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!

Taming the ETF Jungle

Are You ETF'd out?

There are so many ETF's out there that I've become dizzy reading prospectuses and delirious trying to design a mix. My initial wish-list consisted of 20 ETF's from various sources, including iShares, Claymore, and BMO with a few cool Horizon's beta choices for playing volatility and shorting downtrends. I realized that from a personal perspective this would be impossible to execute consistently and take far too much time. I wanted to design a core portfolio of ETF's some of which will be dividend producers, others which will be fixed income, and all that consist of good choices when balancing value, quality and health of companies held.

I decided to stray from the usual guru data on iShares ETF's which seem to be the most touted and focus on BMO. In comparing MER's across many of similar iShares and BMO offerings, BMO seemed to beat iShares on most equivalent funds.

Planning to Retire with Titans and Dogs!

The overall goal of this retirement portfolio is to have exposure to quality Canadian, US equity, and International equity from diverse sectors in addition to diverse fixed income sources, dividend sources and some emerging market exposure that would allow easy rebalancing and fit the retirement investment needs of a 40 something with about 20 years left to retirement.

Titans Meet Dogs Meet Income

Here is the gist of the portfolio:
ZCN: BMO Dow Jones Canada Titans 60 Index ETF 25%
ZDJ: BMO Dow Jones Industrial Average Hedged to CAD Index ETF 25%
ZGI: BMO Global Infrastructure Index ETF 25%
ZMI: BMO Monthly Income ETF 25%

ZCN: BMO Dow Jones Canada Titans 60 Index ETF: Portfolio Strategy: BMO Dow Jones Canada Titans 60 Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones Canada Titans 60 Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index.

Top Holdings:
Royal Bank of Canada    
Toronto-Dominion Bank              
Suncor Energy Inc.          
Bank of Nova Scotia       
Cdn Natural Resources Ltd          
Barrick Gold Corp.           
Potash Corp of Saskatchewan
Goldcorp Inc.    
Bank of Montreal            
Canadian National Railway          

Performance: One year:  MV/NAV   21.71%/22.18%    MER   0.15%

Sector exposure:  financials, energy, materials, industrials, telecommunications, consumer discretionary, information technology, consumer staples, utilities

Geographic: Canada

ZDJ: BMO Dow Jones Industrial Average Hedged to CAD Index ETF: Portfolio Strategy: The BMO Dow Jones Industrial Average Hedged to CAD Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones Industrial Average (CAD hedged), net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index. The U.S. dollar currency exposure is hedged back to the Canadian dollar.

Top Holdings

IBM Corp.
Chevron Corporation
Caterpillar Inc
3M Company
Exxon Mobil Corp
United Technologies Corp

McDonald's Corp
Boeing Company
Coca-Cola Company
Procter & Gamble Company

Performance: MV/NAV 1 year 18.55%/19.33% MER 0.23%

Sector Exposure:  industrials, information technology, consumer staples, energy, financials, consumer discretionary, health care, materials, telecommunications

Geographic: US

ZGI: BMO Global Infrastructure Index ETF:Portfolio Strategy: BMO Global Infrastructure Index ETF has been designed to replicate, to the extent possible, the performance of the Dow Jones Brookfield Global Infrastructure Index, net of expenses. The Fund invests in and holds the Constituent Securities of the Index in the same proportion as they are reflected in the Index. The Manager may also use a sampling methodology in selecting investments for the Fund.

Top Holdings:

Hutchison Whampoa Usp ADR
National Grid plc ADR
TransCanada Corp
American Tower Corp
Enbridge Inc
Gpo Aeroportr Pafco ADR
Spectra Energy Corp
Keppel Corp Ltd, ADR
Consolidated Edison Inc
Sempra Energy

Performance: One year MV/NAV 18.66%/18.68% MER 0.55%

Sector exposure: utilities, industrials, energy, telecommunications

Geographic: US, Canada, Hong Kong, Brazil, Mexico, Singapore, UK, Netherlands, Greece

ZMI: BMO Monthly Income ETF: Portfolio Strategy: BMO Monthly Income ETF has been designed to deliver the performance of the underlying basket of higher yielding BMO ETFs. ETFs are selected by having a higher yield than either the equity market represented by the BMO Dow Jones Canada Titans 60 Index ETF (ZCN) or the fixed income market represented by the BMO Aggregate Bond Index ETF (ZAG). The holdings are weighted by yield, with 50 percent investment in each of equity and fixed income and a cap of 20 percent for each security with a range of 6 to 10 ETFs. The ETF is rebalanced quarterly and reconstituted semi-annually in June and December. In addition, as ZMI is a fund of fund, the management fees charged are reduced by those accrued in the underlying funds.

