Hedge Funds Trading on the TSX?

I must admit I've been jealous of those investors qualified to purchase hedge fund positions. I have a dream goal of entering a long term position with Stephen Palmer's AlphaNorth Partners Fund, which I've discussed before in past blogs. The returns over time are excellent, not without higher risk of course, and seem to perform much better than the index and most mutual funds.

You need to have money to make money

The problem is, however, that you must be an accredited investor or have a great deal of cash to enter a position in most of the highly ranked hedge funds in Canada.

The FUND of Hedge FUNDS Investment

I've found a fund of funds, trading in a manner most similar to an ETF, of three top hedge funds available for investment on the TSX.
Star Hedge Managers Corp .

These "funds" issue "units" which trade like stocks, and aim to provide long term capital growth by investing in a portfolio of private investment funds managed by three of Canada's leading portfolio managers: Rohit Sehgal, Eric Sprott, and Frank Mersch. The Fund invests on a equal weighted basis in units of the Dynamic Power Hedge Fund (Sehgal), the Sprott Hedge Fund (Sprott) and the Front Street Fund (Mersch).

Trading Like a Stock is An Attractive Alternative

These "units" are attractive to me since investing in these funds individually is typically only available to high net worth or institutional investors requiring a $100,000 or $150,000 initial investment.

For example, the Dynamic Power Hedge prospectus can be found here.  A $150,000 investment in 2002 would be worth around $2 million dollars today.

The Sprott Hedge Fund boasts an 805% cumulative return since inception in November 2000 which correlates with 23.4% annualized compared to a 4.9% loss by the S&P500 (CAD) over the same time. Therefore a $100,000 investment in 2000 would be worth over $800,000 today.

The Front Street Canadian Hedge Fund launched in August of 1999 has returned an average of 10.9% per year compared to a 6.4% return by the S&P/TSX Composite Index over the same period.

The Canadian Newswire reported on March 31, 2011 the availability of the Star Hedge Manager Corp II units.

Star Hedge Managers Corp I and Star Hedge Managers Corp II trade on the TSX under the symbols XHM.A (priced at $5 on opening day Dec 31, 2008 and closing at $15.80 on May 5, 2011--an over 300% increase in less than 2.5 years) and XHG.A (ranging from $9.40 -$10.40 since launching on April 20th, 2011).

If you know of any other Canadian Hedge Funds or groups of hedge funds trading on the TSX in this way, please drop me a line. I would love to review them here.

Happy Investing

Disclosure: the author does not own positions in any of the funds listed here at time of publishing.

No News is Good News for Market Mood

How News and Mood Affect the Markets

The old adage "no news is good news" seems to relate well to the stock market. And investor moods plays a big role in market swings.

Market volatility can be very different at different times. For example, the announcement of rising unemployment is good news for stocks during periods of economic expansion and bad news during economic decline.

A rise in unemployment tends to signal a decline in interest rates--good for stock prices-- and yet a decline in future corporate earnings--bad for stock prices. The combination of these two effects and the result in stock prices varies depending on the state of the economy.

Pietro Veronesi, University of Chicago, showed that investors rationally anticipate that during periods of high uncertainty their expectations of future cash flows tend to react more swiftly to news. This predictable higher sensitivity to news tends to increase the asset price volatility, against which risk-averse investors are willing to hedge. His research shows that "in equilibrium, investors' willingness to hedge against changes in their own "uncertainty" on the true state makes stock prices overreact to bad news in good times and underreact to good news in bad times."

Good News in Bad Times Ignored?
The main result is that when times are good, a bad piece of news leads to greater price reductions in investments greater than the reduction in expected future dividends.

Bad News in Good Times Overreacted?
Conversely, a good piece of news in bad times tends to increase the expected future dividends, but also increases the discount investors require to hold the asset, such that the increase in price is lower than the increase in expected future dividends.

As well, the degree of investor reactions to news tends to be high in good times and low in bad or uncertain times. Volatility as a response to news in bad times is also much higher than volatility in good times.
Some Funny Cartoons:

Twitter Predicts Market Swings!
Twitterverse mood predicts stock market moves. In a study from the University of Indiana, it was found that the overall mood of Twitter users could be used to predict market swings.

By creating search queries for popular phrases using keywords such as "happy", "sad", "fearful" or optimistic, a daily "Twitterverse Mood Score" could be compiled which correlated with the direction of market expansion or contraction.

Shifts in Twitterverse moods scores predict market shifts by nearly 90% accuracy.

So What Does Mood and News Mean for Private Investors Like Us?
1. No news is likely good news.
2. Investor mood seems to play a major role in driving markets on any given day.
3. Bad news in good times tends to lead to greater reactions from investors.
4. Good news in bad times does not necessarily lead to increase in stock prices.
5. Twitter can be used a social barometer and therefore predict market moves. 6. Maybe I should get out of the market and put my money in a savings account. (just kidding!)

Happy Investing!

Some funny cartoons

The Next Warrent Buffett and Berkshire Hathaway!

Who is the Next Berkshire Hathaway?

Like any great empire, it's time for Berkshire Hathaway to fall from the top and relinquish the throne of SuperStock to a contender. Berkshire is simply too big to sustain the kind of growth seen in previous decades as evidenced by flattening returns over the past few years. Although Buffett and his team may find a second wind to their astronomical past success, it would seem that as Buffett readies to pass on the crown, it may be time to consider a new ruler altogether in the multinational conglomerate superstock competition.

There seem to be a number of contenders for the next gold medalist in the fight to become the Goldilocks stock story of this new century. The top candidates mentioned most frequently by financial analysts, writers and researchers are Markel (NYSE: MKL), Sears Holdings (Nasdaq: SHLD), Fairfax Financial (TSE: FFH.TO), Leucadia (NYSE: LUK), Brookfield Asset Management (NYSE: BAM), Alleghany (Y),  and Harbinger Group (NYSE: HRG).

Markel (MKL): Located in the US, Markel Corporation markets and underwrites specialty insurance products and programs to a number of niche markets. It operates in three markets: excess and surplus lines, specialty admitted, and the London markets.

Markel's chief investment officer, Tom Gayner, is a conservative investor like Buffett who has returned 14% annually over the past 10 years compared to the sideways trading S&P 500. Gayner is a long-term value investor, investing in companies with high return on equity, low price over book and low price over cash flows.

