Saturday, April 29, 2006

Portfolio Construction - As easy as 1,2,3 - A,B,C

The other day I talked about portfolio outperformance, suggesting one method to outperform the broader market. This method, a "focused portfolio", has plenty of academic support for its effectiveness and rationale. Yet, it doesn't suit every investor. It's time intensive and requires at least average investing skills (i.e. the ability to read a balance sheet, earnings and cash-flow statements). So it's definitely not for everyone.

But the great thing about investing is that there is more than one way to "skin a cat", as the saying goes. That means you can outperform the broader market (which I define as the S&P 500), by doing other things well. One way is through asset allocation and the use of low-cost ETFs to build a portfolio.

A way to enhance these returns is by investing with history on your side - in other words, finding the type of investments that have historically produced above average returns. Of course, also investing with an eye to what the world might be like in ten to twenty years, is another way to boost your returns.

So, having said that, what are some practical ways to build a low-maintenance outperforming stock-market based ETF portfolio for the next ten to twenty years?

Firstly, to acknowledge that so-called "value" stocks and "value indices" produce better market returns - on average - than so called "growth" stocks and "growth indices".

Secondly, to consider that small company stocks traditionally produce better returns than large company stocks.

Thirdly, to see the rapid rise of the emerging markets, and to acknowledge they are likely to be far larger in twenty years than today (they are producing about 20% of global goods today, yet their stock markets only hold about 5% of the capitalized value of stocks in the global economy).

Fourthly, that these advantages should also be stabilized with some large company stocks and broad-based market exposure, that will produce relatively reliable returns over a longer period.

Fifthly, to consider that the US trade and fiscal deficits are likely to continue impairing the currency for a while longer, and therefore willingly have greater than average exposure to other markets.

Finally, to consider your particular own thoughts and ideas, and to add these into the mix somewhat. This might be the idea that health-care stocks will prosper into the future, or perhaps that technology stocks now appear reasonably priced, or that commodities appear to have a bright future for the next five to ten years. Whatever - the point is is to add one or two of those themes into your overall investing mix, if you feel comfortable doing that.

Now, here is a sample portfolio I've constructed that I think would be suitable for an investor with a twenty year horizon (this is the all-stock market portion of the portfolio), and with a willingness to overload promising positions, as discussed recently. For the twenty year investor, this is the type of portfolio that probably needs only to be re-visited and re-balanced every five years or so. So remembering our themes of:
  1. Value orientation;
  2. Small companies orientation;
  3. Emerging Markets exposure;
  4. Some Broad-based;
  5. Consideration of currency implications (ie more exposure to international);
  6. Your own ideas (in this case, mine);
here's the low-maintenance ETF portfolio I'd construct with an eye to the next twenty years:
  1. 20% Broad-based international - EFV - $64.91 - ishares product tracks the MSCI EAFE Value Index, which tracks European, Australian, and Far Eastern markets. This index has outperformed the broader (non-value) index MSCI EAFE index by about 2% annually over the past five year. Five year return on the index is 11.7% annually.
  2. 20% Small company - IWN - $74.99 - ishares product tracks the Russell 2000 Value Index (US small cap). It has outperformed the broader (non-value) Russell 2000 Index by about 3.4% annually over the past five years. Five year return on the index is 16.2% annually.
  3. 25% Emerging markets - EEM - $105.45 - a broadly-based (for emerging markets) ishares product tracks the MSCI Emerging Markets Index. Five year return on the index is 23.2% annually.
  4. 20% S&P 500 - IVE - $70.62 - an ishares product tracking the value portion of the S&P500. Produced a 5.0% annual return over the past five years, beating the broader based S&P500 by 1.0% annually.
  5. 15% Own Ideas (in this case, my belief that commodity-oriented countries will do well for the next five to ten years). I'd equally weight a Canadian ETF (EWC) - $24.86 - and a Brazilian ETF (EWZ) - $44.25 - or Australian ETF (EWA) - $21.94. Five year returns on these indices have ranged from a low of 18.2% to 27.9% annually.
Now, you lose a little bit due to the management expense ratios but, over a decade or so, this looks to me like a portfolio that should significantly outperform the S&P500. By comparison, SPY is trading at $131.47.

Of course, you can always tinker with this, but this is a simple, pretty well-balanced stock portfolio, constructed with the aforementioned moderately overweighting themes in mind. I personally would sleep very easy with this portfolio. We'll check back in with this model portfolio in six months to a year.


