Last week at a visit to an art gallery one of the attractions was a number of paintings of waterfalls. It was not surprising artists paint waterfalls, the moving water, the fall of the water, the misty atmosphere and the change in landscape are all points of interest. Most of us have our favourite waterfalls be the national in scope or somewhere in the hills near our homes or favourite vacation areas. At the art gallery, I was able to pick out a waterfall which I had visited in the past – Niagara Falls which many people do and seeing it is easily done. One of the reasons it is easy is the approach to Niagara is from top of the falls – only by boat do you see the bottom.  Depending on how you approach – the river rapids are seen from both above and below the falls; the water is moving swiftly; and the falls take up a great deal of space. Some of the other waterfalls in the paintings seemed to be approached from the bottom for there are few roads at the top.

Linking to dividend producing stocks, our perspective is what this column is about. If the painting was from the bottom looking to the top, it may not have been recognized. We all bring biases, whether we admit it or not, this can be very good but it should not limit us to one perspective or approach to investing. Capitalize on both capital gains and income.

There are more questions than answers, till the next time – to raising questions.

There are many strategies in the world of investing, how to buy low and sell at a high price and one of the strategies is The Contrarian method as described by Benj Gallander in The Contrarian Investor’s 13 published by Viking Canada, Toronto, 2002. The author writes the Contra the Heard Investment letter and have been doing so for over 15 years. The title of the book refers to 13 rules which will help you to invest or examine companies that are undervalued and should rise in value over the coming year or two.

Rule 11 is Practice Patience. Having patience is easier said than done, it is increasingly hard with the internet and always being on. However, you need patience to buy, to hold and to sell. The race is not to the swiftest.  Remember haste makes waste. On the Contra list there is about 175 stocks, most will not be bought or sold. If you do fewer but better trades leads to more success. Take time to analyze why changes happen? did something happen to change your analysis?

Whenever you buy a stock, you should have an exit plan or when to sell. There are 3 reasons to sell a stock: the company was misjudged and should not have been purchased; there are tax advantages; and the company is now reasonably or overpriced. If you are setting prices when selling use .4 or .9 to sell and on the buy side .1 or .6.  Once it is sold, you might watch the price for 3 months to see if you generally sell too soon or get it about right, if you sell too soon add 10% to your targets and you will be within range.

Rule 12 is Make Numbers Your Friends.

Companies produce an Income Statement and Balance Sheet every year, the income statement indicates the profit and loss for an operation. The balance sheet shows how well the business did over the course of the year. From the income statement and balance sheet comes ratio analysis which allows you to compare with other companies and offer clues where the company is headed towards. Doing this part of your homework allows you to know when to avoid buying the shares.

Rule 13 is Calculate Your Results. You should know how well you are doing.

Linking to dividend paying stocks, now matter what system you use, elements of all rules will come into play. Besides expecting more, why are you picking that stock as opposed to another? if you do your homework, you will know when to sell or not to sell. There are some great companies that have existed for 100 years, but there are many that are no longer to be found.

There are more questions than answers, till the next time – to raising questions.

There are many strategies in the world of investing, how to buy low and sell at a high price and one of the strategies is The Contrarian method as described by Benj Gallander in The Contrarian Investor’s 13 published by Viking Canada, Toronto, 2002. The author writes the Contra the Heard Investment letter and have been doing so for over 15 years. The title of the book refers to 13 rules which will help you to invest or examine companies that are undervalued and should rise in value over the coming year or two.

Rule 7 is Never Use Stop Losses. Stop losses are devices that will trigger prices to get out of the stock. The problem is the stock tends not to act rationally and if there is a wild swing or larger swing in prices than you anticipated the price you were thinking of exiting is not the price you actually exit at. A better idea is to maintain a diversified portfolio with no single company greater than 10% of your portfolio. If something goes down 10% in value, review the reasons why you bought it and do they still stand? Focus on where the stock is going from where it is and what are the alternatives you could be investing in.

