Blessed by the Potato

“I’m never listening to your financial advice again.” ;)

Yet another bad day on the market, as TD (which I still like, damn all evidence to the contrary) was down, just after Wayfare bought some last week; Q9 (TSE:Q) also released their results and dropped almost 14% on the day. To be fair, I never recommended Q9 to her– I like it as a company, but I’ve been looking to unload my shares for the last year (and am kicking myself for not doing so last summer). It’s been a rough week (hell, a rough year) on the markets, and while (most) of it is just paper losses to me, and all the nice cash flows from dividends/income trusts are still in place, it’s still damn depressing to see all that red day after day; hard to stay positive about the investing experience, and pretty much everything else in life! Anyhow, her quote there is probably the best financial advice that will ever appear here :)

In a bit of related news, Wayfare has an RRSP (I still don’t, even though I learned that I can defer any deductions from contributions made now until a year when I have non-grad student income). She had some issues with it recently, and for some reason isn’t off blogging about it on her own (her blog has pretty much dried up after that parking lot stunt in November). Anyhow, since it’s a customer service story about TD, I figured I would share for everyone else.

To go back in time about a year, Wayfare was looking into what to put into her RRSP and asked for help from the advisor at TD in branch. Unfortunately, she learned the hard way that they really don’t know what they’re doing and are mostly salesmen: she got stuck in some high-MER low-yeild mutual fund/GICs and wasn’t all that happy with the experience. So this year she went in better prepared and decided that she’d like to buy some of the TD e-series mutual funds. The guy in the branch was happy to set her up with them, and she was off to the races… or so she thought. After getting a start on her mutual fund early, she had contribution room left and some savings discipline, and wanted to top up the rest before the deadline recently. And she could not for the life of her figure out how to go about doing that. As far as she could figure out, she wasn’t allowed to buy the e-series funds with her particular mutual fund account. Looking back on the documents from her in-person visit it turns out… she wasn’t. Despite being very explicit about wanting the low-MER e-series funds, the guy ended up buying the “investor series” fund. While that version of the index fund is not as bad as some of the funds they could have stuck her with, it’s still a 0.54% difference in costs, and that can add up over time.

She was, to put it succinctly, pissed off at TD for lying to her. I encouraged her to phone in, and fortunately the people on their phone line were a little better informed. The savings of the e-series funds that let them have a low MER come in part because they can only be purchased online from a special account (or a non-registered discount brokerage account if you’re not talking about an RRSP). The in-branch guy had no ability or authority to try to sell her one directly. The phone guy told her where to go to setup/convert her account on the website, and credited her RRSP with $25 as a bit of an apology bonus for the mix-up, and also to offset some of the fees that her more expensive mutual fund would have incurred over the time she had it.

I think the whole affair was handled relatively well — TD seems to have made a decent effort at setting things right for her. Unfortunately, the phone rep couldn’t immediately open her e-series account and do the transfer for her. She has to mail in her forms and then put in a change transaction for her mutual funds on her own when that account is processed, which is seriously a bit of a bummer. The guys in the branches, unfortunately, will probably continue to make these mistakes. At their core, they’re basically in a retail sales position and don’t tend to have a good understanding of the bank’s system or providing sound financial advice (though there are of course exceptions).

Ben asked how I go about picking stocks. I’d like to start by repeating that picking stocks is a bit of a fool’s game. Most people (and professional mutual funds) who try to beat the market simply don’t. Investing in the market via a low-cost index fund is often the best, easiest thing to do. Sometimes, you won’t beat the market because you weren’t diversified enough, took on too much risk (if you have a big loss, such a certain holding going bankrupt overnight due to management fraud). Sometimes, it’s because you’re too diversified and an otherwise ho-hum market was driven to success by the astronomical performance of a few names in the index (Nortel, or more recently, RIM and POT). I mentioned two stocks that I liked back in that post. One, Priszm (QSR.UN) is up about 10%, but still not quite as much as I had anticipated. Teranet (TF.UN) is actually down about 3%.

