This exquisite anchorage in Northern Georgian Bay can be reached only after precise navigation.
January 2013
This Voyage
This is the first posting for The Financial Passage Maker, a newsletter which was started in 2007. It is sent to about 140 people from all walks of life and was started at the suggestion of a few friends who watched my progress in achieving, more or less, a state of financial independence. Details regarding the newsletter will be provided in a subsequent posting.
The newsletter presents observations on investments which are contained in the portfolios I manage: my thinking about strategic positioning; reasons for establishing and exiting various positions; and observations about the progress of the portfolios. In a sense it is akin to "notes to self" as I go about the business of managing my investments.
A significant part of the newsletter contains items which I have encountered during extensive reading and which may interest readers of this newsletter.
The nautical theme of The Financial Passage Maker is the product of my activity as a cruising sailor. Sailing and investing share many of the same attributes: goal setting, advance planning, preparedness, skill in execution, alertness to change, and a commitment to action.
The newsletter is issued quarterly as good ideas are not that common. I will supplement it by short notes as required.
1.
The Financial Log Book (some stocks currently in my portfolios)
Some
of the depressed stocks (e.g. Polaris Minerals, Canam, and Powell
Industries) have recovered nicely over the past year. Is this
recovery for infrastructure-based businesses signalling the markets'
expectation/hope that the economy is on the mend? The only notable
loss was MEG Energy Corp. Along with its tar sands brothers, it
suffered from concerns about rising costs and uncertainties about
proposed pipelines, which if built, would make the enterprises more
profitable.
2.
View From the Mast Head (the strategic view)
No
perspective in this edition due to the length of other sections.
3.
View From the Gun Port (trading activity)
iShares
S&P/TSX Gl Gold E.T.F. (XGT) has been sold. The review of
my portfolios will continue, but I'm reluctant to pull the trigger on
a ready-fire-aim basis as a result of an uncritical reaction
to dips in share prices. If I'd pulled the trigger early, I would
have lost out on some major gains in a few companies which are
fundamentally sound. It's not always easy to go against market
sentiment.
I
take a look at agriculture. Two new positions have been established:
RME, and DE.
I also comment on investing in land and stevia – it's not all
sweetness and light.
Robotics:
a roundabout path leads me to invest in ABB; I
invest in OII with the hope that I can
profit from deep water activity in the oil and gas industry.
4.
Recommended Reading for the Moorings (interesting finds)
Canadian
mutual funds in need of a make-over; perspectives on gun ownership
and the value of guns as protection; conservatives' attack on
science; preparatory work for vacations. Also, an excellent book on
dividend stocks and investing.
5.
In the Wake (reflections on the voyage)
I
have renewed my search for new investments.
1.
The Financial Log Book
| Entity | Initial Price/ Purchase Date | Price 2013-01-10 |
Gain/Loss
year to date % |
Gain/Loss Since Purchase % |
|---|---|---|---|---|
Central
Fund of Canada (CEF.A)
|
9.77
2007-09-04
|
21.38
|
not
meaningful
|
118.8
|
Silver
Wheaton
(SLW)
|
12.37
2007-09-04
|
35.81
|
189.5
|
|
iShares
S&P/TSX Gl Gold E.T.F. (XGT) Sold
|
68.14
2007-09-04
split
average
cost
17.04
|
N/A
|
||
| Polaris Minerals (PLS) |
10.70
2007-06-01
|
0.97
|
-90.9
|
|
| MEG Energy
(MEG) |
44.19
2010-12-29
|
34.5
|
-21.9
|
|
| Cenovus (CVE) |
30.74
2010-07-27
|
33.63
|
3.8
|
|
| Canam Group (CAM) |
6.23
2008-12-11
|
6.36
|
-1.6
|
|
| Canadian National Railway (CN) |
48.88
2009-04-14
|
92.05
|
90.8
|
|
| World Fuel Services (INT) |
17.05
2009-04-14
|
39.87
|
133.8
|
|
| North West Company (NWF) |
16.23
2009-05-07
|
21.74
|
169.8
|
|
| Powell Industries (POWL) |
36.75
2009-11-12
|
42.61
|
15.9
|
|
| Waterfurnace Renewable Energy (WFI) |
28.62
2010-04-12
|
15.35
|
-46.4
|
|
| Compass Minerals Int'l (CMP) |
88.11
2011-01-11
|
74.16
|
-15.8
|
|
| Exploration Orbite (ORT.A) |
3.24
2011-03-28
|
2.69
|
-16.9
|
|
| ABB (ABB-N) new |
20.18
2012-12-13
|
21.54
|
6.7
|
|
| Oceaneering International
new (OII-N) |
52.95
2012-12-13
|
56.31
|
6.4
|
|
| Deere & Company (DE) new |
88.07
2013-01-03
|
89.91
|
2.1
|
|
| Rocky Mountain Dealerships (RME) new |
11.89
2013-01-03
|
12.4
|
4.3
|
Precious
Metals
Things
were essentially flat for the year but I have the sense that the
Inflation Lady has yet to sing. Despite this, I will be phasing out
my holdings gradually. Read on to learn why.
The
following reference provides a generalized overview of the gold
mining industry: cost structure, trends for production, discovery
rates for new deposits, and holdings by central banks. To my mind,
the major “driver” for the price of gold at the present time is
the fear of inflation and the belief that gold is an asset that will
maintain its value in comparison with paper currencies.
There
are three commonly-mentioned reasons for owning gold on the part of
retail investors: insurance against catastrophe, diversification,
and speculation.
a)
Insurance
In
the past, gold bullion (coins included) has been used as a portable
store of wealth in turbulent times. In some societies, gold is still
valued highly for this reason. Gold is also valued as a store of
value in jurisdictions where banking systems operate without regard
to the rights of depositors. Some survivalists in North America
especially, hold gold in its physical form as a hedge against
economic and social breakdown.
