Thursday, May 28, 2009

Bonds are the new black.

Time for a rant on what I've learned about the DIY Canadian investment blog community (if that is indeed a thing that can have a name like that), people posting online about what everyone else in their situation should do with their money (this is regardless if they are a financial advisor, some dude, or a big outfit), following this or that bit of information. Lots of times there is a nice little graph or a box of numbers next to another box of numbers.

Many people enjoy posting their own financial information. Not just their particular investments but their whole list of debts and assets, their jobs, incomes, how big is their family, etc.

I have no problem with people who want to share personal information, especially if their intention is to selflessly help others. However, most of what people consider to be their business is in fact just that- it's their business and no one else's. Privacy is about minding your own business. This isn't a rejection or defensive posturing, just a mutual understanding that my economic and social context is unique to me. It's what makes me 'me' and not 'you', the 'other'.


What am I talking about?


I'm talking about how I've learned to ignore information (like the analysis and trends and fancy equations and statistics) as the key to distilling, understanding and utilizing the underlying reality of the various investment strategies and attitudes.

This is what philosophy is all about. Those guys that people talk about- Plato, Aristotle, they were guys who had a holistic (if still primitive) view of what a person should do with their life (their view of the soul is like how we view our retirement nest eggs) and how to go about doing it in the best way possible.


What does philosophy really have to do with investing?

1) Philosophy is about the pursuit of truth.

2) Investing is about weighing risk with return.

3) Return is cash money in your hands; risk is the absence of certainty about that return.

4) If Philosophy is about truth (which is about validity and certainty) and investing is about risk (which is about the certainty of making money),


5) understanding certainty and using that understanding to our advantage will allow us to maximize return (cash money) while minimizing risk (uncertainty).


So what happens when, in a variety of quips, comments and suggestions, you present the consequences of this line of reasoning to the Canadian DIY financial community?

The answer is not much.

You see, when people have 'bought in' to a line of reasoning, and worse still, put their own financial nest egg behind a line of reasoning, it becomes a very touchy subject.

Though it's easy to divulge how much we have with who and where and how much we owe on this or that, it's actually much more psychologically (and philosophically) difficult to admit compete and total failure.

Indeed, it was Nietzsche who best espoused the idea that without the understanding and acceptance of complete and total failure, one can never enjoy true success. Though he lived a lonely and miserable life, he viewed humanity in organic terms and, wishing in an alternate life he could have been a gardener, Nietzsche argued that the failures of ordinary people are like the dirt and roots and worms and detritus. If they are understood and cultivated properly, they will combine and yield a beautiful flower. If they are mismanaged, they will rot.

This is an apt analogy for a flawed investment strategy. When the reality is that stocks do not always beat bonds, and over the last 40 years bonds have beaten stocks, an individual who attempts to understand and accept reality will adapt.

A logical adaptation, if we attempt to remain consistent, would involve less effort attempting to make significant gains or investments in the stock market.

You see, this is essentially my line of reasoning before the market crash and I took it from my parents (who got it from their parents) before me and it meets a lot of static.

The static takes the form of people who believe that bonds are not available with high enough interest to beat inflation (consistently proven incorrect when dealing with a properly laddered portfolio), people who believe that investment-grade corporate bonds are at a significantly higher risk of default than a government bond (consistently proven incorrect over time), and (perhaps worst of all) people who view the return of capital as a burden- best avoided by purchasing a stock or mutual fund and holding it forever (this is a philosophical disagreement, I buy some equities but I love when I see I have cash waiting to find a new home in my accounts and argue it is never a burden if you always have the ability to wait for a good value investment).

I believe the accepted notion of a 30-70, 50-50 or 40-60 asset allocation, the belief of diversification, and professional management has been completely compromised and undermined by the real world experiences of ordinary people. People who could have been convinced of any asset allocation so long as it beat inflation and preserved a nest-egg, were lead into investment vehicles that charged a lot of money and in the end provided little or no protection from stock market volatility.

As a logical consequence, I have determined that the entire investment community is as flawed as the products they sell, analyze, discuss and throw their money behind. People who argue about the benefit of estate, tax and insurance planning do a disservice to the role an accountant provides (at a fraction of the cost and with no conflicts of interest) and exaggerate how difficult it is for the average person to determine their need for those things on their own for free.