The Confused Capitalist

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Thursday, April 27, 2006

Portfolio Construction - Outperformance

If you want to outperform the market, to build a better portfolio, then you have to be willing to do things differently than most of the herd.

First among these is committing to your positions. Today, this is called a "focused" portfolio or if a mutual fund does it, a "focused fund". Recent academic studies have shown that focused funds perform, on average, a couple of percentage points better than the typical fund. This is no surprise really, since you are willing to commit more capital to those positions holding the best promise.

While some diversification has it's place, too much will produce only market performance at best. Think of it like a game of Texas hold 'em poker: If you got dealt two aces "in the hole" to start the game, would you start off with an average-sized bet? If you did, you'd be wasting your huge advantage.

Investing is like that too: you should commit larger amounts of capital to the most promising positions, and less to the ones which are still promising, just less so.

I personally think that no one who wants outperformance should have more than 25 positions, and that the minimum amount of any position should be at least 4% of the portfolio value. Without being willing to commit at least 4% of your capital to a position, shows a lack of confidence in it, perhaps underpinned by a lack of understanding of it, its industry, etc. In that case, you shouldn't invest at all.

In some exceptional cases, you might want to commit 20% or more of your capital to an exceptionally promising situation. Superinvestor Warren Buffett has remarked that early in his career he held over 50% of his net worth in a single stock, and slept like a baby every night (presumably because he felt the stock was remarkably under-valued).

You need to ask yourself a few questions before your undertake your purchase - before deciding on the percentage of your portfolio you're going to commit to it:
  1. What are the odds that something could go wrong with this stock, and
  2. If something goes wrong, how much damage will it do, and
  3. If things go as I foresee, how much upside does this add to my portfolio?

When you can answer these questions to your satisfaction, then you'll have an idea how much capital to commit. Never forget to build a "margin of safety" into all your estimates.

Thinking differently: the first step to outperformance.


The Confused Capitalist

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Monday, April 24, 2006

Prospecting for great stock values

How do you find great stock prospects?

Well, it's easy but it requires work. The easiest way to begin with some sort of specified list - typically, this works best if you've defined an area or areas of the market that you prefer to invest in. That way, when you see a "wonderfully" priced stock (i.e. read "cheap"), you'll know it, and be able to act on it. This is one of the keys to outperformance - being able to recognize value.

Let me give you two examples from my own portfolio - two stocks - very cheap stocks - that I found. The first was Xceed Mortgage Corp., a Canadian sub-prime lender.

At the time I bought it, it was growing its earnings at a 40-50% rate annually, and yet the PE of this "undiscovered gem" was only in the nine or ten range. In situations like this, you're apt to get rewarded very quickly ... like I was ...

How did I find this? Well, I went through a list of about 400 Canadian financial stocks, eliminating ones that didn't fit my criteria (small/micro cap stocks, as it's easier to find undiscovered value in that area than anywhere else). I then researched the more promising candidates in detail. Overall, this took the best part of two weekends, but I was paid very handsomely for my efforts.

Another area I focus on is herbal medicine/businesses. Spending the better part of a weekend working through a list, I was able to find another undiscovered beauty that also rewarded me very quickly. This was American Oriental Bioengineering, and I found it at a PE of around nine, with an earnings growth rate of better than 50% annually. I was rewarded very quickly in this case too ...

But you can see how much better I would have done, had I even found this stock one month earlier ...

In each case, I also found a couple of other stocks I invested in at that time as well, but it was very clear to me that these two were easily the best ones of those lots, and I invested pretty substantially in both. It probably would have been pretty clear to just about anyone, as the value wasn't that hard to see - what was harder was having the patience and discipline to weed out the others that weren't as promising.

As one final benefit, while the "other" stocks I concurrently invested in didn't do as well, they still did OK, because they at least offered reasonable value. The best thing was that going through those other stocks gave me great confidence that those two both did offer great value and therefore I wasn't scared to overload my portfolio with them - and enjoy the benefits thereafter.

Finding great stock values - easier than you might think.


The Confused Capitalist

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Saturday, April 22, 2006

New blog links

I've added a few links on the right hand side of my blog for some of the better financial blogs I read on a pretty regular basis.