So to start off with, I don’t have a stock picking “process” or algorithm. I should, and I know I should, but I don’t. That said, there are a number of things that I think about and look at with a stock before deciding to invest in it. The first step in a putative algorithm would be how I come across a particular company in the first place, and that’s largely luck and happenstance. Sometimes, I may decide to look into a particular sector, and if there’s an ETF for that sector (such as energy) then I may see what the top holdings in that are, in case for some reason I don’t want to get the ETF as a whole, or just start internet searching. But often it’s just serendipity: either my dad will say something about a company, or I’ll notice it in the news, or I’ll be shopping somewhere and say “damn, this store/product stands to make a mint, who owns it?”

In fact, I have a lot of interaction with my dad, and so far have bounced almost all of my investment ideas off him. (Technically, I’ve bounced all of them off him, but some such as investing in banks, he’s dismissed out of hand, so I haven’t gotten useful information for all of them). That works well since it can be tempting to succumb to confirmation bias and fall in love with a company that you yourself discovered; a second pair of eyes looking for the downside can be quite helpful. If it’s a company he’s familiar with, I can ask him about what he thinks of the management, and he may have useful information on that count, which is something I have no idea how to research.

I’ll look at broker reports, and read the summary of the company’s financials, looking for things like stable/reliably growing earnings (esp. earnings that may be goosed by one time issues), free cash flow, manageable debt, etc. For large companies, I’ll look at how they’re valued (P/E ratio, price/book, etc.) and how that compares to other companies in that sector and over time. For smaller companies, I try to guess at market saturation, room left to grow, sentiment, word-of-mouth. I read what the analyst has to say, how they got to the numbers and recommendation they did, what they see as the downside. I also look at dividends and payout rates, especially for income trusts. There’s a certain value to getting dividends, in being “paid to wait”, or to simply get an income stream like with an income trust. There’s a lot of value to getting cash money right now, both psychological and financial. Due to the way taxes work, if I buy a great stock that goes up 10% per year and sell after 5 years, I pay all the tax on the capital gains in that 5th year. But since I’m a student with a low tax rate now, and the anticipation of a high tax rate later, there’s value to instead having a stock whose price doesn’t move, but pays out 10% in cash every year (that I pay taxes on as I go), even if the tax rate on distributions isn’t quite as favourable as it is on capital gains… but that’s getting a little esoteric for deciding on which stocks to buy.

Even if I like a stock, it’s important to make sure that the stock is “value-priced”, and I find that quite hard to do. There’s a formula I found, reportedly based on a thought process that Warren Buffet uses that you might find if you search around for “future value of free cash flow” (sorry, no link handy). I find using that gives me a pretty low, conservative stock price that most companies only hit in incredibly terrible markets like this… but it does help me feel better about buying in conditions like this. Sometimes, like if you go back to my post about CIBC, you’ll see I try a couple of different methods to try to figure out how much that one should be worth. Interestingly, I thought I was being too conservative with CIBC and watched it tank, then flatline, figured it had hit bottom, bought some, then watched it tank some more into the range of what I had initially figured, and wouldn’t be surprised if it continued to drift down into the centre of that range :) None of this is a particularly specific or systematic discussion though.

Instead, perhaps a few case studies would help. Here are a few stocks that I’m looking at now or did recently, and some of the things I focused on in the buying process.