I
don't ascribe to holding gold for these reasons. I have faith in our
future. At no time in history has western society been so safe and
rife with opportunity.
Seldom
is there any analysis concerning the amount of gold which should be
held for insurance purposes. Commonly mentioned amounts of 5 to 10
percent of one's portfolio will not provide much protection if other
components decline by 50 to 60 percent or more. Further, there is no
way to ascertain the value of one's gold stash or one's ability to
redeem it, especially given that governments are prone enact
draconian measures during times of stress.
As
I have mentioned in previous editions, the best protection against
economic decline and tough social times is to be debt free, have a
good cash reserve, and above all, ensure that you have the skills and
networks to earn a living and compete. In other words, invest in
yourself.
b) Diversification
After reading
extensively on this topic, I have reached a few conclusions:
- generally speaking, the performance of gold is not correlated with most other asset classes (the strength of the correlation varies over time and various authors may be prone to select specific intervals of time to bolster their points of view);
- there are episodes in history where gold has outperformed other asset classes significantly, but this phenomenon has not persisted ... the usual pattern is for bubbles to burst quickly.
- in times of extreme market declines, gold tends to crash in tandem with the rest of the equities markets (the time when you would most need its “store of value”) and then to rebound more quickly.
Most financial advisors now recommend
allocating part of one's portfolio to gold, but I think most of this
thinking has been driven simply by the stellar performance of gold
over the last decade rather than thoughtful, independent, long-term
thinking.
c) Speculation
Speculation
is the practice of engaging in risky financial transactions in an
attempt to profit from short or medium term fluctuations in the
market
value
of a tradable good such as a financial
instrument,
rather than attempting to profit from the underlying financial
attributes embodied in the instrument such as capital gains,
interest, or dividends. Many speculators pay little attention to the
fundamental
value
of a security and instead focus purely on price
movements.
Speculation can in principle involve any tradable good or financial
instrument. Speculators are particularly common in the markets for
stocks,
bonds,
commodity
futures,
currencies,
fine
art,
collectibles,
real
estate,
and derivatives.
I
would argue that most investment in gold and silver on the part of
retail and institutional investors is speculative in nature.
Significantly, speculation takes place within different time frames:
some people focus on the short term (hours, days) “price action”
whereas others are content to “ride the long term trend”. I am a
member of the latter camp. I am not prepared to make the commitment
to monitor short-term price movements and indulge in opaque
investment vehicles which leverage the return (or loss) on
speculative ventures.
Instead,
I focus on my sense of the prevailing long-term sentiment regarding
the “value” of gold. As such, my time horizons are in the range
of three to five years. When I sense a change in that sentiment, I
alter my positions. To manage risk, I have focused on mining
companies with good management, good balance sheets, proven and
profitable production, the strong potential for increasing reserves
in a financially prudent way, operations in stable countries with the
rule of law and listings on the major markets.
My
initial investment in precious metals miners was governed by
the level of perceived risk, so even when I speculated in many junior
producers and exploration companies ... and lost in many instances...
my losses were not all that significant. In the end, they were more
than compensated by two take-overs as major companies sought to
increase their reserves by purchasing established junior mining
operations. I got lucky.
Over
time, I learned that my temperament is more suited to working with
the longer term trends, hence my interest in larger operations,
royalty companies and bullion. However, I will not add to my
positions. Why? My portfolios are heavily allocated to precious
metals as a result of the run-up in prices over the past ten years.
Further, I am wondering about the profitability of the mining
industry. Read this, and consider the relative risks of investing in
a company or bullion:
I
am planning to reduce my holdings in gold and silver. My initial
venture with precious metals was purely speculative ... and I got
lucky. Encouraged by my success, I held on with the hope (greed)
that I would make more ... and I did.
However,
Warren Buffet's reasoning has finally taken hold (see below) and I
plan to leave the party before the music stops playing:
It
is well worth reading the following compendium of articles by Mr.
Buffet. It is sometimes easy to lose one's perspective while
immersed in the daily/weekly tumble of the markets. It takes a
special effort to sit back and look at things with the perspective of
the “long view”, something Mr. Buffet excels at.
http://www.canadiancapitalist.com/a-compilation-of-warren-buffetts-online-articles/
Holdings in oil sands companies have not performed particularly well in the short term. However, if you have the view (as I do) that new global supplies will be more costly and difficult to bring on line, it could be well worth the wait to realize profits.
http://resourceinsights.blogspot.ca/2012/12/the-one-chart-about-oils-future.html
My investment horizon with these beasts is in the order of 10 or more years. I have also invested in a few oil services companies, creatures which profit from the rush to find and exploit new resources, often in circumstances which require ever more investment in new technologies.
Canadian National Railway (CN) – the good times roll
CN's
foray into the carriage of oil was a great strategic move. I
mentioned it in an previous edition of The Financial Passage
Maker. It is now one of the fastest growing parts of its
business.
http://www.cn.ca/en/media-news-arc-cn-mobile-crudeoil-20121105.htm
CN
is well positioned to exploit this niche as its lines are aligned
north/south – from suppliers in the north to refiners along the
Gulf Coast in the south. Further, it has the capacity to make
deliveries without having to user other carriers.
Rail
transport has a few advantages over pipelines: North America's
existing rail network can serve the needs of the petroleum industry
without too much additional construction; there is sufficient unused
rail line capacity to expand oil transportation operations
profitably; “environmental/regulatory barriers” to expanding
capacity are lower in comparison to new pipelines.
One
of my reasons for buying CN was my belief that transportation fuel
costs will rise significantly in the future. Rail transportation is
second only to ships and barges in terms of fuel efficiency, and when
I looked into potential investments into barge transportation a few
years ago, I was not all that impressed by the range of possibilities
on offer. CN is well positioned to earn greater profits when the
economy eventually recovers. CN is a core holding.