Sears Holdings (SHLD):

Sears Holdings Corporation, through its subsidiaries, operates as a retailer in the United States and Canada. The company operates through three segments: Kmart, Sears Domestic, and Sears Canada.

Man at the top, Edward Lampert started his own hedge fund in his 20's, with an investment style similar to Warren Buffett's, averaging returns of 29% per year.

Fairfax Financial (FFH.TO):

Fairfax is run by Prem Watsa, another long-term value investor dubbed “the next Warren Buffett”. Watsa is best known for his most famous calls include selling half his stocks before the 1987 crash and buying S&P puts before the index dove in 2000. He also bet against the Japanese Nikkei but his biggest success came just recently when he bought credit default swaps on the premise that banks and financial institutions would struggle if a credit and liquidity crisis arose.

Since 2005, Fairfax revenue has stayed at roughly $5 billion. Net earnings, however, have grown at 100% compounded annually, from $53 million in 2005 to $856 million in 2008. The market price of Fairfax shares listed on the NYSE has doubled in value over this period. According to filings, Watsa has returned a compounded 23% annualized return in book value between 1993 and 2008.

There are very few who can match a record like that. Over the last ten years, Fairfax’s wholly owned investment management company Hamblin Watsa Investment Counsel has produced a common stock investment return of 19.1% compounded annually, against a (1.4%) decline for the S&P index over the same period.

Leucadia (LUK):

Leucadia National's Ian Cumming and Joseph Steinberg  have their hands in every sector, invest fearlessly, and buy good companies at low prices. Invested in a diversified portfolio of stocks and businesses, Leucadia has generated impressive returns and gained dedicated fans amongst value-oriented investors.

Leucadia is considered to resemble the Berkshire Hathaway of 20 years ago. But unlike Berkshire, Leucadia tends to focus on speculative companies rather than operating businesses and presents an attractive play on its depressed investments and on the ability of Cumming and Steinberg to continue to find new investments.

Brookfield Asset Management (BAM):

Brookfield Asset Management Inc. is a global asset manager focused on property, renewable power and infrastructure assets with over $100 billion of assets under management. The company's investment guidelines include investing in areas of competitive advantage, aquiring assets on a value basis with a goal of maximizing return on capital, building sustainable cash flows and recognizing that superior returns often require contrarian thinking.

The company's remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. 45 year old Bruce Flatt runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet. In the nearly a decade Flatt has been in charge, Brookfield has emerged as the world's biggest owner of prime office space, and its 165 power plants constitute one of the largest hydroelectric portfolios.

But more impressive is how Brookfield weathered the 2009 flashcrash that crippled many of its rivals. Over two years, as its stock plunged by two-thirds along with the markets, the company quietly added to its capital and waited out the storm.

Alleghany (Y):

Alleghany has found its comfort zone in property/casualty insurance with real estate mixed into the formula. Its goal is to create stockholder value through ownership and management of a small group of operating businesses and investments.

Alleghany’s subsidiaries include Capitol Transamerica and RSUI Group. In its last quarter, the company beat EPS estimates by 1.19 (4.85 actual vs. 3.66 estimated). Alleghany Corporation has had an average earnings growth of 1.9% over the past 10 years. As of the end of February, Alleghany holds $825 million in cash for use in future investments and has no debt to note.

Harbinger Group (HRG):
Harbinger's strategy is to buy controlling and significant equity stakes in companies competing in six industries: Consumer products, insurance and other financial products, telecommunications, agriculture, power generation and lastly, water and natural resources.

Harbinger Group Inc. is a holding company with approximately $144.8 million in consolidated cash, cash equivalents and investments as of June 30, 2010. HGI's principal focus is to identify and evaluate business combinations or acquisitions of businesses. HGI continues to review acquisitions and business combination proposals with the assistance of its advisors. A majority of HGI's outstanding common stock is owned by investment funds affiliated with Harbinger Capital Partners LLC.

Have a look at these companies for yourself.My current favorites are Leukadia, Brookfield and Fairfax.

Disclosure: the authors owns shares of BRK.B.
  

Time To Buy Apple!

I don't own Apple stock. But I do consume alot of Apples. 

We collectively own several Apple products in the household including an iPhone, 3 iPads, 2 Apple notebooks, and 4 iPods.  We also own 2 Blackberries, a Dell desktop and a Dell mini laptop--which is not very popular since the iPads entered the picture. Sure I miss Flash and a few other applications that make my personal iPad frustrating on occasion, but not enough to force my hand to replace my tablet with a RIM Playbook.

I firmly believe Apple stock is undervalued.

I have not been a bandwagon stock purchaser, and therefore Apple shares elude my portfolio.

According to Recognia, the little research program that comes with my brokerage account, Apple shares are undervalued by 67%. Wow. For comparison, Google shares are noted as undervalued by 72%., Microsoft by 20%, and Nokia--the major competitor for Apple's iPhone, is listed as overvalued by 17%.

Stephanie Link of The Street recently commented that Apple is the "It" product story of the world. Apple is all about applications. They have the most, boasting 65,000 and growing. They have a huge share of the cellphone and tablet market--in fact no other company comes close.

Apple has the uncanny knack of being able to create products that we never imagined needing and making them a "necessity".

Cueing Up for Apples

Ya, there are line ups for products, backlogs and some disgruntled customers frustrated at the lack of immediate gratification, but few walk away and most are content to wait. No one doubts Apple can meet demand. And certainly if they continue to produce the products consumers want, line ups will continue to form.

Recent history supports Apple's market dominance as always the first one out of the gate on new technology. Apple has alot of cash, great management and a strong research and development team.

Apple Looks Enticing Right Now

At the current price of $350 per share near it's 52 week high, Apple stock is still very attractive. Analyst estimates predict numbers between $375 and $450 for intermediate term stock growth and the Chinese market for Apple products is growing exponentially as they too ride the cultural move from laptops to tablets.

Looking at the Yahoo Finance technicals, RSI is neutral, the stock is trading above its 200 day MA, Slow Stochastic is ticking up and volume has been average but landing on the sell side of the pendulum since mid March.

So is it time to buy Apple?