These include Crossing Wall Street (see picture, left), The Stalwart, and the Capital Spectator. Most of these blogs are updated 5 or more times per week. You might want to take a visit and enjoy their offerings.

I've also moved some of the other ones down to a section entitled Good Blogs, but not updated as often. These blogs are updated a few times a week, generally less than five.



The Confused Capitalist

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Friday, April 21, 2006

A look at the future? Currency issues.

Well, some of the currency worries are now coming to light and beginning to have a perceptible effect on the markets, as noted in a recent posting at, wherein the Swedish central bank publicly stated they'd diminished their reserves of US dollars, in favor of other currencies. This is a trend that can probably only accelerate; one blog (sorry, I couldn't find where I saw this), recently pointed out that the British pound lost 80% of its value as it was replaced as a world currency.

In the interim, the market is still being flooded with liquidity as the Barry Ritholtz at the Big Picture mentions (read as ... "we're cranking up the printing presses, George, as it's the only way out of this pickle").

I've also discussed the effect that the Fed will need to continue rising interest rates, something that'll be needed to protect the currency, and also guard against importing inflation, as the greenback continues its decline against other major world currencies.

In my opinion, these are the early signs of a long future of more of the same, as I've discussed in commentary over here, suggesting that you lock down your adjustable rate mortgages.

The other side of that is, of course, ensuring that all of your own investments aren't denominated in the greenback. This should help "spice up" your returns, as the decline of the USD will aid in boosting returns from foreign stocks and ADRs. This is also part of the reason that well-priced foreign markets will continue to do well for the foreseeable future. While some fret that the mega-returns seen in emerging markets over the past few years is just a prelude to a crash, I don't.

As pointed out in the prior link, many of these emerging economies have moved their public finances to firm footing, their public companies to much more transparent accounting, and their returns on equity are far stronger than ever before. In summary, both the economies and the companies themselves are much more robust than in decades past.

It's my understanding that South Korea is going to be moved out of the "emerging markets" contingent this year - but against that, they still have a very economically-priced stock market, at a 10.5 PE, with projected earnings growth of 15% p.a. for the next two years. Where else can you find a developed country market with these attractive valuation metrics?

Other emerging markets also have attractive valuations too. Against that, the US market offers a relatively high PE, with a very clear deteriorating currency situation possible.

While the over-sized emerging market returns of the past few years may decline somewhat, I think that the overall investing backdrop needs to be considered: Where do you think a rationale investor should park his/her money?


The Confused Capitalist

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Wednesday, April 19, 2006

Long division? * 20 / 10 / 5 * A useful analogy.

Every once in a while, you come across a useful analogy that can help you in your own life, in your own particular situation, that helps you better yourself, or break out of a tired old mental model that no longer works for you.

Whatever it is, you strive to remember it, and use it to your advantage.

I've been reading some of the Robert Kiyosaki books (of Rich Dad, Poor Dad fame). Now I've read some disparaging reviews of his books and the like, but frankly, I like them. I think he brings some good information down to a level that almost anyone can understand, and I always admire people like that. The fact that he's overcome his own learning disability to become very successful, makes me admire him all the more.

Anyway, in one of his books, his "Rich Dad" gave him a piece of advice about the markets that can both help one prepare for profit and be mentally ready for diaster.

His rich dad told him that the markets run in a 20 /10 /5 cycle.

For twenty years, the stock market is popular, and produces good returns. For ten years, commodities rule (we're in the middle of this now). And every five years, there's some type of crisis.

His "rich dad" cautioned him that the timing wasn't exactly precise, but was a rough guide that seemed to recur with regular frequency.

This is a useful analogy in my view, because it allows you to be prepared for the next crisis which, according to the guideline, might be arriving very soon. In 1997 we had the "Asian contagion" and shortly thereafter the Long-Term Capital near crisis, and then in 2001 the terrorist attacks. According to the timing of this formula, some crisis may be arriving on our doorstep soon.

What it is, obviously is somewhat unknown. There's been a lot of talk about "global imbalances" with relatively little talk about how that might play out or trigger a crisis. Perhaps it would be in form of a rapid movement away from the US currency. Or perhaps the rising of interest rates and slow drain of liquidity from the markets will trigger some type of crisis in the real estate market that will spill over in some unforeseen way to the broader markets. Or perhaps it'll be something that sideswipes from "out of nowhere". The point is, is that some preparation might be warranted at this point.

