Investing Comments

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This Blog is for Educational Purposes

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. For a list of the stocks for which I have put up spreadsheets on my web site click here.

Price/Earnings Ratios

Thursday, June 30, 2011

Price/Earnings Ratio is, basically, the stock price divided by the Earnings per Share (EPS). So, if you have $1.25 of EPS and a current price of $10.00, then you have a P/E of 8. (Price divided by P/E Ratio gives Earnings. For example $10.00 divided by 8 gives earnings of $1.25. EPS times P/E gives you the price. For example, $1.25 EPS times 8 gives you $10.00.)

Usually when people talk about a Forward (or Leading) P/E Ratio, they are using the current stock price and EPS estimates for the current financial year. The Trailing P/E Ratio is using the current stock price and EPS for the last financial year. There are variations on this with Forward P/E Ratios using current stock price and next 12 months of EPS and Trailing P/E Ratios using current stock price and last 12 months of EPS.

On my spreadsheets, I calculate Price/Earnings Ratios for Closing, High, Low and Median stock price for each financial year. My median stock price is the median of the high and low stock prices for each financial year. When I give a current P/E Ratio, I am using current stock price and EPS estimates for the current financial year. When I give trailing P/E ratios, I am using the current stock price and EPS for the last financial year.

In order to see if the current P/E ratio is a reasonable one, I compare it to P/E ratios I calculated over the last 5 financial years. The stock price is probably reasonable if the current P/E ratio is around the median P/E ratio of the past 5 years. It is also valid to compare a company’s current P/E to current P/E ratios of similar companies.

I also like to compare the 5 year median Price/Earnings ratios for high and low stock prices to the current P/E ratio to get an idea if the current price is relatively high or relatively low. Realistically, while it is nice to pay a low price for a stock, getting one at a reasonable price is probably more attainable.

When comparing P/E ratios, you need to compare trailing P/E ratios to trailing P/E ratios, and current P/E ratios to current P/E ratios. Remember current is also called forward or leading P/E. In a rising (bull) market, the trailing P/E ratios tend to be higher than the current P/E ratios and the opposite in a falling (bear) market.

A financial year for a company is taken from the date of their annual financial statements. Most companies use the calendar year. That is a year beginning 1 January and ending 31 December. Some companies have non-calendar financial years. Our banks are examples of this. The TD Bank’s (TSX-TD) financial year begins 1 November and ends 31 October every year. Others, like Canadian Tire (TSX-CTC.A) have financial years ending on the closes Saturday to 31 December. For example, the financial year for 2010 started 3 January 2010 and ended 1 January 2011.

As I understand Price/Earnings Ratios, 10 and below is consider low, 15 – 20 is considered normal and 25 or 30 is considered high. This is just a rule of thumb. However, companies like utility companies tend to have low P/E Ratios and tech companies tend to have high ones. Also, mature companies tend to have lower P/E ratios than growth companies.

When companies change from a growth company to a mature company, their P/E ratios will tend to come down. Also, for some companies, investors are willing to pay a higher price (or a premium) for its stock. This will result in higher P/E Ratios that similar companies have. This can occur for various reasons.

There are, of course, problems with this ratio. The earnings part of the ratio is rather a fake number. This is because, for the P/E ratio to mean anything, all companies, across all industries have to calculate earnings in the same way. Earnings also seem to be a value that can be more easily manipulated that say cash flow. So, perhaps it is not a good idea to put too much weight on the earnings value.

I think that the Price/Earnings Ratio is one valuable tool for determining if a company’s stock price is reasonable or not. However, I do not think that it should be the only thing you should use.

Other possible ratios to use are Price/Sales Ratios and Price/Book Value. You can also use Graham Price, Dividend Yield and Return on Equity to determine if the stock price is reasonable or not. Under the new account rules for Canada (IFRS) it has been suggested we should also use Return on Comprehensive Income.

The site Investopedia has a tutorial on Price/Earning Ratio. The site Wikipedia has an informative article on the Price/Earnings Ratio.