Recognia produces several bullish signals of late: a gap up, price cross over 50 day MA, MACD and Slow Stochastics pointing in the right direction and good momentum. First target price is $365.28, an area of previous resistance, and when you add up the psychological factors, more than 90% growth year after year and the current technical indicators, I can't find a reason not to buy me some Apple.

As well, the US dollar is currently riding lower than our buck which gives me further incentive to take a position.

Analysts Love Apple

Most analysts consider Apple a strong buy or buy with only one analyst out of 54 listed on Yahoo Finance considering Apple a sell--who is this guy anyway? Perhaps he owns Nokia.

Apple beat the S & P 52-week gains by 41% (10.65% versus  31.61%) with 921.28 million shares outstanding, a few of which will be mine after the Easter holiday.

So, it's apple pie for Easter, and Apple shares when the markets reopen. 

Happy Easter and Happy Investing!

Disclosure: the author does not own shares of Apple, Nokia or Google as of publication.

Silver is the New Gold

The price of silver has more than doubled in the last 12 months rising four times faster than Gold which climbing to its most expensive level versus gold since 1983.

Like gold, silver is used as a hedge against the weakness of the dollar. Silver is the most widely used precious metal in industry from semi-conductors to solar panels, and political uncertainty in exporting countries like Peru also create further buying interest.

Silver as a Hedge Metal?

In 2008, the price of silver fell to below 10 dollars as it was considered simply an “industrial metal” with much in reserve. As the recession seemed to herald an imminent depression, investors began buying Gold and Treasuries reminiscent of reactions during the 1929-1932 depression, leaving silver out of the loop.

Back in the 30's, silver was considered a base metal, with abundant supply somewhere short of 5 times the actually domestic demand for industry and coins in North America and there was little interest in it as "precious".

Silver made a slow comeback until the late 1970's and on Silver Thursday in 1980, the price of silver collapsed again in the face of government dishoarding and mine supply increases. There was no sign of silver shortage and gold continued to lead the world as the base monetary metal of exchange.

These days, the mindset that gold remains the only hedge against market collapse and inflation is wavering. Although most gold investors would consider silver as ever-abundant and of little interest, recent history would suggest otherwise.

COMEX, an exchange warehouse stock pile of silver has less than 50 million ounces for sale as of a year ago, significantly less than the hundreds of millions of ounces accessible in previous decades. COMEX trades millions of paper ounces of silver per day, the majority never settled in actual physical silver bars, creating a liquidity based on leverage that sets the world price for the white metal.

Supply and demand seem to be mismatched. Is there truly enough  physical silver to fill the volume of COMEX business or is this simply a paper play of in-out IOU's of an irreplaceable stockpile? Would the banks be able to deliver on short sales? Are we simply buying and selling monopoly money masquerading as a silver bar? And what happens if buyers call in their purchases in actual physical silver all at once? Is there enough of the stuff to translate paper into metal?

It would seem that the silver market does not truly require new investments for prices to be forced higher--current paper holders simply have to demand conversion to physical silver.

Why the demand for silver?

As with other precious metals, silver is not in abundance, has been historical used as direct currency, and is pretty. Bottom line. We wear it as jewellery and we print coins from it. But there are other more important applications for silver that are growing in global industry. And annual production of the metal has been significantly less than annual consumption of late leading to growing declines in reserves.

Industrial applications of silver accounted for over 400 million ounces in 2005. Silver is used as a electrical conductor, heat conductor, a flexible metal to shape small wires, and as a catalyst in the plastics industry for manufacture of polyesters and solid plastics.

Billions of silver-zinc batteries are produced annually to power small electronic devices and silver is used in conductors, switches, fuses, vacuum cleaners, dryers, microwaves, dishwashers, computer keyboards and hundreds of other daily use appliances. 

Automobiles contain silver tipped contacts and switches; marine motors, jet engines and tankers all rely on silver tipped electrical circuits.

Silver is used in medicine as an antimicrobial, in photographics, Xrays, and of course to adorn our bodies as jewellery. Silver is used in solar panel production, semiconductor manufacture, and as currency.

What Would Warren Buffet Say?

Well, as usual, I like to pass my thoughts through the buffetometer and this is what I learned: Warren Buffet reportedly purchased 130 million ounces of the white metal in 1997--the legal limit an individual could personally own.

Bottom line, silver is the new gold. Silver applications are increasing, silver stockpiles are diminishing, silver mining may not meet demand. So buy silver.

Disclosure. The authors own shares of the US ETF Global X Silver Miners (SIL).

The Alpha of Canadian Hedge Funds

Meet The Top Dog of the Canadian Hedge Funds

I recently overheard a couple of colleagues chattering about investing in hedge funds and between the technical jargon and comparison gibberish, the only phrase I clearly understood was this:

"If I had 150 thousand bucks, I'd give it to Steve Palmer."

Researching the Markets

After a single quarter of trading, I seem to be at a near break-even point. Having heard horror stories of newbie traders losing 50% or more of their investment dollars in the early days of their trading, I suppose a mere 0.5% earnings profile is not such a bad place to start. Of course I could have earned more working at my regular job, but I see it as an educational  sacrifice that cost far less than any university level course on the markets.

So what did I learn? Other than "keep green on your screen", a favorite Toni Turner sign-off to her twitter updates, I learned that there are good gurus, bad gurus, good funds, bad funds, and that everything is in flux always. I learned there is no sure thing and that psychology plays a major and often under-rated factor in the markets. I learned that technical indicators and Newton's laws of physics also play an often under-rated factor in the way the markets naturally move. I learned I am stupid about these matters and should listen to people with a track record while at the same time executing my own due diligence to confirm that at the very least I agree in principle with the advice.

So what does this have to do with Steve Palmer. Well, everything. Mr. Palmer fulfills the criteria of a good guru and manages a fund that fulfills the criteria for a first class investment. Of course, I would need 150 grand to walk through his Front Street office door, but hey, at least I have a goal.

So Who Is Steven Palmer?

Steven Palmer is a founding partner and Chief Investment Officer of AlphaNorth Asset Management, and runs their Partner Fund. After launching his investment career in 1997, Mr. Palmer became the Vice President of Canadian Equities at a major financial institution and subsequently managed a pooled fund of primarily small cap Canadian companies achieving a first rate ranking and returns of 35.8% over 9 years as compared to 10.0% for S&P/TSX Composite Index and 13.0% for the BMO small cap index.