Right now, pretty much any bank you care to pick has had its share price hammered by this subprime credit crisis. I think some of them might be better bets than others, but they’re all looking attractive to me, especially today after another haircut across the sector. I like the Canadian banks slightly better than the American ones: I think something like Citi might have more opportunity to bounce back and give some stellar returns, but I also see it as being riskier. Even CIBC, what might be the hardest-hit Canadian bank isn’t actually in danger of going out of business, and I don’t think this subprime nonsense will really keep them down for more than a few years (and remember: that’s the kind of timescale I tend to be working on). TD is I think probably the best Canadian bank, and one that I owned for a while until I got scared off by the instability of the sector (but came so close to buying again when it touched $63.50 earlier today). So for a stock like this, current events are a big driver in the share price, so before investing I spent hours out there reading news articles and blogs about the subprime crisis. What was it, what caused it, how many more years can we expect it to drag out, how bad is it going to be for the banks, does TD have any exposure to this ABCP? All questions I tried to at least wrap my head around the issues, even if there was no definitive answer. Unless they’re outright lying to us, TD has managed to avoid investing in the ABCP nonsense, and so shouldn’t have direct losses for that — and that meshes well with anecdotal evidence my dad shared about TD management and their Enron experience (basically, that management has a bit of a “never again” philosophy about it, and does not accept “but every other bank is doing it and making money” as a reason to break their risk models and let the brokers buy like lunatics). However, that’s not to say that it can’t hurt their mortgage business. A house might have an owner with a perfect credit rating and TD might give them a perfectly safe, conventional mortgage… but some portion of those owners might have gone out to get a second subprime mortgage on the house, and that might come around to hurt TD. That fear, that potential risk, means that we should get their shares at a bit of a discount — and to me it looks like there’s plenty of discount on TD. It’s a good bank, I think it has some decent growth prospects left thanks to its extended hours, and everything else looks to be falling in line. Based on valuing it by Price/Earnings ratio (P/E) at around 12X — a decent floor value for a Canadian bank, it should be around $65, and for the last while it was there or just above. When the market returns to “normality” and the uncertainty around banks finally gets resolved, a 14X P/E would probably be more appropriate, making the share price something more like $75. At $65, it pays out a dividend of approximately 3.5%, which is pretty sweet for a relatively safe payout (I doubt TD will have to cut its dividend, though other banks may be in danger of doing so). Today, TD drifted below $64, but closed just above that, and I’m thinking seriously about getting back into it at this point. The only reason I haven’t yet is that my “dry powder” or cash reserves serving as both my fixed income diversification and patiently-waiting-for-a-super-awesome-buy fund is now down to just enough for a single stock, and while I like TD at these prices, I’m not quite sure it’s “my last one buy” value yet.

Another company I’m liking at the moment is the Yellow Pages Income Trust (YLO.UN). Income trusts are a bit of a weird structure that I admit I don’t fully understand. I know that rather than pay corporate taxes on money they make, they send a large part of it out to shareholders, and the money is taxed as income in their hands instead. They tend to trade based on their distributions and cash flow, and share price rarely moves much in either direction. So, YLO does the Yellow Pages in Canada. I’m sure you’ve heard of it. They make money by people buying advertising in there, and then they send the money out to shareholders in monthly distributions. There are some concerns about YLO, particularly about how an economic downturn might hurt ad revenues, and how readership may falter in the age of the internet. However, I know that I am one of the most internet-addicted people on the planet, but when I want a pizza or a plumber, I look in the yellow pages (or their website www.yellowpages.ca) to get local information. There was another rival phone guide sent around a few years ago, and I never used it: it was junk. So their business model appears to be pretty safe in my eyes. Historically, they’ve traded at around $13-14/unit, which represented a yield of about 6% or so. That kind of low yield is usually associated with a very safe income trust that has a strong history of maintaining or increasing its payout and that doesn’t look to be going anywhere. For some reason in the recent market turbulence, YLO dropped down to the $12 range, which represented a yield of something like 9%, and I bought some around there. I looked at the financials, and they make plenty of cash to keep up the distribution; their payout ratio (how much money they pay to shareholders as a fraction of total income) is a healthy 83% or so. That’s a pretty typical, healthy number: when it starts getting above 90%, then you have to worry that an economic bump in the road might lead to a distribution cut. Above 100% and the company is in a seriously nonsustainable position. Anyhow, YLO is generally regarded as a good safe income trust, and as such the price has tended to be stable and the yield has tended to be relatively low. Then after dropping into the $12’s for a month or so, there was another big hit to the share price in the last few days to under $11, where I bought another bunch of it. There’s been no news, no analyst reports that I know of that are bringing the price down, so I see no reason not to recommend it. There is, of course, always that sinking feeling that the “market knows something I don’t”, but for the life of me I can’t see any reason for such a quality company to be priced so low. With this one, I don’t expect the share price to ever get over $12-$13 — that seems like a good place for it to sit for me, but even just collecting 10% a year is a decent return to look forward to. Again, things I looked at when deciding to buy it were analyst reports, discussions with my dad (he also likes it and thinks it’s a quality company, and the only reason he doesn’t own any is that he thought it was overvalued and the yield was too low — at $11 he loves it), and blog posts (themoneygardener in particular is bullish on YLO). It’s rated as an “Action List Buy” by the analysts at TD, and appears to have a good long-term plan for dealing with the end of the income trust age.

