Top Posts of 2008:

As I browse over the posts from 2008 on TMWTFS I’m very pleased with the high quality content that was published on investing, individual stocks and the markets over the past year.

While many of us look forward into 2009 here are some of the top posts recognized by popular readership, highest traffic and most comments.

Never being afraid of some controversy I took a critical view of Derek Foster’s books that target new investors with “little or no investing knowledge” in The Foster Effect

The Art of Discipline was featured in a BusinessWeek article and spoke to my belief that discipline is an important aspect of any individual investors’ long-term strategy.

Cashflow is King provided useful insights into why cashflow is an important factor to examine when analyzing a company and what cash is used for by businesses to pay their bills.

I take another critical view of a term often used in the media and by investors in Recession Proof – Searching for Evidence.

Like the critical approach? The Ultimate Value Trap lays out my case for why General Motors (GM) is a business with a sustainable competitive disadvantage.

In August under the encouragement of a number of readers I went through a detailed four part series of exactly how I conduct a fundamental stock analysis with Taking Stock in IGM.

I decided to start a new series of posts titled Confessions of a Value Investor centered on lessons I’ve learn from various investing dilemmas or mistakes. See Part I & Part II

I created 15 Simple Solutions for investors to concentrate on in the New Investor Index

During the precipitous market declines in October I offered ten elements of My Short-term Plan (I, II, III, IV, V, VI, VII, VIII, IX & X)

I had some fun and shared a confession of mine with readers about a chronic addiction: being Addicted to Dividends. Then I subsequently launched the site Dividends Anonymous

Since I knew the moneygardener was likely to do all his Christmas shopping again this year in one location I helped readers understand the investing prospects of Costco with Taking Stock in COST

I provided an in depth look for readers into my Canadian Dividend Growth portfolio with Inside My Dividend Dream

The most successful post for the year by far was the concentrated analysis of Manulife Financial I published titled Taking Stock in MFC.

I’ll also include a glimpse into the feedback I’ve received from readers on topics for 2009:

• Taking Stock in PFE
• Taking Stock in SAP
• Creating a Value Mosaic
• Person Savings Series
• Canadian Currency Strategy (hedge)
• The ‘Flations’
• The Future of Dividend Growth
• A Theoretical Portfolio (retiree)
• Restaurant Royalty Trusts
• The Launch of TCM Inc.

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Competition for Capital:

I’m not the brightest investor on the street, but I know enough that something isn’t quite right when I’ve fielded two dozen questions in recent days about the investing prospects of the Bank of Montreal (BMO) from peers who are intently focused on the stunning 9%+ dividend yield of its common shares.

I first want to lay out in this post the cost of capital that banks have currently experienced when going to the market for equity to shore up their balance sheets.

For investors who might be asking, “What’s this tier 1 capital ratio everyone is talking about?” it’s a basic measure of a banks overall financial strength and health. This ratio measures a bank’s core equity capital to its risk-weighted assets. Risk-weighted assets are a group of assets held by the bank that are weighted for credit risk using a formula provided by industry regulators. Essentially – what reserves does a bank have on hand to cover losses on any assets that it holds?

There’s been a significant move recently in Canada for financial companies (banks & insurers) to raise equity in order to place them over the minimum regulated threshold with the banks as a peer group seeking to bump their tier 1 capital ratio to ~10%.

Royal Bank (RY) announced on December 8th that it intended to issue $2.0B in common equity with the option of fully exercising a total of $2.3B. The pricing of the common shares was set at $35.25 per share and would increase their tier 1 capital ratio to 9.9-10.1%. The equity priced at $35.25 was approximately issued at 1.75x book value and sold at a 6% discount to the previous market price. This puts the issue into a valuation perspective for what it costs to raise this equity.

Canadian insurer Great-West Life (GWO) announced on December 9th that it intended to issue $1.0B in common equity. The pricing of the common shares was set at $20.75 per share. At this price the equity issue was done at approximately 1.9x book value and sold for a 7% discount to the previous market price.

Bank of Montreal (BMO) announced on December 15th that it intended to issue $1.0B in common equity with the option of fully exercising a total of $1.1B. The pricing of the common shares was set at $30.00 per share and would increase their tier 1 capital ratio to 10.4%. At this price the equity issue was done at approximately book value when you account for dilution and sold for a 8% discount to the previous market price.

So let's compare: 1.75x book value & a 6% market discount for RY versus 1.0x book value & a 8% discount for BMO.

That might not appear to be a huge difference to the average retail investor, but consider that on October 31st, 2008 when BMO reported quarterly earnings their tier 1 capital ratio was 9.77%. To raise equity at such a discount for such a small move in their capital ratio makes me suspicious for a number of reasons.

Something is not right here and I hate to be the perpetual downer when it comes to BMO, but investors need to put this into perspective regardless of the attractive yield of the common dividend.

Here’s another perspective:

On December 16th the common equity of BMO trading on the TSX closed at a yield of 9.23%. The highest yielding preferred issue (BMO.PR.K) closed at a YTW (yield to worst) of 8.09%.

That’s a -114 basis point spread between common & preferred equity!

Essentially the market is giving no respect to the preference of the preferreds in the capital hierarchy. The common equity is essentially spitting in the face of the preferreds when water always travels downhill.

If I conduct the same quick analysis with perpetual preferreds for the other four major banks you find the following information:

RY: closed +178 bps above common
TD: closed +137 bps above common
BNS: closed +120 bps above common
CM: closed +141 bps above common

That’s nearly a 235 basis point spread between the lowest positive spread of the BNS preferreds and the negative spread of the BMO preferreds.

My current concern with BMO is that this equity raise makes no logical sense from a valuation perspective and unless they anticipate their tier 1 capital ratio being hammered down in the foreseeable future this almost appears as desperate in comparison to their peers.

If I can borrow a quote from Scott in a recent conversation we had about this equity issue:

“I mean really, who does a share issuance at book value? To me, this is like saying we are only interested in diluting your stake in the break-up value of the business. The operating business has no value, so we aren’t going to charge you for it. Well, if the operating business has no value, then that means that past earnings are just a myth under the current reality.”

When I evaluate management I focus not only on what they’re saying, but what they’re doing. In my opinion actions speak louder than words in the world of business. A CEO or president can publicly state intentions as clearly and inspiring as they want; but they have to follow through on those words with tangible actions.