Orbite
Aluminae (ORT.T)
The
stock has been very volatile – typical for an emerging mining
company. I have been tempted to sell on short-term strength and buy
on weakness, but I am not well-suited mentally for activity of this
nature. I think that this company has great long-term potential. At
some point, it might be a take-over target. Financing will be a
continuing challenge.
Polaris
Minerals (PLS)
I
think that this company is undervalued and believe that it had
considerable upside, especially if the economy starts to recover ...
or perish the thought, that an earthquake hits the west coast.
Accordingly, I established an additional position at $0.67 per share
and have done well in recovering a substantial portion of previous
losses. (This transaction has not been recorded in the Financial Log
Book but I would suggest that you take a look at the chart for the
past year ... it rocks.) I made the mistake of falling in love with
this stock and hope that love will prevail over time.
2.
View From the Gun Port
A.
Positions Sold
iShares
S&P/TSX Gl Gold E.T.F. (XGT) – sold
I
sold this holding. Although I made a slight profit of about 18
percent since purchasing it in September 2007, the ETF's performance
has paled in comparison with most of my other holdings in precious
metals. In recent years, operating costs, taxes and other costs have
risen significantly in the industry. As opposed to investing in the
“average” via an index, I have concluded that it is prudent to be
more selective i.e. to invest in companies with good management,
lower cost structures, and with good programs to replace mined
deposits (or invest money more profitably elsewhere).
My
reason for retaining the Central Fund of Canada is that its price is
based solely on the worth of its stash of gold and silver. This is
perhaps, one of the “purest” plays on the price of gold and
silver and it does not involve many of the risks associated with
investments in mining companies.
The
retention of Silver Wheaton, another major holding, is based on the
following reasoning:
- within reason, costs to SLW are known;
- geopolitical risk is fairly low as a result of the company's policy of investing in stable jurisdictions;
- holdings are diversified, meaning that operating risks are somewhat diminished;
- management has a good track record; and,
- there is a significant potential for leverage i.e. that the share price will increase disproportionately in relation to the price of silver (I believe that the price of silver will increase over time).
As
mentioned previously, I will reduce my holdings gradually and will
take some profits with the two aforementioned companies.
B.
New Positions
In
the following discussion I will focus more on strategic positioning
and company strengths and will leave it for readers to follow-up with
a more detailed technical analysis as part of their due diligence.
Robotics
I
will write about this topic at greater length in a future edition.
Although my research is still at a preliminary stage, I am developing
an emerging perspective. Here are some of the salient points to
date:
- there are low barriers to entry for the development of most applications (robots, software) but higher barriers to making money from innovation;
- there is a lack of universal standards to facilitate the development and integration of innovations into the mainstream;
- the sense that large companies have a competitive advantage in incorporating robotics into their products and marketing and servicing them via their existing networks;
- there is a growing realization that robotics has the potential to offset the wage advantage enjoyed by emerging countries: the advent of light and easily trainable robots will gradually revolutionize manufacturing for domestic manufacturers in North America and Europe especially in the short to medium (5 to 15 years) term;
- the benefits of miniaturization have yet to be realized;
- advances in artificial intelligence and control systems will be game changers (but they are devilishly hard to anticipate from an investment viewpoint) ... and there are some downsides to unregulated artificial intelligence:
An
IBM supercomputer had to have its memory wiped because its
programmers could find no other way to stop him swearing.
http://www.dailymail.co.uk/sciencetech/article-2260784/IBM-wipes-supercomputers-hard- drives-bid-stop-potty-mouthed-machine-uttering-obscenities.html
While
my research will continue, I decided to invest in two enterprises
which have the following characteristics:
- good strategic position (a focus on market needs which have the potential for growth, competitive position by virtue of offices and facilities which are embedded in regional market areas etc.);
- long track record of expansion through acquisitions and organic growth;
- prudent management with the ability to make hard decisions about product offerings;
- geographically diverse markets;
- demonstrated ability to incorporate robotic innovations into their product/management/services systems; and,
- reasonably robust financials.
The
Company provides a range of products, systems, solutions and services
that are designed to improve power grid reliability, increase
industrial productivity and enhance energy efficiency. ABB is focused
on power transmission, distribution and power-plant automation and
serves electric, gas and water utilities, as well as industrial and
commercial customers. Its Power Products division manufactures three
categories of products: High-voltage Products, Medium-voltage
Products and Transformers. The key technologies include high- and
medium-voltage switchgear, circuit breakers for various current and
voltage levels, power and distribution transformers, as well as
sensors and products to automate and control electrical and other
utility networks. ABB Ltd is structured into four regions: Europe,
the Americas, Asia and the Middle East and Africa (MEA).
I
have watched this company for several years. I gained a new
appreciation of the strategic importance of upgrading the power grid
during the time I was involved in founding an energy research centre.
ABB is a leader in this field. Much as steam revolutionized
transportation and manufacturing, it could be argued that the ongoing
impact of electrical technologies has been just as profound, if not
more so. The global demand for electricity will not abate any time
soon and the maintenance of national grids will become a strategic
priority as politicians respond to the demands of consumers, both
domestic and commercial.
ABB's
foray into robotics to enhance its product offerings is a natural
development and preliminary indications are that the company is
handling this integration quite well through a mix of strategic
acquisitions and organic development. Robotics is far more than
“moving arms”, although ABB has substantial interests in this
field as it applies to manufacturing and material handling – all
natural fits with its core business. In this sense, robotics is an
“enabler” for the company's business.
I
will leave it to the reader to undertake his/her own due diligence
and follow-up research as there is not sufficient space in this
edition to present my own detailed analysis.
Oceaneering
is a global oilfield provider of engineered services and products,
primarily to the offshore oil and gas industry, with a focus on
deepwater applications. Through the use of its applied technology
expertise, Oceaneering also serves the defence and aerospace
industries.