Holdings:
BMO Eq Wgt REITS ETF
BMO High Yield US ETF
BMO Eq Wgt Utilities ETF
BMO Emerg Mkt Bond ETF
BMO Cvd Call Cdn Bank ETF
BMO Mid Corp Bond ETF
BMO Long Corp Bond ETF
BMO Equal Wgt Banks ETF
BMO Short Corp Bond ETF
BMO Eq Wgt Oil & Gas ETF

Sector exposure: financials, corporate bonds, high yield bonds, utilities, emerging market bonds, energy

Geographic: Canada, US, emerging markets

No performance data available yet. MER: 0.55%

ZCM       25%
ZDJ         25%
ZGI         25%
ZMI        25%

Disclosure. I don't yet own these ETF's. Fifty percent of my savings is directed towards a sleepy portfolio such as this. Currently I have investments in TD-e series funds including the Canadian Index, US Dow Jones Industrial Index, International Index and Canadian Bond Index. Yawn!

Happy Investing!

One side of Couch Potatoe and A Barrel of Crude to Go Please!

I have a connundrum. I am perplexed at what style of trader I should be. Although I enjoy the thrill of the daily chase in the markets and individual stocks, I am not sure my personality can handle the ups and downs, anxiety and panic, and momentary thrills cut short by the sudden gap downs in stocks I was certain would be winners (ie. RGEN).

Too Much Noise!

I have been listening to too much noise. "I have an awesome mutual fund, check it out." "My ETF investments weathered through 2009." "My grandfather made his fortune in penny stocks." "Diversify, don't put your eggs in one basket." What does all of this mean? Do I diversify and invest in everything?

Then I'll just order one couch potatoe portfolio to go please, with a side of gold bars and a barrel of crude!

I have some money. I want to invest it. It is currently burning a hole in my trading account. I bought some stuff. The stuff hasn't moved. I made some profits on a couple of small tech plays and one mining venture. Then I bought some ING mutual funds, some index ETF's and although I have green on my screen, there are small bits of red that bug me and plague my mind with fear of failure.

I want to automate my investing to a comfortable level of regular contributions to some basic things like mutual funds and broad market ETF's. But I also want to enjoy the ride of trends, the thrill of the venture pops and the occasional volatile day trade. Am I crazy?

Is this bipolar psychotic trading?

What I've decided to do is hedge my bets. I picked some funds with 4 to 5 star performance over three years to focus one half of my investments on a regular basis with a 33% bonds, 33% Canadian Equities, and 33% Other (mostly US Equities) split. Of the remaining 50% of my savings, I decided to allow the market and a couple of my favorite gurus drive these decisions. So half of my investing is a no-brainer process that I will try to rebalance semi annually and use cost averaging to help weather any falls in the market.

The other 50% is the fun part. I can't seem to decide if the penny stock world, the sector trend investing, or value investing is the way for me to go. I have a moderate to high risk tolerance for this 50% that I would otherwise probably spend on stupidities anyhow. So I am going to create a program for myself. Not a computer program, but a set of regular activities, analysis and predefined reactions to execute my plan.

Pick Some Pros to Do The Work

I've nailed my Gurus to 3: Tony Turner, whose club I have decided to join; Ron of the Doityourselfinvesting.com duo, whose newsletter/club I recently subscribed to; and The Motley Fools who are just plain cool and whom I want to invite to dinner!

I'd love to get in on all those penny stock millions, but honestly, I don't have time to sit and watch my screen on intraday charts, sweat bullets or cry in my soup. Kudos to those warriors with the constitution for that, but I will pass.

So, feeling confident with my decisions and plan, ING will run my RRSP and TFSA with their Streetwise Funds; I have some small bits of this and that over at TD in the e-series funds for my youngest daughter's college days which are still a far way off; and as for the rest--it's time to get cracking and figure out what to buy and when.

The Fun Part: shopping!

Stop Jumping In and Out of Success!