Rule 8 is Look to Hit Home Runs in the Stock Market. When you buy, what is your expected return? If you aim for 400% and get 100% that is still good. If you aim for 4% and gain 2% have you done that well? Most professional investors lose money of 40% of their trades, but they hit home runs on a few and that makes up for the others – let the profits run is a good thing to do.

How to decide which companies fit or where to look for homeruns?

The Contra method starts with companies who have fallen 33% in one year or have an upside of 50%.  Once you have the list, the next step is eliminate those over $25 a share. If you are after capital gains stocks between $10 and $25 is easier to achieve it.

The next step is to eliminate those companies who have not been listed on the stock exchange for 10 years. This does a couple of things – it allows you to investigate further; it allows you to have the expectations the shares should go up it is a matter of when or does the company need to do something – get debt under control? meet new competition? commodity cycle?

The names need to be decided how many shares would you being willing to buy? Contra uses what they call a Point Tally System but it can be adjusted to meet your requirements.

Stock Watch List – which are the good potential or alternatives.

Price is what you pay, value is what you get.

Rule 9 is the Search for Beautiful Black Swans.

At Contra they use $25 minimum, but that can and does include blue chip stocks which have rebounded. It is noted that when blue chip stocks run into serious trouble, they will fall from inflated heights, particularly during downturns when they tend to fall the most. This is when it is important to decide do they rise again or why did they fall?

It used to be that you need to use the post office for information to be sent to you, now we have the internet and access to great amount of information including SEDAR and more information will be seen on the exchanges you trade on.

Rule 10 is the Develop the Ten-Day Buy. During December is the deadline for tax-selling, which means if you sell your losers you can offset them against your winners. The deadlines tend to depress stock prices which means it is a great time to buy. After the deadline passes, stocks in general tend to rise at least a 1/4 of a percent.

More in tomorrow’s post

Linking to dividend paying stocks, with the Contra Method, a process or ability to narrow the selection is always the key. The contra method is about stocks under $25 but you can change it to whatever you wish. If you start with those that pay a dividend, and expected to continue, you will find a wide variety of companies. Sometimes the capital gain will be a factor in investing, sometimes the dividend but with the dividend it is about protecting your investment as well as getting paid.

There are more questions than answers, till the next time – to raising questions.

There are many strategies in the world of investing, how to buy low and sell at a high price and one of the strategies is The Contrarian method as described by Benj Gallander in The Contrarian Investor’s 13 published by Viking Canada, Toronto, 2002. The author writes the Contra the Heard Investment letter and have been doing so for over 15 years. The title of the book refers to 13 rules which will help you to invest or examine companies that are undervalued and should rise in value over the coming year or two.

Rule 1 is Prepare to think Different. The focus is on out of favour companies or when the rest of the world is focusing on the new and exciting, the focus is what was new and exciting and can those companies become new and exciting again. The key is to develop guidelines to those companies that are out of favour and try to understand what needs to happen for the rest of the world to see why there is value in the companies. For example – at the moment interest rates are low, those with higher levels of debt are seen to be taken advantage of the economic climate. If interest rates go up, those companies with high debt will lose some of their value; the restructuring will add the value back and all will be good. The question is why are the companies out of favour?

Rule 2 is Recognize that Conventional Risk-Reward Relationships are Often Bogus.  The essence of investing is to exam the risk-reward ratio. If you invest, what is your expected payback? The essence of Contra methodology is to seek out those opportunities when the risk-reward ratio is out of whack or not the norm. There are many types of risk – capital, inflation, interest rate, liquidity, reinvestment which means there are many ways to measure risk. There is standard deviation from the norm; beta, the time value of money, probability, and asset preservation. The most important lesson to learn is learning to maintain and grow your assets because if your assets go down 25% you need to grow them 33% to come back to equal. A drop of 33% means a comeback of 50% to comeback to even (those are very good returns and you are just getting back to even). Use the tools available to you such as compound interest

Rule 3 is Diversify, But Beware of the Devil of Over diversification. In order to reduce risk, you do not want all your eggs in one basket or you need money in more than one basket. How many is an interesting question and by being in too many baskets – one assets tends to perform or works in tandem with another. The rule of 72 is important – divide the return you are receiving by 72 to determine how many years it will take to double your holdings. If you receive 2% then the number is 36 years; if you receive 8% then it is 9 years; if you receive 20% then it is 3.6 years. The higher the number the more difficult it is to do it the following year.