Oceaneering’s
business offerings include remotely operated vehicles, built-to-order
specialty subsea hardware, deepwater intervention and
manned diving services, non-destructive testing and inspection,
mobile offshore production systems, and engineering and project
management.
In
previous editions, I observed that the days of “easy oil” are
almost over. As a result, operations have expanded to include the
seabed. The following trends in the industry led me to search for
companies like OII:
- an increased “spend” in offshore drilling activity;
- since 2000, more than half of new major oil discoveries have been offshore;
- independent oil companies are looking increasingly to the seabed for new opportunities because business conditions for the exploration and development of land-based plays are becoming less attractive for a variety of reasons including: more restrictive regulations; more restricted access due to competition from sovereign oil companies; increased royalty payments etc.;
- many of the new discoveries are so huge that they offer economies of scale thus making the implementation of new technologies feasible;
- pressures are forcing companies to adopt new technologies to reduce finding/extraction costs;
- increasingly, discoveries are in areas of deep water where robotic technology is an absolute necessity;
- there seems to be an inexhaustible supply of money for new technology as multinationals and national oil and gas companies compete for strategic resources;
- many companies have a culture which embraces new technologies;
- there are fairly high barriers to the entry of new technology companies;
- offshore oil field development activity appears to relatively insulated from dips in oil prices as deep-pocketed companies are driven by the belief (hope) that prices will recover and the necessity of replacing depleted reserves.
OII is
attractive for a variety of reasons:
- the company's focus on deep water is congruent with exploiting trends in the oil exploration and development industry;
- it has little debt and considerable cash flow;
- its revenues were not affected in a major way during recent (ongoing?) economic hard times for the global economy;
- it has consistently grown its profits over the past five years and has strong financials for a growth company; and,
- it is leader in its field.
If you
have the time, it is well worth reading this take on the oil
industry:
Agriculture
In
earlier editions, I addressed agriculture, noting:
- the persistent increase in the global demand for food, including higher value food products as consumers are becoming more affluent; and,
- significant challenges faced by major consuming countries, especially in Asia: water scarcity, loss of productive land, complex land holding patterns which hamper efficiency, unclear/uncertain land titles and rights.
I
thought about ways to invest in agriculture, and developed a mental
model of the global food system. I then identified a few potential
areas for further investigation: fertilizers, farm machinery,
processing, and farmland. By a round about way, I recently decided
to invest in farm machinery – this a result of some initial
investigations in the field of robotics. I will soon invest in
fertilizers and may write about that voyage in a future edition.
Years ago, I invested in processing and have done very well with
Saputo and Nestle.
Farm Machinery
I have
invested in two companies: Deere & Company (DE) and Rocky
Mountain Dealerships (RMI).
Deere
& Company (DE) http://www.deere.com/
This
venerable and successful company builds, sells and services equipment
for the agricultural, construction, forestry and turf industries. It
also has a financial services business. Sales, services and
manufacturing centres are strategically located throughout the world.
The
company is desirable for several reasons:
- the demand for agricultural and construction equipment will remain strong in the long term (forestry will likely rebound soon);
- the company has a good reputation for innovation and leading edge products, especially in high end markets;
- the brand is “sticky” in the agricultural community, especially in North America, and it has a well developed dealer network;
- it has reasonably robust financials;
There
are several risks associated with this company:
- high debt (although it appears this is endemic to this business sector);
- significant competition in developing markets such as India where DE has only a 10 percent share of the tractor market;
- continued drought conditions in some of its major markets, especially in North America;
- the potential for new equipment sales to decline in the short to intermediate term due to reduced commodity prices and higher farming costs (labour, materials, energy).
I
looked at some speciality equipment companies and will likely
continue my search as part of my investigations into robotics. In my
view, advances in machine vision, artificial intelligence and plant
breeding will reduce labour costs significantly in future years,
especially in tending, harvesting, packing and processing.
Rocky
Mountain Dealerships (RMI) http://www.rockymtn.com/
In
North and South America, there is a decided trend towards farm
consolidation for a variety of reasons.
http://www.google.ca/url?sa=t&rct=j&q=statistics%20canada%20farm%20machinery&source=web&cd=8&cad=rja&ved=0CHMQFjAH&url=http%3A%2F%2Fwww.georgemorris.org%2Fpublications%2Ffile.aspx%3Fid%3D144b3403-54ae-4c65-951c-68fb3093929f&ei=cdrlUISjEMKa2gXZvoGQAw&usg=AFQjCNFP2vhwnKTyrc2472hDXEgY7B91Bw&bvm=bv.1355534169,d.b2I
Increasingly,
farms are being operated as businesses as opposed as land holdings to
support a lifestyle. In time, I expect that 20 percent of farms will
earn 80 percent of farm revenues. In Canada, we are well on our way
to this state. Increasingly, larger farming operations are looking
to dealers who can offer a wide inventory of equipment supported by
sophisticated customer services, including financing, and accessories
and parts and service. There is a trend for consolidation within the
ranks of dealerships for a variety of reasons, including:
efficiencies through the shared use of IT and best practices, price
reductions through bulk purchases; the possibility of offering larger
inventories and so on.
I
looked at the American Midwest a few years ago for potential
investments in this general field but neglected to look at
possibilities in Canada. Recently, I looked at the prairie provinces
with “new eyes”. The region is attractive for several reasons:
- a vibrant farm economy supported by high commodity prices (which I figure will be maintained at reasonably high levels over time commensurate with the global demand for food);
- the reputation of Canadian farm products on world markets (with the possible exception of GMOs in the EU);
- the continuing consolidation of farmland into enterprises which place a high priority on high technology equipment to save on labour and maximize yields through measures such as the differential delivery of plant nutrients and disease/pest control agents;
- higher economic growth rates than the rest of Canada and the associated demand for equipment to meet the demands of a booming resource industry and infrastructure.
Upon
further review, I decided to buy Rocky Mountain
Equipment (RMI).
