Blessed by the Potato

“It’s a good patient money buy. It’s a great company that isn’t going anywhere. If I was setting up a portfolio for a widow, GE would be at the top of my list of picks… but I think it might be too conservative for you.”

This was the gist of what my dad had to say when I called him this morning to talk about GE, which just reported some disappointing first-quarter results. I’ve been keeping an eye on GE for a while, figuring that I would buy in around $32 (of course, the few days when it was that low the market was hiccuping so bad I was scared away, even though I shouldn’t have let fear affect my buying), which is where I decided that there was very little downside. At the moment, GE has gone down over 10% on the earnings news to trade at just a hair below $33 (US), which is close enough that I’m seriously thinking about it again.

For one thing, it neatly patches a hole in my diversification. Since I am young* and open to taking risks, a lot of my non-index portfolio is in some risky stocks (such as Q, QSR.UN, and banks — which shouldn’t be this risky!) in hopes of getting higher returns. But I’m still not willing to suffer too much of my portfolio in high-risk things, so I also have some safer stuff (FCE.UN, YLO.UN), but my portfolio is nonetheless really poorly diversified as I mentioned in a previous post about index funds. There looks to be a place at the table for GE, though perhaps my biggest argument against that is that any patient money I could put in GE I could equally put into an index such as the DJIA. Of course, some that patient money is sitting in my high-interest savings account at the moment making a lousy 3.35% (why does that slide down more every week I check it PCF?!), while GE is offering a famously stable dividend of 3.8%. I also think that it might outperform the index for a while.

There are two reasons I might think that. The first is that it might be oversold today after this report. There are some worrying signs in it: GE missed forecasts, and more importantly, profit was down while revenue was up, so something troubling happened to their profit margins/efficiency there. However, a part of the let-down was certainly related to the financial sector/credit markets lately, and I think that’s going to be a temporary issue, offering them a big chance to rebound (note that when discussing my patient money, temporary could be up to 2 years). GE, being a massive conglomerate with its fingers in just about all the pies, also has a wind turbine and nuclear generator division, which I think could be big winners in the decades to come. Of course, being a massive conglomerate it’s hard to say if those winners will be enough to raise this massive company to outperform the indexes, but my hopes are high.

* – or so I continue to believe, in spite of grey hairs and bald spots.

Update: I haven’t even posted this yet, but GE dipped more into the $32.50 range, so I bought some at $32.53. The exchange rate fee (2%, ouch!) makes me think I may have been better off with that index fund after all.

Michael James on Money has written a few good pieces on market timing lately. Trying to time the market is always a fairly risky affair, though it sounds so very lucrative. Basically, there’s a lot of variability in the market, and it goes down a lot, as seen recently. If you could just avoid those downturns (sell your stocks, jump to cash), you could do so much better. The trick is that it’s essentially impossible to predict market downturns in the near term. Since the market tends to go up over time, guessing wrong and jumping out of the market too early makes you sit on the sidelines while your stocks go up and you end up doing worse than someone who just bought and held. Plus, as an in-and-out market timer, you have to guess right twice: first, when to get out, and second, when to get back in. Being wrong on either one can hurt your returns. Michael James ran a number of simulations to show that it’s better to be a buy and hold investor than a market timer, assuming that you can’t actually see into the future.

I had one more variation on the market timing strategy that I wanted to test out, because it’s one that I’ve been using myself lately without really thinking about it. The strategy is basically to be a buy and hold investor, but to time my market entry as money is saved every month. Essentially, to wait until a drop in the market to buy in. For me, it’s worked out fairly well in this market the last few months because, well, recently the market has been insane with big swings in both directions, so it hasn’t been hard at all to wait for a day when everything is down over a percent or two. I thought that this strategy might work because for one thing, you only need to guess right once (when to buy), and for another, it might be a way to take advantage of some of the short-term noise in the market (it goes up and down daily, so you don’t spend very long at all waiting for a down day, whereas with other market timing strategies you might wait a long time for a significant downward movement, or a downward month, and spend too much time on the sidelines). The premise is that you are saving regularly, and have some amount available; $500 on the first of each month in this example. Then, you just pick your moment on when to invest it in the market. Michael James was kind enough to run this scenario for me on his data, and found that investing immediately when the money was available was better than trying to time the market, but this strategy was at least not terrible like some other market timing strategies can be, but it’s still not great. I still harboured hopes/suspicions that with more noise in the data, more variability to take advantage of, that this strategy could be a winner (his data only sampled the market monthly).

To test this, I needed daily historical stock market data, which I found somewhat difficult to come by. I ended up using the NAV chart from ishares which gave me daily data for their S&P TSX composite index from 2001 on. This, I think, should be a very good surrogate for actual daily data from the TSX. While it would have been nice if I had made some nice elegant program in Matlab or something, instead I just bashed together a mess in Excel, which you can download here.

My results? Well, if you wait for any daily change of less than zero (any down day), you do slightly worse from March ’01 to March ’08 (the timer would own ~751 shares of the index fund, vs ~757 for the investor who immediately bought in each month). If you wait for a bigger down day (a negative movement of at least a percent), you do even worse (~749 shares). As one might expect, in “bear” markets, holding off a bit was a better strategy than buying immediately, but overall this was not a good strategy (and bull markets tend to be the norm) — plus there’s a good chance that this result is due to chance alone!