Rule 4 is Don’t Expect Mutual Funds to Perform as Well as Stock Market Averages. Using Mutual funds can be a very good thing to invest in and there are many kinds and many different varieties. Instead of owning one or two stocks in a sector, you can own a basket of them so there are many advantages. The disadvantages tend to be costs (or fees), the funds tend to be short term oriented – to do well and have more people put money into them, and many will do as well or below the index.

Rule 5 is Do Not Practice Dollar Cost Averaging. Dollar cost averaging is set aside a set amount of money to be continually invest in stocks and mutual funds. The theory is over the long term, you will be buying into both bulls and bear markets but the value of the investments will go up. The key is to be selective in the funds you pick, because the market goes up and down, but there are some funds which it can be more useful for example monthly income (only invests in bonds or stocks which will give your a monthly income); it works well with index funds because the losers are taken out and replaced by winners; but for growth funds they go up and down and it takes a lot to break even.

Rule 6 is Be Skeptical of the Tried and True. One of the beliefs of the stock market is the efficient market theory, people are buying and selling for good reasons and generally prices will be what they should be. Often times this is true until people decide stocks are too high and sell. Then there is multiple opportunities.

Another belief is buying and holding for long periods of time. If you look at the stock market names of 50 years ago, some will be the same, but many are gone. If you held the existing ones for 50 years, you would have done very well, the problem is how do you know which is which? If you own a stock which has increased 10 times, there can be greater opportunities for you.

The best advice is be willing to buy and hold and be patient, but when the opportunity is ripe, sell and pursue other opportunities.

The other rules will be in tomorrow’s post.

Linking to dividend paying stocks, if you concentrate of these type of securities, while you are holding you also get paid a dividend which means your total return increases. As long as the company can pay or is profitable it is worth holding, when times change or competition changes, you can move to new opportunities.

There are more questions than answers, till the next time – to raising questions.

When the airplanes hit the twin towers of the World Trade Center one of the hardest hit firms was a firm which was making money as a bond trader – Cantor Fitzgerald occupied floors higher than where the planes hit and lost many of the people who made money for the firm. In a book called on top of the world – Cantor Fitzgerald, Howard Lutnick & 9/11 – A History of loss and renewal by Tom Barbash published by HarperCollins books, NY, 2003.

In the financial services industry the biggest asset is your people for over the years they have built relationships with other people and institutions and there is a high degree of trust factor. Although everything is recorded, trades were done when people say agreed and billions of dollars moved between firms. In the bond business, it was essentially unregulated and Cantor stepped in to ensure institutions could trade bonds and knew what the prices were. The firm bought and sold the bonds, trying to remain with no inventory and would make a little money on the transactions. Given the market was in the billions, those fees provided upper income lifestyles to those who worked in the firm. With Cantor, there was an element of trying to hire the best on the street and bringing in family members to work. The result was many people spent their off hours together, particularly where family is involved. In early 1990’s the World Trade Center was a target of a bombing but within a few days, things were back to normal, this gave the firm the expectation they could regroup if something was to happen.

When 9/11 happened, besides the people there was a very real possibility the firm would not open – in the financial services industry it is about the credit which the firm has at the banks. Losing your credit is losing the ability to operate. Cantor as a firm was the biggest firm in bond trading, if it did not open its competitors would step in and they would never regain their prime position. This meant many long hours – using multiple locations, high learning curves to get the firm up and ready. It also meant dealing with people who wanted things to be back to the way they were September 8th.