He has an impressive track record for his young years and seems to make people lots of money, particularly investing in small cap Canadian companies, one of the most volatile, yet potentially most lucrative, investment fields.

Why is AlphaNorth so Attractive?

AlphaNorth Partners Fund is a "long biased hedge fund" launched in December, 2007, focussing on Canadian equity securities and offered to "accredited investors".

Returns Since Inception
(Dec1, 2007 to February 28th, 2011)
                                                            Annualized    Cumulative
AlphaNorth Partners Fund               48.7%            262.9%
TSX Venture Index                           (4.1)%            (12.6%)
TSX Total Return Index                    4.0%               13.7%

Sure the fund dipped low in 2008 with nearly every other fund on the market, but it regained its lofty standing with a vengeance to earn an average annualized return of 48.7% since December, 2007. Big performance, big fund and a big ticket price of $150,000 initial investment. Not for the average Canadian, not for the faint of heart.

The Historical Accredited Investor

Bottom line, you have to have money to make money. And you need to be an "accredited investor" to buy a piece of AlphaNorth. A hedge fund is a high risk investment. And historically, the "accredited investor" class was designed to protect investors and investees against market crashes that could potentially wipe out personal or fund net worth.

Following the 1929 market crash and subsequent great depression, the US Congress intervened to set strict rules in place to in essence, "clean up" the practice of securities investing. Thus the Securities Act of 1933 and subsequent birth of the SEC, led to law that was passed which required companies to provide detailed information to investors so that they could make informed decisions. This Act also defined which investors could invest in certain securities, thereby creating the "accredited investor".

An accredited investor was defined as having "a net worth of at least one million US dollars or having made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount the following year."
Accredited investors have access to a level of investments such as hedge funds and other potentially high yield funds that the average Canadian unfortunately does not. And in all fairness, the law exists to protect that average Canadian from losing everything they own if a volatile investment such as a hedge fund crashes and burns up their life savings. It also protects the fund from having low risk tolerant investors run away at the first sign of a negative market flux.

Hedging With The Hedge Funds

From Wikipedia: "A hedge fund is a private investment fund which may invest in a diverse range of assets and may employ a variety of investment strategies to maintain a hedged portfolio intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings."

Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s annual return is higher than that of the previous year.

Check out Steven Palmer's AlphaNorth Partners Fund here.

Happy Investing

Penny Stock Pros and Cons

I keep running into emails and popup ads about penny stock millionaires investing in  micro cap "picks" and earning incredible returns in a very short time. It seems easy--spend a bit, make a lot, but is it too good to be true?

Weeding Out the Good Picks

Micro cap or "penny" stocks are defined as shares in companies with a market capitalization of under $250 million. Some of these companies are venture miners or start-up internet projects, others are well-established small companies with real income, real sales and real customers. Others have been identified as scams built to simply create an investment and scam their investors.

So, how to weed out the good from the bad? What are the pros and cons of penny stock investing.

Micro Cap Stocks Outperform

There are some very strong reasons why an aggressive investor would choose these microcap companies as a serious investment strategy.  Over the last decade, micro cap and small cap stocks have outperformed the larger entrenched higher priced blue chip companies, especially in recessionary times or during the earlier stages of recovery.

When micro caps stocks take off, they tend to rise very quickly, doubling or even tripling in a matter of hours or days. They cost less, so more shares can be purchased to earn more return on investment.

Penny Stock Newsletter Services and Marketing Reports

Microcap companies often employ newsletter services and other marketing techniques to promote their stock to investors which creates an environment of hype and increased interest in the stock which then sends the price higher rather quickly. These same newsletters often provide in-depth coverage of the micro cap companies which help investors better understand their structure, focus, direction and financial status.

Not for the Risk Averse Investor

These stocks are volatile and often trade on limited volume making them very risky investments. It's sometimes difficult to gather accurate unbiased research on the company or to know if the business is a legitimate.  Some of these companies are venture projects with no clearly marketable product as yet and of questionable financial status.

How to Sift Through Penny Stock Jungle

Penny stocks trade less on fundamentals and more on sentiment. A hyped stock may spring up as the "next big thing" only to drop dramatically a mere hours or days after the spike as day traders and scalpers take profits. Some newsletter services may not be considered reliable and simply act as a marketing service to hype a stock in order to drive its price up for short term investment profit.

Choose penny stock advice from recognized well-established sources that offer other larger stock investment ideas, strategies and have been in business for several years, preferably quoted by other reliable sources.

Don't invest in penny stocks if you don't have the risk tolerance required. Your investment dollars can disappear as quickly as you earn it. Investing in a sleepy portfolio of index funds would certainly be safer.

Apply the same due diligence to these stock choices that you do to a regular investment. Pass the stock through your technical analysis software, consult your financial advisor, and look carefully at the company fundamentals including market capitalization, trading volumes and length of time in business. Does the stock seem to follow the underlying index or is a confusing mess of high and lows with no apparent definable pattern that correlates with anything other than wind direction.

Places to Search for Micro Cap Ideas

Here are some places to find investing ideas which include both well established mid and large cap stocks as well as well-researched and trusted small and micro cap investing ideas:

The Canadian Venture Exchange

Pat McKeough's TSI Network

The Motley Fool

And here are some penny stock investment sites that provide various tips, strategies and investing ideas for micro cap stocks:

Canadian Penny Stock Blog

Penny Stock Rumble

MicroCap Canada

Happy Investing!

Disclosure: Microcap stocks comprise approximately 5% of the author's personal investment portfolio.

The Rise And Fall of Emerging Markets

In 2009, emerging markets were seen as the "hottest investment ticket around" by most analysts and advisors. Taking a hit in 2008 and bottoming out in 2009 with the rest of the developed markets, emerging markets rebounded with a vengeance gaining 130% compared to the developed market rebounds of 90% on average.

What is an Emerging Market?

According to Wikipedia, " Emerging markets are nations with social or business activity in the process of rapid growth and industrialization." As of now there are over 40 individial emerging markets with China and India considered the largest.