Site such as Globe & Mail, in their stock summary used a P/E that is based on the last 12 months EPS. If you go to financials and add up EPS for last 4 financial periods, you will get the EPS used in their P/E Ratio. The Forward P/E ratio is supposed to be based on EPS estimates. However, I cannot match earnings used on this site (or others sites using same estimates) for the Forward P/E. Google Financial also gives P/E ratios for various stocks. See Google Finance.

Usually sites state what they are using as the EPS. Some use Diluted EPS and others Undiluted EPS. I use the Diluted EPS. Sites can also vary on the P/E Ratios depending on how up to date they are in what they use for EPS. You need to be aware of how a site gets their EPS. They usually always use the current stock price.

Also Yahoo gives current P/E ratios by industry. However, please be aware that this is geared towards the US market, not the Canadian market.

Insider Trading

Monday, May 2, 2011

The only clear message on insider trading is lots of insider buying. This can tell you that insiders really feel that their company is undervalued in the market. There can be many reasons for this. Insiders could feel that a company is being unjustly punished for a recent bad quarter or year. For insiders to buy, they much also feel that the company has a bright future.

However, do not take a company’s repurchase of their shares the same way. Companies repurchase shares for lots of reasons, and from what I have read, they do not do their repurchasing at low stock prices. However, I do take increases in dividends as Management believes in the ability of the company to provide future earnings and cash flow to cover the increase in dividends.

Insiders with options probably sell because they feel that options are part of their pay. Also, they may not want to hold lots of stock in the company in which they work. Look at what happened to Enron Corp. I understand that lots of employees had stock in this company and also had lots of their pension money in this company. When it when bankrupt, they lost their jobs, their savings and their pensions. Enron showed that you should not be too dependent on the company in which you work. If the company goes bankrupt, you can lose a lot. In bear, markets there are always companies that go bankrupt.

Looking at Insider Trading Reports shows how much company’s officers own in both shares and options. I must admit, I do not much care for companies where insiders have masses amount of options and few shares. The push to give options to company’s insiders was to align insiders interest with the shareholders. But this is not what occurred. At some companies, insiders are cashing in options in the 8 figures. Look at my recent review on BCE where I found that the CEO sold off $43.7M shares. He was cashing in on his options.

I look at reports to see what is happening. Is there a lot of insider selling or insider buying? I do not like it when there are massive amounts of Insider selling. I recently reviewed BCE and found that the CEO has sold off some $43.7M in shares (from Options). See my blog entry at BCE. Insider buying is a good indication of the insider’s faith in the company as is when insider retain the options they are given. (I also consider management has faith in the company when they increase the dividends.)

Some of the big companies I owned seem to lately have an orgy of insider selling and not only BCE (TSX-BCE). Enbridge (TSX-ENB) insiders have recently sold almost $50M. See my blog entry at Enbridge. Also, Canadian National Railway (TSX-CNR) insiders have sold some $27M. See my blog entry at CNR. Compare this to some smaller insider ownership companies like AltaGas Ltd (TSX-ALA) where the CEO owns some 1.5% of the company and there is some insider buying. See my blog entry at AltaGas. Also, take a look at TECSYS Inc (TSX-TCS) where insiders own 60% of the company. Here there is a bit of insider buying and no insider selling. See my blog entry at TECSYS.

I also like to know if there are large portions of the shares owned by someone or some company. I do not mind companies with a large family ownership position. However, not everyone feels this way though. Look at recent money spend to get rid of Stronach from Magna and related companies. There are pros and cons to family ownership of companies. The best pro is that these companies tend to have very low debt and good debt ratios. A con would be that family secessions could be tricky.

Wikipedia does a have are large item on this subject of Insider Trading. Reuters gives interesting information on institutional buyers of companies. See Reuter. Note that for Canadian companies you have to follow the stock symbol with “.to”. For example, for BCE use “BCE.to” to get information on this stock.

Friday, March 30, 2012

A problem with insider trading reports is that they only consider “options” that are called “options”. However, I look at all free stock that is given to insiders as options. As far as I am concerned, such things as Deferred Share Units are options. Some people call these other “options”, restricted stock awards. See article on this subject from 2003 in Benefits and Pension Monitor magazine. Deferred Share Options are called such things as Rights Performance Share Units, Rights Restricted Share Units, and Deferred Share Units.