Rocky Mountain Equipment
is a consolidator of agriculture and construction equipment
dealerships, primarily focused around the Case IH, Case Construction
and New Holland brands. We are the largest independent dealer of Case
IH and Case Construction equipment in Canada, and the 2nd largest in
the world. RME’s business employes nearly 1000 people directly, and
serves tens of thousands more customers and their employees.
Operating 39 dealerships across Alberta, Saskatchewan and Manitoba as
well as customers radiating beyond those 3 provinces, RME’s goal is
to bring professional, stable, and dependable equipment partnerships
to its customers.
For
more detail, visit the company's web site:
http://www.rockymtn.com/
The
company is attractive for a variety of reasons:
- the company's business model is easy to understand;
- it has demonstrated an ability to expand through strategic acquisitions and achieve economies of scale therefrom;
- wisely, the company respects the acumen of dealers in newly acquired businesses and offers them 50 percent stock to involve them directly in the business;
- it has reasonably attractive financials and a consistent record of increased earnings (the company managed to remain profitable during the last economic downturn);
- RMI has experienced management with “dirty hands” and a proven record of building equipment businesses in the Canadian west;
- management is deeply committed through a 20 percent ownership position;
- it seems to be more attractive than its main competitors when assessed by several metrics: Cervus, Wajax, and Finning;
- it would appear that the company has managed its expansion in a measured way, pausing to consolidate acquisitions before moving forward too aggressively;
- there are opportunities for further expansion;
- the company's geographic diversity provides a measure of protection against localized conditions which can impair crop production – circumstances which cause farmers to take a conservative approach to equipment purchases with the consequent reduction on profit margins.
There
are, however, some potential downsides:
- the impact of a potential reduction in government spending on infrastructure as Alberta comes to grips with its provincial budget deficit (construction equipment is a small part of the company's business);
- competition from other farm equipment companies such as Deere;
- the difficulty in retaining and recruiting qualified staff in the face of a vibrant job market;
- the impact of fluctuations in the price of commodities (this may affect the sale of used equipment more than new equipment and leave the company with expanded inventories); and,
- greater difficulty in securing funds if interest rates increase.
Farmland
My
earlier investigations in land were somewhat disappointing. I looked
at a few Canadian firms which invest in farmland but found that their
retail investment vehicles were unattractive to me for a variety of
reasons:
- I could not understand the exit strategies and their implications for retail investors (if it is not spelled out clearly in the prospectus or reasonably deduced, I tend to lose interest);
- the companies are lazy in the sense that they bring no “value add” to the properties under their ownership – they are landlords/land speculators and not much more;
- if some of the companies receive revenues above a set amount, they are entitled to rake off a share of the profits which otherwise would have gone directly to shareholders (i.e. the retail investor takes the risk during bad times and the company profits when times are good.);
- climate change may have an adverse impact on holdings in some areas (e.g. increased incidence of drought and early frost).
After a
year, I started to investigate farmland once more, this time with a
different perspective:
- companies with a focus on developing farmland in order to realize a better return per unit of area; and,
- companies with active agricultural operations and participation in adding value to raw farm products. (Under certain circumstances, there are economic advantages in vertical integration.)
My
search extended to some of the major farming states in the U.S. and
South America. For ethical reasons, I avoided Amazonia in Brazil.
For geopolitical reasons, I am somewhat leery about Argentina – an
agricultural juggernaut which has been constrained from reaching
greatness by corrupt and inept governance at the national and
provincial levels.
I have
avoided Africa for a variety of reasons: the ethics of interfering
with indigenous life ways; rampant corruption; political instability;
and a largely rudimentary infrastructure. I have avoided China as I
feel that investments in that country are too fraught with a variety
of risks: corruption, lack of transparency, uneven application of the
rule of law etc.
I am
still on the hunt and may report on my findings in a future edition.
Stevia
– sweet and sour
A
few years ago, we stayed at a farm in Catalonia, not far from Girona
(northeast of Barcelona). Maria's food was simply outstanding –
traditional Catalan food that you simply cannot get in a restaurant –
and some of the best food I have enjoyed in Spain. If ever you want
to explore the fantastical world of Dali, this is a great base.
We
made friends with our host, and on a return visit two years later,
she asked us to bring her some stevia, a natural sweetener. It was
the first I had heard of this plant.
While
researching potential investments in agriculture, I came across
stevia while investigating agriculture in saline and drought prone
areas. The S&W Seed Company is focused primarily on
drought-resistant alfalfa seed, but it also has an interest in
stevia. http://www.swseedco.com
The
market for stevia may expand rapidly as an alternative to artificial
sweeteners. Opposition from the artificial sweetener industry
hampered regulatory approvals for stevia but these have been
surmounted and the market may expand significantly for a variety of
reasons. Also, there is a concern about relying on foreign supplies
of stevia. About 75 to 80 percent of the world's supply is grown in
China, but concerns over the safety of foods from that country
(justified or not) will likely confer a marketing advantage over more
tightly regulated jurisdictions such as the U.S.
There
are several listed companies which grow and refine stevia in China
but my past experience with listed companies with narrow operational
bases in China has not been positive. I am not alone:
Some
enterprises in the U.S. and Canada may not be all that they appear
.... seems as if the following story has been repeated in other
instances – with sour results for investors:
http://investorshub.advfn.com/Stevia-First-Corp-STVF-24284/
(Make sure to read the comments section.) When visiting the
web site of the Vineland Research and Innovation Centre, I was
fascinated to discover that a search for “stevia” yielded “no
results found” ... wonder why? I've learned to search the names of
company officials and to explore both positive and negative aspects
of a company but adding positive and negative terms to my search
terms (e.g. “legal proceedings”) as part of my due diligence. I
have no opinion about the company – simply that the situation led
me to take a look elsewhere.
