In praise of value

I'm a value investor. As of this week, that is.

I own, for instance, Potash Corp. of Saskatchewan (POT.TO), the world's largest producer of this crop nutrient. A Canadian value to boot. I've traded this stock several times in the past year and made some quick and easy money each time. But I have not yet held it like this, as a  v a l u e  i n v e s t o r. (My good old friend gb used to promptly redefine those stocks which, once he bought them, were just as promptly taking a dive (as it happens, a frequent occurrence), as long-term, value investments.)

Potash prices have been going down, along with the potash miners on their way to work, for a long time now. Potash is the common name for various compounds containing potassium, which are used mainly as fertilizers. An eventual rebound is to be expected, as economies improve and soil fertilization, unlike the Canadian Parliament, can no longer be prorogued.

And if I'm really lucky, the rumoured potential acquisition by BHP Billiton will materialize, and provide a great opportunity to sell. Now that would be good value. (Like striking gold. Or potash.) (Agrium Inc. is still trying to buy reluctant CF Industries, which in its turn finally gave up — for now?! — trying to buy Terra Industries. All this fertilizer business smells a bit. Is anyone still doing any actual drilling out there?) Sir, would you like some potash with that? But I digress.

What really did it, what really whisked me over to the value camp, was the acquisition this week of the Mother of all value shares. No, not this one (BRK.A), this one (BRK.B, the class B common stock):

Which is close enough. And courtesy of a 50:1 Mother of all stock splits. As you know, Warren (I feel I can call him that now) is, still, the Mother of all value investors (or, perhaps, the Father of). When he buys one railroad company, all of them go up, as if everybody will all of a sudden rush to buy trains. So I'm very optimistic.

My experience with the maternal superlatives is mixed. I once had a dream of working for the Mother of all companies in my field. Once I was hired, I wanted to leave within the first few months. Things were far from what I expected. Then 'inertia' took over, and I hanged on in there (for too long). I had, along the way, the best of times and the worst of times. I hope for better results overall with Berkshire.

And with Potashkewan too.

Oh the dickens, what a week!

Charts: Globe Investor

Start small, grow rich

Singapore, Taiwan, Austria: what do they have in common?

All these countries have extremely performant and export-oriented economies.

Singapore - iShares MSCI Singapore Index (EWS)

Singapore has an export-oriented economy, one of the most exposed to the global economy. This city-state does not expect to return to growth until the global economy shows its signs of recovery. Most notably, the full recovery will depend on the economic performances of overseas markets such as the US, China, and Japan. However, once the external trades start to pick up, Singapore's economy is likely to be among the first to rebound.

Taiwan - iShares MSCI Taiwan Index (EWT)

Another heavily trade-dependent economy, it will continue to suffer until global economic recovery takes place. Several economic indicators point to a slight easing of Taiwan's deep economic recession during the second quarter of 2009.

Six of the seven components of the index — export orders, average monthly overtime in industry and services, book-to-bill ratios in the semiconductor machinery industry, monetary aggregate M1B (currency in circulation, current-account and passbook deposits [M1A] plus passbook savings deposits), stock prices, and producers' inventory — showed positive movement. However, the barometer, which uses five colours to measure the health of the economy, continued to flash blue, indicating recession, for the ninth month in a row.

Austria - iShares MSCI Austria Investable Market Index (EWO)

The latest Purchasing Managers' Index (PMI) released by Bank Austria showed a slowing of the downturn in June, and points to a turnaround of Austria's industry most likely in the summer.

Decline in new orders, stocks of finished goods and output lose momentum. Layoffs remain at a high level. Industry poised for stabilization but a clear recovery is not anticipated.

Sources: Economist Intelligence Unit, Bank Austria

The worst of the epidemic is over, but Mexico's economy is hit hard

Mexico’s economy caught the flu rather badly, and has contracted 8.2% in the first quarter of 2009. Experts assess that it is likely to continue to sink further and faster than had been expected. Look for a recovery of the patient in the second quarter of 2010.

Mexico factsheet (data from the Economist Intelligence Unit):

• Area 1,972,545 sq. km.
• Population 104.9 million
• Number of households 24.1 million
• Fertility rate (per woman) 2.4
• Adult literacy 91%
• GDP US$677 billion
• Agriculture 4.1%
• Industry 26.4%, of which manufacturing 19.5%
• Services 69.5%
• Mobile phone subscribers per 100 pop. 36.6

In the meantime, your research for investment opportunities may start with the following Mexican funds and companies: iShares MSCI Mexico, Telefonos de Mexico, Cemex, Mexico Fund, Mexico Equity & Income Fund, Cimarex Energy, America Movil.

