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thoughts_from_2011_12_and_13 [2019/07/12 11:49] tom |
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+ | Thoughts from 2010: | ||
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+ | Thoughts from 2010 | ||
+ | DIVIDENDS MATTER: From December 1969 to December 2009, the compound total return with re-invested dividends for Canadian stocks was 5,285%. Not counting dividends, measuring stock-price gains alone, the gain over the same period was 1,481% (according to S&P in Barron' | ||
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+ | Low Interest Rates are dangerous because they lead people to do stupid things. People sacrifice quality to get a higher yield. In these dangerous times, you should focus on risk aversion rather than maximizing immediate return. Conserve your principal. You'll find out why in a year or so. The dung has not hit the fan yet. And if you still have a financial planner, he or she will be trying to sell you some type of guaranteed product. Say no. Stand up, turn the photograph of her or his family on the desk around to face them, not you, and leave. Don't say a word. If you don't, you will be enriching your advisor, not you. As Dan Richards says in a front page story in the March 26 2010 Investor' | ||
+ | Digest this fact from Barron' | ||
+ | “focus on risk aversion rather than maximizing immediate return” Again. | ||
+ | “focus on risk aversion rather than maximizing immediate return” Or… | ||
+ | Do not sacrifice quality to chase yield. | ||
+ | Ramp down your expectations for growth: There is a new normal. Read “Stock market investors, it's time for a reality check” by John Heinzl in the Report on Business, April 7 2010. Double digit returns disappeared with the bull market (except for those of us who bought our dividend growing common stocks years ago and are now getting double digit yields from the dividends alone). | ||
+ | Think a range-bound market…at the best. | ||
+ | “focus on risk aversion rather than maximizing immediate returns” S. Klarman | ||
+ | The headline of my February 2010 issue was 'Seven Lean Years' | ||
+ | “equity bear markets have usually ended with the cyclically-adjusted p/e bottoming out in single figures” Buttonwood | ||
+ | “I still feel the bill for the crisis has not yet been paid.” Buttonwood | ||
+ | In the long term, Canadian equities have returned a real 5.8% per year. (real = after inflation) | ||
+ | “The final return of an equity investor is highly dependent on when he starts to put his money in.” Buttonwood, February 25 2010 | ||
+ | A friend e-mailed yesterday to say he had just read my latest report on his Sony E-book at Tim's (on Feb 25 THI announced a dividend increase of 30%). How exciting is that? And the print edition of my Volume XXX No.1 was not even back from the printer yet. Technology! (By mentioning Tim's dividend increase, I am certainly not saying buy THI. THI's p/e is an expensive 21) THOUGHT: What a world we live in. Hundreds of folks slave away in places like Tim's serving coffee, and lots of ' | ||
+ | Eschew Synthetic Income: THOUGHT #2: If you hold a mutual fund which owns Tims, would your income be going up 30%. Does your fund even pay income? Probably not much. Why are you holding it? In my mind this is the biggest problem with mutual funds. As funds do not pay out much income, when you get to retirement, you are at the mercy of the market. If stock prices are up when you retire, you'll have a fine retirement. If not, sorry for your luck: ask for a job at Tim Hortons. Dividend growth investors, in contrast, set things up and buy common stocks that provide income while they are still working. When they retire, the income is already flowing, most likely at double digit rates. We do not depend on market prices to finance retirement. We do not have to create synthetic income out of capital, as mutual funds do. We enjoy actual income. And our income increases, as Tim's dividends do. When is the last time you received a 30% raise. In my last Connolly Report, I included four yield charts. One showed Enbridge' | ||
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+ | “Dividend yield telegraphs what a management team knows about its business and its prospects for growth as well as the state of its balance sheet and franchise.” | ||
+ | Don Killride, head of Vanguard' | ||
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+ | If you are thinking of just buying a dividend mutual fund to execute the dividend growth strategy, think again. In the last five years, only one Canadian dividend fund beat the S&P/TSX total return. Only one! (Source: Report on Business March 6 2010, Shirley Won's table of 33 Canadian dividend funds in order of return over the last five years.) Ten of these Canadian mutual funds returned less than 2% a year. And ' | ||
+ | The last market peak was in 1999. If you think your fund will get back to that level soon, don't. Prices were irrationally high before the crash. The last peak before 1999 was in 1968. Our daughter was born in 1968. She's over 40. Can you wait that long? The peak before 1968 was in 1928. And before that, 1906. The waves are long. (Source: The Economist, Buttonwood: 'The very long view' February 25 2010.) “The patterns suggest that each generation discovers a passion for equity investment that is followed by disappointment.” We are in the disappointment period: it will be long. Google to find this column. Read it thrice. There' | ||
