Instrument Selection...

I vividly remember the reason I am not a flute player today... a friend in 5th grade pressured me to join her in the empty clarinet section. Because I had no siginificant back-bone, I succumbed to sucking reeds and playing 2nd seat while she played 1st. I think I liked the clarinet best polished, pieced and laying in its velvet-lined case. Not surprisingly, I did not have a career in it.

Selecting an invesment instrument is kind of like that; indecisiveness usually gives way to what someone else says.

Not wanting a repeat performance of this earlier ephisode, I researched and can across this handy little savings calculator from the Aussies. There are probably many others out there, but I like this one because I found it.

Now, I had read about the 'magic' of compounding and understood the concept, but when I started plugging in my numbers, it emerged in my mind as a 'new reality'.

Shopping around for an investment instrument basically comes down to the interest rate (rate of return), since the other variables like time and contribution and initial deposit are, for me, fairly rigid.

Avoiding the load, registered fixed deposits from my local credit union look pretty good. But I am eager to see what else is out there.

Budget Time and Short-Selling

It's time to have a look at tooling that household budget.
On paper, it looks good - there seems to be ample funds left over to do many good things. However.

Life is not a 'paper-respecting' kind-of-thing.

The problem comes in, I think, when you use that budget plan to make commitments to an auto-paycheque deduction to a locked-in savings like an RRSP (this comes highly recommended by many guru investors - paying yourself first). If I commit to a certain deduction, then find I've been too agressive, I might leave myself short on the clothing/grocery/living expenses side, no?
How do you just pick up the phone and change the auto-deductions of a registered plan when things look short? Can you?

Of course, the sensible answer screams out to me, "Of course you can!", and so I should just take a stab at it then watch it closely for the 1st month or two and make those fine-tuning type of adjustments. As this is a new endeavor, I know my agent will understand. If he doesn't, I can get a new one.

It's worth working out because this, after all, is the goal.

In other interesting news, a perusal through the Investing section on news.com.au, reveals a very nice explanation on Short Selling and Margin Loans by James Dunn.

It is clearly a gamblers game and shorting a stock is not part of the long-term strategy we are seeking. It ranks up there with lotto tickets. But at least we now know how it's done, by whom and why.

The Future for Investors...

'The Future for Investors... Why Tried and True Triumph Over Bold and New', by Jeremy J. Siegel who writes for Kiplinger's and is a professor at the University of Pennsylvania. With a Ph.D. in economics from M.I.T., no wonder the library won't let me renew this book for another 3 weeks - the waiting list is too long!

Here's the synopsis:

According to Siegel, the catalyst for this book is to answer 2 questions:
1. Which stocks to hold long-term?
2. What I do when the boomers cash out?

Under the following chapter headings, here's the short of it:

1.) Uncovering the Growth Trap

- Economic growth is not the same as profit growth.

- Low P/E stocks have consistently returned 3% more than the S&P itself, while high P/E stocks came 2% short.

- Flying in the face of conventional wisdom, Siegel says that the continual inclusion of new companies into the S&P indexing mix is bad for investors, bringing down the over all potential of the market.

- The Basic Principle of Investor Returns
"The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual growth and the growth that investors expected."

- Generally speaking, investors are, as a rule too optimistic about fast-growing companies and too pessimistic about slow-growing companies.

2.) Overvaluing the Very New

- Don't be trapped by the tech stocks famous for their lightning fast growth, but rather go for the the old tried and true formula companies. (growth is not return)

- Recognizing and avoiding a Bubble...
a.) every stock can and should be valuated (no assets? no earnings? = trouble)
b.) don't lose objectivity over 'your' stocks; it's all business
c.) stay away from large, little-known companies (like Cisco)
d.) triple digit P/E's are bad (Big-Cap tech stocks... severely overvalued)
e.) never sell short in a bubble

Don't buy IPOs; they are full of high risk and they fail to deliver. It's like playing the lottery. (Unless you are lucky enough to get one at the offer price, then sell it during its rise to the trading price.)

3.) Sources of Shareholder Value

- Look for steady dividend returns to reinvest (as the means of valuation) even buying into spin-offs as a 'hold' strategy.

- Look for a high yield dividend that enables you to buy more shares at a lower share price because then even minimal growth will produce a greater return than few, expensive shares of a fast-growing company.

- A trend towards eliminating dividends and inflating share prices is directly a result of self-interest as executive pad their own pockets with their employment stock options. Divident payments show the true health of a company over the long term, not share priced.

- Definitely accumulate additional shares over the long-term through dividend reinvestment.

- Hold spin-offs to avoid selling the shares on the open market, minimizing transaction fees and significantly reducing the capital gains (tax).

4.) The Aging Crisis and the Coming Shift in Global Economic Power

- The boomer cash-out will be offset by stellar combined growth (investments of labour and capital) of China, India and others.

- Hide your investments inside of a Treasury Inflation Protected Security or TIPs, and hold on. (I wonder if there is a Canadian equivalent?)

- Hope that other global economies will keep things going.

5.) Portfolio Strategies

- Choose to invest in foreign countries with a low or negative GDP because stats have shown these provide very good returns as compared to countries expected to experience growth, as these are usually way overvalued.

- Look to the 'global market economy' and weight your portfolio with at least a 40% share of stocks from foreign-based firms. (use Global Index Funds - actively managed stock mutual funds consistently underperform)
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This book is excellent not only for Siegel's sound go-forward strategy, but because he lays out a wisely tempered and detailed case for 'why' he makes the recommendations he does.