CV Technologies (TSE:CVQ) is the maker of Cold FX and some other more recent branch-outs from that line. Earlier this year, everyone seemed to be talking about Cold FX. All the stores were stocking it. Costco was pushing it. Word of mouth was pretty much entirely positive, and I thought to myself that here was a real winner. A product that’s going to really shine, a company with a good model (it’s not just a treatment, it’s a prevention thing that you just have to always keep buying more of!), great word of mouth that seemed to be reaching critical mass, and a favourable ruling by Health Canada that even allows them to claim some scientific backing for certain claims about reducing the severity of colds… I was really enthused about this and ready to invest in CVQ. I didn’t, and so far have been fairly glad of that. First off, despite Cold FX seeming to be everywhere, and not needing as much promotion from Don Cherry these days, the company isn’t really making that much profit off what they’re selling in Canada. What profit they were making in Canada, they took and loaded into a big cannon, and fired it off into the air in a generally southward direction. At least, I think that’s what happened. After showing signs of being successful in Canada, the company went to try to expand into the States, and somehow lost a ton of money trying. I have no idea how that’s possible. Granted, I’m just a grad student, but I would figure that if you’re selling something like a bottle of fancy ginseng pills, you might have advertising and marketing expenses as you try to build awareness in a new country. You might have to put out a few loss-leaders and promotions to get the stores to stock your stuff in the first place, but that should be about it. Generally, you should be making money on each crate you sell to the drugstores, even if those drugstores can’t move the crates of your crap off onto their customers to then order another crate. It’s not like you have to build a network of your own stores and crap… so the fact that these guys just seemed to hemmorage money while trying to expand into what is both a larger market and one that is not really all that far away from a logistics standpoint really raised a red flag for me. Another red flag was that they were going to “restate” some earnings or accounting reports or something at some point along the way. Accounting restatements scare the everloving shit out of me, doubly so when it happens in a small poorly-known company. I’ve been burned with my pants down at least twice now by companies with crooked management who cooked the books or lied or what have you, so when it looks like some of that same crap is going down in this company, I just stayed the heck away. CVQ was trading at just about 70 cents/share when I first got it into my head that ColdFX might be an awesome investment, and since then it’s been bouncing around 60-65 cents, so I look to have done the right thing by shying away.

So I know that’s not hugely helpful in the mess that it’s in now, but it’s a start and I hope that’s enough to foster some discussion and help you out.

Insert standard declaimer about not following financial advice from random people on the internet.

Well, the recent cuts to the bank rates have percolated through to the PC-Financial Interest Plus savings account: down to 3.85% now. That’s not quite as low as the rates have been cut, but it still sucks a little. 4% was a nice psychological number to earn. It gives me more incentive to put my money in the stock market, as soon as I find another stock or two to invest in. (Of course, that’s exactly the response the goblins at the Fed were trying to put in my brain).