The Reactionary Roller Coaster Ride

The market recovery in 2010 and now 2011 has sparked new enthusiasm for international investors in China, India, Latin America and other developing nations, creating somewhat of an emerging market bubble. Unfortunately, due to recent world events, this bubble may have just been popped as emerging market investments have been very volatile, particularly since the Japanese earthquake and tsunami and also in reaction to political unrest in many developing regions.

So although there are many pros to investing in developing markets, such as growth potential, younger worker population demographics,  lower debt to GDP ratios, and better stock market performance as the world investors embrace these markets --there are a plethora of political, environmental and even industrial  barriers that lead to reactionary roller coaster rides for potential investors.

Still a Sound Investment Inspite of Volatility?

Eighty percent of the world’s population produces nearly 50 per cent of the world’s gross domestic product yet are significantly underrepresented in the world markets. Economies of the emerging markets like India, China and Brazil are growing faster at 6 or more percent annual the growth of western economies at 2 to 3 percent. Industrialization brings workers to cities leading to increased demands for infrastructure and therefore more demand for industrialization which leads to a cycle of inherent economic stimulation to support growth.

Unfortunately, although these markets possess impressive growth potential and opportunity for market boom, they possess an element of risk that can lead to overreactive meltdowns in magnitudes significantly larger than reactionary market dips in the developed world. Some examples of world events correlating with mini-meltdowns for emerging market indexes:

Riots in the streets of Cairo. Unrest in Libya.  Japan's unfolding nuclear crisis. Continuing unrest in the Middle East. Civil wars in African countries.

What Do the Analysts Say?

Well, in addition to the "Gold and Oil will rise and fall" commentary, there is some uncertainty about emerging market investing as a whole since volatility correlates so closely with any political, economic or environmental uncertainty in these countries. Some believe this is the top of the emerging market bubble and it's downhill for awhile until world attention wanes from war, earthquake, tsunami and terrorism back into the mundane issues of greenhouse gases, unemployment, pollution, and entertainment industry gossip. Although I'm not sure this will happen anytime soon, global uncertainty seems to have a significant effect on emerging market performance which is predicted to fall lower before it rises yet again with the rest of the world markets.

How To Invest in Emerging Markets

In addition to mutual finds and individual stocks that you can indentify through the TSX, TSXV, and NYSE, there are many exchange traded funds (ETF's) available that allow for focused or diverse, narrow or broad, and even geographical choices in emerging market investing. Here are some options for Canadian Investors:

iShares: XEM: Emerging markets Index.
Claymore: CHI: China. CWO: Broad emerging markets. CBQ: Bric
BMO: ZEM: Emerging markets equity. ZID. India hedged equity. ZCH China.
Horizons: HJU: Emerging markets bull. HJD: Emerging markets bear.

Disclosure: at time published, the author does not own any of the ETF's listed in this article.

You Are Smarter Than Your Advisor!

1. You Are Smarter Than 90% of Mutual Fund Managers!

2. Index Funds Will Beat Managed Funds 90% of the Time.

3. This Means that You Have a 90% Chance of Beating Every Financial Advisor in the World!

If this is true, why do we spend so much time and money on the search for the alpha of mutual funds for our investments? Because we all want to be Warren Buffets? Or because we are too scared to imagine going it alone?

I think the average Canadian investor feels the stock market is far too complicated for mere mortals to understand. To imagine we could do better on our own in the Bay or Wall Street Jungles is simply preposterous!

What Does The Millionaire Teacher Say?

In his financial blog of March 13th, Andrew Hallman,  author of The Millionaire Teacher, reports cashing in $700,000 of individual stocks and reinvesting this cash into index funds. He admits to beating the indexes with his stock picks consistently over the past 10 years, yet his research brought him to this grand decision.

The Enemy of Good is Better

"No matter what happens, going forward, my investments will be in the 90th percentile, in terms of performance", says Hallman. He goes on to write, "the enemy of the great plan is the perfect plan".

" Reaching for that perfect plan (at least in the world of investing) is like reaching over the edge of a ravine to pluck a pretty flower.  You might fall.  Do it enough times, and you surely will.  I’d rather have 90% of the cliff’s flowers brought to me each morning, rather than trying to collect all of them by venturing precariously over a railing".

I can't wait to read his book The Millionaire Teacher.

Meet "Harry"

Hallman reports on a retired friend, who in 2008, fired his financial advisor and opened an account of Index ETF's which he says make the actively managed mutual funds "look silly". "Harry", not his real name, keeps 40% of his portfolio in bonds, rebalances his portfolio occasionally (three times in a couple of years or so), doesn't bother watching the thing daily and owned the following as of October, 2010: XDV, XSB, XBB, XIN, XSP, and XIC. See details here.

 "Harry's Rules" as listed by Hallman include:

1. Keep costs and taxes low by purchasing index or exchange traded funds.

2. Diversify your eggs across a variety of baskets instead of gambling on individual stocks or sectors--and hold, don't trade.

3. Be greedy when others are fearful and fearful when others are greedy. Stick to your set portfolio allocation no matter how smart everyone else appears.

"I'm Smart Enough to Understand the Odds"

Hallman writes that 70% of his personal investments lie in index funds. He says: " I’ve never bought a lottery ticket in my life, and I haven’t wasted so much as a dime at a casino, yet I have immensely enjoyed giving the indexes a beating over the past decade.  That said, I keep track of every dollar I have invested.  And if the market indexes catch me, I’m going to sell the stocks that I own, and run with an investment portfolio that is 100% indexes. I may not be a genius, but I’m smart enough to understand odds".

See Andrew Hallman's Blog and Complete Story HERE.

What Would Warren Buffet Say

As usual, I must run this information through my Buffet-O-Matic Screener. And I find that Hallman isn't the only alpha investor touting index funds. Guru Warren Buffet in his 2004 letter to Berkshire Hathaway Investors writes:

"Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous."

So Now What...Back to the Couch Potatoe?

Yawn. I've been trying to find a nice sleepy-ish portfolio that covers the indexes in a way in which would be unique and interesting and manageable to some degree in spite of all the advice to "buy and forget".

I like looking at the markets. I like trading. It's fun. So forgive me for wanting to be part of the action.

I love watching the news and tying it to the markets, making predictions and watching the reveals, plotting charts and finding winners, then eating crow or basking in the glow of my screen at the end of the day.