After which, look forward to the good times of tequila, the doffed sombrero, and the siesta...

An abundance of investment opportunities to feed the world

A recent article in The Economist talks about outsourcing's third wave, identified to be the agricultural investment abroad. Although it can be argued that outsourcing traces its roots to thousands of years ago, on a global scale in modern history the manufacturing and services sectors may be deemed as the first and second wave of outsourcing.

An interesting paper signed by Joachim von Braun and Ruth Meinzen-Dick of IFPRI (International Food Policy Research Institute) provides more details about the new trend of global investments in farmland abroad.

Two companies that will benefit from this powerful, and potentially very fertile, global trend could be Deere & Co. and Monsanto.

VIX and stocks run in opposite directions

The VIX (CBOE Volatility Index^®), or "investor fear gauge", measures market expectation of near-term volatility, as conveyed by a range of S&P 500 index option prices (both calls and puts). It is, essentially, the price of buying options in order to protect stocks.

A high VIX value is seen as a greater degree of market uncertainty, while a low value reflects greater stability. As the graph below shows, when the VIX goes up, the stocks go down (S&P, Dow, NASDAQ). Conversely, when the VIX goes down, the stocks go up. Hence, an investment in iPath S&P 500 VIX Short-Term Futures exchange traded notes (which track VIX futures) can act as a bearish hedge.

Other volatility indexes: VXN tracks the NASDAQ 100, VXD tracks the Dow Jones Industrial Average, and MVX tracks option prices on the S&P/TSX 60 index ETF. Note that Vicks is another thing entirely.

A couple of questions arise:

• Q: Are rising volatilities almost always a precursor to falling stock prices, as the market wizard stated in Steven Sears' Barron's article, or are falling stock prices the cause for rising volatilities?

  A: Yes.
  

• Q: What is the relationship between VIX and Viagra?

  A: With all due respect, it seems that the markets do just fine without Viagra, in particular when the VIX comes down.

Still thinking of investing in banks? Think Canadian first

A ranking based on the analysis of total assets and long-term credit quality ratings from Moody's Investor Service, Standard & Poor's, and Fitch, shows that out of the 500 largest banks in the world, Canadian banks are among the safest.


Source: Global Finance: World’s 50 Safest Banks, European Central Bank, Eurostat.

If clicking on the image to enlarge is not an option for you, here are the Canadian rankings: 10. Royal Bank, 14. Toronto Dominion, 23. Scotiabank, 32. Bank of Montreal, 42. CIBC. Top spot went to Germany's KfW.

Canadian inflation hits 14-year low - agricultural commodities gaining even more appeal

Thomson Reuters published this morning a report on the latest inflation figures in Canada.

Canada's annual inflation rate in April dropped to a 14-year low of just 0.4 percent, a move analysts said meant the Bank of Canada would be in no rush to raise record-low interest rates.

The central bank last month cut its benchmark interest rate to 0.25 percent and promised to keep it there until mid-2010 as long as inflation remained tame.

The core annual inflation rate - closely watched by the Bank of Canada - dropped to 1.8 percent from 2.0 percent in March. The rate excludes the costs of volatile components such as fruit, vegetables, natural gas, fuel oil, and gasoline.

The fall in energy costs helped offset a rise in food prices, which have been steadily increasing since February 2008. Prices in April were 7.1 percent higher than a year earlier, slower than the 7.9 percent year-on-year increase in March.

The Canadian dollar firmed following the data and by 8:30 am was at C$1.1488, or 87.05 US cents, from around C$1.1553, or 86.56 US cents.

To oversimplify here, and joining the chorus of other bulls on the sector, I believe that agricultural commodities may be a safe place to deploy some money. The due diligence, as required before any investment, could start off with a close look at the two Canadians icons playing in the agricultural space, Agrium and Potash Corp of Saskatchewan.

The tiger is happily roaring and the Indian stocks are surging

There are numerous Indian stocks trading as ADRs (American depositary receipts) on the NYSE and NASDAQ. Worth taking a look at.

Following the Congress Party decisive victory in India's election, with the most seats since 1991 and no longer needing communist partners in the coalition, the Bombay Stock Exchange, founded in 1875, halted trading within seconds of the market’s opening at 9:55 am local time as shares surged. For the first time ever, after the trading resumed at 11:55 am stocks jumped further, triggering an automatic shutdown for the rest of the day.