Buy (immediately) & hold it is!

[Oh, and for the curious: saving $500/mo over those 7 years (+2 mo) comes out to $43000 packed away. The “index” here is worth $84.70 at the end, so 757 shares comes out to $64117.90; missing out on ~6 shares from trying to time the market is about $500 you’d be out — just about one month’s worth of savings!]

Dear Bell;

Please stop highlighting this box on my bill. I’m typically a pretty careful guy when it comes to managing my finances, and for over a year with this new bill layout I’ve managed to find the right box for my payment and have sent in the right amount by the proper time. But every time, I look to that right-most highlighted box first, and then have to catch myself. Last month I don’t know if I was in a rush or tired or what, but for some reason I didn’t, and ended up sending in a payment that was short by the amount of the taxes. The late fees (10 cents) were pretty reasonable for being short by about $6, so I’m not complaining about that. But please, just stop shading that subtotal box. It’s not where people’s attention should be directed, so it shouldn’t be highlighted equal to the amount due. It will even save on ink!

For that matter, how about following typical layout conventions for people who read left-to-right and put the final sum on the right, with the smaller line items on the left? Better yet, how about going back to the old bills which were one or two pages, depending on how many calls I made, as compared to the three taken up by the new bill?

The GST cut was perhaps one of the worst ways to cut taxes for a large number of reasons. Consumption taxes are, to my thinking, better than income taxes, especially mild ones like our sales taxes (to try to fund the entire government budget from consumption taxes would get ridiculous). Plus, the GST was actually pretty progressive: essentials like rent, some groceries, and drugs don’t have GST applied to them. People with low incomes can file for a GST rebate to cover what GST they might pay on other items. And cutting the GST, especially in two separate small cuts, was a waste of effort as countless retail transactions and software had to be retuned.

A paltry gift to Canadians to begin with (especially in low-to-middle class), a recent report by CBC Marketplace shows that for many things we buy there is no savings to be had from the GST cut. At least, not for consumers. When the GST was cut, many retailers instead opted to keep the old prices and pocket the difference in the GST. Some of that was out of the convenience of round numbers: vending machines and parking meters don’t deal with pennies, and movie/concert tickets do tend to come out to round numbers (not that it really matters since so many of them go on plastic)…

All that talk about saving pennies though, and I’m reminded of recent discussions about the merit of continuing to mint the one-cent coins. I don’t even think many transactions would need to be rounded to the nearest nickel for quite a while — the half-life of pennies seems to be quite long, so we could probably count on a fairly healthy supply of them for another decade or two after they stop minting them (assuming the copper thieves don’t get them all).

Recently the opposition parties passed a bill from the Liberals making RESP (Registered Education Savings Plan) contributions tax-deductable, as RRSP contributions are. This was a huge gift to parents of kids who are college/university-bound, so much so that it threatened to overshadow the recent TFSA gift unveiled by the cons. In full-on “pay attention to meeeee” pre-election kitty mode, the cons couldn’t just seem to let that stand. So now they’ve threatened to turn it into yet another confidence motion. These kids are seriously itching for an election, and have been for some time now.

Under current rules, there is no immediate tax reduction for RESP contributions, which are allowed to compound free of capital-gains levies. Instead, the government matches a small percentage of parents’ contributions up to a maximum of $7,200 over the lifetime of the plan.

I’m actually a little torn on this issue. On the one hand, this is a really nice tax gift to parents and something that will help further the affordability of higher education for people that… well… could probably afford it anyway. On the other hand, this is getting to be too generous. The RESP already allows money put away for education to compound tax-free, and when withdrawn are taxed in the hands of the student (who is often in a lower tax bracket than the parent) and contributions get some matching money tossed in by the government to boot. Adding a tax deduction on top of that makes it hands-down the best place to put your money if you have a university-bound child.

I feel dirty for potentially agreeing with something the dirty, crooked, heartless cons might say, but I think that this tax break for RESPs might have gone too far. Of course, I’m not all that concerned with Flaherty putting the blame for losing the surplus on it — he’s blown far more money on far less worthy causes — but rather because I fear for the future of higher education, especially if the cons get another term. This improvement to the RESP (and lost tax revenue from the deductions) would give them just the sort of flimsy cause they need to proclaim that getting a university education is more affordable now, and cut back on government support, letting tuitions rise. This would of course hurt the low-income students who don’t have RESPs the most (for the rest, it may be zero-sum), and be a serious bummer to those who get advanced degrees and have to pay for extra years of tuition beyond what their parents might have saved for…

On the gripping hand, “Canada’s New Government” is being ridiculously juvenile by making yet another piece of legislation a matter of confidence. I can only hope that when the election eventually happens (we’ve had so many false starts in the last two years that I’ve stopped expecting anything) that the cons get soundly trounced.

Edit: What I’m trying to say here is that the tax relief for the RESP is really only going to help those families that already could save for their children’s education, it’s not really going to make higher education more affordable for everyone. Since this is going to cost the government in lost tax revenue, I think that money would be better spent in direct tuition relief or in a straightforward beefing up of the matching grants for RESP contributions.