What can investors take from this? Do your own due diligence before blindly jumping into the market despite the attractive yield and market sentiment over the safety of a Canadian banks dividend.

Over the past year I’ve commented privately with peers at the astounding discount that Royal Bank can raise equity at (via common or preferred shares) versus their Canadian competition. When you can raise common equity at 1.75x book value or preferred equity at 50 bps lower than similar preferreds from competitors with no shortage of demand in sight from the market you have one thing: a sustainable competitive advantage.

Not many investors would realize this at first or second glance, but one thing we’ve all realized during this market turmoil is that equity comes at a premium. When a company is able to issue equity at a considerable discount to its peers it stands to take advantage over the long-term in a significant way.

In my opinion, after studying their issues over the past 18 months, RY is likely conducting business at a significant advantage to their peers. They’ve been able to tap the equity markets for capital at a substantial discount to their competition and are in turn likely charging a premium rate for the equity they issue back to customers in business loans, personal lines of credit or mortgages.

When you can generate this type of spread in pricing during an environment as difficult as this a competitive advantage becomes quite clear.

Disclosure: I own shares in RY and indirectly in GWO through PWF

The Stock Analysis Mailing List is closing to free subscribers effective January 1, 2009.
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Entrepreneur Journeys:

Entrepreneur Journeys, Volume 1
By: Sramana Mitra

Sramana Mitra is an author, strategy consultant and technology entrepreneur who lives and works in Silicon Valley California. She has a master’s degree in electrical engineering and computer science from MIT and is a columnist with Forbes, Seeking Alpha, Yahoo! Finance, Cadwire & TheStreet.com.


Entrepreneur Journeys begins with a quote in the prologue that sets a tone for the interviews and insights Sramana Mitra shares with her readers; “Entrepreneurship is not a career. It is a way of life.”

I’ve had the pleasure to meet and work with a number of entrepreneurs and small business owners who have put their thoughts to actions for the various needs of an untapped market. While I haven’t had the pleasure to interview CEO’s and owners of global businesses I continue to look to innovators and entrepreneurs for new trends and applications of strategic management both for my consulting work and as an individual investor.

Entrepreneur Journeys is a much different book in the format it is presented to the reader. Sramana presents not only a diverse variety of interviews with various entrepreneurs on topics of technology and innovation, but also her personal thoughts and insights on where technology is moving, areas of growth for industry and opportunities not being fully taken advantage of by well established businesses.

This unique presentation holds the potential to capture a much wider audience of readers; especially those interested in learning about strong business fundamentals. Whether you’re an individual investor, business person or small business owner with little interest in becoming an entrepreneur yourself Entrepreneur Journeys offers important insights into how to recognize, operate and develop a business based on the simple fundamentals of success.

Long time readers of TMWTFS know that I spend a great deal of my time attempting to link important fundamentals of business practices to investor insights in an effort to promote effective and successful strategies. Any business continuously needs to make improvements in their operations that lead to increased customer retention, higher profitability and a more sustainable competitive advantage that protects against other entrants in the same industry. From an investor perspective I want to invest in companies that are innovative and on the leading edge of their industry with respect to consumers, operations and general business practices.

I don’t want to ruin the content of the interviews in Entrepreneur Journeys by revealing information on the unique conversations between Sramana and her guests, but I have decided to instead list of some key concepts I felt were touched on in the book that will help small business owners, investors and entrepreneurs to become more successful in their endeavours. My hope is that the concepts listed will create interest from readers to pick up a copy of the book, give it a read and spend some time reviewing and reflecting on the important lessons offered.

Finisar:

• Take control of quality
• Need for a change in cost structure
• Focus on the customer

Zoho:

• Simplicity & modesty breed success
• Go for brains, not just the books
• Fiscal discipline
• Never be afraid to redefine your business model
• Compete on price only when you have the cost advantage
• A focus on the $1 customer

Kayak:

• Simple marketing: great product and service
• Engineering driven business
• Look for your competitors Achilles heal

SimplyHired:

• How technology makes the difference
• Fill the consumer need

Qualys:

• Acknowledge obstacles
• Never fear competition; focus on solutions for the customer

Concur:

• Redefine the business model to move to where the market will be
• Confront issues within your business immediately
• Deal with challenges or hide from them
• On-demand products expands your target market

MercadoLibre:

• Avoid mass marketing
• Concentrating on product infrastructure
• Build your company by building a strong product platform

The interviews in this book are valuable resources for any small business owner; especially those without any formal business education or training. From the perspective of an investor I was very interested in the themes received in the book on Latin America, energy recovery technology, software solutions, education and changing role of technology in life and business. This book reinforced a long held belief I share with clients of my own small business that commerce is more than having the right tools to do the job; sometimes you need to know how to use those tools more effectively in order to be successful.


I had the pleasure of discussing Entrepreneur Journeys with Sramana Mitra in November to ask a few questions about the book.


Can you tell readers a little about yourself and your inspiration for writing Entrepreneur Journeys?

I am a serial entrepreneur, having started 3 companies, plus having built a consulting company. Now I am also tinkering with publishing – blog, books, columns … I love to write, I have always loved to write. And I fundamentally, passionately, believe in entrepreneurship as a solution to the world’s biggest problems. I think, now, more than ever, the world needs entrepreneurs in droves to step up to the plate. But how do you inspire and educate a whole new generation of entrepreneurs? How do you develop a “scalable mentoring device” that can motivate large scale entrepreneurship on a global scale? My belief is that you can only do that by telling people stories of everyday heroes – not Bill Gates and Steve Jobs – but people they can relate with – and showing them that it can be done. “Yes You Can.” My book series is an effort to inculcate entrepreneurial energy at every level – high school, college, university, and professional. Lost a job? Don’t be disheartened. Take your destiny in your hand. Become an entrepreneur.


From a professional perspective can you give readers some insight into how you view the internet changing the global business environment; specifically Web 3.0 that you touch upon in the book?

Personalization is my key thesis for Web 3.0. Healthcare. Education. Commerce. Travel. Job Search. Searching for a mate. Everything changes with Web 3.0. Everything will become personalized and dramatically more efficient. You can have an “assistant” for many functions.