Linking to dividend paying stocks, in the case of Cantor it is a partnership company however the process speaks to backup plans and crisis management. The easier aspect is getting the company up and working, the harder part is dealing with the expectations of people and everyone comes from a slightly different perspective. In Cantor’s case, the firm said they would take responsibility for the families, but what did that mean? did that mean everyone is still on the payroll? is the paycheque still coming in? Given the firm was worried it might or might not survive and the need to recreate all the files for the firm time needed to pass, for others they wanted less time and a conflict would play itself in the press. Cantor’s case is the same for all firms – time expectations for things to happen is what needs to be planned for and remember people are people.

There are more questions than answers, till the next time – to raising questions.

Every industry is generally content with the ebbs and flows of the economy of the world, there are cycles which people try to prepare for, generally not very well, but they try. What throws a wrench into the plans are crisis, for as much as we all talk about crisis planning, we are not very good at it. Whether the crisis is a some sort of violence attached to it or it is medical related. In the classic case of medical is J&J reaction to its drugs being laced with life threatening drugs. J&J pulled all of its medicine off the shelf and changed its production facility to have the aluminium foil on top of the drug, plus the move to pressed down and turn tops. This action which initially cost millions, save the company billions and their actions is considered to the classic case of what to do. In the not being prepared and not sure what to do is the book Cattle Crisis by Scott Wooding published by Fitzhenry and Whiteside, Markham, 2006. The book focused on the Mad Cow disease or BSE in the Canadian cattle market.

For many years, Mad Cow disease was not seen in North America, it had been seen in England and almost destroyed the cattle industry. One would think those in the industry would have crisis management plans if the diseases showed up. If the disease shows up, the effect on humans is not good, which means all countries of the world would close its borders to meat exports. This is to be expected, the issue is how does the industry move to come back to normal. Prior to the border being closed with a case of BSE, 90% of beef exports and 99% of live cattle exports went across the border to the US. In addition, the biggest meat packaging plants are owned by large American companies. Cattle farmers and the supply system did not treat the border as that big of a deal. The industry was expecting the case to be isolated, it would take a few lumps and all would return to normal. Then a second and third case happened which brought out the protection issue and a presidential election meant delay is better than saying yes. The result is the beef industry went into a two-year depression with affects all throughout the economy.

It could have been, the beef industry thought the government testing was adequate and maybe needed to be expanded. Another issue is no one is really certain what cases BSE and why one steer is affected and not another, but what does happen is when the borders closed, there was a glut of beef supply which sent the price down. The governments of the day reacted by giving price supports to the beef farmer, which sounds good. The meat packers benefited because of the various methods they ensure they have a product for their plants.

In the years since, all cattle are tracked and there has not been any cases of BSE however the issue of the day is what should the industry do in the worst case. Over time, there were programs to reduce the supply and price supports but with government money time is not on your side, government money takes months rather than weeks.

Linking to dividend paying stocks, it is worth looking in the markets the company receives its greatest profits to pay the dividends, what is the worst crisis the company has to manage and can it? or is it dependent on either the government or the normal flow of economic cycles? If it is, reduce your holdings for the recovery will be long time in coming back.

There are more questions than answers, till the next time – to raising questions

The transformation of the city of Mecca is the book written by Ziauddin Sardar titled Mecca The Sacred City published by Bloomsbury, London, UK, 2014.

Mecca as the maps show is in Saudi Arabia and the House of Saud is in charge of its upkeep. Thanks to oil wealth, the city has been radically changed for the better or at least what its rulers believe is the better. At times, the religion is more puritanical or less religious diversity is seen. One aspect was to expand the Mosque because pilgrims went from 200,000 to 2 million. It was both easier and less expensive to arrive at Mecca, which lead to many changes for all. The city has changed, wealth and those catering to the wealth changed the skyline of the city from what it once was. The Hajj and the aspect of going to Mecca at least once in a lifetime if one is able is open to more people which is good. For the author who has a long history with the city, sometimes it is hard to see the past structures served their purpose, but with more people changes needed to be made. In the end Mr. Sardar believers Mecca is a place of eternal harmony, something worth living for and striving to attain. it has always been and it will always be.