Financial advisors are your best friend, but only when they understand how to treat you and your money with the respect you deserve. If you remain uneducated to the actual returns of the various asset classes that you can invest in, you will drastically increase the likelihood that you will unknowingly lose money when you think you are helping to 'grow' it.

There are some people, like 'NurseB911' who writes his blog about his financial journey, that are starting to catch on to reality.

The rest would rather refuse to look at their financial profile and continue to hope and pray the DOW magically goes back to 13000. The smart money has been slow and steady FOR ALL ETERNITY.

Monday, May 18, 2009

Is Obama Reading My Blog?


But here are two articles that are consistent with the investing philosophy of the fixed-income investor. A.K.A. the bondage freak.

It is also totally contrary to what all DIY investors believe, but just look at the articles first.


So, there are two reasons I use the title space to ask if Obama is paying attention to my investing philosophy (which is by no means unique, and as this article shows is actually quite old)


  1. Obama keeps approximately 90% of his family's savings in cash and bonds. The articles say that he keeps about 90% of everything in US Treasury notes and a chequing account. It does not disclose the maturities, or the specific nature of his treasury notes (we should assume Obama is getting a pretty good price and yield from his broker).
  2. Obama had several mutual funds, but chose to put all the equity investments (about 10%) in a mutual fund, which is an index fund. It invests large amounts of the investors' capital in shares of companies that fit on a list of social issues that are an important part of the life and values of the Obama family.


I look at those two points which are featured in the article and it reinforces the attitude towards investments that I have been advocating on this blog and in my life.


The fundamental approach and attitude is that you need to protect and preserve your capital.

Once you have done this, you should be free and confident (and, in essence, obligated) in pursuing the accumulation of wealth through a successful career you enjoy (not through growth of an equity portfolio), as well equity investments can be made to reflect your interests and personality without overly risking capital.

If I can speculate about the investment strategy of Obama:

  1. Best Case Scenario:

He is taking this conservative asset allocation strategy and using it as a way to provide the financial security to allow him to focus on his career. He can likely earn money above the inflation rate, and he can pay his taxes and this would provide enough money to support the quality of life he had enjoyed before he became "Chocolate Jesus". He's in the perfect position, after he serves the public, to accumulate and mobilize vast amounts of 'money capital' because of the tremendous amount of 'social and political capital' he will have created if his investments in his career strategy (aka. Domestic and foreign policy of USA) are successful.


  1. Obama is prudent and imagines what would be his Worst Case Scenario?

His government is corrupted and ineffective. American influence, prestige and power are reduced along with the value of the US Dollar and the stock market. Obama is ushered out of office in a single term after Sarah Palin and the re-animated head of John McCain sweep the 2012 elections. In this worst of all futures, Obama is left with no fame (except failure, disappointment and disgrace), no connections and no or little ability to build and/or mobilize vast amounts of money.


If Obama starts his presidential life with about 1.2 million in investments and about 1 million in his home, and then follows most DIY investors, he could be looking at a 39% loss in his investment portfolio.

This could mean that his 1.2 million in investments could shrink to 750 000, with no job, no ability to earn big money, and two daughters who have high expectations about their future education. Obama would not be left with enough retirement savings....

However, follow Obama as he follows the age-old strategy, where you stay conservative with your cash and savings, and are aggressive and bold in your career- and your small equity investments, investing in whatever you are respectively passionate about. Even if currency depreciation afflicts the holders of American investment vehicles like treasuries, the highly liquid nature will allow Obama to move his entirely protected nest egg into higher-income earning vehicles. He won't have to worry about taxes, because Palin will eliminate all taxes as a way to eliminate all abortionists, gays and minorities.

Wednesday, May 13, 2009

Interest rate trends and GICs

So I talk a lot about fixed-income investing and usually like to focus on investment-grade corp. Bonds.

But when I look at my investment portfolio and the changes that have taken place over the past few years, I think it's important to comment about interest rates.

Following the 'benchmark' bonds, issued by the federal government, that are used for bank to bank lending; following the medium and long-term 'benchmark' government bonds; and following the popular GIC rates is critical in becoming educated in the Canadian bond market.