India's economy quadrupled in size since 1991 as a result of free-market reforms. Asia's third-biggest economy expanded 5.3 percent in the quarter through Dec. 31, the slowest pace since 2003, while factory output in March shrank the most in 16 years.

Still, a caveat. Although India will benefit from a large amount of capital flowing into the country, Credit Suisse Group said in a report,

the rally may be halted by global markets, monetary and fiscal constraints, and data disappointment.

Who in your merry merry month of May?

Rob Carrick's column in today's Globe and Mail is altogether Canadian, title allusion and all.

He draws attention to a few 'beautiful losers' (so called because they didn't rise as much as others in the recent rally), Canadian utility stocks that pay good reliable dividends (in the range of 3% - 6% as of the end of the week), are still reasonably priced, and may be worth adding to your portfolio. The list consists of several of the usual suspects: TransCanada, BCE, Fortis, Canadian Utilities, and Telus. And who shall I say is calling?

David Baskin, president of Baskin Financial Services, whom he interviewed, "is highlighting shares like this for conservative clients who are still wary of the markets and might otherwise put their money in bonds and treasury bills." Rob adds, "Share price appreciation is another reason to own stocks like these. Over the past five years, Fortis, Telus and Canadian Utilities have outperformed the S&P/TSX Composite on a cumulative basis." Who for his greed?

Of course, as a general rule (thank you, wise ml), seeing stock advice anywhere is not a prescription for prompt purchase. Check it out yourself first. Also, if the current market correction goes on for a while (or longer), the patient investor may be able to get their pick(s) here at an even better price. In Canada, sit on it over the long weekend. Timing and luck are of the essence... Who by accident?

Buying opportunities - a view from Boston

It was a very pleasant trip driving from Toronto to Boston on Eisenhower Interstate 90 on Friday morning. For someone who checks the markets diligently before investing, ideas may come from real life experiences such as shopping or travelling.

That said, buying Caterpillar and/or Wall-Mart at the moment, or after the markets pull back, may constitute a profitable investment for the future. Eisenhower Interstate 90 was full of CAT bulldozers (doing maintenance and improvement work to the highway) and Wall-Mart trucks (hauling merchandise for the masses).

An introduction to stocks

Companies raise money by issuing stocks. This is a brief introduction to common stocks — ordinary shares with voting rights attached. A company may have more than one class of stock, with different voting rights and dividend payments for each, e.g., class A and class B.

When you purchase stocks (shares, equities), you essentially own a piece of that company (and can go around and brag about it). As a shareholder, you have a claim on its assets, earnings, and have a say in its management. Even though you may not own stocks directly (in your portfolio), you most probably do in mutual funds or your pension plan.

Stocks are riskier investments that savings accounts, GICs, and bonds, but with risk comes the potential for bigger gains.

Here is information about a stock representative of what you'll find on any investment site. This one is a snapshot from the Globe and Mail (where a new format for stock quotes is in Beta) of Royal Bank of Canada common stock (its symbol here is RY-T; Yahoo! Canada Finance uses RY.TO) during a trading day in Toronto. We'll go through its main bits of information.

C$ 43.990 — the current price at 1:43pm (the quotes outside trading platforms are usually delayed, here by 15 minutes), which represents a net gain of 52 cents (or +1.20%) over yesterday's closing price (which was 43.99 - 0.52 = $43.47); the Open price (at which Royal Bank shares first traded today), at $43.24, was therefore slightly lower than yesterday's close
High, Low — today's price fluctuation
Bid, Ask — information on the current bid - ask haggle on the trading floor
Volume — the number of shares traded so far today
52-wk High, 52-wk Low — the trading price range of the stock during the last year (see also the one-year chart later below); if you were smart & lucky you would have bought Royal Bank on February 24th of this year (02/24)
Mkt Cap — market capitalization (market cap): the total dollar market value of all of a company's outstanding shares, i.e., the number of all its shares multiplied by the current share price. This figure gives you a company's size, as opposed to its sales or total asset figures. RBC's $61B makes it a large-cap company
EPS (ttm) — earnings per share in the past twelve months
P/E — price/earnings per share. Generally speaking, a high ratio of the share price to the company's earnings per share (a more expensive stock) suggests that investors are expecting higher earnings growth in the future, in comparison to companies with a lower P/E (cheaper stocks)
Forward P/E — forward price/earnings
PEG — price/earnings to growth
Annual Div. — some companies are even more attractive to the long-term investor, as they also issue dividends (usually quarterly) - part of the company's earnings are returned directly to its shareholders. For each Royal Bank share an investor receives $2.00 annually, which works out to a Yield (based on yesterday's closing price) of 2/(43.99-0.52) = 4.6%. So if you buy shares at roughly this price you'll get a return of 4.6% (unless the company gets into cash-flow troubles and cuts the dividend in the future, unlikely in the case of a Canadian bank) plus whatever appreciation the share price achieves (capital gains). Both dividends and capital gains are taxed outside a registered plan such as an RRSP or TFSA, but at a lower rate that interest income.