At twenty-seven I grew up with the personal computer, the internet and use both of those on a daily basis. How will the world be different with Web 3.0?

I grew up with servants in India. That’s the parallel. I would like a “web 3.0 servant” for dealing with a lot of repetitive tasks that I perform on the web that reduces my click-level dramatically. I want to be the “master” of technology, not “servant”. I want technology to be “my servant”.


What has Google missed that so many niche companies are now focusing on? You touched on Google’s Achilles heel: the verticalization in e-commerce that’s coming to search; how serious is that threat for them over the long-term?

I think, over the next decade, the threat of vertical search and vertical personalization is very serious for Google as emerging brands develop for each of the verticals. It’s the Walmart versus Saks Fifth Avenue model. The latter is a much better user experience. Google is like Walmart.


One thought that kept coming up as I read the book was that I felt as if you missed an opportunity to capture a wider audience for Entrepreneur Journeys. The businesses and entrepreneurs featured in the book are very technical and the content at times would be difficult to grasp if you didn’t have a basic understanding of this market niche. In hindsight would you take a more broad approach for your interviews in the future for Entrepreneur Journeys Volume 2?

My expertise is in technology, so I wanted to really drill down into something where I have tremendous value to add. Also, I think technology entrepreneurship is the need of the hour – in healthcare, in education, in energy, in rural development, in curing poverty … you name it. In Volume 2, I will be focusing on Bootstrapping, and it includes stories of journalists who’ve created very nice small businesses, for example, but still by using the Internet. In Volume 3, I will focus on Positioning. That volume draws from my extensive consulting background and numerous engagements through which I have developed a rather sophisticated understanding of Positioning. It’s a very important aspect of building a successful company. And of raising money.


One intriguing theme that you kept revisiting was one of the small business and how a focus on fundamentals of operating that business gave certain entrepreneurs an advantage over much larger competition. Do you think that the niche focus is something that many entrepreneurs disregard initially because of the scale of competition rather than just pursing a need that isn’t being serviced?

Niche is really key for start-ups to be successful. The resource constraint is acute, so you cannot ever afford to bite off more than you can chew, and then swallow. Most entrepreneurs fail by becoming defocused. And then they’re not successful in anything they try. Better to focus and be successful in one area, and then move to another.


From the book what do you feel is the one dominant theme that an independent investor can concentrate on for the future?

Stock market pov (point of view)? Look at the big masses of untapped market opportunities. MELI and Latin America. SaaS and small businesses – Concur, Qualys, Zoho. Base of the Pyramid. Focus on “Markets” above all.


The theme of entrepreneurs addressing unmet needs with new business ideas was something that captured my attention immediately as an avid student of strategic management. When I look at the role for technology moving forward I often feel that many small businesses don’t take full advantage of their opportunities. Do entrepreneurs simply think differently or is their view of the world different?

You will see the technology democratization change dramatically. Small business will become avid consumers of technology going forward. SaaS, iPhone – there is much going on that will drive the cost of technology ownership down by orders of magnitude. Usability is also a big focus. New generations are tech-savvy to start with. Technology democratization is a big theme to watch, as we not only move to rolling out computers to the Next Billion, but also to the Last Billion.


What can a small business owner or investor learn from entrepreneurs to better meet the undressed needs of their target market?

Understand the inefficiencies and the problems of the players and users in the market. Then design a solution that fits without requiring changes in human behaviour. Changing human behaviour is expensive. I would say, almost impossible. But if you create a solution that allows users to achieve something efficiently that they already want to do, then market penetration becomes smoother.


I was hoping you could provide readers with two definitions that I think are a core focus of these interviews: a strategic roadmap and value proposition articulation. What are the most frequent mistakes that a small business owner or inexperienced entrepreneur faces when attempting to conduct either?

You need to look at “Strategy” as a complex exercise. Not just a knee-jerk reaction. Here are a couple of worksheets (I & II) that address both topics you ask about.


“Culture eats strategy for breakfast” was a quote that I couldn’t resist writing down from your interview with Jerry Rawls of Finisar; do you agree? (and why).

No, I don’t agree. I think both are intertwined and equally important. Great culture, coupled with a stupid strategy, results in the same kind of disaster that the opposite creates. I think Jerry is extremely biased in his comment, but I am open to divergent points of views. For Finisar, what worked in the last downturn will not work this time around. They need a different strategy, and culture alone will not save them. I would go so far as to suggest that this time round, Jerry may develop more respect for Strategy and Consultants, because the job ahead is not an operational re-engineering, but a strategic re-engineering of his business.

When I was reading your interview with Carol Realini from Obopay the thought of mobile banking (via a phone) in countries that lack adequate infrastructure brought about so many applications in many emerging markets that companies could utilize. With the world becoming so interconnected globally do you see innovation lagging here in North America because of our ability to not think outside of the box?

I think America has shown tremendous ability to think outside the box, and will continue to do so. However, it has to shed the erstwhile acceptable position of “big brother” and get used to being one of the 3-4 major economies. Innovation will flow, if this more open, more collaborative cultural shift happens over the next decade. We’re now in a “balance of power” era, no longer an America-dominated age. Carol Realini, for example, will need to watch her competitor Sanjay Swamy of mChek carefully!


Entrepreneur Journeys, Volume I can be purchased online via Amazon and would be a great gift during the holiday season for any individual with the spirit of an entrepreneur.
For more information on Sramana Mitra visit her website.

(Disclosure: I was not paid or compensated in any form for this review)

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Charitable Donations 2008:

I received some flak the other day in an online forum for a comment I made about my method of selecting charitable donations:

“I often donate my time with volunteer work, but one thing I always look at is the cost structure of the charity. If more than $0.10 of every dollar is going to pay for administration, advertising, etc than I'm likely not interested. When I give I intend for it to go to those who need it, not to help support fat charities who can't work efficiently. There will always be some cost, but in the case of cancer research I want the money I give to go directly there, not anywhere else.”

I wanted to provide an example for readers who may be debating which charity to give a charitable donation to for the holiday season or year-end tax purposes.

My basic view is that charities should operate as efficiently as businesses in handling expenses. For every dollar a charity or any non-profit spends on administration or a frivolous expense that is one less dollar that goes towards important research, public education or client services.