If you visit this is an excellent resource for tracking US government issued debt.


Look at the "yield curve", this graph plots the various maturities according to their current market yield.


Two important facts:

  1. The volume of bonds (government and corporate) that are exchanged on a day to day basis is roughly 10x greater than the value of the volume of cash exchanging hands via the stock markets of the world
  2. Because there are so many different types of issues and different maturities of bonds from each individual issuer, it is uncertain and unlikely that individual bond issues will be traded every day. This is the 'liquidity risk' people refer to when holding bonds, when interest rates (or the price of your bond) fluctuate and they hope to sell their bonds in order to capitalize, only to find that selling their bonds is difficult.

Because of these two facts, it's possible to think of the bond market as a kind of ocean cruise-liner (please refrain from Titanic analogies), which parallels the vitality of the overall economy. When investors the world over have confidence in the economy, the government or bonds in general, it typically drives up the price of all bonds and when the government is encouraging growth, it typically lowers interest rates to encourage lending and ultimately lead consumers to avoid putting their money into savings. Governments can be like the captain, ordering to speed up or slow down the ship- lower interest rates typically encourages growth, higher interest rates encourage saving money and taking it out of the economy to curb inflation.

In the previously described situation, the world before the economic meltdown was fairly reflective of my description. After the meltdown, a flight to safety and the lowering of benchmark rates for intra-bank lending has created the perfect storm. Captain Bernanke has ordered all men to the coal furnaces; fire the engines, full steam ahead! Benchmark interest rates of all maturities have plummeted to the lowest point in history.

This is important for me, because when I moved my money into fixed income, I temporarily placed a lot of it in GICs. The strategy is simple: Most advisors recommend, and a common misconception is, that it's to your advantage to be fully invested at all times.

Conversely, the way the corporate bond market works, it's actually best to buy in increments (part of the reason laddering your portfolio so that 10% of your portfolio value is freed up each year for reinvestment). So as I moved out of equities and income trusts and into the fixed income market, 1 year GICs- cashable after 30s days without penalty- are an ideal holding point for my investments if I'm not sure what to be looking for right away.

Due to giving my attention to my own search for alternative investments and the way things worked out with the economic meltdown, I've ended up holding onto the majority of my GICs, I started holding cash at 3% and the last time I purchased any (in September of 2008) the yield was about 1.4%. Now that the Federal Reserve systems around the world have gone to work, the yield for a similar GIC is now literally 0%. It's getting close to the point where you have to pay for a GIC to hold your money....

This is a problem for me as the GICs will be due in September. Fortunately, I believe the credit markets have not collapsed and this has turned into the greatest time to purchase corporate bonds in recent history.

The moral of the story is what I will call the DNAGS dynamic multi-sector wealth factor.

DNAGS stands for DO NOTHING AND GO SLOWLY. The secret of wealthy people who have managed to preserve and grow their wealth is their staying power. Sure, it's important to be confident, aggressive and pursue opportunities as they arise. What is equally important is staying conservative and using a conservative philosophy to avoid being overly-committed or jumping in too early into an investment before verifying it's soundness (this has the consequence of typically looking for moderate total average yield- with the bonus of enhanced security and confidence in your investments).

So as it is, I have about 4 months until my last GIC is due, month by month, I've been moving out of GICs (starting with those which yield about 1-1.4%) and into corporate and some provincial bonds.

So far, I've been able to take money that was earning about 1% and turn it into investment-grade bonds (no maturity longer than 6 years, so far) that are yielding about 6%

This is at least a full percentage point (or 100 basis points) better than the corporate bond ETFs available in Canada. I paid my advisor an average one-time commission of 1% of the purchase price.

Monday, May 11, 2009

Microsoft now a defensive play?

As an additional sign that the credit markets have not collapsed, the biggest and most historical software company of them all is offering its first debt issue.

This is an excellent example of the opportunities and frustrations that retail bond customers face.


You read this article in the morning, and as the defensive investor the idea springs to your mind:


"I've always wanted to get a bit of the action from the Microsoft business, but the stock has done horribly these past few years and I'm too conservative, even with my speculative investments, to ever purchase common equity in the company I will likely use every day for the rest of my life."