The quote box described above relates directly to the intraday chart below. The red dashed line is previous day's closing price. The trading volume is also tracked.

And here is the one year chart:

On the same Web page you'll also find the latest headlines related to the company, its annual financial results, and earnings estimates.

Finally, this chart compares Royal Bank's stock to the S&P/TSX Composite index (whose symbol on Yahoo! Canada Finance is ^GSPTSE) since 1995:

The two small, black arrows indicate stock splits, detailed at the bottom of the chart. In a split a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by the specific multiple, the total dollar value of the shares remains the same, as no real value is added. In a 2:1 split, you receive one additional share for each share you hold. One reason for stock splits is that a company's share price has grown too high for many investors to buy in round lots (for instance, this one). Pre-split chart values are adjusted, to provide a consistent picture.

You may also want to check out:

• OSC's Investor Education Fund:  How does the stock market work? Is this stock a good investment for me? How much do stocks pay? How do I buy and sell stocks and bonds?


• RBC Direct Investing's Education Centre:  Equities 101


• Investopedia's Stocks Basics.

What every investor ought to know

... according to Marc Faber.

1. There is no investment rule that always works.

If there was one single rule, which always worked, everybody would in time follow it and, therefore, everybody would be rich. But the only constant in history is the shape of the wealth pyramid, with few rich people at the top and many poor at the bottom. Thus, even the best rules do change from time to time.

2. Stocks always go up in the long term.

This is a myth. Far more companies have failed than succeeded. Far more countries' stock markets went to zero than markets which have survived. Just think of Russia in 1918, all the Eastern European stock markets after 1945, Shanghai after 1949, and Egypt in 1954.

3. Real estate always goes up in the long term.

While it is true that real estate has a tendency to appreciate in the long run, partly because of population growth, there is a problem with ownership and property rights. Real estate in London was a good investment over the last 1000 years, but not for America's Red Indians, Mexico's Aztecs, Peru's Incas, and people living in countries which became communist in the 20th century. All these people lost their real estate and usually also their lives.

4. Buy low and sell high.

The problem with this rule is that we never know exactly what is low and what is high. Frequently what is low will go even lower and what is high will continue to rise.

5. Buy a basket of high quality stocks and hold.

Another highly dangerous rule! Today's leaders may not be tomorrow's leaders. Don't forget that Xerox, Polaroid, Memorex, Digital Equipment, Burroughs, Control Data were the leaders in 1973. Where are they today? Either out of business or their stocks far lower than in 1973!

6. Buy when there is blood on the street.

It is true that, very often, bad news provide an interesting entry point, at least as a trading opportunity, into a market. However, a better long term strategy may be to buy on bad news, which has been preceded by a long string of bad news. When then the market no longer declines, there is a chance that the really worst has been fully discounted.

7. Don't trust anyone!

Everybody is out to sell you something. Corporate executives either lie knowingly or because they don't know the true state of their business, and the entire investment community makes money on you buying or selling something.

8. The best investments are frequently the ones you did not make!

To make a really good investment, which will in time appreciate by 100 times or more, is like finding a needle in a haystack. Most 'hot tips' and 'must buy' or 'great opportunities' turn out to be disasters. Thus, only take very few investment decisions, which you have carefully analyzed and thought about in terms of risk and potential reward.

9. Invest where you have an edge!

If you live in a small town you may know the local real estate market, but little about Cisco, Yahoo, and Oracle. Stick with your investments in assets about which you may have a knowledge edge.

10. Invest in yourself!

Today's society is obsessed with money. But the best investments for you may be in your own education, in the quality of the time you spend with the ones you love, in your own job, and on books, which will open new ideas to you and let you see things from many different perspectives.

© Copyright 2009 by Marc Faber Limited - All rights reserved.