Wayfare’s been on my case for gambling via picking stocks. Gambling — addiction to — has been an issue for me that I’ve always kept very tight control of, so she gets (somewhat legitimately) worried when she sees me pore over the market reports in the morning tracking my picks and deciding which to buy, trying to decide if the market has bottomed yet, etc. I get whacked about the ears doubly so because I just did some research about beating the market being a fool’s game, and had a post linking to the great articles on low-cost index mutual funds. I am building a small portfolio of index funds with TD’s e-series funds, but am mostly just putting new money that I manage to save in there. Money that was in individual stocks is being churned back into individual stocks, and money that was in my high interest savings account is being split into individual buying opportunities as well as index funds (with, I’m somewhat sorry to say, most of the money going into individual stocks rather than the funds).

There was a foul run of freezing rain here coating everything in a thick layer of ice, on top of which we got a bit of heavy snow. I went out to scrape my car, and spent nearly an hour just to get part of the windshield done. In that time, over a centimeter of snow had piled up on the parts that had been brushed (but not scraped). I had curling, but after spending that long I just decided to say “fuck it” and stay in (by the time I checked my watch I doubt I could have called a cab to make it on time even if I did want to blow $15 just to make curling). My skip called me from the rink in a foul mood “It doesn’t matter how bad the weather is, they never cancel curling” and asking why I didn’t get a spare. I was at a loss for words, since I was fully intending to go right up until it was too late to get a spare anyway. He hung up in a tiffy, and I lurked about at home in a bit of a funk.

And the stock market was also in a funk this week, dropping nearly 5%, and the week’s not over yet. Despite this drop, and my renewed interest in moving all but the slimmest of emergency buffer out of my PC Financial account, there haven’t been any individual buys that I liked at this point. I’ve been looking particularly at getting something in the oil sector, and have looked at Petro-Canada (PCA) long and hard for a while now. My original price point was $43, which it just touched today, but recent results might force me to rethink that number, so I’m holding off for now. I like Petro-Canada in general, in part because it’s an “integrated” company: they extract oil, refine it, and sell it at retail stations. Sometimes, that might work against them: for instance, while oil extractors are making a killing with high oil prices, there appears to be a bit of a limit in terms of what can be passed along to drivers at the pumps, so refiners and retailers may suffer a bit. This might average out Petro-Canada’s results, but it saves me from having to guess at which particular part of the energy sector will perform well. It also appears (pending my reanalysis) to be a little under-valued relative to some of the other companies such as Imperial Oil (IMO). I’m also considering taking some of the guess work out and getting my oil fix with an exchange traded fund from iShares (XEG). However, that one I don’t think is as bargain-priced at the moment, so I might sit back and wait a while longer.

I did make some small, incremental buys of those TD e-series funds with this dip, buying a tiny bit more of each of the 4 indexes I’m using: the Canadian, US (S&P500), Dow Jones Industrial, and International. At the moment, I haven’t put a huge amount of thought into how I want to allocate things there, since there is plenty of time to rebalance later. I’m basically going with a nearly even split between them all, which would make my US part about twice as big as the Canadian and International parts. I think that for sure the US part should be bigger than the Canadian one as long as the individual-stock-picking part of my portfolio is already largely (nearly exclusively) Canadian. In the longer run, I will probably aim to have them be about equal. I think, academically, that the international index should be just about as big as the US components combined to get good global weighting (or complemented by another international index such as a “BRIC” ETF), but the markets are volatile as it is, and the international index is even more so, which has turned me off a tiny bit. I still don’t have a bond fund component, which is another post in its own right.