Accounting and My Spreadsheets

Thursday, March 17, 2011

When I started to discuss Canadian Pacific Railways, I first concentrated on the new accounting rules and they affected this company. I went on discuss account figures on my spreadsheets and their value. The first part of my blog entry is below. To view the original blog entry, go to the Canadian Pacific Railway blog entry.

The FASB (Financial Accounting Standards Board) and such board to various countries together with the IASB (International Accounting Standards Board) make changes on how companies can do their financial statements. Often with these changes, companies also restate previous results. Sometimes these can be substantial. For Canadian Pacfic Railway, their book value under new rules decreased by almost 30% under new accounting rules in 2011.

Book Value is theoretically the break up value of the company or the shareholders’ net value in the company. It is an important measure of the company’s progress to look at the growth in book value. However, this is really only in theory as companies in financial difficulties usually lose their shareholders’ value if they are going bankrupt. So at the point of bankruptcy this value does not seem to matter much. Hopefully, you are out of a stock before this happens. However, it is an important measure of the value of the company to the shareholders.

New accounting rules can affect a number of my measurements as I use accounting values on my spreadsheets. These changes will not stop me from using these values, but it is important to understand, that they are not absolute as they can change and some times change a lot with new accounting rules. Looking at various values like book value, revenue, earnings etc can give you an idea of where a company is going and where it is currently. This is, of course, to give a feel for where the company was and is going. It is never meant to be absolute. Accounting is often more art than science.

In investing, it is handy to have a feel for the past and present, but you also want to look at the future too. Analyst’s reports and news items are a good place to look about what the company may do in the future. I also look at analysts’ recommendations. I look at the range of recommendations as well as the consensus recommendation. Most consensus recommendations are a Buy and a few are a Hold. You seldom get other consensus recommendations, but they do happen.

Another place to look for what is in the company’s future is the annual statement. Look at parts that cover such things as management discussion and analysis. Look for messages from the President and other executives.

Of course, none of this stuff is absolute. That is why you want to diversify your portfolio. It is also, why you do not let any one stock get to be a too big of percentage of your portfolio. My limit is 10%. I have sold off good companies, like SNC-Lavalin because it grew so much. It grew to a higher percentage of my portfolio than I was comfortable. SNC-Lavalin is still a great company and I still have a good investment in it, but I still cannot afford to have too much in it because it could really damage my portfolio is anything happens to it.

I should also mention that I seldom change past accounting figures. I know that sites that give you accounting values change past ones when they are restated. The Globe and Mail site comes to mind in this. See CP Financials. My approach is almost never to change values because of restatements in financial statements. Although, I must admit that when I do a new spreadsheet, I use financial statements to do two years at a time.

Is Dividend Investing Dead?

Friday, January 28, 2011

I have been investing since the 1970’s and on a regular basis; some analyst/market observer will tell you dividend investing is dead. In fact, the way I heard about dividend investing was reading such an article. I did not know until that time that people invested that way. To me, it sounded like a good idea. In the 1970’s I was just feeling my way as far as investing went.

When I talked to people who invested, they all seemed to be going for the big score. None of these people seemed to have made any money at this, let alone really making a big score. Of course, some would make talk about making 500% or 1000% return on some investment, but they still had no real money. Either they blew what they earned on the next big investment score, or their investment was so small that they really didn’t earn much money. I figured that there must be a better way.

Dividend investing is simply when you buy stocks for their dividend payments. You hope that over time both the stock price and the dividend payments would increase. I must admit that this is how I made enough money to stop working. It is especially my investment in large dividend paying banks and utilities where I have made the most money.

Of course, the total value of my portfolio has varied greatly, but not so my dividend income. My dividend income has generally just gone up. Recessions are a problem when with investing. My dividend income increases overall slow down. Some companies cut their dividends, some leave them level and some increase them. Recession affect different companies differently. Also, different sorts of recession affect companies differently too.

There has been two recent recession with bear markets. The first affect tech and industrial companies the worse. The last one affected financial companies the worst. In both these recessions, my stock portfolio value has tanked, but my dividends have not. Since I live off my dividends, these recessions have not really affected me much. It is hard to see the value of my assets go down, but my dividend income has increased both times.