Linking to dividend paying stocks, cities which have a religious reason to exist will occasionally be divided by people and their views either too liberal or too conservative. If they operate with peace and diversity is open, sometimes the most amazing results will occur, unfortunately people are people and they will jockey to take power. Similar to dividend paying stocks, to take power means sometimes management is great and sometimes, one hopes their grasp will slip away quickly for the asset or company is truly special.

There are more questions than answers, till the next time – to raising questions.

If you are Muslim, one of the commandments is to visit Mecca and walk around the Kaaba 7 times if you are able. In the early days of the Muslim religion the aspect of if you are able meant most people did not go to Mecca, however with the rise of the middle income millions now go. Mecca was the birthplace of Muhammad and God’s words were first revealed to him in Mecca, but the city did not embrace him till much later. Before Muhammad, Mecca was a pagan worship city located on trade routes which made the city or town important for a month or two. After Muhammad, as the rules of praying is to face in the direction of Mecca, the city became more important and dependent on pilgrimage. The transformation of the city of Mecca is the book written by Ziauddin Sardar titled Mecca The Sacred City published by Bloomsbury, London, UK, 2014.

In and around 785, the Santuary or the Haram was changed to what we see of it today. The 484 columns were built and with the completion Mecca was changed from a “backyard” town to a rich, cosmopolitan city with all the good and negative aspects of city life. It was during this period, those who came to study, came and question and find answers. Once can easily imagine many different ideas of what Muhammad actually meant or did not mean. In addition people wanted to send precious goods to Mecca either as presents or to be sold to the travellers. This meant bandits threaten the travellers which the government would need to deal with.

As the city grew, it faced danger from other empires who were intent on taking Mecca, however when the city was at peace, the city would be prosperous for the wealthy would compete with each other to build mosques, fountains, schools, public baths, libraries and hospitals. Mecca had the kind of infrastructure that other Muslim cities had for centuries. One of the methods Mecca received funds was the surre of the Holy Cities. The word surre is from the Turkish word meaning precious gifts. The people established many foundations which were aimed at part of life in Mecca and distributed at the Hajj time.

Although many rulers wanted to do development work – the consulting time was months which meant projects took decades to finish. The city went through its ups and downs as cities and empires went up and down.

Linking to dividend paying stocks, you will likely pick one of more of your stocks as the jewels in the crown and expect to hold them for a number of years. That may turn out to be an excellent decision, but know that all companies similar to cities go up and down even though the importance of them remains. In the case of Mecca, as the city is very important to those who pray and because of the event everyone would have and does have an opinion about the city. Sometimes the leaders are not any good and add little value to the holdings, sometimes they were great. Cities like Mecca will bounce back and more about that in part 2

There are more questions than answers, till the next time – to raising questions.

One of the tasks around the home is to cut the lawn, while lawn additives are rarely used, the grass grows anyways. In parts of the lawn the grass is thicker, in parts there is puttering around to add to the soil for the grass to grow thicker. Besides having a mulch lawn mower – the grass cuttings go back onto the grass and cutting up the leaves in the fall, for the most part the lawn does what is best for itself by itself. However, if the forecast during the week is for rain, it will mean the lawn will need to be cut every week till the summer months heat up perhaps it will be every two weeks. It might be the household maintenance that is practiced is an exception for there is a multi billion dollar lawn companies. If you go to your local hardware store, it is easy to see the names and you can always ask if people are actively doing something to their lawns or being passive. You will find active tends to win out.

Linking to dividend paying stocks, these are the companies while you can tinker with them, their payment of the dividends is consistent. Ideally, you want your company to increase profits every year and thus increase the dividend, but as long as the dividend is being paid you have won half the battle. Similarly the lawn is growing no matter what I do, the dividends are flowing no matter what I do or do not do.

There are more questions than answers, till the next time – to raising questions.