Priszm (QSR.UN), which I mentioned 2 weeks ago hasn’t really moved anywhere. It’s still yielding a very attractive 19%, though there is a good chance that will be reduced somewhat: my guess is it will get cut to about 15%, based on the current price of about $6.35. That’s still pretty good looking though. My dad and I can’t quite figure out why it hasn’t taken off on this news. There was a huge sell-off from a single broker last week, what my dad terms an “iceberg order”. It is so named because there is a huge amount of stock to be sold, but you only ever see a small part of it on the market at a given time, with the rest lurking just below the surface. This one broker kept putting up small lots of shares at the same price — as soon as one lot sold, he put up another one, keeping the price down. No real way to know if it was a mutual fund bailing out of it, or what the story was. Anyhow, that seems to be over, but the price just hasn’t moved since then.

Another income trust to look at is Teranet (TF.UN). They’re yielding a conservative 8% at the moment. This is a company that collects the Ontario and Toronto land transfer taxes, earning royalties from those activities which it pays out to unit holders. Now, the Toronto land transfer tax collection deal was only mentioned a few days ago, and it’s not clear how much more they’ll collect in terms of royalties, let alone whether city council will stick with the tax (they can’t seen to make up their minds about a budget in the slightest lately). The stock jumped up to about $10.25 on the news, and then a few days later dropped back down to the $9.75 range. Now, part of that drop appears to be an analyst’s report released that said Teranet was at risk of cutting their distribution since it represented over 90% of its cash flow. My dad noticed a mistake in the analyst’s math: he was using the wrong figure for cash flow/income, and the payout ratio is really only about 70%. That might signal a potential increase in the distribution to come, or give them a buffer in case of an economic problem. Speaking of which, I can’t make up my mind about how recession-proof this company is. On the one hand, they make money from any housing transfer, even a foreclosure (or so I am lead to believe), no matter if the price is astronomical or busy crashing. However, I worry that there may be a volume issue — my dad disagrees. It should be a relatively safe harbour for an 8% return anyway, especially with some extra revenue to come from the city of Toronto and a bit of a buffer in their payout ratio.

As always, a standard disclaimer that I’m not a financial advisor, I’m not very experienced in matters financial, and that if you do let my ramblings (so-called since they can hardly be construed as advice) on stock market issues percolate into your brain and you somehow lose money, don’t blame me.

There was an article in the London Free Press that made my head spin. The government is giving away free money (forgivable, interest free loans).

And very few people are taking advantage of it.

I have no idea why the government has this program (presumably to encourage home ownership or to prop up the bottom of the housing market), and the article doesn’t really give any reasons.

Funded by the senior governments but administered by municipalities, the program gives qualified renters a five or six per cent down payment. The loans usually run between $5,000 and $7,000.

The money must be paid back if the home is sold within 20 years, otherwise the loan is forgiven. Renters must get a pre-approved mortgage amount and have an annual household income below a maximum amount, which in London is $50,000.

No one is sure why the program hasn’t produced the expected flurry of applicants.

The London program had a tight deadline and a price limit of $120,000 on any home bought through the program. London launched the program Jan. 9 and expected to receive as many as 1,000 applications for 120 available loans. Officials planned to decide the “winners” through a lottery.

But by the deadline day Thursday, only 25 people had applied. A late rush boosted the total to 60.

[quoted out of order]

Wow, an interest free down payment, and if I stay in the house for 20 years, the money is free? If I was looking for a house, you could sign me up. Hell, I’d take two. I wonder why I hadn’t heard of this before?

Louise Stevens, London’s director of municipal housing, said the program was well-publicized in London in lending institutions, libraries, realtors and the media.

“We promoted the heck out of it,” she said.

Now granted, I’m not shopping for a house so I don’t talk to realtors or shop for mortgages, but I still never heard about it in the media or libraries. They must have hired the same advertising agency who spread the word about electoral reform. (What? Exactly.) In fact, here is an article on this program, and through the whole thing the program is never given a name! It’s simply “the program” or “a program”, no name, no website, and no managing department to contact (the closest we come is the “Municipal Affairs and Housing Ministry in Toronto”, which is I gather not the London part administering this program, and the name Louise Stevens).

