The title refers to the book written about Nortel called The Bubble and the Bear by Douglas Hunter, Doubleday, Toronto, 2002. Nortel was a high flying stock in the 1990s to 2001 when it crash and burned. In 2014 it is still being dismantled.

When Nortel stock was rapidly rising, similar to many other companies that have rapidly rising stocks, very few people care for the long term. There is a great many advantages to a rapidly rising stock price, the only disadvantage is at some point and nobody knows when, but at some point stocks will fall in price. Eventually the market determines what should be the price, but with a company such as Nortel the overwhelming market sentiment was on the rising price side. Nortel had many plus factors on its side – its heritage was AT&T and the Bell system. That was a terrific customer base – the phone companies had provide very stable, regulated profits every year. Along comes the internet, which Nortel has an distinct advantage in with optical technology and a long history of research and development. In addition as we switched from land lines to cell phone, Nortel had an advantage in their abilities to build the architecture of the system. An even bigger advantage was as a long established company – it had wonderful banking relations to do all the things which needed to be done. All the investment houses knocked on their doors for business and many were well rewarded. There was no reason not to doubt that when buying Nortel stock it was a good one to own.

The twin aspects of the internet and deregulation of AT&T changed the landscape. What in the past took decades for business to change, took an estimated 5 years before the mantra if you did not have internet and high speed, your economy is toast. There was a great deal of pressure and demand on companies to connect its customers to the internet – those that choose the right system won, those that choose the wrong one had to buy their way in to stay in the game. For a time, Nortel perhaps due to its roots in the telephone system was backing the wrong systems until it bought Bay Networks, then it had the reach of the correct system used in the internet. Nortel stock continue to rise, there was no reason to doubt it should not rise.

As the internet changed business, it changed Nortel’s customers who went from the very solid Bell systems to those that wanted to compete against the bell systems such as MCI and WorldCom. The Bell systems had monopolized the phone systems and MCI, Sprint and WorldCom all wanted to lower the costs of long distance phone calls. To their credit, long distance rates fell rapidly, which was good. What was bad was so did the profit margins. With the rise of the internet, data transmission was more important than voice. In many cities if you build new roads, soon they will be filled with cars. In the middle of the US, if you build a new road, there will be no extra cars than which already exists. In order to have a infrastructure for the internet, new roads across the US were built. It was later that people asked about usage capacity.

When usage capacity began to be asked, and the answer was below 10%, the next question to be raised was how does the company make money? It would take 6 months before anyone would listen to those could not figure out how the company was making money. As the company stock was doing very well and continually rising, it was assumed the users were paying the bills. It turned out, that would happen, it was just not happening right away.

Linking to dividend paying stocks, all industries changed and have gone through great changes, those that make a profit and pay dividends are to be congratulate as an investor, every once in a while, you should ask how does the company that you own make money? What sort of margins does it make and how stable on the bulk of profitable sales and services is it? Sometimes you should be the devil’s advocate and pay attention to those who have a completely different opinion of the company. When you are reasonable certain on the answers, then you can let the company do its thing and continue to pay you dividends.

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

The title refers to the book written about Nortel called The Bubble and the Bear by Douglas Hunter, Doubleday, Toronto, 2002. Nortel was a high flying stock in the 1990s to 2001 when it crash and burned. In 2014 it is still being dismantled.

One of the interesting things the author Douglas Hunter did was to examine at the time the new era of the chat room. In times gone by, most of the information from Wall Street was centred on Wall Street it terms of reports, people who spent time meeting with the company executives, people who through their jobs the gossip or worked on various accounts. To be on Wall Street was connected to all sorts of groups but it was a more leisurely pace. With the internet, information was opened up, the SEC gave access to information to anyone who had a computer so an individual could read the same reports as the analysts. Soon the President and CFO were giving reports which you did not physically have to be in the room to listen to, you can not either watch them or listen to them. The other aspect which changed was the rise of the discount broker or people could open up an account and do as much trading as desired. With the rise of the discount broker, there came the TV news channels and more people could invest. These items are a great thing to have happened. They changed the method investing is done.

One would think, with the greater access, more people of different points of view having access, the level of playing field closer to the pros, not at the same level but at least closer, better markets would be the result. In the case of Nortel, as Nortel share was increasing which in general everyone like, they were problems with accounting. Not that Nortel broke the rules, but they certainly bent them. However, with a rising share price the non pros or day or week traders, acted as the company’s position was 100% accurate and only wanted higher prices. The chat rooms were filled with stories, with every good announcement the price should go higher.