This would include, in my opinion, careful review to ensure that your portfolio isn't excessively exposed to any one over-valued or speculative sector, and that it generally appears robust and reasonably valued. And of course, a review to ensure that you can handle any leverage you're using, should one or two factors about it turn negative.

Analogies - use them, or lose them!


The Confused Capitalist

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Monday, April 17, 2006

Groovy man! Are the Seventies Back?

Now, I've been saying this for just about two years. For those old enough to remember, do these times remind anyone of the 1970s (sans hippies, of course)?

We've got an increasingly unpopular war, that seems increasingly like it's going to last longer and longer, consuming more and more money. A war that started in a fervor of patriotism, increasingly questioned by the populace at large.

We've got foreign companies nipping at the heels of American companies - in the 70s, the re-emergence of post-war Germany and Japan; today, the rise of China and India.

A flood of liquidity into the market, that seems to be fuelling inflation beyond that recognized by "the powers that be".

A real estate market in ascendancy.

Gold on the rise. A large federal deficit.

Fuel costs spiraling ever upwards, it seems.

Now, I remember how it all ended ...

Is it just me, or is this the 1970s redux?


The Confused Capitalist

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Saturday, April 15, 2006

ETFs - Some guides to the enlarging smorgasbord!

The world of ETFs is expanding, but there is a dearth of sites dedicated to some basic research (i.e. valuation tools) on them.

I find ETFs are a very useful portfolio risk management and return enhancement tool: unfortunately, it takes a lot of digging to uncover favorable valuation metrics that underlie wise choices. The following are some links I've been able to uncover to date.

Some of these leads have been provided by my internet friend, portfolio manager Roger Nusbaum. He definitely uses these a lot for his clients.

The following are some links that may prove useful in your search for basic information relating to them:
  1. Index Universe (has some good screening and charting features, including international ETFs).
  2. Morningstar's offerings on ETFs (as always, something useful on this site).
  3. Fund Super Mart (not really about ETFs, but useful if you're trying to uncover emerging market PE ratios).
  4. ETF Connect (basically more charting tools).
  5. ETF Trends (Mostly opinion/commentary about ETFs).
  6. ETF Investor (Mostly opinion/commentary about ETFs).
and some of the actual ETF providers:
  1. iShares (Useful PE and PB screening tool)
  2. Select Sector Spyders (has value metrics on the various sector SPDRs).
  3. PowerShares (not much there re: valuation tools)
  4. Bldrs Funds (not much there re: valuation tools)
  5. Hldrs Funds (not much there re: valuation tools)
  6. Rydex Funds (not much there re: valuation tools)
  7. State Street Global Advisors (not much there re: valuation tools)
  8. Vanguard (not much there re: valuation tools)
Well, that's about it for now. I'll add more to this later as I gather further information, and will put a link to this on the right hand side of my site. If you have some particular site that you've found useful, please post a comment and I'll add it later to these.


The Confused Capitalist

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Ring, ring. Ring, ring. (Hello, is anybody there?)

And who says they don't ring a bell at the market top (or close to it)!

I think that the US market is very close to a top for the next several years, and it isn't because stocks are overly expensive. There's been lots of research showing that, relative to recent historical norms, stocks remain at roughly fair value (I'd define fair value as within 10% of its perfect actual value). The PE ratio of the S&P500 at about 18 or 19 isn't something to get alarmed about.

What is, is the rising interest rates. This will drain liquidity from the market as rates will be - I predict - rising far above that foreseen by most commentators today. That's because interest rates aren't just used to control inflation - but to support a weakened currency and attract needed outside financing, when a deficit situation exists when internal lenders no longer buy enough bonds to support the deficit (i.e. the USA today). In two years, I predict that a 30 year fixed mortgage will be in the 8.5% to 10.5% range, between 200 to 400 basis points higher than today.

Secondarily, the downdraft from the real estate market (expect that to be a serious force about 12 months from now), will also drain liquidity from stocks, as some owners of investment or secondary real estate, will partially cash out of the stock market to support their increased real estate loan payments. Others will sell their investment or secondary homes, but with the stock market also in a secular decline, won't redeploy their additional capital (if that exists for them), into the stock market. They'll keep it on the sideline in CDs and other savings intruments that will have relatively attractive yields.

Finally, the yields of savings instruments will continue to become more attractive, and will also compete for cash that recently was almost automatically deployed into the stock market, or real estate.