Still, it seems like a somewhat silly program: while an interest-free loan of $5000 is nothing to sneeze at, it’s probably not going to make the difference between a renter getting a house or not. The article doesn’t mention whether that 5% down payment figure is the only down payment the prospective buyer would be allowed to make: i.e., could they take $15,000 of their own savings and make a 20% down payment? If so, that might be a killer, as the extra payments from having to carry mortgage insurance would quickly eat into the government’s interest free down payment.

Or maybe it’s that price ceiling: $120,000 doesn’t buy a heck of a lot in London these days. If I had a salary of ~$50,000 I could rent some awful nice houses (like the one I’m in now!) or 2/3 bedroom apartments and have some income left over for a car, savings, etc. (whatever it is people who don’t use all their money on food and housing spend it on). According to MLS, there’s only a handful of places under $120k in North London: 11 condos and 2 houses; half of those are one-bedrooms; about 120 in all of London. Granted, that’s just right now, and there could be more over a longer period of time (or before the “rush” on Thursday); but it would be a close thing indeed to potentially enough to fill this program in the span of just a month. I highly doubt there would be 1000 such places, as the London officials seemed to expect.

Sometimes I wonder where people get their ideas from. In searching for this program, I found an article from Jan 9 in the London Free Press announcing the beginning of the program, where they say that there were “22 homes and 83 townhouse or apartment condos for less than $120,000 in London.” Having read that then, how could they have possibly expected so many applicants? Sure, more renters can apply than there are homes, but to get 10 unique prospective buyers per house? That earlier article also gives this snippet of information: “If the home is sold within 20 years, the buyer must pay back the original loan, without interest, plus five per cent of any increased value of the home.” Now I think that this would probably work out quite well for the homeowner, but if you’re expecting your home to double in value within 3 years and then move, that little clause might send you off. On further thought, there’s another good reason why this program was doomed to failure: let’s say you were a renter/prospective homeowner, and wanted a house in the $120k neighbourhood. Or even more appropriately, someone who didn’t qualify for this program (an existing homeowner, or someone making over $50,000/year). Knowing about this program, you’d realize that there would potentially be a bidding war fueled by government money on houses/condos under $120k, and that all those bids would be capped at $120k. So if you really wanted a particular place, you could probably safely bid $120,001 and come in as the highest bidder (at least, higher than the government-handout mob).

Oh, and that earlier story has a web address for the program: but it’s wrong and points to a domain squatter instead. The proper address should be http://www.housing.london.ca/

God the Free Press sucks. One of these days it’s going to get to the point where I’d rather do work than read the LFP. I think that day might be tomorrow.

Never try to catch a falling knife.
Never shoot a running horse.

These are two simple sayings that investors use to remind them of how to manage getting into and out of a stock. They essentially boil down to one word: patience. Fortunately dear readers, you have me here to act as a giant stock market nooblar to reinforce the point for you. I’ve made two recent mis-steps in this volatile market.

Never try to catch a falling knife.

My falling knife was Russel Metals (TSE:RUS). As I mentioned earlier, I had accumulated a bit of cash over the last two years or so and didn’t put it to very good work. It was at least in a high interest savings account, but I felt that a good portion of that money could serve me better in the stock market. So I spent a weekend with my dad looking for stocks to buy (and then discovered the magic of low-MER index funds). There were a few that I liked, but except for TD (which I’ll get to), I thought they were all a little too expensive for me. Russel metals in particular was one that both my dad and I liked. It’s a steel company, and they make a variety of steel parts, particularly tubular steel for oil sands projects. Their expertise in rolled steel and proximity to the oil sands lead me to think that they would have a pretty steady business as long as the oil sands kept pumping. They also paid a decent dividend. However, I just didn’t like them at the price they were at (around $26 at the time), and figured (via a valuation calculation that, given my inexperience, might as well have been composed of a dart and price target) that under $24 seemed right to me, so I put in an order at $23.75 and just kept renewing it every few weeks.