It is warning to shareholders if the company never seems to have bad information – everything is rosy, all the cylinders are burning at the right time. When the market is hot and prices seemingly go up, why prices go up is not to be questioned, the correct strategy at that time is to go with the flow. At some point down the road, all companies have to sell what the make or service and rules of financial statements need to followed. In the case of Nortel, its accounts receivable started to rise or the number of days it took to get paid from its customers. The company had announced who some of its customers were (WorldCom); investment in other companies was rising, because they were taking stock rather than getting paid; the sales of the companies it was buying was not contributing more to the revenue side (they were buying research) which can be a good thing but research means no sales at the moment. The market was fixated on the stock price, not the results of the company, and when the price of the shares went down the price went down, they went down with a thud.

Linking to dividend paying stocks, whatever company you own it still has to make money on its operations, when the company reports its earning it is important to ensure that how it makes its money is sustainable and when you verify it is, then you enjoy the dividends and long term capital appreciation of the stocks.

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

The title refers to the book written about Nortel called The Bubble and the Bear by Douglas Hunter, Doubleday, Toronto, 2002. Nortel for those who do not remember was once one of the high flying companies that was linking the world as the internet became common to everyone. In an earlier time, it was similar to linking all the countries by the railroad. Similar to the railroads, millions of dollars of raised to build the railroads, and many were built. The difference between building and operating profitably is the reason why you can count the number of railroads that exist of two hands. In the railroad age, the railroads were given the understanding by the government they would back them up, for without a railroad, your economy went downhill. In addition to this understanding of a guarantee, the rates of interest were higher than other investments and millions of dollars went to buy railroad stocks and bonds.

In Nortel’s case since the invention of the telephone, there was a very specific method to deliver the voice over the wires. The system had not changed in over 100 years and the companies that delivered the service were large and profitable. The shareholders who owned included the term orphans and widows which meant at least in your financial life there was stability. With the advent of the internet, a new method had to be invented, invested to deliver data. At the same time, communication was changing from land lines to cell phones. Whatever company set the standard and the world or major service providers accepted, the company has a major advantage over its competitors. When there is a major advantage, the growth will be great. At some point it will level out and consolidation among the competitors happen. Those that relied on cash flow – have clients that pay on time will in the end survive. All of this is easy to see while looking back on the sector, what is remarkably harder is predicting the right choices. For a long time, the right choice was Nortel which had evolved to build an optical system which could move significant amounts of data and voice. It seemingly had the right customers – most of the world’s best telephone companies who were transforming to internet companies and growth rates which allowed the ability to make money on the stock wonderfully easy.

Then something happened when downturns happen, Nortel which was seen as a growth company instead of growing at 40% a year only grew at 5% which meant the stock was overvalued. If you are investing for capital gains, growth is great and you are willing to pay higher multiples for the growth. If you are investing for dividends, then growth is desirable, but sustainable in order to protect your profitability and be able to pay the dividends. You are willing to pay considerably lower multiples for dividend paying stocks. As the stock was seen less as a growth stock the price fell. However when the price was high, Nortel was using its stock to buy other companies in order to grow. As the price went down, this strategy was no longer a good one. In addition, what was thought as a wonderful customer base turned out not to be so for WorldCom and others did not survive and Nortel’s accounts receivable went upwards. In addition, prior to the decline in tech stocks in general, companies such as Nortel when customers could not pay, the companies took stock instead. When the stock markets were desiring as many tech stocks as possible and bidding prices up, this was a wise decision. When the markets were down, the stock prices went down and soon not only receivable rising, but values of holdings were rapidly decreasing. Many things happened seemingly all at once and Nortel was a stock not worth owning.

Linking to dividend paying stocks, Nortel was a dividend paying stock until in went bust, in all likelihood it should have stopped paying dividends as the company was losing money but the sector was hot. One lesson to learn is if you own a dividend paying stock and the sector becomes hot and starts to operate like a growth sector, take some profits and move your money to a non hot sector. With the remaining stock let it ride till you see the signs the hot market is over and get out with more profits. Move those profits to a sector which is profitable but not seen as a growth area.

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

Recently while looking in the library a book about city buildings was seen. The book focused on a large city in North America and surrounding area projects that were proposed but not built. When cities expand land becomes more expensive and people see opportunity. Companies which are growing need to consolidate their work forces, developers want to make money and buildings are proposed. Not all get built, first the buildings are proposed and then people have to commit to the space, once there is enough commitment to satisfy the bankers, buildings can get built. The time between the proposal and commitment can be lengthy which is why there are more buildings proposed than get built. As time goes by economic cycles change, economic models change, business changes and of course people change. There are many variables before a building is built. Which is why the development industry tends to be a copycat industry, if single family housing is selling then that is what is built.

While looking through the book, if the projects had been built they would have changed the landscape of the city. Some of the buildings were proposed for the what now is the core of the city, some were proposed for outside the core because that is where someone either owned land or could accumulate a large parcel of land. Near where the author lives, 40 years ago someone tried to accumulate land and failed to get a bigger piece and the project died. Now a midrise condo is on of the site of a former bread factory and former parking lot and fits well into the neighbourhood.

