I want to treat my money as if I was making an important vote in the future of my world, supporting the success of companies I want to support.

This sounds ridiculous in the context of financial planning.  The stock market is known to be a cold and hard place where the human soul is corrupted in a world of greed.  There is no place seemingly, for anything warm and fuzzy.  But this paradigm works, and in fact, has a proven ROI.  Sharon Allen writes in this article in Forbes that the world’s most ethical companies had a growth rate of more than double the S&P 500 over the past 5 years (the article is written in 2009).  This makes total sense to me.  Employees want to work in an environment that holds ethics as a strong pillar to their corporate culture.  And a highly engaged work force is shown to deliver higher ROI for investors, as described by Reese Haydon in this article.  I don’t often see much written about how a company is a good investment because they ranked high on a Hewitt engagement survey, and yet, this would be a powerful indicator on whether to invest in a company for the long term.

Another key component to my vote is around the product or service the company provides.  For me, I adopt Peter Lynch’s advice around the layman’s market research getting “one up on wallstreet”.  I tend to invest in the companies I interact with that I like.  I make a voting decision every day with my money on which companies I like when I consume their products or services.  When I have many good experiences repeatedly, they are a good candidate for an investment.  I know, for instance, that McDonald’s Restaurants is tireless in their pursuit of employee engagement and product excellence.  They are a natural choice for investment for me.  Google continues to innovate and I use many of their software products so I am constantly plugged into their work, so again, a natural choice.

No where in my decision to buy Google or McDonald’s is there any mention on charts, or PE multiples.  Of course, it is important to know the financial health of a stock, and how pricey the stock might be at a given time, and their growth prospects.  But, these might only help inform timing, and not the decision to invest.

I take my money personally, and hence I want to invest with a personal commitment to companies I want to be successful.  True, if you can time the market on it’s ups and downs, you might do better, but for me, it’s better to vote like it counts for something.

http://www.forbes.com/2009/07/21/business-culture-corporate-citizenship-leadership-ethics.html

http://www.decision-wise.com/blog/2013/06/10/show-me-the-money-the-roi-of-employee-engagement/

Building a SMART Portfolio

The objective for any portfolio or investment is to maximize returns.  With imperfect knowledge, we must put some guidelines in place to help keep us on track.  I decided to use the SMART objective methodology to craft my strategy.  A SMART objective, (see here for wikipedia) is SIMPLE, MEASURABLE, ATTAINABLE, RELEVANT, and TIMEBOUND.  

Simple (KISS)

This is the first criteria, and it might be the most important one.  It also has a lot of applications to what we are talking about, since not only must the goal be simple, but also the methods you use to achieve it. It is incredibly easy to make your portfolio complicated.  Keeping it simple is important, because otherwise you can get lost.  Believe me in this, because I got a bit lost once.  But now I’m found, and a little poorer for it.

So what does simple look like?  Since we are talking about making the goal simple, a goal for retirement could be to have enough saved so that you have enough to live on when you retire and are no longer making an income.  What does this look like?  This needs to be defined, and most people have no idea what their number is.  I actually do not know what mine is as I write this.  This means my portfolio does not have a proper goal, which is a problem.  How will I know if I have met my goal if I don’t have a target?  Not good.  A future blog article, for sure.

Re-evaluating your portfolio against this goal on an annual basis takes little time, but is critical.  This is a task that is as important as paying your mortgage, or taking out the garbage.  Yet, I don’t know anyone that talks about it, which likely means that most people don’t do this (including me).  Your financial planner would do this for you if you have one, but really this is a critical task that you need to understand yourself.  I’m only in my 30’s, so retirement is a ways off… but I need to do this as well because at some point I will have to sell my high risk stocks, and move the money into low risk stocks.  And then at some point I will have to sell my low risk stocks, and move it into bonds or cash or something even lower risk, like a loan to family (joke joke!).  The process of this evaluation is a good discipline to do each year.

Keeping your portfolio simple to meet your goal is also important, so you can easily track your progress (ie: MEASURABLE).  Keep the number of accounts you hold small if you can.  I have three government registered accounts which are tax favourable and support retirement.  I also have two non-registered accounts for trading in Canada or the US respectively.

You may also consider keeping the number of equities you hold small.  This will make it easier to track each company on how they are performing.  Simplest case, you can just hold an index to the S&P 500.  Indexes are good, and diversified, and are pretty much the same as mutual funds, without the MER.  You could also buy a single company stock straight up and hold it, but there are associated risks with putting all your eggs in one basket, and I would never advocate this over the long term.

Measurable

Measurable is pretty easy to understand, since you need to be able to measure your progress to your goal.  Mint.com is a great tool to use which I use, since it tracks your overall net worth across all your holdings, including real estate.  For stocks, there are lots of online portfolio management options like Google, Yahoo, or StockRover.  I have started to manage all my investing in MS Excel manually.

Attainable

Wouldn’t we all want to be a millionaire?  Well, most of us will have to be in order to survive at our current lifestyle.  Maybe the old expression now is, “wouldn’t we all want to be a billionaire”?  While this is a great goal, I know for me it is not attainable based on what I like to do with my life.  I’m not driven by money, I only want enough to be able to live comfortably.  While I haven’t calculated my magic number yet, it will probably be around $2 million so I can survive comfortably and support my family.

Even if $1 million is a crazy goal for you, never underestimate the power of goal setting.  It is the single most important activity to achieving success.  By having a clear number to work towards and measure yourself against, you will likely surprise yourself.  So, push for a higher number and see what happens over a couple decades.  Studies have shown this.

Relevant / Realistic

I see a lot of sites say the R is Realistic in SMART, but I always think that’s the same as Attainable.  Relevant, however, is pretty important.  Your goal has to be relevant to you, otherwise you won’t believe in it, you won’t care, and you will not have a good investment performance as a result.  I tend to select companies that are relevant to me in one way or another.  I like the idea of solar power, for instance, so I have purchased SPWR which aligns to my interest in this industry.  Many companies publish details on their impacts to their communities, their charitable contributions, etc. to entice shareholders interested in investing in ethical businesses.

Time-Bound

Retirement age is usually a fairly well-defined number for most people.  Having a date for when you must meet your objective will help guide your investment decisions.  If you have X dollars now in savings / investments and you need Y, then you must invest the difference between now and your deadline, minus the difference in terms of the gains you can expect to make.  This starts to get math heavy, so you may want to speak with a bank about it.  They are usually pretty good with helping on this stuff.

There you have it.  The SMART methodology for investing.  When I look at investing in a new company, I will reference the methodology outlined here as a component of my new investing discipline.  I hope you found it useful.