Real estate and the stock market returns will be well correlated over the next three to five years. Negative returns. Or am I the only one that hears the bell ringing?


The Confused Capitalist

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Friday, April 14, 2006

Staying the Course

Having some faith in your positions is crucial to long-term portfolio outperformance.

This implies that you have enough confidence and knowledge of why your investment choices are sound, to stick with your strategy during the softer markets. Much potential portfolio outperformance has been undone due to a lack of knowledge and faith in choices, by selling out during a weak patch.

That's one reason I favor an investment diary - writing down what I picked and why, and then reviewing those writings before I buy or sell. Although I've been practicing this for less than a year, I find it's already helping me reduce my portfolio turnover, increase the clarity in my investments, and provide me with better confidence to continue to "stay the course" over the past while. I think that this has been at least partially responsible for helping me to produce a return rate in my own portfolio over the past year in excess of 30%.

I highly suggest that you start an investment diary, together with an investment scrapbook. Both are "capital ideas" likely to improve your investment performance.


The Confused Capitalist

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Thursday, April 13, 2006

Canada: What Housing Bubble?

Well, apparently unlike the US housing market, even after a strong five years of house price gains, housing in Canada remains undervalued.

According to recent research by Merrill Lynch economist David Wolf, the Canadian housing market is, on average, undervalued by 10-20%. Mr. Wolf ran his model based on average incomes and the cost of debt, and in only one (Victoria) of the 15 major markets measured, was the housing over-priced - and even then it was just a modest 4%.

To check his model accuracy, he ran current prices and incomes in the major US cities (yes, most were over-priced, according to his model), and also ran it against the frothy 1990 Canadian markets (again, his model suggested they were then, in fact, over-priced).

One of the more surprising findings was that even in oil-rich Alberta - after years of very strong gains - the major cities of Calgary and Edmonton were amongst the most-undervalued cities in Canada.

According to Mr. Wolf, Canadian prices can rise by an average of over 4% annually for the next four years before they'll achieve full value.

In the meantime, those worrying about a Canadian housing bubble can relax ... relax ... relax ... relax ...


The Confused Capitalist

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Wednesday, April 12, 2006

The Ultimate Question - Customer Relationships and Investing?

A recent book review by Harvey Schachter of The Ultimate Question: Driving Good Profits and True Growth was very interesting.

According to research done by author Fred Reichheld, the vast number of questions asked in relation to customer service aren't all that useful in helping a company to devise metrics that assist in developing profitability.

According to Mr. Reichheld, the only question that's required is this:
How likely is it that you would recommend this company to a friend or colleague?
Respondents are then asked to score this "ultimate question" on a scale of 1 to 10, with ten being the best score.

People rating the company at a nine or ten are considered "promoters" of the company, those at 7 or 8 are considered passive and those below are considered detractors.

The detractors, says Mr. Reichheld,
... may appear profitable, but their criticisms and attitude diminish a company's reputation, discourage new customers, and demotivate employees. They suck the life out of a firm.
The net ratings are developed by subtracting the percentage of detractors who are customers from the percentage of customers who are promoters.

So if a company had 65% promoters as customers, and 30% as detractors, it's net scores would be 35. The highest ranking firms were USAA (a non-public insurance company, catering mostly to military personnel) at 82, Harley Davidson at 81, Costco Wholesale at 79, at 73, eBay at 71, and Apple Computer at 66.

Interestingly, I looked at the stock charts of all the public companies mentioned therein, looking at their ten year records. While Amazon and eBay had only traded for 8 1/2 and 7 1/2 years respectively, one thing seems very clear. This measure is an unbelievable proxy for stock market performance too. The minimum any of these stocks had increased over that period was by a factor of five and went as high as 24x.

The S&P 500 had only doubled over that same period.

The ultimate question: The only one needed for investing too?


The Confused Capitalist

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Thursday, April 06, 2006

Corporate Reason in the Age of Analysts

Brilliance is sometimes simply being willing to say the obvious and to stick with it. On the one hand, we have the myopic analysts, and on the other, we have a few select folks like superinvestor Warren Buffett and company.

Contrast the rationale of analysts found in the prior link, with the recent words (2005 Chairman's letter) of Warren Buffett:
"Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.

When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as '“widening the moat.' And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. If a management makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted.

