InvestorsFriend Inc. Newsletter December 27, 2011
Another Year of Beating the Market
As we close out 2011, my own portfolio is up 3%. That may not be great but it certainly beats the Toronto stock exchange index which is down 11%. Meanwhile, the Standard and Poors 500 index is up 1%.
My own portfolio has done better than the TSX index in 10 out of the past 12 years. The average out performance has been 9% per year. My portfolio has returned a cumulative 302% over the past 12 years while the TSX index is up just 41% and the S&P 500 index is down 17%.
An investment in an equal amount of each of the Buy or higher rated stocks on this web site from the start of each of the past 12 years has returned a cumulative 325% and has beaten the TSX index in 10 out of the last 12 years since the inception of this web site.
Here is how we have accomplished these excellent returns:
All these years our basic approach has never varied. We have applied fundamental analysis to a select group of companies to identify those which appear to be under-valued. Almost all of the stocks have been middle to larger size companies. There have only been a very few penny stocks. There have been (many) financial companies, pipeline companies, retailers, restaurant chains (including two large coffee chains), beer brewing companies, software companies, a property developer, a lumber company, rail roads, telco and cable companies,and a number of miscellaneous companies.
And, by the way, I call these “companies” rather than “stocks” for a specific reason. Those who invest based on fundamentals including earnings and earnings outlook are necessarily thinking about a company. A company has revenues and expenses and customers and profits and assets. On the other hand if you think in terms of investing in “stocks” then you may fall into the habit of thinking of your stock as just a squiggle or chart on a screen. Those who invest in stocks may try to guess where the stock’s price will go without even thinking much about the underlying company. That simply is not our style.
For the most part there has been no mining companies, and few commodity companies of any kind.
The analysis has been 100% fundamentals based. We have studiously ignored technical analysis and momentum based approaches. I have not used stop losses in my own portfolio and we have not recommended their use.
We have not used any “target” prices. Our “Buys” occasionally turn into “Sells” when the price has risen a lot or the earnings have declined. More typically a Buy or Strong Buy later becomes a (lower) Buy or a Weak Buy / Hold and at that point we have often indicated that we have sold some or all of our position to move into stocks with higher ratings.
As far as market timing goes, we don’t do a lot of it. But some years we find very few Strong Buys and other years we find many stocks to rate Strong Buy. My own portfolio has mostly been fully invested in equities but very occasionally I have held as much as about 40% in cash. And I have used some margin or borrowed money at times as well.
As far as dividend stocks or income, we have not really targeted that although in more recent years we do include some higher yielding companies on the list.
Our stock picks from the start of each year and how they did are fully documented on our performance page. Click each year to see the specific stocks. But enough of the past; what will tomorrow bring?
Investments for 2012 and beyond:
When it comes to thinking about companies to invest in for 2012, most investors ask the wrong questions. They ask, will the market go up? and will this particular stock go up?
The problem with those questions is that quite simply, nobody knows. There is an infinite number of things that can happen to the the world economy, the North America economy, to world and local politics, to a particular company, to interest rates. With all of these variable it is never possible to know with certainty which direction a company’s stock or even the entire market is going to go over a short period of time like one year. There is little point in dwelling on questions that cannot be answered.
Better questions that CAN be answered are along the lines of: Does the stock market appear to offer good value at this time? Does company XYZ appear to offer good value?
It’s impossible to guarantee that investing in the market, or in a particular company, will turn out to be a good investment even over the long term. But it is certainly possible to do some analysis and conclude whether it appears to be a good investment.
Over a lifetime if you make good decisions by investing in good companies at reasonable prices, then things are very likely to work out well for you.
So, Are the Markets Attractively Prices at This time?
Yes, our analysis suggests that North American stock markets on average are reasonably priced and likely to provide a reasonable return over the long term.
What about Individual Stocks?
We have identified about five company stocks that we rate in the Strong Buy category heading into the new year. And we may find a few more by January 1. And in addition to that we have identified at least six more that we would rate as Buy or higher Buy.
We never make any guarantees. But overall we feel that there are lots of good investment opportunities available. I certainly feel good about owning my share of profitable corporations.
Success in Investing:
It has been said that in many endeavors just showing up can be 90% of success. Stocks have been that way over the years. Yes, there have been plenty of bad years. But history shows that an investor who simply kept their money in the markets through good times and bad over the years has made a good return over the years. There are ALWAYS reasons to fear being invested in stocks. And there are many people who simply cannot afford the volatility. Perhaps they can’t afford the risk of loss, or perhaps they can’t handle it emotionally. Many people however can afford to take some risks and can learn to deal with the emotional aspects.
Picking The Best Company Stocks of All:
Ideally, I would like to analyze hundreds of stocks and choose those few that appear to offer the very highest expected returns. Realistically, I can’t do that. Instead, I analyze a group of companies and invest in the best that I can find from that group. One rule that I have followed, almost without exception, is that I invest in only what I have analyzed.
Future Analysis:
By the end of March 2012 we will be updating our articles that analyse the overall value of the Dow Jones Industrial Average, the S&P 500 and the Toronto stock index. This update will incorporate the 2011 earnings. We will also update our Article that lists a broad range of exchange traded funds and provides an indication of which funds and sectors appear top offer good value based on their dividends and P/E ratios. This analysis is provided free of charge. This ETF article alone provides sufficient information from which to choose a diversified low-cost portfolio.