My total income has gone down a couple of times. The first time it went down some 15% in 2002, as I sold off my remaining bonds to buy dividend paying stock. Stocks generally have a lower yield than bonds. It took just over 2 years for my income to recover from this. The second time my total income went down it was in 2008 and the decline was 3.4%. I was earning less in interest on my MMFs. I have enough in MMFs plus ING Account and expected dividend income to fund my spending for the next 5 years. This is so I am never in a position where I have to sell an investment at an inopportune time. This second time it took just 6 months for my income to recover.

Saving for Retirement

Wednesday, January 19, 2011

First, with the debate about increasing CPP or using private industry to look after increased pension, no one seems to talk about the cost. By cost, I mean fees or administration costs. We seem to get a good deal from CPP because it is not properly funded and its cost will come from taxes. I understand that CPP is better funded when compared to similar plans from other countries. Lots of countries are on a pay as you go basis for their pensions and these are all in trouble.

I have seen no where that any one looks at the amount of money going to governments compared to what is spend on taxpayers. Everyone seems to agree that government employees get higher salaries and benefits than employees of the private sector. This would lead one to believe that the administration costs of governments are quite high.

My point is that, it may be cheaper for pensioners to have increased pensions run by the private sector than by the government sector. The other thing is that the CPP fund has currently a very big foot print in our financial markets. Should we really give it an every bigger one?

The above are my thoughts on the subject of pensions. But, what I really want to talk about is saving for retirement. Stock, bonds, mutual funds, ETFs etc all cost lots of money. What you buy will determine your future. So, it might just be wise to understand what it is you are buying.

On my blog, I mainly talk about specific stock. Personally, I have learned a lot about investing by doing. I tried initially to read about how the stock market worked, but I really did not pay attention until I bought some shares. So, I read some and did some stock buying to learn. There are investing educational sites on the internet. See Investor Education Fund (IEF) site that is funded by the Ontario Securities Commission called Get Smarter About Money.

One thing that complicated my investing in stocks in the 1970’s was the rising interest rates. I had barely gotten started when I realized that I could make more money in fixed assets than in stocks. This was the late 1970’s and early 1980’s. I had started to buy Canadian Savings bonds on a monthly payment basis to cash them in, in November, to buy stocks. However, interest rates in 1978 were around 9 1/2%. This is probably better than you could make in the stock market. And, to boot, Canadian Savings bonds are almost risk free.

GICs at that time peaked 18% in the early 1980’s. You cannot make that sort of money in the stock market. GICs are also investment vehicles with almost no risk. So, for a few years I mostly bought bonds and GICs. The high interest rates came to an end. The last bond I had was a 20 year CIBC bond at 9.65% in 1994. I sold that a few years ago at a good capital gain. As it gets closer to maturity, the value of the bond would decline and be worth only the $50,000 I paid for it.

Why did I start to invest? My dream was to live off dividends from stocks and spend my time reading. I had a 30 year plan to do this, but I later realized that it was unrealistic as it called for returns in the neighborhood of 10% return per year on average. Well, you never know how life will turn out. I got my dividend income in 23 years, so I quit work. Along the way, I got interested in investing and hence my investing blog. I also worked in IT and developed an interest in computer.

So, I spend my mornings reading and my afternoons working on my computer. I do investment spreadsheets, I read stuff, I do genealogy and I keep in touch with friends and family via my computer. Life does not turn out as you expect. In the same way that life goes up and down, so does the market. So, do not get trapped into buying high and selling low. That is buying as the market is rising and selling when it is falling.

It is not so bad to buy into a rising market, just do not over pay for a stock. But, selling in a falling market can be disastrous. You will lock in any paper losses you have. If your stock falls you should ask your self before you sell – is the company going bankrupt? If not, perhaps you should reconsider selling; a lot of stock movement has to do with P/E ratios going up and down, and not the stock’s intrinsic value changing.

Graham Number

Thursday, September 30, 2010

I thought today I would talk about the Graham Price or Graham Number as there has been questions about this item. This is based on the principles of Benjamin Graham and it is meant to be used to calculate the maximum price you should pay for a stock. The Dividends Matters website has a tutorial on this subject.