Take a look at the dilemmas of managers in the auto and airline industries today as they struggle with the huge problems handed them by their predecessors. Charlie is fond of quoting Ben Franklin's 'An ounce of prevention is worth a pound of cure.'

But sometimes no amount of cure will overcome the mistakes of the past."
Something to think about the next time you're pondering an investment ...


The Confused Capitalist

Wednesday, April 05, 2006

Teaching about Stock Market Investing

Yes, that's a picture of me ...

One of the more important things we do as parents is to pass our values and learnings onto our children - to help them navigate through "the school of hard knocks" without actually having to get a post-graduate degree there. Call it our contribution the big scheme of things, by focusing on the little scheme of things.

So, just like my father tried to help teach me about things he'd found valuable in his life - auto mechanics and handyman stuff of all sorts - I'm destined too to try help my children. Whether it has any effect or not - who knows - I still run screaming whenever I think I might have to do any type of car repair, and maybe my daughter will do the same in what I'm going to try to teach her: Investing 101.

Of course, in any teaching, if you can find the intersection between their interests and what you're teaching, it's much more likely to be successful and to stick over the longer-term. So, I'm going to concentrate on some stocks I think she'll have a general interest in anyway.

My eldest is about a year or so away from entering college, and has interest in fashion. She also works in the retail/fashion industry. So, I'm going to help her invest a small amount of "her" college fund into one of two stocks in the retail/fashion industry. We are going to go through the process together of trying to see which stock she should select and to help guide her towards whichever one of the two seems like the better investment. But in the end, whatever stock she picks will be her own choice.

We'll be going through some of the lessons detailed in my book The Brink's Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks, that I hope will help guide her through the process of how to look at an individual stock. We'll be considering the relative merits of Reitmans Canada - a woman's clothier - listed on the TSX as RET.NV.A; and La Senza - another woman's clothier - listed on the TSX as LSZ.SV.

Both have been on a tear lately, having gained 40% over the past year, as the hot Canadian economy has increased the disposable income for the average soul here, with a resultant bounce in retail sales. Both stocks have PE ratios around 16 or so and are currently trading in the $20 range.

I'll keep you all apprised of the process and which stock she ultimately picks ...


The Confused Capitalist

Tuesday, April 04, 2006

Reminder: Reduced Content for 2 more weeks

Just a reminder that I have reduced my quantity of postings over the last week or so, and will continue to have reduced postings for about two more weeks, due to a time-intensive project I have in the works.

Aside from the current postings, please feel free to wander around and check out the archives and so on ...

Soon - at the conclusion of the two more weeks - I hope to be able to resume posting on a daily basis, as I had previously done ... the sign then will look like this ...


The Confused Capitalist

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Monday, April 03, 2006

A Business that Uncle Warren would just love!

Found: an IPO that "Uncle Warren" would just love (at the right price of course!)

Canada's most-populous province, Ontario has announced that they will be selling off their interest in the electronic provincial land titles registry, Teranet. Teranet, partially owned by Teramira Holdings Inc., is reportedly ready to push out its prospectus this week, which should be available on Sedar (Canadian equivalent to Edgar), very soon. It is reportedly to be structured in a Canadian income trust format, which eliminates or minimizes corporate taxes. Income trusts have become a favorite of Canadians and Canadian companies over the past few years, with many former corporate entities converting to an income trust.

Teranet is the kind of business that Warren Buffett would just love, since they hold a monopoly on the registration of land title transactions that go on in the province. Just the kind of toll booth that Warren loves.

Teranet charges fees ranging from $18 for an electronic search, to $70 to register a mortgage document. It currently has 750 employees. In 2003, the last year that its operational results were made public, it sported an operating profit for $118 million on revenues of $190 million. Last December, Standard and Poors raised its credit rating to double-A, and noted that $100 million had been taken out of the company during the past year. If Ontario continues growing at the rate demonstrated over the latest available five census years (1996-2001), at about 1.2% annually, combined with revenue increases at or above the rate of inflation, this is a very nice-looking business indeed.

RBC Dominion Securities is leading the offering, and initial reports state that shares are expected to be priced at $10 (CDN) per share level, with initial annual cash distributions projected in the $0.70 to $0.80 range, thus yielding 7-8%. If this is actually the case, I would expect that yields will show a quick decline to the 5% to 6.5% range, as the secondary market quickly reprices the shares to reflect the relative safety and security of this offering. (For comparison purposes, the Yellow Pages Income Trust - probably a lower quality business - sports a 6.4% yield currently).