When individuals or businesses donate to a charity that donation carries the expectation that the money is going to a good cause and trickles down to those who need it most. Management of any non-profit clearly have expenses that they incur from operating their individual charities but they receive donations with the trust that those funds won’t be mismanaged and will ultimately go to those who need the help.

If I give $2,000 to Charity X because I feel research into finding a cure for disease X is a worthwhile cause I want the majority of my money to get to where it helps the most. The same goes for public education, client services or other supports I donate money to for various charities.

Here’s a table I put together to compare three charities I’ve supported in the past:
- Canadian Cancer Society
- MS Society of Canada
- Canadian Diabetes Association



I look for two major things in a charity before I give:

• The percentage of revenue that goes towards administration (target <10%)>The percentage of revenue that goes towards fundraising costs (target 20-30%)

The basic principle behind each target is fairly simple:

• I want to ensure that the money I donate is being directed towards programs that benefit those who need it
• I want to ensure that the money I donate is not being used for costly initiatives

I encourage individuals thinking of donating to a charity to always ask questions and investigate before donating. Your money might not be directed towards the activities you intend to support and instead might pay for expensive advertising campaigns or administration that doesn’t benefit those in need very much.

There are a number of popular charities who have very expensive administration structures, that I won’t name publicly, that still support good causes. While their cause is admirable their organizational structure and spending is horrendous. Information on any charity in Canada is easy to receive and by law every charity must make available their financial statements to the public.

My intention for this post isn’t to discourage charitable donations; in fact I advocate that those of us more fortunate than others give a little in return. What I do hope is that individuals or businesses willing to give this year ask important questions and investigate on where your dollars are going and how efficiently your money is reaching those who need it.

Clarie’s Three Charities for 2008:

• Canadian Diabetes Association
• Local Food Bank
• United Way

What do you look for when considering a chartiable donation?


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Investing Carnival #25:

Welcome to The Weekly Investing Carnival supported by the members of The DIV-Net.

Triaging My Way To Financial Success is proud to bring the December 9th, 2008 and 25th edition of The Investing Carnival. At The DIV-Net our members publish and welcome articles each week related to Value Investing, Dividend Investing and Long-term Investing.

The Investing Carnival encourages readers to submit content related to not only Value Investing, Dividend Investing and Long-term Investing, but also the stock market, real estate, commodities or other alternative strategies.

Featured Articles from: The DIV-Net

Disciplined Approach to Investing presented A Look At The Consumer
Dividends4Life presented Stock Analysis: Sovran Self Storage, Inc. (SSS)
the moneygardener presented No Dividend Cuts Yet From Canadian Banks
The Stock Market Prognosticator presented The Financial Crisis and the Collapse of Ethical Behavior
Dividend Growth Investor presented International Over diversification


Stocks:
Magic Diligence continues a series of posts on “Magic Formulas” for 20 stocks based on the prices/sales ratio with Top 20 Magic Formula Stocks by Price/Sales Ratio

One Family’s Blog gives a detailed comparative analysis of eight CanRoys

Learn The Stock Market And How To Trade uses some technical analysis to suggest a purchase in First Insurance Suggestion - AIG

Dividends4Life takes readers through a dividend stock analysis of Becton Dickinson & Co (BDX)

Old School Value shows readers how to properly Analyze Financial Statements of AeroGrow (AERO)

ZachStocks gives an analysis of why TransDigm Group’s (TDG) profits are gaining altitude

The Div Guy presented Procter & Gamble, Durable in a Downturn


Dividends:
Thicken My Wallet asks Why all the fuss about dividends?

Dividend Growth Investor discusses intentions of Dividend Portfolio Investing for Monthly Income

Triaging My Way To Financial Success presented Dividend Investor Interview I


Personal Finance:
Investing School has 25 Ingenious Ways to Spend Your Time in the Current Financial Crisis

Money Blue Book provides 10 Steps on How to Become a Millionaire and Get Rich

The Personal Financier asks Is This the Opportunity of a Lifetime?

PersonalFinanceAnalyst describes some Fantastic Investment Advice in one Word...Education


Market Commentary:
Disciplined Approach to Investing gives a short lesson on the fact that Economic Conditions Not The Same as The Great Depression

Mutual Funds: A Revolution in Financial Planning writes about The Trouble with Mutual Funds: Why Your Mutual Fund Return Stinks


Retirement:
Early Retirement Extreme helps to answer the question for those seeking early retirement, “What the down market means for extreme early retirement?”

Our Financial Planner helps investors with retirement with a Guide to Choosing Your 401K Retirement Funds and Contribution Package


Real Estate:
Real Estate Investing School provides 20 Real Estate Investing Tips to Becoming a More Profitable Real Estate Investor

Living Off Dividends & Passive Income presented Real Estate Only Goes Up!

Stock Market Prognosticator presented Is The Housing Market About To Turn?


Book Reviews:
Value Discipline reviewed The Success Effect saying, “This is an enjoyable read, a great stocking stuffer for yourself, your partner, your friends. I highly recommend it!”

Living Almost Large reviews Investing in an Uncertain Economy for Dummies


General Investing:
Ripe Trade takes readers through the Best Asset Allocation

The Digerati Life has 14 Effective Strategies to Leverage a Weak Stock Market

The Dividend Guy presented Viewing My Sector and Asset Allocation

the moneygardener presented portfolio weighting breakdown

Dividend Money presented Invest Now When The Odds Are In Your Favor

Barel Karsan presented Beware The Big Bath


Thanks to everyone who submitted content and remember that past posts & future hosts can be found by visiting The DIV-Net Carnivals page.

Dividend Investor Interview II:

Welcome to the second Dividend Investor Interview featuring two dividend investors of different ages, investing backgrounds and from different parts of the world.

With New Year's resolutions on the minds of many investors December is a month of bringing new perspectives to readers to see how others approach dividends, risk and the current market environment.


Dividend Investor Interview II:
John (aka: jonnyrotten)

First let’s explore your current investor profile with some back ground information if you don’t mind.
Can you give readers some demographics?

I am 46 years old, married, with 4 kids. I teach at a university in Japan. I consider my risk tolerance to be high.


When did you first begin investing?