Benjamin Graham wrote a book called The Intelligent Investor and this book is considered to be a classic investment book. On my website, you can find out how to order this book on Amazon if you care to purchase it. See Graham. Also, this book review and other books I have reviewed are on my website at Book Reviews. Benjamin Graham has an entry on Wikipedia. There is also a good review of this book at Motley Fool website.

Why do I look at this number? I want to be able to figure out what a decent price is to pay for a stock. To this end, I not only look at the Graham Number, but also P/E (price/earnings) ratios, P/B (Price/Book Value) ratios and dividend yield. That is why I look at the current ratios, the dividend yield and the Graham Price and compare them to 5 and 10 year averages.

Having invested for many years, I doubt if you can do better than pay a rather average price for a stock. What I am trying to prevent is over paying for a stock. What I have found is that if you over pay for a stock, the dividend yield that you get over the long term can be affected. If you do this too much, I am sure your portfolio will also suffer.

The formula I use is the square root of (22.5 X EPS X BVPS), where EPS is earnings per share and BVPS is Book Value per share. When I am calculating the current Graham Price, I simply use in my formula, the estimate earnings for the current year and the current book value (all from my spreadsheet).

For other years, in the Graham Prices on my spreadsheet I use the diluted reported earnings per share. There is some controversy about what you should use. Some think that you should use net earnings divided by the outstanding shares. I find mostly that there is not much difference and I want a quick and easy way to get a value to match against the current price.

Some site talks about the NCAV (or net current asset value) and have a formula for that, but I do not use this figure. For a discussion on this aspect of Graham’s way of investing, see Daniel Libeskind’s site.

I am not the only blogger who talks about Graham’s methods for valuing stocks. See Stingy Investor’s blog. See Dividend Matters site again for how a company such as Saputo (TSX-SAP) is valued. Also, see the Div-Net site on how they use the Graham Price in valuing Lowes Company (NYSE-LOW). There is also the Tipblog.in site that explains how they use Benjamin Graham Number to determine a fair price to pay for a stock.

A Little Web Advice Can Be A Dangerous Thing

Monday, September 13, 2010

I was reading this column of the same title by Jonathan Chevreau of the Financial Post on the weekend and I would like to make some comments.

We all know we cannot count on people being smart all the time. That is rather dangerous. On the other hand, you cannot assume that Joe Q or Jane Q public is dumb. This is just as dangerous. People very often forget this, and it is especially common in politicians, but it can be found in lots of other places as well. I do not know about you, but I read blogs etc to get ideas and learn about other people approaches to such subjects as investing. I rather think this is common.

I must admit that I do not often talk about fixed income as I have very little of this at the moment, interest rates being so low being a main reason. However, the same rules apply to fixed income as to other investment. Do not invest in what you do not understand. Also, you want to make sure you understand how any entity you investment is going to pay out what you expect. This applies to a bond as well as any stock.

Maybe bloggers that talk about stocks do not talk about fixed income because that is a whole other world that is probably more complex than stock investing. I have had some experience in bonds, GICs, etc, and just because something is labeled fixed income, you cannot assume that it is a safe investment. Do not let anyone fool you into thinking this, because it is wrong. You still need to know what you are doing, or you should get help.

As far as investing in dividend funds, I would not do so, as I do not invest in Mutual Funds or ETFs that contain stocks. However, I do invest in dividend stocks. Are they for everyone? Of course, not. As I have pointed out, do not invest in what you do not understand. Do not invest in anything that prevents you from getting a good night sleep.

I have not come across any blogger that says to “avoid foreign markets because of currency risk/currency conversion fees”. However, I think that it is worth pointing out that if you invest in a Canadian company that has overseas business, you do have a currency risk. It is just the company you invest in that helps you to manage this risk. I do seek out Canadian International companies to invest in because of this and I have dabbled a bit in foreign stock. Never made much in foreign stock, but it was a learning experience.

And if you happen to come across a blog that says, “Follow my lead because I made 30% returns every year in the last seven years", remember what your mother said. If something sounds too good to be true, it probably is. My mother was not very sophisticated, but she certainly knew a tall tale when she saw one. But, really, however, many people are going to believe such a claim and for how? And, this gets back to my first point. Do not underestimate the general public.