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+ | Shares versus Funds: I was asked to do an interview for a column in Les Affaires, a Quebec-based business magazine, comparing owning shares directly versus holding funds. Here are the points I made. | ||
+ | There are three main problems with holding mutual funds or ETFs versus owning shares directly. 1. In retirement we need income. Mutual funds and ETFs are not noted for providing income. So, on retirement, income has to be created from funds by selling holdings. I call it synthetic income. If the market is down when you retire, or goes down during retirement, there is a big problem. You must sell when prices are low. In contrast, the income from dividend growth common stock can grow. You go into retirement with stocks that already provide income, often double digit yields. You do not have to sell to obtain income. I buy common stocks that pay dividends for the income, and I hold, as Warren Buffett does, forever. ♣ 2. With holding shares directly, there is no annual fee. Fees on mutual funds, in the long term, kill you. ETF fees are lower, but there still are fees. ♣ 3. Most professionals do not beat the market. Most dividend mutual funds do not beat the market. ETFs and mutual funds hold shares that do not pay dividends. That's not good. It is the income people need. I buy common shares for the income. I hold them for the income, as other people would hold a bond for the income. ♣ It's all about the income. Going forward from this point, for years, the market will not be providing much in the way of gains. The great bull market is over: we are in a secular bear market. Believe it! If your investments do not provide income, you will not have a comfortable retirement. If your investments do not provide actual (real) income, you might have to continue working. I feel sorry for the folks who hold the $585 billion in mutual funds. ♣ BENIGN NEGLECT: Regarding the possible return for the investor - Dividend growth investors keep track of income from their stocks, not so much the gain in price. The price does not really matter as we do not plan to sell. It's called benign neglect Here are some examples of the income provided by a few of the stocks I follow. Eventually, the gain in price will be about the same as the gain in the dividend. Yield on GWO bought in March 2009 at $14.20 is 8.7%; yield on BMO bought in 1987 at $6.90 is now 39%; Yield on Toromont bought in 1996 is now 16.3%; yield on TransCanada bought in March 2000 at $11.80, now 12.9%; Sun Life bought in March 2005, now 3.3%; Cdn Utilities in 1992 at $12.50, now yields 12.6%. Some of those purchase dates were years ago. See what I mean about patience! But it's worth the wait. Interest rates are very low currently. However, yields on our common stocks purchased years ago, are mostly double digit. Ask me if I care, or even know, what the current stock price is? ♣ Or alternatively, | ||
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+ | * Dividends matter. If your shares do not pay dividends, are you losing about half your return? For the decade ending December 2008, 63% of the return from the stocks I follow was from dividends. The average compound growth rate of the common stocks I follow was 9% for that decade. (Connolly Report June 2009 p.675) If your stocks do not pay dividends, how do you make money in a dismal (read sidewards) market where their might not be any capital gains. Don't believe me? Do a ten year price chart for Walmart (WMT). WMT has been hovering a few dollars above or below $50 for over a decade. | ||
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+ | Second Quarter 2010 | ||
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+ | “To not only learn but also effectively implement investment lessons requires a disciplined, | ||
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+ | Yields on 1982 cost - I've written about holding common stocks for the growing income many times before. In the February 1993 Connolly Report, for instance, I had a table showing 1993 yields on stock bought ten years before in 1982. Those who were with me then are very wealthy now. Here are some examples: Quebec Tel bought in 1982, with dividend growth, yielded 17.2% by 1993, Maritime Electric 14.2%, MT&T 13.8%, BCE 13.7% Island Tel 13.7%, BC Gas 13.3%, Fortis 12.7% and Newtel 12.4% on the 1982 price. Most of those companies no longer exist (BC Gas was sold to Americans, Quebec Tel was bought by Telus, Maritime Electric in PEI was purchased by Fortis). The bank ' | ||
+ | * Had you purchased Bank of Nova Scotia in 1990 though, after it got into trouble yet again, at a price half way between BNS's high and low price in 1990, $3.64 a share, your yield, because the dividend grew from .25 a share to $1.96, by 2010 would be 53%. Twenty years is a long time, but a 53.6% yield means a comfortable retirement. And, here's the icing on the cake: your capital would have grown from a split-adjusted $364. for 100 shares, to $3,659 per 100 shares. Unbelievable, | ||