Why jump in and out of stocks at the wrong time and lose money? Whether you are making investment decisions based on your own analysis or using the expertise of others to guide and direct your investments, it's important to examine your past performance to see if your style and plan are actually working. Many financial "advisors" suggest buying and selling various managed funds, while other "experts" tout the snatch and sell on the run method. A common complaint in messages boards and blogs across the net is that of "missing out" on a trend, catching it on the wrong side of a peak or valley, or simply always being one step behind the action--playing the bench instead of enjoying the profits of a trend. Do it yourself investing can be a frustrating path to financial gain if your purchases are disjointed, incoherent or irrational.

Consider An Automated Plan

You've heard this before: set your goals, make a plan, stick to the plan, reassess the plan, rebalance. That's all fine--but it still requires you to do the research, analysis, make the selections and execute them. Financial advisors can do this for you. Fund managers are supposed to this for investors. And there are several online services that provide similar input into your investing activities to take the guesswork out of what to buy, sell, and when.

Single Instrument Investing

There are thousands of mutual funds--either passively managed using indexes, or more actively managed with specific equity allocations--which allow you to invest in a diverse collection of stocks and/or bonds and let your money sit and grow. The problem with many mutual funds is that over 80% of them don't tend to beat the various indexes in which they invest, and often come with significant management fees (MERs) that can chew up 2 to 3% or more of your annual profits. Other companies have designed pure index funds requiring low maintenance and thus lower MERs. ING Direct Canada, for example, offers a selection of Streetwise Funds which aim to replicate Canadian indexes in various proportions of bonds and stocks depending on your investment needs. The company suggests we "invest early, invest often and stay invested", using cost averaging to spread out the cost per unit of the fund and spread the risk of investing over the entire market with low management fees of around 1%.

A variety of exchange traded funds are also available with broad market diversity which serve to expose investors to various markets, various sectors and with optional amounts of bonds and equities, all which can be traded directly on the market like a stock. Some examples of these ETF's which can be purchased individually to replace a diversified mutual fund include these two iShares funds:
XCR: Conservative Core Portfolio Builder seeks to provide a combination of income with the potential for long-term capital growth.
XGR: Growth Core Portfolio Builder seeks to provide long-term capital growth by investing primarily in equity securities and to one or more alternative asset classes, with the balance invested in those that provide exposure to fixed income securities.
Claymore, Horizons and BMO offer similarly diversified ETF's.

Sleepy Portfolio Options

The original Couch Potato Portfolio was designed for investors who want to expend the least amount of energy into their investments by choosing a collection of index mutual or exchange traded funds and rebalancing them from time to time, but at least annually. Find the couch potato portfolio options here.

Memberships in Managed Automated Portfolios

Folio Investing is an American company that offers a portfolio of stocks, ETF's and mutual funds which can be traded in a single transaction. They offer multiple investment strategies based on collections of instruments and even allow you to customize within an strategy if you chose to exclude certain sectors or companies for personal or political reasons. For example, you can elect to delete any companies from a certain group of equities that might be involved in alcohol, tobacco, gambling, weapons, genocide or nuclear power. I really dig their website for its simplicity and attractiveness and functionality. They have a cool questionnaire tool that helps you determine what portfolio to buy based on risk, investment objective, time to retirement and sector interests. Check it out here.

Membership in Self-Directed Do It Yourself Investing Groups

One of my absolute favorite finds of the last few weeks has been doityourselfinvesting.com. The monthly membership service costs $10 at the writing of this blog which gives you a newsletter, regular portfolio updates and any alert notices that you'll need to take action on should urgent buy or sell signals present for equities or ETF's in the core portfolios suggested. They offer 4 portfolios currently: an equities portfolio for the US and one for Canada, and 2 similar ETF portfolios for the Canada and US. They publish their stats, previous holdings, performance and some back issues of newletters which are quite interesting and educational. I was most impressed with their performance during the last flash-crash which far outweighed that of any index fund, most mutual funds and the majority of single ETF's or equities. I highly recommend taking a look here.

Happy Investing!

Disclosure: the author owns shares in ING Streetwise Mutual Funds, is a new member of Do It Yourself Investing, invests in a couch potato portfolio using TD e-series funds, owns shares in XCS - S&P/TSX SmallCap Index Fund and does not own shares of XCR or XGR.