Personally, I have learned as much from other bloggers as I have from newspaper columnist, books, and other so called experts. I think the main thing to keep in mind is to use your common sense. I do not know of any dividendman etc blogger, but I do know a blogger called “Dividend Girl”. I have referred to her site previously at Dividend Girl. She basically talks about what she is personally doing. She may not say her name, but I can understand that. In this day and age, as a woman, you still must be careful. If I give the sort of information out on what I am doing as she is, I would not put my name to the blog either.

You never know from whom you might learn something useful. So, do not let anyone put you off reading your favorite blogger, whoever that should be.

Dividends and Special Dividends

Friday, February 26, 2010

Jennifer Dowty wrote a column Dividend Paying stocks that I found very interesting. Jennifer is Associate Vice President and Portfolio Manager MFC Global Investment Management of Manulife. See her Bio. The title of the article in Investor’s Digest was Dividend Stocks: Buy, Hold and Collect. The Investor’s Digest is a publication of MPL Communications. See publications on their site.

Her picks were stocks that not only increased their dividends, but also have special dividends. She said she screened over 600 companies to come up with 12 picks. There are only 3 on this list that I know about and have reviewed. Over the next while, I will be doing spreadsheets on these stocks and reviewing them.

Special dividends are great, because they can add considerably to the return you receive on a stock. However, there can be problems with them. The first is that you cannot depend on them. The problem maybe just as you really need them, they are not paid. Special dividends are only paid if a company can afford to pay them. Therefore, the chances they will not be paid in a recession are quite large.

The following were Jennifer’s picks: Armtec Infrastructure Income Fund (TSX-ARF.UN), Computer Modelling Group Ltd. (TSX-CMG), First National Financial Income Fund (TSX- FN.UN), Genivar Income Fund (TSX-GNV.UN), Gluskin Sheff + Associates Inc. (TSX- GS), Keyera Facilities Income Fund (TSX-KEY.UN), Le Chateau Inc (TSX-CTU.A), MCAN Mortgage Corporation (TSX-MKP), McGraw-Hill Ryerson Ltd (TSX-MHR), North West Company Fund (TSX-NWF.UN), and ShawCor Ltd. TSX-(SCL.A).

Dividends are often paid based on earnings or cash flow. For example, a company decides to pay out a certain percentage of its earnings. This can cause dividends to rise quite substantially in good times. The problem also is that in bad times, the increases are lower or non-existent. Dividends could also be lowered or stopped. If you have been following my blog, you would have seen dividends in the first year of our current trouble increase still quite well. However, in 2009, dividends increases were much fewer and some of my company’s lowered or temporarily stopped their dividends.

Other things can affect dividend payouts as well. The most common is the Asset/Liability Ratios being too low. Often when companies borrow money, they sign debt covenants. Basically, they agree to have A/L ratios at a particular level. That preferred ratio is usually 1.50, but it could also be at another ratio. That is why I show Liquidity (Current Asset/Current Liability) and Asset/Liability Ratios on my spreadsheets. A low ratio can affect the payment of dividends.

Another think that could affect dividends or their increases is that the company needs money for some reason. It could be that they want to expand their business or they might want to update or need to repair some existing facilities. If you are depending on dividends you should paid some attention to a company’s announcements and also read some of their annual statements that refer to future intentions.

It is great to review someone else’s picks. You never know what gems might appear. Besides, the world continuously changes. In 50 years time, what are great stocks now might no longer exist. Same as the stocks of 50 years ago, few are around or are the same anymore.

Investing In What You Do Not Know

Monday, February 22, 2010

Personally, I do not think that you should be investing in Mutual Funds or ETFs without an understanding of how stocks and bonds work. I would think that the best why of gaining knowledge is to invest in some stocks or bonds, even if on a very small scale. Some people can read to understand these investment vehicles of finance, but hands-on practice is still probably a necessity. There is nothing like practical experience to learn something.

It is not so much that you should not invest in what you cannot afford to lose, but what you cannot afford to lose in the short term. There is going to be fluctuations in the short term. You should plan on a 3 – 5 year period to exit a Mutual Fund or ETF portfolio. So, if you are retiring in 3 – 5 years, you should be putting into cash the money you will need at retirement. I live off my dividends, so I have cash and future dividends to last roughly 5 years. The interest on cash and MMF funds could make you cry. However, this is better than having to sell assets at a loss because you need the money to live on.