I began buying GICs as a young teenager, and mutual funds by the age of 25. I bought my first stock when I was about 27. During my university days, I would receive interest-free loans and bursaries and simply deposit them. I paid my school expenses from earnings from summer jobs and other part-time work. When I graduated, I paid back the loans in full and pocketed the interest. I suppose this was possible in my day when tuitions were not that high.

Some might think this unethical, but I don't feel that way: I took advantage of what was available to me and made the most of it in an entirely legal way. Like buying with a credit card, paying the bill in full with no interest when it is due, and receiving cash back at the end of the year.


How did you start investing? What style?

I began with mutual funds. I bought a wide variety of them with no particular understanding of asset allocation or specific goals.

I merely hoped to invest and make money. I was attracted to the stunning returns of the Altamira Equity Fund in its early days under Frank Mersch, and this was one of my first funds.

What were your previous investing objectives?

To make money. I did not have a long-term target or goal in mind until I married and began thinking about retirement.


What has helped to influence you over the years you've invested?
(Media, mentors, family, experience, etc)

My father, first of all. He has invested all his life, and we share a love of stock and economic talk. He used to manage investments for his mother, and even as a small child, I always heard about my grandmother's stock, how it had risen or split or paid dividends. I grew up thinking it natural and lucrative to invest in the stock market, and only in encounters with friends and other relatives did I realize that many regard the stock market as a form of gambling that they avoid. Many people I know are very, very conservative and only invest in term deposits or managed funds.


How long did you invest in actively managed mutual funds?

About 15 years.


What was it about dividends that immediately caught your interest?

During the dot-com meltdown, I watched my spectacular paper gains evaporate, leaving me with nothing to show for my time and trouble. While I was willing to wait for some of the funds to recover, I began thinking about the fees I was paying to hold these funds. When my portfolio had grown to $100,000, I realized it was costing me about $1500 to $2000 a year for management alone!

But where was the management when all the profits vanished? The only winners were the managers!

I recalled how the funds had been marketed, with their amazing one-year returns... I was also noticing that as a non-resident of Canada living in Japan, significant taxes were being withheld from any distributions I received. My performance was seriously lagging the market, and most of the gains I made were being taken away by fees and taxes.

I started to look for a better way. Through some reading, I came across the style of dividend growth investing.

Here was a tax-efficient and relatively conservative style that appeared to be a winner, both in bull and bear markets. The math was simple, and the long-term outcome predictable to quite a high degree of certainty, unlike the stock market in the short or medium term. I decided to move some money from mutual funds into dividend-paying stocks.

When the first few dividend raises arrived, I was instantly addicted. I began moving quite aggressively to unload funds and acquire dividend-paying stocks.
Do you have regrets? If so, what are they?

I sometimes regret that I am not more patient to wait for prices to come down, especially now which might well be a once-in-a-lifetime opportunity to buy. I managed to sell funds for significant gains in 2007, but I bought several stocks at prices that I now see were too high.

I also regret that I didn't sell out of funds in 2000 when I was looking at double and even triple digit gains in some cases. I got carried away by greed and should have realized that anything that returns 50~100% in less than a year should be sold and moved into other sectors or investments.


What has been your biggest mistake?

As mentioned above.


What has been your biggest success?

Well, I doubled my money in the Altamira e-business fund in about 6 months. At least this was a good move. Having learned from past experience, however, I sold without hesitation BMO China, Resource, Precious Metals and Special Equity when I saw short term gains of over 30%. Hindsight shows that I did the right thing, especially with the sector funds.


Why dividends?

They're a bird in the hand. Cash money right in the bank. But "dividends" should be qualified with "dividend growth reinvestment," for I think the style only works by focusing on the stocks with a history of dividend growth, and by reinvesting all dividends back into new shares. This way, you win when the markets drop, because you can buy shares more cheaply, and you win when they rise, because you have capital gains to see.


Where do you see yourself in 10-15 years from now?

Hard to say. Life always surprises. Ideally, we will move back and forth between Japan and Canada, taking advantage of all that both great countries have to offer. Unlike some others, I don't aim at early retirement but rather at part-time employment. By 55~60 I should be able to accept courses that I want to teach, and say no to those that I'd rather not. I don't mind working 2 or 3 half-days each week for a few months, followed by a few months off to enjoy my own pursuits, hiking, swimming, gardening, reading, and just puttering around the house fixing things up.


What advice would you give to an investor struggling with how to invest?

Unlike me, don't be IMPATIENT! Realize that becoming financially independent is probably going to take 20 years or more. Establish a plan and stick with it. Read all you can, but be wary of the day-to-day media babble, and be especially cautious with the opinions of "gurus." When they pronounce that oil is going to $200 or gold to $2000 or the TSX to 16,000, realize that they are long on these bets, but will be almost certainly be short before the general public who follow them. They are in there for themselves, not for you. Don't get carried away with excitement during bull markets, and don't succumb to panic and fear when markets correct. Buy solid companies with good management and cash flow and hold them. Invest regularly.

Finally, be diversified: don't bet the farm on the oil sands or the banks or even a solid blue chip like Johnson & Johnson (JNJ); a little of everything. Diversify also in other ways: invest in your home, your health, your marriage, your career. Encourage your partner in life to invest differently than you do. My wife is 100% in cash, and she's beating the snot out of me! For now.


How are you coping with the present market meltdown?
Has your investing philosophy changed?
What are you doing?

The short answer: nothing. I hold solid companies that I believe will emerge big winners from the present crisis. Such companies as Royal Bank (RY) and the Bank of Nova Scotia (BNS) have been making strategic acquisitions and building their wealth management positions.
Manulife (MFC) has been heavily oversold, but I suspect funds that are desperately trying to raise cash are selling off their winners, first and foremost. It is a rare opportunity to pick up stocks like these at 30~40% discounts and more.

Still, I am sitting tight, reinvesting dividends, and looking to add to positions that are currently under 3% of the portfolio. In the coming months. I may add to positions in TD Bank (TD), Husky Energy (HSE), Rogers Communications (RCI.B), Fortis (FTS) and Thomson-Reuters (TRI). I would like to start positions in Enbridge (ENB) and TransCanada (TRP), but only if and when the price is right, say roughly, $32 and $30 respectively. If the Canadian dollar recovers to at least 0.95, I may add to positions in Vodafone (VOD), British Telecom (BT), AT&T (T) and Johnson & Johnson (JNJ). JNJ is the one stock I hold that I may go well overweight on, up to 10%. Not only is it the safest stock I own, but the dividend growth record is unrivalled. While I don't expect much in the way of dividend growth from the banks over the next year or two, I feel confident that JNJ will raise by 8~10% next year.