Over the long haul, given that all land titles have to be registered here, the business looks like a great medium to long-term situation, that should offer the opportunity for above-average returns.

Monopolies: Businesses that Uncle Warren just loves. Maybe you should too!


The Confused Capitalist

Sunday, April 02, 2006

Raising the Median - Global Warming

For those who remain uncertain about global warming this news item just in: Canada shatters record for warmest winter ever recorded.

Canada shattered the record for the warmest winter ever, blowing away it away; its winter temperatures were some 7 degrees (Fahrenheit) above normal, and in the more northern parts of the country, it was closer to 12 degrees above normal. This is just as I have read since the mid-1980s, when the then feeble computers and climate science predicted that the far northern reaches of the planet would experience the most extreme shifts in weather.

I don't think I need to re-hash the debate from the fake science side, nor to get into a debate about other potential causes. Whatever might be contributing to the warming, it is occurring and we do know how to do something about it. We can have an influence on the rate of warming, at the very least, and at best, begin implementing long-term strategies aimed at reversing the damage.

Now, I know many of you are stock market aficionados, often with an interest in the underlying business fundamentals that makes picking stocks so interesting. I think that if many of you were looking at "The World, Inc.", what you'd see is a "deep value" investing situation. On the surface, there's lots of things wrong with the business - and perhaps it's on the verge of bankruptcy - but underneath, you believe that there's a very viable "turn-around" situation. However, an experienced turn-around CEO would probably be needed to review all the existing systems and to plan strategies for the survival of the business.

Environmentally, the litany of problems is well known, so I'll just focus on how some issues relating to global warming might be overcome.

Firstly, let's face it, national governments haven't shown much stomach for implementing some of the necessary remedies. Some of these would include national mass transit systems, city-to-city, that make rapid transit alternatives like bullet trains a real alternative to ozone-destroying and massive-polluting airplanes. I mean if people must commute back and forth between cities for business, let's build some environmentally-friendlier ways. Others would include very high standards for vehicle gas mileage, and national solutions for drastic reductions in global warming gases of all sorts.

But I digress. My focus is much more what can be done on the local (city) level and the state/provincial level. Here, taxes of all sorts could act as a disincentive to single-occupant vehicles and particularly the larger vehicles that produce 2-5 times as much warming gases as smaller efficient vehicles. The taxes could then be used to build out great transport systems, that could act as a real, viable, convenient, alternative to the single-occupant car.

Next, what about all our buildings? Of course, there's the usual array of energy-saving devices that could be outfitted - yes, some are more costly initially, but we need to think long-term here. Mandating a certain level of energy-efficiency in every new building on a local building code level - and backing it up with mandatory testing - could go a long way to producing a lower level of energy use.

And what about all the wasted space of building walls and roofs? How about mandating on a local building code level, that every building is required to produce 20, 30, 40, or even 50% of its own power usage, on site? This means making all those spaces more functional, equipping them with solar panels, mini-windmills, or other energy-creating devices - perhaps some yet to be invented. And of course the state governments would mandate that the surplus power created could be sold back "into the grid", thus further helping reduce other fossil-fuel use.

How about mandatory geo-thermal heating for all new buildings, which cuts heating costs in cold climates, and air-conditioning costs (and the associated global-warming gases too) in hot areas?

How about further mandating green roof systems in local building codes, where those systems make sense?

If we don't start acting very, very, very soon, the price will be too high - warm winters in Canada, and more of these things cleansing the Gulf Coast and Eastern US Seaboard of humanity and habitable areas ...

More resources: I highly recommend that you check out the following sites for practical ideas ...

  1. The respected Rocky Mountain Institute founded by Amory Lovins (full of practical ways to better respect the earth's capacity); and
  2. Greenpeace's climate change pages
In short, there's a whole lot that could be done, immediately, on local and state levels, without waiting for the inertia of national politics to be overcome by perennial disastrous occurrences.

As one final comment, we - as a society of peoples - need to recognize the reality of the last 100 years. That is, that we are more like the world's largest colony of ants and take advantage of that fact, rather than act like we're all single solitary foraging bears - the way we've built-out a lot of our systems to date.

Environmentalists - Raising the Sustainability Median!


The Confused Capitalist