I have talked to a lot of people who have invested in Mutual Funds and ETFs because they do not understand the underlying assets. They seem to think that all gains made is due to them, but all loses are a catastrophe and are someone else’s fault. They wonder where their money has gone, but they never asked where it came from when the value of their assets went up. Markets normally fluctuate. The capitalistic market place is boom and bust. It has always been. It may have been caused by stupidity in Wall Street this time, but if it were not, the bust would have been caused by something else. This is also looking at investing in the wrong light. What you need to look at is the long term, and in the long term, equity investment is good.

And, there is nothing wrong with investing in Mutual Funds. (I would not do this personally, but that is another story.) The point is if you are not willing to do the work to properly invest the money yourself, the next best thing is to pay someone else to do your investing. What I disagree with, is for a person to allow someone else to invest for them into something they do not understanding. If they had at least some understanding, the current recession would not have been a surprise. Recessions are common. We have them all the time. With any sort of historical perspective, investors would know that.

My guess is that most people, who are complaining about losing money in this latest recession, invested in things they knew nothing about. If you cannot afford the risk of the whole market, you should be in stock that used to be called “widows and orphan” stock. I do not believe they still exist, but you can buy conservative, dividend paying stock. They would be low risk stock from well know firms that pay good dividends. These are unexciting stock and they are generally ignored, especially in bull markets. Most mutual fund companies call funds containing these stocks “Income Funds”. I do not know why, but they do.

So, please, if you are investing in Mutual Funds and ETFs, get some education about what it is you are investing in. Do no invest with no knowledge and then whine about your investment when things go wrong. It is annoying. But I guess the real problem is, I have heard this all before. Every recession it is the same whine about investments going sour.

It seems to be every decade we have a recession and every time people who have invested in what they do not understand whine about how it is not their fault they lost money, it is someone else’s fault. If investors learn nothing in this recession and do not take responsibility for their investments, I will hear the same whine in the next recession also. It is annoying.

So, What If The Volitity, Bear Market Is Not Over

Thursday, January 15, 2010

There have been 5 and 10 year periods in the past when the stock market has had little in the way of capital gains. What have I done? I have collected dividends. Some years the only returns you receive are dividends. This is the reason that I buy dividend paying stock.

The economy can go to hell in a hand basket, but can you image that you will not buy food, or not use electricity? Can you image that everyone will be unemployed and there will be no cars on the road? I cannot image this will happen. Even if we have a huge terrorist attack, and even if our economy takes a lot longer to recover, I cannot image these things happening.

My investment suggestion is to buy good dividend paying stock and wait things out. If things work out better than a lot of the scenarios that I have been reading, how can you lose with such stock? You may not get the big score, but you will also not lose your shirt either.

The think is no one can predict the future economy or the stock market. The problem is, like the weather, there are far too many variables to consider. Also, with the economy, big things can come at us from somewhere out in left fields that no one really expected. So, if you want to invest, get yourself some nice little dividend paying stock from a company that makes real stuff. You can then wait and see how the future will unfold. The thing to remember is that life always goes on, no matter what happens.

The other thing to talk about is probably gold. I know a lot of people are pushing it. What I do not like about gold is that is it non-income producing asset. The other thing is that in the past, gold has all of a sudden, made huge moves. People are pushing gold like they did in the last gold bull market. Then, all of a sudden, the price of gold dropped. This is not a conservative investment.

At least with other resources we use them. We use oil for cars, trucks and airplanes. We use other metal to build things. However, we like gold because it is pretty and it does not tarnish. Gold’s price has a lot to do with how we feel about it. It also has a lot to do with how we feel about our currency or the US’s currency. It is more emotional than the stock market.

I know Asian people like to keep gold as a store of value, but they generally keep it in coins or jewelry. They also have this habit as they have had a much longer history than we have, especially when it comes to currency. It was autocratic rulers that muck around with their currency and this is why they like gold. People of the democratic form of government do not tend to treat gold in the same way. This applies especially to those of European descent.

So, again I will say, to wait out the current economic situation, buy some nice dividend stock of a company that makes real things.