In short, it's business as usual. Regular investing and constant reinvesting of all dividends. Remarkably, and perhaps this is the best evidence. I have that dividend growth investing is a winning strategy; my cash flow has been steadily rising, even as the market value of my portfolio drops. A steadily rising cash flow: what more could an investor ask for?

Many thanks to John for sitting down to share his thoughts on investing, dividends and investor fundamentals. If you found this interview helpful please share your appreciation and comments below.

See Also:
- Dividend Investor I


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2009 TMWTFS Post Generator:

Here is an opportunity for readers to submit requests and potential ideas for future posts to be featured on TMWTFS in 2009. Whether you have ideas that are big or small this is your opportunity to have a voice on topics you may want better insight into.

Topics can include a specific analysis of a stock, mutual fund or ETF; specific questions about topics I’ve written before or something entirely new. If there is a past post you would like more clarification on or revisited submit your request.

While I can’t guarantee that every idea, suggestion or request will be written on in a future post I will certainly try my best to accommodate submissions.

This feature is important from my perspective because I am able to generate a number of ideas for future content that readers are very interested in reading and it helps you to answer investment questions that you may be having difficulty with.

The 2009 TMWTFS Post Generator will be located at the bottom of the site for readers to access for the remainder of December. Each submission will be sent to me privately and I will provide a list of submissions that I intend to write content on next year.

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I am happy to announce that I have received a very good response so far for my Stock Analysis Mailing List. I have contacted individuals privately who have signed up for this exclusive feature to confirm their interest as of 12:00pm EST today.

27 RSS subscribers have signed on so far and I am in the process of writing my first post, Taking Stock in KO, for release in early January 2009.

Those on the mailing list will receive exclusive spreadsheet information and valuation range for the company that will not be published as extensively on TMWTFS. Interested readers can sign up or find more information via the link above I have provided.

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Dividend Investor Interview I:

For this week and also on December 8th I have the pleasure of presenting interviews with two dividend investors of distinctly different ages, investing backgrounds and from different parts of the world.

The DIV-Net, its member sites and Triaging My Way To Financial Success are excellent sources for topics on dividend investing, but gaining new perspectives from other investors is a great resource to have for those looking to learn as much as they can about this style of investing.

With 2008 drawing to a close I felt these interviews might be helpful for readers looking to develop some new year’s resolutions for your investing approach. My hope is that these interviews will provide meaningful insights into investing and provide as a compliment to what I present here on this blog.


Dividend Investor Interview I:
Paul (aka: Augustabound)

First can we explore your current investor profile with some back ground information if you don’t mind?
Can you give readers some demographics?

I’m thirty-four years old, born and raised in Hamilton, Ontario Canada
I was raised by my Mom who has no investing experience or real understanding of the investing world and no inclination to know either. She's into real estate as a career and has some investments in real estate.
I'm married, no kids yet.
We own a home in Newmarket Ontario (mortgage, so the bank owns it). We've been in it for 2 years and want to start making annual lump sum payments and will start rounding up payments to the nearest hundred next renewal time.
I'm a contractor, self employed, have been for 4 years.
Our household combined income is around $150 000 per year.


With all the turmoil in debt and equity markets what would you consider to be your risk tolderance?

I'd say my risk tolerance is high since I have 20-25 years until full retirement, but I'm not as risk taker per se. I would say that I could devote 5% of my portfolio to riskier investments. I haven't as of yet though so the first sign of a loss might make me re-think that strategy.


Do you mind explaining to readers how you define risk?
What you would consider to be risky investments?
How do you go about minimizing risk in your investing activities?

I'd say risk to me is the potential for losing my investment. Currently I don't see losing money in the great blue chips that are on sale. Investing in a company with a strong balance sheet, management who has the experience to guide the company through tougher times and a product or service that people will continue to need with limited competition.
Risky investments to me would be the opposite of my example above. Some riskier investments that I would see myself studying would be alternative energy companies, specifically green energy for the building industry, geothermal and solar power for example. Small cap companies who may have a strong balance sheet and good management but they may be in an unproven industry or sector would be another risky venture.
The longer this housing bubble unravels I think the more people are seeing how the lack of transparency affects our banking industry (more so in the United States than Canada). If Warren Buffett can't understand a prospectus (as he said in an interview) for some of the financial derivative contracts out there, then how is an independent investor going to understand it? These also encompass some of the banks in the United States. I read a report last year that Citigroup (C) had over 2000 subsidiary companies. How does the independent investor decipher that annual report? They don't, and most professionals don't, yet still invest in these big, strong, secure and safe banks. That's risk.
If you don't understand what you're investing in fully and completely, that's risky. To minimize that you need to know what that company does to make money. Some of the most successful companies of all time can be summed up in a short paragraph as to their business operations and how they generate revenue. Coke (K), Pepsi (PEP), Anheuser-Busch (BUD), 3M (MMM) etc. I like Warren Buffett's quote, "Diversification is insurance against one's own ignorance."
I interpret that to say, most diversify because they lack the skill or desire to fully understand what they're investing in and are taking the somewhat easier road. I believe hedging and diversifying are two different ideas that most think are one in the same. Hedging is attempting to limit your risk in something that is out of your control. Currency might be an example of that. Instead of focusing on American companies, I buy what I think are great businesses around the world to limit my exposure to a catastrophic event in the US or a political upheaval or unrest. Diversifying is buying more companies stock or more mutual funds because "more is better", and some think they are limiting the down side risk by doing that. If a company files for bankruptcy it may only be 2% of my portfolio, it won't hurt a bit. But if I had done my research and investigated all avenues I more than likely would have seen the increasing debt load, for example. Or the fact they've taken longer time to pay suppliers, or are even delinquent on some accounts. Usually all the red flags are there, you just need to find them


When did you first begin investing?