Hooray! for Financial Bloggers!

Search Google for financial advice and you'll navigate through hundreds of sites proclaiming the gospel solution to your investment needs. If you can manage to get to the bottom of this information without having to sign up for endless spam mail or pay through the nose for bulletins and reports, you might come out with a few disjointed tidbits and a whole lot of noise.

Filtering Through The Noise

After spending weeks and weeks bouncing from the large general bodies of information such as the Toronto Stock Market website, TD Canada Trust Investing, The Financial Post and Globe and Mail, I discovered the Financial Blogger.

Financial Bloggers range from the self-taught do-it-yourself-investor to the financial advice professional and everything inbetween: retired CEO's, economics students, stay-at-home mommies and active daytrading techy gurus. And like many internet-based personalities, you might not even know who these people really are huddled behind their computer screens late at night pecking out anals of wisdom and uploading them to cyberworld.

Testing Success

I love to read a Blogger who submits regularly and shows transparency. "Here is what I do. Here is my portfolio. This is what I made. This is what I lost. This is what I did right. See how I screwed up over here."

I want to see the wisdom behind their investments, the reasons for their choices, the analysis they performed, the gut-feeling that moved them, the psychology behind their choices and the results.

Blogs I Like to Read

The Canadian Capitalist Ram Balakrishnan is an Ottawa based software developer with a gradiate degree in Electrical Engineering with over 1000 posts and 1 million subscribers.

The Globe's Market Blog David Berman has been writing about business and investing since 1995. He began his career at Canadian Business magazine, where he wrote full-length features on a range of topics, from goose slaughterers to broadcasters. Later, he moved to MoneySense magazine, where his emphasis turned to investing. More recently, he worked at the Financial Post as an investing writer and daily columnist. He has a bachelor of arts degree from the University of Toronto and studied journalism at Ryerson University.

The Post's Wealthy Boomer Jonathan Chevreau joined the Financial Post in 1993 and has been the personal finance columnist since 1996. He has authored or coauthored eight financial books, including The Wealthy Boomer and a financial novel, Findependence Day. His column runs in the Post on Saturdays and Wednesdays and he blogs most days at wealthyboomer.ca.

Canadian Business' Larry MacDonald Larry MacDonald is a former economist who now manages his own portfolio and writes on investment topics. He is the author of several business books, including corporate biographies of Nortel and Bombardier.

The Canadian Couch Potatoe Dan Bortolotti is a journalist who has written about personal finance for many Canadian magazines, including MoneySense, Financial Post, More, Chatelaine and Today’s Parent.

Invest in the Markets "I work full time, provide for my family, and don’t have a lot of spare time… I was taught at an early age to invest in mutual funds, GICs, Government Savings Bonds, and other forms of “safe” investments. 20 years later, my interest in the markets has developed through education, trial and error, reading and research, and even a couple years as an investment advisor for one of Canada’s major banks."

Money Smarts Blog Mike Holman has worked in the Canadian financial industry for almost two decades.

Million Dollar Journey "Clearly written, accurate, informative, not over-selling an idea, just telling you what you need to know. You shouldn’t take this as comprehensive advice, just as information on high interest rate accounts...this is one personal finance blog that is worthwhile for the average person…"

Beating the Index Mich, the author, works in software, lives in Montreal, has a young family, and is a do-it-yourself-investor with the goal to retire by 64.

Canadian Financial DIY The author describes himself as a late-50s Canadian who has been managing own investments for about fifteen years in taxable accounts. RRSPs, RESPs, LIRAs, trust accounts. Personal finance blogger since early 2007. Former career in government and corporations with a long-ago MBA.

The Earning Curve "Sharing the experiences, knowledge, and challenges of a beginning Canadian investor. My goal is to become educated and effective at maintaining healthy personal finance habits, with a focus on eventual wealth building. The goal of this page is to offer up my investing ideas, issues, and my portfolio, and allow the reader to learn from them, evaluate them, and hopefully discuss them."


Other Investor Resources Online

Business Week   The online version of the magazine, provides a porwerful stock screener.

Globeinvestor   Stocks, investing and financial news from a Canadian perspective.

MoneySense   Canadian all-around personal finance web site.

Ratio Capital   Professional Portfolio Management for Individual and Institutional Investors.

StockCharts   Charts, tools and technical analysis education.

Happy Investing!