I'm not a day trader. But I check my portfolio every evening to see the proportion of green to red and fret for a bit, or pay myself on the back. It's fun!

Argh! is what I say to Hallman and Buffett

...and guru x, y and z... knowing they are right, but wondering where to draw the risk/return line for myself.

I admit that the majority of my investments lies in unmanaged index funds through ING Direct and TD.

And I admit to having a small graveyard of dead penny-once-pound stocks haunting my broker account from the early 2000 tech bubble that for some reason won't go away no matter how many times I zero out the book value!

So what is the perfect balance for me? What will keep me interested in the markets, involved in the day to day bells and chimes, yet invested well enough to ensure a healthy and happy retirement in 20 years or so?

Answers anyone?

It All Boils Down to Diversification

Just as I diversify my index investments between markets, I think I'll diversify my time between investment styles. I need 80% low stress, 10% moderate stress and 10% roller coaster. Don't we all?

My Diversified Investment Style Portfolio

Low Stress (80%): Index Investing:

                ING Streetwise Funds (automatic monthly contributions)
                TD e-series funds (Can Index, US DJ Index, International Index--I have enough bond exposure through ING)

Mod Stress (10%)
                 My ETF portfolio of sector related indexes to watch regularly incorporating buy/sell signal analysis, guru intervention (my doityourselfinvesting.com friends) and other sources of information such as world events and sector news.

Rollercoaster Stress (10%)
                My Canadian Venture Exchange! I enjoy these little prospector gems where news and technical analysis combine to thrill or chill those who dare to enter.

Find your own balance, but be smart--smarter than 90% of the Financial Gurus out there and invest in the indexes!

Happy Investing!

Bargain Basement Investing!

How to be a Value Investor like Warren Buffett


Shopping for deals in the stock market is something for the value investor. It involves finding stocks trading below fair value. Akin to discount shopping name brand items at outlet malls, value investing involves identifying stocks of solid companies, with a history of consistently growing revenue and earnings per share (EPS).

By comparing the current stock price to the company's historical fair value it can give you a place from which to compare potential investments. Stock brokerage analysis tools such as the Recognia Inc. research kit allows you to plot price movement of stocks along the fair value line.

Choose Stocks Priced Below Fair Value

Prices that currently fall below this line represent good value stocks as they are expected to eventually rise to where they should be. Many stocks tend to trade far above fair value--typically hyped stocks with lots of investor appeal, the "next big thing" stocks and tech stocks.


What Would Warren Buffett Say?


If you follow this blog, you'll see frequent reference to the great Buffett and buffettisms of trading. Buffett is a life long value investor who has made gazillions of dollars buying and holding value and growth-worthy stocks. A $10,000 investment in Buffett's Berkshire Hathaway in 1965 would be worth 30 million according to Investopedia.

Buy and Hold Value Stocks

Buffett screens companies with respect to consistency of performance with return on investment (net income/shareholder's equity); the avoidance of excess debt (debt/equity ration); high and increasing profit margins; age of the company on the market (at least 10 years public); companies with unique products that do not rely heavily on commodities (external influence); value--is the stock selling at a discount of at least 25%? Although it's difficult to determine a company's true intrinsic value, value analysis can provide a good source of value investment direction.


Not for the Active Day Trader


Value investors are Warren Buffet fans--the buy and hold gang. As long as a company continues to grow and earnings chime in at their expected marks, the stock will remain attractive to the value invester.


Remember, when using technical analysis to chart a company's historical market performance, future performance is not a given. There are no genies in bottles locked away in the analyst programs. But we do know that the past often equals the future, and the more often an event occurred, the more likely it is to recur. And this is what stock speculation analysis counts on.


Some Stocks to Value Analyze for Yourself:


Bonterra Energy Ord Shs BNE: TSX


Computer Model Ord Shs CMG: TSX


AlarmForce Industries Ord Shs AF: TSX


Calian Tech Ord Shs CTY: TSX


Toromont Inds Ord Shs TIH: TSX


WaterFurnace Renewable Energy Ord Shs WFI: TSX


Happy Investing!

Investing in Clean Energy!

With all of the nuclear meltdown fear and concern over  safety, it's a good time to talk about clean and sustainable energy.

Sustainable energy sources are defined as forms of energy that meets the needs of the present without compromising the future. These forms include renewable sources such as solar energy, wind power, hydroelectricity, geothermal power, wave and tidal power, and certain forms of plant matter, in addition to technologies that improve energy output from these sources.

What are the Types of Renewable Clean Energy?

Solar Energy: China is currently a world leader in the renewable energy sector, followed by India Germany, Spain, the United States and India. India, one of the sunniest countries in the world boasts over 300 sunny days per year and is quickly becoming a contender in solar energy development.
Photovoltaics: Photovoltaics (PV) is a method of generating electrical power by converting solar radiation into direct current electricity by using solar panels containing a photovoltaic material (silicon, telluride, copper indium among others).

Wind Power: According to the Global Wind Energy Council (GWEC) , wind energy capacity grew 22.5% in 2010  even though coal and natural gas remain cheaper in leading power consuming nations. China has surpassed the United States as the world leader in wind power, including the number of installed and manufactured wind turbines. China benefits from low labor cost, low capital cost, government support, and preferred access to rare earth materials such as neodymium and dysprosium.

Hydoelectricity: China’s is also the world leader in hydropower installation with the goal to eventually replace coal with hydroelectricity as the major energy source.

Geothermal Power: Geothermal energy is non-carbon based energy source that is environmentally friendly, and doesn't release harmful greenhouse gases into the atmosphere. Geothermal power is derived from energy found along tectonic plate boundaries where earthquakes and volcanoes are concentrated used in three types of energy production including, dry steam plants, flash steam plants and binary cycle power plants that transfer heat between liquids to power turbines.

Wave Power: Wave energy uses the energy density of waves from the oceans to create a renewable zero emission source of power. Over 100 small companies around the world are employed in converting the sea’s power to electricity.

Tidal Power: uses the tide cycles to generating electricity. As far back as the Middle Ages, small tidal mills in Scotland and Europe were built. The world’s first and major tidal energy power plant was built at La Rance in France in 1996.