Following
an initial burst of investor euphoria, the stocks of stevia-focused
companies have settled down. For the most part, they are very small
enterprises and, for that reason, more risk prone: burn rates may
exceed their ability to secure financing; markets for products have
to be developed; technical difficulties may be unanticipated in
ramping up production; and so on. The quality of management is key
in these circumstances, including experience in running a business,
especially in agriculture.
3.
View From the Masthead
I
will not write about recent sightings due to the length of this
edition.
4.
Reading for the Moorings
The
Little Book of Big Dividends
This
is a very nice book by Charles B Carlson (2010). It continues the
tradition of excellence in Little
Book – Big Profit Series produced
by John Wiley and Sons.
http://lp.wileypub.com/LittleBook/index.html
In
previous editions of The Financial Passage Maker I have
highlighted a few Little Books. A collection of the series
would make a fine gift for yourself or any other investor on your
favourite persons list ... failing that, borrow them from your
library. One of the values of the series is that the Little Books
are just that – pithy accounts written by fine minds.
Charles
Carlson's thesis is this:
Find
stocks with above-average appreciation potential and safe and growing
dividends, and buy them at attractive prices.
His
approach is this:
My
gripe with a lot of investing books is that they tend to be long on
theory but short on specific, actionable advice and recommendations.
Chapter 4 “names names” taking the ideas and tools from the first
three chapters to create lists of my favorite stocks offering big,
safe dividends. And we go global ...
Mr.
Carlson is true to his word. He writes clearly and concisely and his
arguments are presented in a logical manner. An updated list of his
favourite stocks is presented on his web site (see below).
I
will buy a copy for my son. We will use the Big Safe Dividends (BSD)
formula as a starting point to identify potential stocks for
inclusion in his portfolios. We will then follow up with a more
detailed analysis of potential purchases once the field has been
narrowed down. It will be part of a continuing process of learning
and, hopefully, a useful step on his path to financial well being.
The wonderful thing about investing in good dividend stocks is the
potential for capital gains and the continued stream of dividend
income, which if invested, can boost portfolio performance
tremendously. To give you an idea of the power of dividends, take
the example of an investment I made in the Northwest Company.
Although the stock has increased in price by about 30 percent to
date, the accumulated dividend income accounted for 40 percent of the
total gain.
After
some thought, I have decided to weight our tax sheltered accounts
(especially RRSPs for U.S.-based companies) in favour of dividend
stocks. This is the outcome of a review of our financial plan. The
mistake I initially made was to diversify within each account
and/or to hold many of the same stocks in many of our accounts. It
has been corrected. For further information about the treatment of
dividend stocks in TFSAs, start by reading this:
http://www.moneyville.ca/article/1128410--tax-free-savings-account-power-increasing
Depending
on which type of account you have, the tax treatment can vary
significantly. For example, U.S. witholding taxes are waived in RRSPs
but not in other types of accounts such as RSPs, RESPs and
non-registered accounts. Over time, dividend income can be quite
significant, so it's prudent to minimize taxes through wise planning.
I hate attending to clerical tasks, but when faced with such
distasteful work, I try to estimate my hourly rate of return from
such drudgery. I have concluded that it's worth my effort. On the
basis of personal experience, I have found that the real benefits of
tax planning and other forward-looking measures are realized years
hence ... like many things in life.
Mr.
Carlson maintains a very useful web site, Big Safe Dividends
http://www.bigsafedividends.com
In
my opinion, it should be on the bookmarks list of all thoughtful
investors. Unlike most other sites which often tout the latest hot
stocks and involve themselves with the trivia of the moment, this
site is solid. At various points, every investor asks the question,
“Where to from now?” The BSD site provides sound direction for
the way forward.
Incidently,
I reviewed the featured stocks in this edition using the BSD formula
... you may wish to do the same.
Here
is an excellent article about the benefits of investing in dividend
stocks. The key points: start early and invest with a 20 year time
horizon; invest in solid companies; have patience.
The
aforementioned site, Dividend Growth.ca, has a wealth of useful
information and should be on your bookmarks list. It also notes some
excellent books on dividend investing – books which would be quite
useful for more detailed follow-up once the groundwork has been
established with Mr. Carlon's book.
Mutual
Funds
In
previous editions of The Financial Passage Maker, I have
offered several rants about the mutual fund industry in Canada.
Years ago, I abandoned any thought of investing in these creatures.
Why?
- outrageous management fees;
- sub-par performance (most do not even match relevant indices over time even when management fees are not factored in);
- management practices do always serve the best interests of retail investors;
- the emergence of other more attractive investment vehicles such as ETFs; and,
- my positive experience in investing in equities via an on-line account.
Mutual funds served a purpose when they
were originally created in that they provided the average person with
a way to participate in the market: access to markets, management
services, and so on. However, with the increase in personal net
worth over the past half century, the advent of competitive products,
increased investor sophistication, and easier access to information
via the Internet, the mutual fund industry is under some stress.
Further, in response to public pressure and government regulators,
the industry has been forced to review its practices.
On
December 13, 2013, the Canadian Securities Administrators issued a
discussion paper, entitled CSA
Discussion Paper and Request for Comment 81-407 Mutual Fund Fees.
This
document is well worth reading. Here are some excerpts:
In
a study on advisor relationships and investor
decision-making prepared for the Investor Education Fund70
(the IEF Study), only 64% of investors indicated that their
advisor told them about costs before asking them to buy.71
In addition, only 45% of investors indicated their advisor
told them how much compensation he or she would receive for the investments they made.
A
study commissioned by the Investment Funds Institute of Canada
similarly reports that only 54% of investors recalled that their
advisor discussed his/her compensation when they last purchased a
mutual fund.72
The
same study found that only 64% of investors
recalled that mutual fund fees such as front-end sales charges and
DSCs were discussed.
Only
4 out of 10 respondents
indicated they understood DSCs, and only one-third of
respondents indicated they were aware of trailing commissions.74
To
date, advisors have not been required to disclose all forms of
compensation they receive from their clients’ mutual fund
investments.