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+ | A Poor Financial Plan – One finds individual financial plans regularly in the press. While you can often garner a good idea or two from the columns, most plans, in my view, are next to useless because the financial planner is usually just toeing the industry line, hawking mutual funds and not thinking outside the box. In the Report on Business of May 8 2010, there was one with the headline “Time to shift away from risk”. The subject, an engineer, was age 57 and had lost her job. Among other things, her non-registered portfolio has $65,000 in dividend-paying mutual funds and $215,000 in dividend-paying stocks. Her locked-in retirement account of $230,000 has 60% stocks and 40% fixed income. Her house is free and clear, but she has an investment line of credit of $52,000. You can read what ‘the expert’ said, if you like. | ||
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+ | I was interested in what this financial planner did not say. This planner, and most don’t, does not understand dividend investing. No mention was made of dividend income or dividend growth. All those dividend stocks she already owned, and there was no mention of the essence of dividend investing: her yields are probably very high already and her income will grow as retirement progresses. And, with all that dividend income, she will most likely not be paying any tax at all, even on her OAS and CPP. What an error. The headline was off-putting too. In the actual newspaper it was “Time to shift away from risk” On the web site it was “Time to shift some investment holdings. If early retirement is the goal, a move away from market volatility is key.” Volatility is not risk. Volatility only become risk is you have to sell. This person at age 57 does not need to sell. Dividend stocks provide income. Why would you sell assets that provide a growing income? Culling maybe, but wholesale selling, no way, even though the market is overvalued. It’s the income that counts: the price of the stocks is irrelevant as she should not sell. What's important is the sustainability of the dividend. Dividend eliminations are very rare. Folks need income in retirement: dividend-paying common stocks provide it. Forget about all that GIC income ladder bunk. In the long run, GICs are not really secure: they have lost value every year since 1932. | ||
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+ | GUARANTEED PRODUCT* The headline over Fabrice Taylor' | ||
+ | Here's something to think about. If your stock does not pay a dividend, you are left with only one way to realize a return: hope the price goes up and sell your shares to someone else. I well remember the 1970s. The market went sidewards for years. Colleagues who had been sold mutual funds in the late 1960s, were devastated (mutual funds are sold, not bought). I began the Connolly Report after that in 1981, looking for a better way. I found it. Now I do not focus on price: it's the income that counts, the dividends. With the sideward market that looms ahead, dividends will provide most of my return. Some sixty three per cent (62.8%) of the return from the stocks in my list for the period 1998 to 2008 came from dividends. (a stock by stock report on this is inside dividendgrowth.ca) The compound annual growth rate (CAGR) of the common stocks I follow (never preferreds…they are not) over this decade was 9% per year. Have you done this well? And prices were not high at the end of 2008 either: the data is not doctored. Nine percent a year beat the market too…by quite a lot. Investigate dividend growth investing. The last decade was not dismal for dividend growth investors. The Dow, at just over 10,000 as I key this in May 2010, however, is much the same as it was then, just over 10,000. | ||
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+ | Third Quarter 2010 | ||
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+ | ”[T]he starting yield is very important to future returns. And it is currently low. (Buttonwood' | ||
+ | Long term “80 percent of your total return is generated by the price you pay for the investment plus growth in the underlying cash flow” James Montier p.155 The Little Book of Behavioural Investing | ||
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+ | THE INERTIA BENCHMARK : Mutual funds do not, but should, compare their returns to the inertia benchmark: what performance would have been achieved if the portfolio manager had done nothing. In his gem of a book, James Montier has a chapter (thirteen) called 'The perils of ADHD Investing': | ||
+ | Foreign stocks - I've added a paragraph on global investing under Diversification on the Investment Topics page. | ||
+ | Beat the benchmark - Money managers are happy when they beat their benchmarks¹. Some even put a half-page ad in the Report on Business. Such was the case for Manulife Investments on July 7 2010. Their Global Opportunities Class fund substantially beat their benchmark¹, | ||
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+ | * The Little Book of Behavioural Investing (2010) by James Montier is excellent¹. It will help you to control your behaviour and help you become a better investor. Chapter 5, 'The Folly of Forecasting, | ||
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+ | In Chapter 11 of The Little book of Behavioural Investing, James Montier talks about professional money managers and why they “fear underperforming that index above all else (aka career risk)” Hence, the professionals cannot do the right thing. They must index. Absolute returns are not part of their equation. The returns of Manulife' | ||
+ | ¹ In his July 10th 2010 Economist column, Buttonwood, taking about indices, put it this way: “Fund managers started to focus on ' | ||
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