Clean Energy Companies Listed on the Toronto Stock Exchange:
5N Plus Inc. VNP 
Algonquin Power & Utilities Corp AQN 
Alter NRG Corp. NRG 
ARISE Technologies Corporation APV    
ATS Automation Tooling Systems Inc. ATA 
Azure Dynamics Corporation AZD 
Ballard Power Systems Inc. BLD 
Bennett Environmental Inc. BEV 
BioExx Specialty Proteins Ltd BXI 
BioteQ Environmental Technologies Inc. BQE 55.9 BC Y
BIOX Corporation BX 
Boralex Inc. BLX 
Boralex Power Income Fund BPT 
Brookfield Renewable Power Fund BRC 
Brookfield Renewable Power Preferred Equity Inc BRF 
Burcon NutraScience Corporation BU 
Capital Power Income L.P. CPA 
Carmanah Technologies Corporation CMH 
Cascades Inc. CAS 
 China Wind Power International CNW (my pick)
Day4 Energy Inc. DFE 
Dynetek Industries Ltd. DNK 
Electrovaya Inc. EFL 
Genesis Worldwide Inc. GWI 
Gerdau AmeriSteel Corporation* GNA 
GLV Inc. GLV 
Hemisphere GPS Inc. HEM 
Hydrogenics Corporation HYG 
Innergex Renewable Energy Inc. INE 
ISE Limited ISE 
Macquarie Power & Infrastructure Income Fund MPT 
Magma Energy Corp. MXY 
Marsulex Inc. MLX 
New Flyer Industries Inc. NFI 
Newalta Corporation NAL 
Northland Power Income Fund NPI 
Palko Enviornment Ltd PLK 
Plutonic Power Corporation PCC 
Primary Energy Recycling Corporation PRI 
ProSep Inc. PRP 
Ram Power Corp RPG 
RuggedCom Inc. RCM 
SunOpta Inc. SOY 
 Tembec Inc. TMB  (my pick)
Timminco Limited TIM 
Turbo Power Systems Inc. TPS 
U.S. Geothermal Inc. GTH 
 WaterFurnace Renewable Energy Inc. WFI  (my pick)
Westport Innovations Inc.* WPT 
Xebec Adsorption Inc XBC 
Zongshen PEM Power Systems Inc. ZPP 


Some of the Top Companies Listed in The United States:

Portfolio 21's Top 10 'Green' Companies for 2011:
On  December 30, 2010 Global mutual fund Portfolio 21 (PORTX) announced its Top 10 Green Companies for 2011. These companies demonstrated the qualities of innovation and leadership, a distinct competitive advantage and the potential for long-term value according to CEO and Chief Investment Officer Leslie Christian.

ABB provides power and automation technologies that enable a wide range of industries, including utilities, to improve their performance while lowering environmental impact. ABB is also the world's largest supplier of the electrical heart of wind turbines. ABB's products are well positioned to respond to the global demand for reliable and efficient electricity delivery.

Cisco provides networking products and services for home and business communications. The company is positioned to respond to the global demand for data centers, cloud computing, and collaborative technologies that minimize travel and associated environmental impacts. In 2010, Cisco further improved its competitive position within the virtual communications sector through its acquisition of another Portfolio 21 holding, Tandberg.

Eaton provides electrical systems and components for power distribution that reduce energy use. Eaton's customers include renewable energy and hybrid vehicle companies. In 2010, Eaton joined the Department of Energy's Save Energy Now LEADER program, pledging to reduce the company's own energy use by 25%, indexed to sales, between 2006 and 2016.

Growthpoint is a real estate management company with a portfolio of commercial, retail, and industrial properties in South Africa and Australia. Recognizing that buildings consume 40%-50% of the world's energy, Growthpoint is leading the implementation of green building and energy saving practices in South Africa and is an active participant in development of the country's first commercial green building standards.

IBM's hardware and software business services assist customers in reducing energy consumption and costs. For example, this year IBM and Schneider Electric (another Portfolio 21 Top 10 pick) announced a new combined solution to manage energy efficiency in buildings. IBM has made impressive reductions of its own greenhouse gas emissions and is part of the Green Power Market Development Group and the Chicago Climate Exchange.

Johnson Matthey's core skills are in catalysis, precious metals, and fine chemicals. Catalysts are seen as a boon to green chemistry because they enable chemical reactions to be carried out under milder conditions, require less energy, and use fewer toxic chemicals and solvents. Chemical catalysts are also expected to help produce clean fuels, convert waste and green raw materials into energy, and improve emissions from combustion engines.

Novozymes is the world leader in biotechnology-based industrial enzymes and microorganisms. These enzyme products can reduce the use of energy, raw materials, and harsh chemicals, as well as reducing waste. In 2010, Novozymes launched a new enzyme product to produce fuel from agricultural waste, which is a competitive alternative to gasoline in both price and performance.

Ormat is a geothermal and recovered energy company. The company also has efforts in thermal solar and biomass. Ormat has installed approximately 1,300 MW of geothermal and Recovered Energy Generation power plants. Favorable regulatory environments and governmental initiatives to promote clean energy are creating potential for Ormat to grow in established and new markets.

Schneider Electric provides energy automation, monitoring, and control solutions for utilities, buildings, and other infrastructure uses. The company also makes energy saving devices and power supply equipment for solar and wind power systems. In 2010, Schneider continued its partnership with IBM to launch a new system for data center energy management.

Tennant Company is a leader in equipment for floor maintenance and outdoor cleaning, specializing in chemical-free products. Utilizing the Natural Step Framework, the company studies the life-cycle environmental impacts of its products. Tennant currently offers an eco-friendly portfolio of products, including Green Seal-certified cleaning agents, and its ec-H2O cleaning machine, which requires only water and no added chemicals.

Happy Investing!
Disclaimer: The author currently owns China Wind Power (CNW: TSX).

Stay Away From Bonds?

Are Bonds A Bad Investment?