Linking to dividend paying stocks, in the stock market and in every market some will see opportunity to make money and some of the ventures will be successful and some will not. As long as people are seeing opportunity then you have a healthy market which is a good thing. Within the markets some companies consistently make profits, some will be considered less than cool, but consistent money making is always very good. Within the consistent money making companies those that pay dividends have been through the economic cycles and continue to pay a dividend which is great. The stocks may not be the highest performers on a year to year basis but looking at on a 5 to 10 year basis the stock price plus the dividends will have enrich the shareholders will less risk than the highest performers.

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

What a wonderful title for a book and an interesting book it is – Millionaire by Janet Gleeson, Simon and Schuster, NY, 1999 is the story of John Law. The story of John Law is the story of modern finance structure beginning in France in 1700’s. It was a similar story that can be found in many countries, France was running a terrible deficit and needed help, the country eventually turned to John Law to move from payment by gold and silver to paper money. In addition, Mr. Law founded a company which took over the operations of the Mississippi from the government, the lands were all the lands which are drained by the Mississippi River or most of the Midwest of the United States. England had the east coast and Spain had the west coast. Mr. Law was a excellent gambler as he could calculate the odds for success in his mind, and then follow the rule to bet big when the odds favoured him. At the time of the Mississippi Company, England had the successful East India Company which started with trade with India and China and evolved to a large profitable drug company primarily opium. The drugs gave the East India Company much of the silver production of China and a very healthy return for shareholders in London. Eventually all countries wanted the same returns and other companies would be formed by the Netherlands, England and France. Early on the promise of great wealth – minerals, trade etc. lead to ever increasing share prices on the exchanges. In France, so many people were making money from Mississippi Company shares the term millionaire was first used. In addition as the price of the shares increased, it was easier and easier to get a bank loan or buy on margin with less than 10% down. The Mississippi Company was ahead of its time – in a couple of hundred years great wealth would come from the lands, however at the share price the Mississippi was at over $10,000, it was a short term investment. The shares of the Mississippi Company went towards 0 and in the 1800’s France sold the lands to the United States and it would be known as the Louisiana Purchase.

When times were good on the stock market, Mr. Law pushed France into a paper currency country when he passed a law all bills greater than 500 francs must be paid in paper currency. Mr. Law had the country invest in infrastructure and generally pulled the country out of the recession. Unfortunately when the markets declined as the shares of the Mississippi Company were vastly overvalued, the country reverted back to silver and gold for payments. It would be another couple of hundred years before all countries adopted the paper currency that we know today.

Linking to dividend paying stocks, in Mr. Law’s day and in the very recent past bubbles have developed and will develop when great amount of people look for increasing large returns from the stock markets which is why the quotes of valuation – what price is the stock trading relevant to its earnings are heard. However the other side is how much money did people make and can I make the same return or more? If there is a valid reason for a stock to keep climbing, just be aware what comes up typically comes down. In the case of dividend paying stocks, the question besides the valuation is the income or dividend sustainable? if it is then whether the stock continues to go up or the market corrects itself does not matter as much as can the stock pay the dividend if the market goes down.

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

There are a great many theories on how to invest and the best method – one such method is called liability driven investing. The aspect starts with the question what do you want to do with the money you are investing in. Besides having more, which is a nice and good answer, you invested your savings, what kind of return do you want or need to meet the obligations that you are investing for? The liabilities driven investing method is linked to pension plans or life insurance companies who have obligations in the future and try to match the obligations with investment returns. In the pension world, at some point people retire and expect to receive a pension on a regular basis, with the baby boom starting to retire, the numbers can not be matched with new entrants to the work force. The pension funds have to match liability driven investing. On a personal level you do not have to, but liability driven investing would reduce the risk of selling when the market occasionally takes a downward part of the cycle. Ideally we all sell in the upward portion of the economic cycle.

Linking to dividend paying stocks, from a liability driven investing method, the dividends which you earn provide a consistent revenue stream which can be tailored to match your needs. If you pick companies which have consistently increased their dividends, then you can note the dates they are paid and match some of your needs and wants with those payments. The other wonderful piece of news is whatever the economic cycle, dividend paying companies tend to go down less and bounce back faster ehrn there is a move by the market to buy quality stocks. When the market catches up to the dividend paying stocks, there is switch to stocks that offer greater growth, but your dividends are continued to be paid. You can have the best of both world’s as the size of your dividends increase you can reinvest some of it and some of it can be put towards other investments.