The
embedded nature of advisor compensation costs limits the ability of
mutual fund investors to control or influence these
costs.
Under current mutual fund rules, a proposed increase in certain
discrete fees and expenses charged to a mutual fund,
such
as a proposed increase in the management fee rate, must be put to a
security holder vote.80
Since trailing commissions
are generally
embedded in management fees as opposed to charged as a discrete fee
to the mutual fund, trailing commission rates can
be increased without security holder approval.
Currently,
the only means a mutual fund investor has to express disapproval with
an increase in a mutual fund’s trailing
commission
rate is to exit the mutual fund. However, a redemption could be
detrimental to the investor if tax consequences
and/or
sales charges are triggered under the DSC or low-load option. Faced
with these potential costs, an investor may opt to
remain
invested in the mutual fund.
The
use of mutual fund assets to pay for trailing commissions may give
rise to actual or perceived conflicts of interest at both the
mutual
fund manufacturer and advisor levels.
Using
fund assets to pay for trailing commissions could encourage
additional sales of the fund. This could increase the fund’s
assets
under management, which would increase the management fees payable.
This creates an actual or a perceived conflict
of
interest between the mutual fund manufacturer and the fund’s
investors.83 This
practice could put the mutual fund
manufacturer
at odds with its statutory duty to act in the best interest of the
mutual fund84 to
the extent the mutual fund
manufacturer,
rather than the fund and its investors, is the primary beneficiary of
the fund’s asset growth. The mutual fund
manufacturer
must be able to demonstrate that it is acting in the best interests
of the mutual fund and its investors, and not itself,
when
engaging in this practice.85
This
perceived incentive for advisors to recommend the sale of mutual
funds that pay higher sales commissions and trailing
commissions
may be made even greater by the ‘compensation grid’, the
mechanism that dealer firms use to determine the pay
of
an advisor.98 Under
this grid, the more commission or fee revenue the advisor generates
for the firm, the greater the portion of that
revenue the advisor gets to keep. Some dealer firms impose a minimum
amount the individual advisor is expected to generate.
These
compensation incentives can potentially result in a misalignment of
the advisor’s interests with those of investors.99
For example,
because trailing commissions on equity mutual funds and
balanced/asset allocation funds (as discussed above) are typically
higher than trailing commissions on fixed income and money market
mutual funds, advisors may be incentivized to
favour
such mutual funds in portfolio allocations. Similarly, since trailing
commissions on mutual funds sold under a front-end
sales
charge are generally twice as high as trailing commissions on mutual
funds sold under a DSC, an advisor may be induced
to
favour the front-end sales charge option over other available
purchase options.
On
the other hand, advisors who are new to the business and who don’t
yet have a large trailer fee-paying fund book of
business
may be more incented to favour mutual funds sold under a DSC, despite
their lower trailing commissions, in order to
receive
the 5% sales commission payable by the mutual fund manufacturer at
the time of sale.
In
its measured prose, the discussion paper sketches an unattractive
portrait of an industry which has subordinated the interests of its
customers to its own bottom line.
The
only reason why mutual funds continue to survive in the Canadian
retail market is due to the disinterest, ignorance and/or laziness on
the part of a very large segment of the public. As mentioned in
earlier editions, I am astounded that otherwise intelligent people
who have invested a great deal in learning how to make a living
suddenly turn into financial Mr. Hydes and abrogate responsibility
for taking a direct hand in attending to their fiscal well-being. It
is an interesting aspect of human nature: the ability to accept and
adopt abstract thought without critical review (i.e. religious belief
and sales pitches from much of the financial services sector) coupled
with the inclination to focus undue attention on tangible things such as cars,
fine wine and televised sports ... sad ... but profitable for the
financial products industry.
Conservatives'
Attack on Science
Conservatives
in the U.S., Great Britain and Canada have launched a prolonged
attack on government-sponsored science. Some observers have
portrayed it as the triumph of ideology over reason. More thoughtful
observers have attributed it to self-interest on the part of the
business community. In essence, the attack is rooted in two things:
- a refusal to believe that there are limits to growth (and a corresponding belief that technology will solve environmental problems as opposed to science-based environmental regulation); and,
- a belief that market forces should be the prime mechanism for determining a nation's future.
The
following article is well worth reading.
A
specific instance of an attack in Canada is presented in two
references below:
Some
businesses have moved research labs overseas as cost-savings
measures. However, globalization and the off-shoring of key
capacities have not always benefited North America.
Christensen retells the story of how Dell [DELL] progressively lopped off low-value segments of its PC operation to the Taiwan-based firm ASUSTek [LSE: ASKD]—the motherboard, the assembly of the computer, the management of the supply chain and finally the design of the computer. In each case Dell accepted the proposal because in each case its profitability improved: its costs declined and its revenues stayed the same. At the end of the process, however, Dell was little more than a brand, while ASUSTeK can—and does—now offer a cheaper, better computer to Best Buy at lower cost.
Christensen
also describes the impact of foreign outsourcing on many other
companies, including the steel companies, the automakers, the oil
companies, the pharmaceuticals, and now even software development.
These firms are steadily becoming primarily marketing agencies and
brands: they are lopping off the expertise that is needed to make
anything anymore. In the process,major
segments of the US economy have been lost, in some cases, forever.
Fortunately,
there is a growing trend to “on-shoring” - the repatriation of
manufacturing and research and development to North America. This
was addressed in a previous edition of The Financial Passage
Maker. I have renewed my efforts to investigate potential
investments along this theme, robotics especially.
Gun
Ownership – What are the externalities and how valid is the
argument about the effectiveness of guns in the hands of the “good
guys”? Hint ... heard of the 21 foot rule?
This
is one of the most interesting articles that I've read to date on
guns.