I got it at that price not too long ago, in the middle of a steep fall to it’s current price around $20. If I had waited for it to settle in to its current price, I probably would have been a lot happier. Of course, I can’t be too upset: as long as they keep up their dividend, I should make 7% on that money. And I think it’s a good long-term hold, and the day before I got it, it looked like it would take quite a downward spike to hit my bid. Though there are all kinds of ways to feel stupid when a stock you just bought falls over 16% in just a few days. If I had more money to invest, I probably would have bought it in a few separate lots as it was falling.

Never shoot a running horse

TD Bank is perhaps my favourite bank stock. They may not have as much of a dividend as some of the others, but they have such a great retail bank business that always seems to get at least decent word of mouth, combined with the longer hours inherited from Canada Trust. They have a great discount brokerage service, and have been prudent with their US acquisitions; overall it’s a company I feel proud to own a part of (new call centre excepted). Moreover, they managed to sidestep most of the subprime fiasco (I say most because while they may have avoided investing in ABCP, the reasoning goes that there’s a good chance a mortgage given by TD to a perfectly low-risk client could be under a sub-prime second mortgage, and if that client goes into arrears, it’ll hurt TD just as much as if TD made the sub-prime loan in the first place). That, in my mind, makes them a shining beacon of conservative, intelligent management in this sea of financial sector disaster. At $65/share back in November, I thought they were a good bargain and bought some up. It shot up to $75 within two weeks. However, I was in it for the long term, and didn’t end up taking any profit there. I got to watch that high slowly erode as TD was dragged down with the rest of the financial sector, all the way back down to where I bought it. It’s been unusually volatile these last few weeks, and to be honest, I got spooked, particularly when it fell below my supposed more-than-fair buy price. My dad phoned me up and told me to sell it and cut my losses — while TD may be a great bank, possibly the very greatest these days, the market sentiment (or the “macro picture”) just wasn’t behind banks, and TD was going to get killed with the rest.

So I put in a sell order with an ask price of $67/share two days ago, hoping to catch another inexplicable spike back up, and get out with a modest profit to watch from the sidelines. That happened today. I can’t really complain: I made 2% after commissions in just over two months. However, if I had the time to watch it today, I might not have sold so soon into its huge rally at the end of the day — it closed up over $68. By selling while it was in the midst of its upswing (shooting the running horse), I gave up a fairly decent amount of potential profits. Who knows what tomorrow might bring?

Again, it was a bit of a noobish thing to do, but I’m trying not to beat myself up over it too much. While I still like TD for the long-haul, this volatility makes me think I can get it for a better price than I had. So, I take a bit of a profit today, and sit back with my cash and wait for a better buying opportunity.

Speaking of buying opportunities, I bought some more Priszm income fund (TSE:QSR.UN) today. Priszm is an income trust that manages several fast food restaurants, mostly KFC and Pizza Hut locations. They’ve had some financial troubles of late (and I can understand why — when I drive by KFC it’s always empty!), and had to cut their distribution for a few months while they got the company back in order. They had been paying out at about 6% during this time. Now they’ve just announced that the distribution is going back up to $1.20/year. At the current share price of $6, that’s a 20% return! There are some concerns: the TD analyst who did the report felt that $1.20/year might be unsustainable for Priszm, and I can totally see where they’re coming from. However, the distribution the analyst suggests, and that my dad also thinks they’ll settle to in a few more months would still represent about a 15% return. It might be a bit of a troubled company, but I’ll take a gamble on getting 20% on my money, with a decent shot at 15%, and what looks to be a fairly solid floor of 6%. Of course, since it does appear to be higher-risk, I only put about half the money I got back from my TD sale into Priszm. The rest will wait for this volatile market to bring me another buying opportunity.

I don’t know why I’d need a disclaimer about not following my advice in the very post where I talk about the nooblar mistakes I made, but just in case it’s needed: I am not a financial advisor. This is not financial advice. Don’t buy or sell based on my recommendation, and if you do, don’t come whining to me afterward.