We would also like to add more companies to our list. There are many promising and interesting companies to look at. Not only might we find some good investments, but we enjoy learning about different businesses and how they operate and make money (or not).
Get Our Stock Picks for 2012
If you are interested in knowing which stocks we are buying and why and if you not already a subscriber to our Stock Analysis service you can access our stock picks by subscribing for as little as one month for just $13 per month or at our Boxing Day Special reduced rate of $100 per year. Click for more details of how to subscribe.
Real Estate
It is well known that house prices in the United States are down dramatically from their peak values. According to the latest Case-Shiller home price index, (released just today) the average house price in the United States has declined 32% since peaking in July 2006. But that does not tell the whole story. Houses in Dallas Texas are only down 8% since mid-2006. But those in Los Vegas are down an average of a whopping 61%. Florida is down an average of 50%, and there would certainly be some homes down much more than that.
Meanwhile, in Canada the Teranet index shows that the average house across the country has increased in value by close to 40% since mid-2006. In Vancouver the average gain was about 60%.
House prices in Canada are now substantially higher than those in the United States. Roughly speaking, it’s not unusual for house prices in Canada to be double those in comparable sized cities in the U.S. (But it varies greatly depending which cities are compared in various parts of each country.)
That disparity will not last indefinitely. It seems to me that house prices in Canada are vulnerable to a decline. It may take higher interest rates or higher unemployment to trigger a decline, but before too long a decline is quite possible.
Meanwhile house prices in the United States are probably at or close to a bottom and will likely be rising over the next few years.
Many younger Canadians with huge mortgages are at risk financially if interest rates rise. It might be prudent for homeowners with large mortgages to lock in their interest rate for 10 years or more. Unfortunately, for unknown reasons, Canadians simply do not have access to reasonable interest rates when it comes to locking in for 10 or more years. And if Canadians do lock-in for 10 years or more, they an face massive penalties if they need to get out of the mortgage. Such penalties usually do not apply in the Unites States.
I high-lighted the problem in a recent email to some journalists
In (last week’s news from the United States I see:
WASHINGTON (AP) — The average rate on the 30-year fixed mortgage fell to a record 3.91 percent this week, the third time this year that rates have hit new lows. Meanwhile in Canada the posted mortgage rates for longer fixed terms are:
5-year fixed 5.29% but 4.09% special deal (so similar to U.S. 30-year fixed rate)
10-year fixed 6.75% but 5.45% special deal (39% higher than U.S. 30-year fixed)
25-year fixed 8.75% (call for special deal) I called and the mortgage specialist was not aware what the special deal might be and had never heard of anyone locking in for 30 years. The posted rate is more than double the U.S. 30-year fixed rate.
Americans can get 3.9% locked in for 30-years (with the ability to refinance or pay-off without any interest rate differential) while Royal Banks posted rate is 8.75% for 25 years (and massive interest rate differentials could apply if you pay it off early).
Money is the ULTIMATE GLOBAL commodity and yet Canadians pay more than 100% higher interest rates than Americans for a 25-year locked in term . In both cases on government insured housing loans. And yet our government interest rate is 2.50% versus a higher 2.98% in the USA. Something is vastly wrong here.
I dont think this has to do with any lack of Canadian bank competition, it has to do with the fact that the Canadian banks presumably cannot access 30-year deposit/investor money through securitizations but the American banks can. Yet our banks have CMHC insured mortgages, so what is the problem in getting the low cost investor money?
Whatever is the reason that Canadians cannot get an affordable locked in rate for 30 or even 10 years (affordable being the key word), we need this. Now.
Interest rates are about the lowest in the history of humanity
Investors are willing to lock in and lend money to the Canadian government for 30 years at 2.50%.
It is an urgent matter of national financial security that we find a way to give our homeowners 30-year locked in rates at something affordable (under 5% and maybe as low as the 3.9% that Americans can get).
Investors will likely accept some kind of early pay-off features as well. They accept it in the U.S. so why not in Canada? (with CMHC/government guarantees)
Many home owners are at serious financial risk if interest rates rise.
Furthermore, why not take advantage of idiot investors willing to lend for 30 years at rates as low as 2.5%?
Seriously, this is the opportunity of a lifetime for Canadians to lock in at the lowest interest rates in history. (If only affordable rates were made available like they are in the USA)
How can we get the banks and CMHC working on this immediately?
Are you interested in asking CMHC why Canadians must pay about 8.75% per year to lock in a mortgage for 25 years when Americans pay just 3.9% AND have the ability to refinance or pay off the mortgage without paying huge interest differentials? You can email CMHC at chic@cmhc-schl.gc.ca. And you can email Rachel Swiednicki of the Canadian Bankers Association at rswiednicki@cba.ca. I wrote last week to both of these organizations to request an explanation and to request that they work to provide Canadians with the ability to lock in their mortgage rates on terms comparable to those available in the U.S. If some of you email them as well, that might light a fire under them.
END
Shawn Allen, President
InvestorsFriend Inc.
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