My first investment was the gift of a 500 dollar Canada Savings Bond from my grandparents on my 12th birthday. I think I lost the certificate somewhere between high school and university. Nonetheless, the old adage "buy bonds" seems to no longer apply in today's economy as a sure fire way to secure your retirement income. In fact, financial guru Pat McKeough says "Stay out of Bonds" in his publication, How to Trade Stocks and Make Good Investments in Canada. Does this shift in conservative investing philosophy make the heavily bond invested coach potatoe portfolio and other conservative investing strategies obsolete? Are all bonds off the block or are there certain types of bonds and fixed income investments which continue to be appropriate and acceptable instruments to secure my retirement?


In this issue of TheInvestobot, we'll explore the real story behind McKeough's rejection of bond investments, what type of fixed income investments are available to balance the conservative side of your retirement portfolio, and I'll propose some ideas that may quell the bond-fear breakdown in the old "buy a bond and forget about it" strategy of our parents and grandparents.


What is a Bond?


First things first, what are we talking about? Technically speaking, a bond is an IOU of sorts issued by various government treasuries, companies or international organizations that entitles holders of these investments a coupon payment at periodic intervals until maturity. These coupon payments are typically a fixed amount represented by a percentage of the face value, or a floating rate of return in relation to some index or reference.

This is a summary from Wikipedia concerning bonds:
"Governments issue government bonds in their own currency and sovereign bonds in foreign currencies. Local governments issue municipal bonds to finance themselves. Debt issued by government-backed agencies is called an agency bond. Companies can issue a corporate bond or get money from a bank through a corporate loan ("preferred stock" can be "fixed income" in some contexts). Securitized bank lending (e.g. credit card debt, car loans or mortgages) can be structured into other types of fixed income products such as ABS - asset-backed securities which can be traded on exchanges just like corporate and government bonds".

The difference between bonds and stocks can be simplified to this: Bonds retain their nominal value, stocks may lose value from the date purchased. A bond with a $1000 face value will be worth $1000 at the end of the term. Bonds pay interest, some stocks pay dividends. Governments issue bonds but never issue stocks.

Other Types of Fixed Income Investments

According to TD Canada Trust, investors can purchase the following types of fixed income products in Canada: Government of Canada Bonds, Federal Crown Corporation Bonds, Provincial Bonds, Stripped Bonds, Mortgage-Backed Securities Term Deposits and Guaranteed Investment Certificates. You'll notice that 4 out of 6 of these choices are "bonds". So if we are to heed guru warnings about staying out of bonds, that leaves mortgage linked term deposits and GIC's as the only other way to fill up 25-75% of your investment portfolio depending on your stage in life for conservative investors. Seriously? That seems odd since so many mutual fund and ETF companies tote bond diversification as part of a balanced investment strategy. Some sources include preferred stock as a type of fixed income investment since they usually issue regular dividends.

Why The Negative Attitude on Bonds?

Enter new google search: "stay away from bonds".

In summary of the multiple pages of results that came up, there seem to be three major reasons to avoid bond investing through managed funds and ETF's which boil down to lack of control as to which bonds are purchased, limited returns, and bond fund fees which might eat up any profits in low return investments. There are newer funds which offer no-load fees and low MER's, but the overall sentiment was that your money simply won't grow.

I found this somewhat hard to believe since the average annual return on investment in the TD e-series Canada Bond index fund was just over 5% and many of the low MER ETF's like the iShares XBB which is based on the DEX Universe Bond Index was a modest but acceptable 6.25% since inception. That still pays more that the average 5 year GIC at 3%. So why the negative press on bond investing as a whole. I'm not yet convinced.

Pat McKeough says "STAY OUT OF BONDS"!

Pat McKeough is an intelligent, experienced, revered and highly recommended financial guru, writer, expert and advisor here in Canada. As a subscriber to his newletter The Successful Investor, I received a free report on investing in Canada entitled How to Trade Stocks and
Make Good Investments in Canada. In this primer, Mr. McKeough has written a chapter entitled "Stay Out of Bonds".


McKeough writes that interest in bonds has been revived due to recent market volatility as bonds provide a source of steady income and guaranteed returns. However, according to his analysis, bond prices are projected to fall over the next few years as interest rates inevitably rise due to government deficits. He suggests investing only a small portion of your portfolio in bonds and other fixed-income instruments, and in place, "aim to build a diversified portfolio of well established companies with long histories of rising dividends".


McKeough suggests that the right equities/fixed return ratio in your portfolio will depend on your financial circumstances, temperament and how close you are to retirement. He suggests that if you chose to hold some fixed-income investments, stick with Canadian T-bills with maturities of around three months and stay of long-term bonds.


Hunting for Fixed Income Investments

Summary of my research? For the fixed income portion of your portfolio, purchase short term T-bills, GIC's, mortgage-backed securities and solid dividend-paying equity or preferred stock. Here's the breakdown:

1. National Housing Act (NHA) Mortgage-Backed Securities:
This is an investment in a pool of Canadian residential first mortgages which  provide monthly interest, a competitive rate of return and good liquidity, which means you can easily convert your investment into cash. NHA Mortgage-Backed Securities are sold in $5,000 denominations in terms of six months to 25 years and are backed by the Central Mortgage and Housing Corporation, an agency of the federal government.
REITs qualify as fixed income instruments if they lend money directly to real estate owners and/or operators or indirectly through the purchase of mortgages or mortgage backed securities. There are ETF REIT's available through iShares, Claymore, BMO and Horizon's. I am going to review these in an upcoming issue of TheInvestobot.
2. Treasury bills and other money market instruments:
Issued for terms of one month to one year with a wide variety of maturity dates, Treasury bills, bankers' acceptances and commercial paper provide higher yields than bank accounts and term deposits. Canadian T-bills with 3 month maturities can be purchased through brokers such as TD Waterhouse.
3. Guaranteed Investment Certificates:
GIC's can be purchased from any bank and most brokers and typically offer fixed term investments of 1 to 5 years with guaranteed interest at the end of the term.
4. Preferred Stock/ Dividend Paying Equities:
Preferred stock is stock that tends to act like a bond because it has a fixed dividend payout but isn't guaranteed if the company does poorly. From Investopedia: "There are a number of strong companies in stable industries that issue preferred stocks that pay dividends above investment-grade bonds. The starting point for research on a specific preferred is the stock's prospectus, which you can often find online. If you're looking for relatively safe returns, you shouldn't overlook the preferred stock market."


ETF's available for preferred stock include: Claymore's CPD  and iShares' XSP .

Happy Investing!