For
those who think that carrying a gun will afford a greater measure of
personal protection from bad guys, it is worth considering this:
Originating
from research by Salt Lake City trainer Dennis Tueller and
popularized by the Street Survival Seminar and the seminal
instructional video "Surviving Edged Weapons," the
"rule" states that in the time it takes the average
officer to recognize a threat, draw his sidearm and fire 2 rounds
at center mass, an average subject charging at the officer with a
knife or other cutting or stabbing weapon can cover a distance of
21 feet.
|
Once,
when hitch hiking in Europe while still in my teens (then one could
travel on $3 per day if you were smart), I carried a switchblade knife as protection.
After some reflection, I decided that the implications of using it
(if even I could) would be horrible and I gave the knife away. My
best defence, I decided, lay in an increased awareness and always
having a back-up plan to run away in the event that I could not talk
my way out of difficulty. As it turned out, I did experience a few
potentially threatening situations, but was always able to talk my
way out.
Perhaps
one of our former Prime Ministers was right when it comes to dealing
with intruders: collect Inuit art and use it as a multi-tool.
Travel
– Preparatory Research
If
you are like me, the joy anticipation associated with planning a trip
almost equals the joy of the visit itself. If you are like me, your
first step is to read a few guidebooks and visit web sites such as
TripAdvisor, Google Earth, and YouTube.
In
recent years, I've started to investigate a few more sources of
information.
I
start by reading the local/national newspapers to “take the pulse”
of daily life. While there are often English language papers in
non-English speaking countries, I have often found it useful to make
an effort to read the “native” press as it's a great way to brush
up on your language skills if you have even a rough inkling of the
language. There is a plethora of other web-based material, including
the usual food blogs and community events schedules. More
interesting, sometimes, are specialized on-line sources which cover a
variety of topics including: trade and industry, sports, crafts and
the like. It is surprising to discover just how rich these sources
can be at times.
When
planning visits outside of North America, I have found that the expat
community is a source of valuable information. Most
countries/regions have comprehensive web sites and blogs which
address topics of interest to tourists, including: adapting to
cultural customs, dealing with the law, rentals, domestic travel,
food, sources of further information, etc. In order to access sites
of this nature, simply search for “expat” and add the name of the
country/region. You will find a diverse range of opinion which
ranges from the bitterness of people who have failed to accept their
new surroundings to the relaxed satisfaction of those who have found
heaven. One thing I might try is to contact some of those
individuals with the thought that I could ask them for
advice/assistance on specific topics such as rentals and local food.
Who knows where contacts of this nature might lead to?
As
a geographer, I delight in immersing myself in landscape. As such, I
never tire of travel as even the most mundane, visually unspectacular
scenery is often embodied with an incredibly rich “story”. In my
on-line research, I start by using the term “landscape” followed
by the name of the country/region. I follow up by adding terms such
as “culture”, “agriculture” and “history”. In the
British Isles especially, there is a very rich tradition of landscape
geography – an effort to understand the present “look” of the
land by understanding the agents which created it: geology, patterns
of settlement, land use practices, etc. Another dimension of
“landscape” is perception – how people relate to it. This
aspect is quite dynamic and can vary immensely in temporal and
spatial scales. Once you have acquired knowledge and sensitivity,
you will be able to get a better read of your surroundings by
detecting the likes of medieval field patterns, Roman roads, ancient
reminders of the craft of woodland management (different styles of
hedge rows, seemingly deformed trees cut in a variety of methods to
provide wood products), reasons for the location of sacred sites, and
so on. Or you may wish to experience landscape through the eyes of
art religious people, soldiers, and farmers ... the list is endless.
The perspective of “landscape” provides a context for things
seen, thus enriching one's experience as a traveller.
5.
In the Wake
After
a hiatus of two years or so, I have renewed my search for new
investment opportunities, especially in equities. I fell into the
trap of complacency and restricted my reading largely to “financial
porn” i.e. the business press, financial blogs, etc. It was a
rather mindless activity and unproductive. With this realization, I
stopped.
I
have started to learn all I could about several fields: robotics,
agriculture, transportation, and strategic trends in society. I
formed some rudimentary “views” which are now being refined. It
has been a tough slog, but there have been moments where the
intellectual journey has led me to some totally unexpected
destinations .... and I hope ... some profitable investments.
As
a result, the tone of this newsletter will change somewhat. In some
ways, it constitutes a return to an earlier style, but this time, I
hope, one with a greater measure of contextual depth. For the most
part, I will not remark on financial attributes of featured companies
as they are readily available. Further, many financial measures and
analytical methods are over-complicated and unreliable – the
products of overactive minds on the part of very intelligent
academics and financial operatives in search of the “next great
thing”. As always, I will continue to write about things which
make life worth living as financial success is most often, a
byproduct of curiosity and application.
Purpose
of the Newsletter
The
Financial Passage Maker provides ideas for people interested in
building wealth. It is aimed at thinking people who have decided to
take on personal responsibility for their financial well-being.
The
newsletter is issued more or less quarterly, a reflection of the fact
that good investment ideas are not all that plentiful ... certainly
not sufficient to justify a monthly or bi-weekly report. All ideas
presented in this newsletter are ones that I have invested in
personally. I am not interested in filling space with observations
on stocks I do not own. I eat my own cooking.
The
Financial Passage Maker chronicles the messy process of building
the equity portion of a financial portfolio. I hope that it will
provide some useful insights and enable readers to think critically
for themselves. As in all things, however, the path to financial
well-being takes consistent effort coupled with humility and a
knowledge of self. This can only be developed through practice over
many years.
The
Financial Passage Maker
chronicles my voyage in the investment world. In no way do I
recommend that you base your personal investment decisions on the
contents of the newsletter unless you are prepared either to consult
a financial adviser qualified in your area of interest or undertake
due diligence
on the basis of your own research - or both. Remember, in the final
analysis, you are responsible for your own financial well-being.
Would you have it any other way?
aaaa
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