My first investments were employee sponsored pension plans when I was 18. I started with $25 per pay that was matched by my employer. Plain Jane Canadian balanced mutual fund from Jarislowsky Fraser. My human resource manager at the time basically told me she was enrolling me in the plan. Sixteen years later I know it's the best thing anyone did for me since I didn't notice the money coming off my pay. She's a big reason I had $35,000 in the plan when I left the company, with out her I probably wouldn't have done it myself and would be starting from scratch by myself now.


How did you start investing?
What was your style?

When I left that company 4 years ago and saw the $35,000 I kind of knew I needed to do something with it and wasn't totally sold on mutual funds. Even early on I knew there was something wrong with a company charging 2-3% per year for a fund that has over 100 stocks and bonds in it (by this time the company plan was now under a different administration and we had the choice of McLean Budden and Standard Life funds). I knew there was something better to do with my money. I thought even there were better strategies than dollar cost averaging every 2 weeks like the plan does. At some point I started getting books out of the library on basic investing, then I read some Buffett books and was hooked. Value investing is for me. This guy went from a few thousand dollars working out of a room in his house to being the third richest (at the time) person in the world. Buffett's ideas made sense to me, buy great companies when they're cheap and hold on for the long term. So far that's been my strategy.


How do you define quality when investing?
What sort of criteria do you look for?

That's a tougher question than it seems. When I think quality I think Johnson and Johnson (JNJ) even Honda (MHC) or Toyota (TM). But I wouldn't necessarily invest in Honda or Toyota because of the highly competitive, cyclical, low margin industry they're in.
Fairfax financial. Prem Watsa is extremely good at what he does, seems candid with shareholders and has a long track record of doing what he does best.
Same with Buffett and Munger from Berkshire Hathaway (BRK.B). They have an abundance of quality companies under the Berkshire banner. Solid businesses that will be running profitably in years to come and most will be profitable in any economic environment. Again, same as Fairfax, they're candid with shareholders and create money for their shareholders by doing what they do best.
I think most of all from Berkshire or Fairfax (FFH), they stay away from what they don't understand, but most of all they allocate capital in way most beneficial to their shareholders.

Industry leaders are usually considered good quality. To be the best you need to know your role and capitalize on it. Nike (NKE), Caterpillar (CAT), Kraft (KFT), Wal Mart (WMT), Proctor & Gamble (PG), McDonalds (MCD) and Microsoft (MSFT) are examples in my opinion.


What were your previous investing objectives?

Put enough money away for retirement; plain and simple. For the most part that still holds true. I love my job, so working isn't a problem for me. I would imagine when I decide to retire, it will only be semi retirement, I'll do something I really love part time. Maybe build furniture in my shop in my spare time and I'll probably be contracting even small jobs in my area a couple of days a week or even consult.


What has helped to influence you over the years you've invested?
(media, mentors, family, experience, etc)

I don't have any personal mentors in my life but I try to learn what I can about Buffett, Munger, Graham, Whitman and another manager I've been newly interested in Bruce Berkowitz.
If anything the media has taught me is most of the everyday stuff that goes on is just noise as Graham has put it. No substance to what's out there just unjustified emotion for the most part.
I stopped watching BNN (Canada’s Business News Network) because everyday there's another reason the market is in bad shape or the country is going into a recession. I also got pretty tired of them having guests on that were regulars and they gave you their stock tips for this week that were totally different than last week. Having a TV show made Jim Cramer go from a former successful hedge fund manager to a circus clown who needed to come up with multiple stocks everyday to fill an hour on the air.
As far as family influences go, my Grandfather retired from Stelco with a good pension and a veterans’ pension so he was taken care of by his company and his country. I knew I wouldn't be on taken care of on either account so I needed to do something myself.
I also racked up some credit card debt after college and knew I couldn't spend my life always playing catch up. I saw the stats of people who carried credit card debt on for years and the outlook wasn't good. I knew putting money away as early as I could would result in more years of compounding in my favour later on in life.


How long did you invest in actively managed mutual funds?

I was in mutual funds for about 15 years through my defined contribution plan and group RRSP. Once I started studying the stats of the success or lack thereof for the mutual fund world I knew I needed my money to start working for me. Few mutual funds beat the indexes they track for more than a year or two and the fact they are somewhat confined to new money in and redemptions, those were a couple of variables out of my control that I didn't like. The more money in means the manager needs to either buy new stocks to add to the already large amount in the average mutual fund or buy more of what's in the fund at a possible higher price. Of course redemptions work in reverse of that. The manager might have to sell off a winner to keep the fund somewhat liquid. Too much mutual fund selling could possibly move markets lower which leads to more redemptions and thus, more selling. At least as a value stock investor I can take advantage of the sell offs like we've seen the last month, it's not that easy when you're in funds and most of the variables that make the mutual fund world work are out of your control.
I also think Canadian funds are somewhat weak compared to the US counterparts. There are some great money managers in the US that we don't have direct access to. Of course there are some great Canadian managers but the likes of Stephen Jarislowsky are reserved for company sponsored plans or higher net worth individuals. Francis Chou is the only great manager I can think of that a regular do it yourself investor has access to.


What was it about dividends that immediately caught your interest?

I've read countless articles and books that show the proof that dividend paying stocks outperform non-dividend paying stocks over the long term. Combine that with a value investing approach and we should be on the road to a nice retirement.
I also like the fact that quarterly I get some cash in the investment account and I can buy whatever stock is on sale at the time, or hold it and wait for a bargain to come along. It's easier than having to save cash to invest from the pay check.


Do you have a threshold, or minimum dividend yield you require?

I seem stuck on 2%. Not sure why though. I like Ben Graham's minimum for the "lay investor" as he calls them. I think he requires 75% of the long term bond yield.
So I guess currently that would be (0.75*4.5%) = 3%
Some also say they look for a yield better than the average yield of whatever index the company is traded on. Again, I think we're at or near 3%.
I really couldn't tell you why I'm stuck on 2%............or now maybe 3%. The yield is the main reason I hadn't looked seriously at Canadian National Railway (CN), Canadian Pacific (CP) or Burlington Northern Santa Fe (BNI). I actually saw BNI at $77 in the spring and didn't bite because I couldn't get past that 2% wall. I watched it go over $113 in the next 5 months. I figured if I had owned it I would have locked in a partial profit by selling part off. Then I realized I probably would have held it all the way back down to $77 like it was last week. Now it yields an even 2% but our Canadian dollar is a full 20 cents weaker now, it was about 94 cents if I remember right when BNI was below $80.
Maybe there's another potential blog topic for you to use. Currency strategy for us here on the good side of the border.