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

The Bully of Bentonville is the largest retailer in the world – Wal-Mart and is from the book of the same name written by Anthony Bianco, Doubleday, NY, 2006. Wal-Mart has changed the face of retailing for good or bad, depending on your point of view. From an investment point of view, Wal-Mart has produced outstanding returns, continues to produce those returns and has made the Walton family billionaires many times over. Wal-Mart is headquartered in Bentonville, Arkansas and its retailing focus from the time it started was on smaller towns and cities where there is plenty of money to be made. Companies such as Sears made their focus on the suburbs of American cities and left the downtowns and smaller cities to other competitors. Retailing by its nature is a very competitive area to be in. People make stuff and it needs to be sold somewhere, and the economy of the US is very dependent on people wanting to buy stuff. Wal-Mart has developed some of the best information systems to go along with its ability to deliver everyday low prices on a base of goods needed by the average household. Once somebody gets into the store, they find other items which have higher mark ups. In the global economy, there is always someone willing to deliver goods at a lower cost to the retailer, which is why many of the goods come from China or elsewhere. That is good news if your income is not dependent of providing increasingly lower prices, which is why many manufacturers have left the US. If you income is not dependant, then Wal-Mart saves you money.

Similar to many companies, Wal-Mart which is one of the largest private sector employers has been the active user of municipal, state and federal dollars to build new stores, for training purposes, but starts its employees at minimum wages or slightly average. There maybe opportunities to move upwards, buy shares in the company and other features but given the high turnover of staff, in the book it was running at greater than 50%, most employees see benefits in leaving before the year is done. Perhaps it is because of the retailing work hours and environment, perhaps it is to other companies paying more, whatever it is, the number is expensive given the size of the company.

Linking to dividend paying stocks, since 2003 Wal-Mart has paid a dividend and has consistently raised the dividend and expectation is to do so for the future. As an investor, Wal-Mart is a company worth owning the shares. Wal-Mart has the best distribution network, analysis on consumer wants and needs, and stable market share in the retail world and is a very tough competitor in a very competitive landscape. As a leader in the retail environment besides everyday low-prices, Wal-Mart has the ability if wanted to change how retailing is done from production, packaging to point of sale, understanding in the consumer economy the greatest competition is to be found in the retail world.

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

The title refers to one of the final four remaining teams in the playoffs of the NFL and similar to most sport franchise there are teams that seem to make it into the playoffs with a legitimate chance to win the cup every year. The team the author likes made it to the playoffs but was defeated. In the case of New England, what is remarkable is they were in the final four even though some of their top performers have been or are injured and not playing. When the coach eventually retires he will go into the Hall of Fame with an outstanding win/loss ratio. It could be easily argued that Bill Belichick is a great coach because his teams that made it to the final four, and into the championship game, player personal changed considerably from year to year. One would think a need for a quality core number of people who worked together to form a great team and new people to the team would see from the example the veterans bring to the team and the new people would fit in. In football there are 53 people that suit up for a game, in New England’s case this year 25 of those players that were not on the team last year including 15 first year players. In theory, all the other teams had a opportunity to look at the those players, but when they arrived in New England, they performed better than expected. Perhaps it is the flexibility of the system New England uses, whatever Coach Belichick does, the system he uses elevates all the players as soon as they play for the team. (New England lost to Denver but you can be assured they will be back again next year).

Linking to dividend paying stocks, in the face of the increasing competition where more and more people and companies have access to similar information to be a consistent winner is something to celebrate. Although each team is different, in terms of culture and expectations, the consistency of having a winning season such as New England is a joy to watch and learn from. When you find a stock which is consistently paying dividends or making profits for its shareholders that is something to celebrate. Both for the management and the employees who every year start fresh and produce consistently good returns.

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

When you enter you home the first thing you see is the front hallway, in the author’s case the colour has not changed in a number of years. There was no particular reason to change, except once a year there is a desire to paint something. If you were to paint your hallway – there is a great deal of choices in terms of paint colours and one time I brought a picture and asked for a colour. To narrow down the colour will take some time and consideration – depending on the size of your job the paint stores have software where you can preview your colours just to make sure. Having decided the colour – the next aspect is the preparation to paint – stuff has to be removed from the walls, floor boards need to be taken off to be painted (perhaps a different colour), the wall may need sanding to smooth it over, the green tape has to be put on the wall to keep the paint in between the lines and the newspapers are put on the floor. None of this is hard, but if you do not do it, the telltale sales are easily found. The colour of the paint is put on the wall and it feels good. You wanted a change and produced a change and now you need to live with it unless a desire to paint a different colour.

Linking to dividend paying stocks, the new colour which you wanted gives you a satisfaction each time you enter the house, similar each time a dividend paying stock pays the dividend there is satisfaction in your bank account or brokerage account. Over the years the colour continues to give you satisfaction and depending on the colour it could even be considered fashionable to have. However before you put paint on the brush, you did homework, similar before you bought the stock you did your homework and as your choose well, the results over the long term will be an increase in your net worth.

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