Do you have regrets? If so, what are they?

The same as most others, start sooner. Not racking up so much credit card debt which took me years to pay off. The money would have been better spent elsewhere, like investing it.


What has been your biggest mistake?
(not specifically a stock – but maybe something more fundamental)

Last fall I bought a stock that was outside of my investing objective. It was somewhat cyclical and I didn't fully investigate the company’s direction and place in the market. Lesson learned, stay the course. If you have a solid plan then why deviate from it? Emotion, that's why. I saw it as cheap and it was cheap for a reason. Bought at $24, sold at $14 when I knew that I bought for the wrong reason and the general outlook for the company wasn't good, now it's around $10.


What has been your biggest success?
(same as before)

Following through with the plan. I've become somewhat obsessed with investing. I read whatever I can get my hands on, I surf the internet for whatever ideas, philosophies and investment history, more specifically with the investing legends, Buffett, Munger, Lynch, Graham etc. They say so much with saying so little.
I don't know what I would do being self employed if I didn't have an interest in investing, how would I retire?


Why dividends?

Cash money in the investment account quarterly. Dividends are usually paid by more stable successful companies so it's also a kind of vote of confidence from the company telling me things are OK. That's why I prefer a somewhat steady rise in the dividend and dividends paid over long periods of time. Buy the company when the stock price is one sale and you've usually got a winner. The old "buy a dollar for fifty cents" idea like Buffett, Graham and Klarman.


Where do you see yourself in 10-15 years from now?

Same place I am today, hopefully with mid six figure investment account and starting to plan the transition to semi retirement.


What advice would you give to an investor struggling with how to invest?

Read, read, read. Find something that you can relate to like with Warren Buffett. When you find that inspiration, study everything you can about it. Buffett's ideals just made sense to me, it doesn't for others. To each is own. To invest on your own you need to be willing to put in the time to read and study your options and investment possibilities. If your not able to or have the inclination to, then go to a professional and get some advice. Or do what some others do and park your money in an index fund or exchange traded fund that tracks the broader market. If you can sleep tight at night knowing you're on the right track then you probably are, if you can't sleep with your current investment situation, then you need to change something. It needs to feel right to you, and each person is the best judge at knowing that about themselves.
In the contracting business we see it time and time again. Someone who has no business "doing it themselves" does it themselves and it's usually wrong. Sometimes even worse, against the building code and/or dangerous. Know when you're not skilled enough and ask for help. If you believe you're skilled enough then keep going. Investing is one of those skills that always needs updating and is a continuous learning process.


The approach of “Measure twice, cut once”?

That' a great analogy for me.


Would you be interested in giving five of your favourite stocks and a few reasons why?

Power Financial (PWF), a holding company which owns 56% of IGM and 70% GWO and 56% of Pargesa Holdings. Pargesa owns parts of Total SA, Suez SA, Imerys SA, Lafarge SA and Pernod Ricard. They have strong fundamentals and raised their dividend in July even amidst the recent fall out. They have a strong balance sheet and generate more free cash flow every year. Trading at a P/E of 10, it's only been this low one other time in ten years.

United Technologies (UTX), a diversified company ranging from elevators, HVAC (heating, ventilation and air conditioning) to jet engines, most of their businesses are industry leaders and well positioned for future growth. Good fundamentals, balance sheet, free cash and dividends raised every fifth quarter since 1987. Trading at a ten year low P/E. It's fallen from $80 last November to $47 currently, mostly as a result in a slowing economy and not business fundamentals.

The Coca Cola Company (KO). Maybe the most recognized brand world wide. In the second quarter of this year they got their balance sheet back in favour of their current assets. Their current liabilities crept past their current assets the last 2 years which is not usually a good sign, but Coke doing what it does best, kept their margins in tact, generating cash and raising their dividend selling Coke syrup around the world. They may have the most sustainable economic moat, able to raise prices when needed and has such a network worldwide that can't be challenged. Also trading at a ten year low P/E and near their 52 week low. People drink Coke no matter the economic conditions.

Bank of Nova Scotia (BNS). One of the few banks to avoid the sub prime issues and doesn't have large invested interests in the US like it's Canadian counterparts and focuses more on Latin and Central America and parts of Asia for it's non Canadian growth. Again, good fundamental and dividends. They seemed to get dragged down, more a guilt by association with other world banks. They have maintained their balance sheet and fundamentals in a tough environment the last year and are currently yielding over 5%. Their good financial position has enabled them to buy E*TRADE Canada from it's parent Etrade Financial to help build their discount brokerage unit. Other companies aren't able to make these kinds of deals because their too busy trying to cover their losses.

Rohm and Haas (ROH). I've just started looking into arbitrage situations and ROH is on my list. Realistically I’m not ready for special situation investing yet as I have more to learn, even about the basics. The deal is scheduled to close in the first quarter of '09, whereby The Dow Chemical Company (DOW) has tendered an offer to ROH shareholders to buy the company. The offer is for the equivalent of $78 per share and the current share price is $68. Currently the deal is for close to 15% over market price. When the deal was first announced, it was for 74% over market value. Of course it would have been unrealistic to buy at that time not knowing the detail of the deal, but the stock price doubled overnight on the day of the announcement. Successful special situation investing hinges as much on the time you buy as the price you pay and the length of time until the deal closes. There are far too many variables involved to invest upon the initial announcement of the deal. Those who have followed the ups and downs of Bell Canada to go private in a deal with the Ontario Teachers Pension Plan know the risks in arbitrage. Both parties need to be in and stay in good financial condition and if there is third party financing, they also need to be in a position to follow through. Shareholders (and bond holders as Bell Canada found out) need to be in agreement of the sale and current market conditions should also warrant the deal closing. With the fear of a recession, deals aren't happening as frequently as they have the past 3-4 years, companies can't justify spending money if tough times could be ahead.

Many thanks to Paul for sitting down to share his thoughts on investing, dividends and investor fundamentals.
If you found this interview helpful please share your appreciation and comments below.


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