"The currency risk was always too much to deal with to make the stock an attractive investment after the tech Bubble burst"

"Now that they have issued so many billions of dollars in bonds, I can grab an AAA-rated investment that yields interest of a full percent above federal bond rates of similar maturity, that's a good deal!"

"I should be able to call my broker, or I can use my discount brokerage to purchase some units... oh joy!"


So here is the sad reality, why some people are turned off from the Canadian bond market, and what you should do as the DIY Canadian investor.


  1. When Microsoft issues this debt, they have already arranged for ALL of the billions of dollars to be purchased the moment it is issued.
  2. This works the same way that underwriters work for IPOs. A very large financial institution (or a group of financial institutions) will put up the entire cash amount up front to Microsoft, who then has an additional 2 billion dollars of capital to play with. Microsoft is then responsible for paying the interest on this capital and returning the full amount on maturity
  3. Once the major financial institution(s) have the bond issues in their possession, they will create a secondary market for them.
  4. First, they will sell the bonds (with a slight mark-up to pay for overhead and sales commission) to institutional investors (these investors include pension funds, insurance companies, government investment funds, even smaller financial institutions).
  5. Once the institutional investors have had their fill (the big boys eat the meat, the little guys get the scraps) they will retain the left-over bonds for you, the retail investor.
  6. By the time you get to purchase these bonds, if you ever do, the mark-up, and fluctuation in price could reduce the spread above a treasury note of similar length to zero.

What does all this mean?

It means that if you follow the news about debt issues, you are likely to be disappointed. What is more important is following trends in interest rates (which typically reveals where in an economic cycle you find yourself). Specific companies are not the primary focus of the bond investor- assets, debts, revenue and expenses are the primary concern of the savvy bond investor.

The FP article is interesting because Microsoft has never had to issue bonds (maybe they're starting to run out of money) and the article points to the resiliency of the investment-grade corporate debt market throughout the financial crisis (this strength has been widely overlooked, I do my best to change that).

But this story is very little help if you are trying to establish your diversified bond portfolio. If you lack this insight into the bond market in Canada, your first reaction is probably disappointment

The bigger picture is that when the corporate bond market grows (with the highest-rated corporations, like Microsoft leading the way) it encourages every single competitor to do the same. This has the net result of increasing the yield offered to investors (both institutional and retail) in an attempt to lure more capital.

I asked Hank Cunningham, the sagely author of In Your Best Interest: The Ultimate Guide to the Canadian Bond Market, what the retail investor should do if they missed an opportunity to purchase an attractive yielding bond.

The appropriate response is simple: wait for another investment grade corporation to have a new bond issue. So long as there are investors seeking the reliability and solid return of corporate bonds, there will be investment grade companies that are more than eager to meet that demand.

Sunday, May 10, 2009

Checking out the new format as I learn to use office 2007 for the first time in 2 years.

The credit markets are not collapsing, as we had earlier feared.

Tuesday, May 5, 2009

big time returns... a nice time but not a long time, so have a good time, your stock can't rise everyday.

I've repeated on several occasions that I never keep more than 10% of my own net-worth in the stock market.
I'll just focus on how and why i came to take this attitude and why it's made me enjoy the stock market more even if my exposure is less and to look at equity investments for what they really are (at least through my jaded, hippy-hating eyes).

This view probably started out as an asset mix of around 20% (think pareto's principal- which i don't follow anymore), and from 2005-2008, became more and more conservative. It was mostly because i simply dislike extreme volatility in any aspect of my life where it's not absolutely necessary. Over the past decade the stock market had been booming, but it had also been busting and booming back at a very high rate. I disliked the constant boom and bust so much that i decided to get out of the market. The final sale i made was BMO. I purchased shares at about $62 in July 2006 and sold them in February of 2008 at $57.

at the time i felt like i was taking a beating but just happy to get out.
Everything in my portfolio for the remainder of 2008 was in bonds and GICs (luckily, i was able to buy 1 year GICs, cashable after 30 days, that yield 2.8-3%) Current GIC yields of similar duration are about 0%... I also kept a very small position in a major energy company.

So while i hated the market for what i perceived as volatility. The crashing housing prices in California and Florida and Arizona were in the news, and i was thinking maybe it's time to take the cash and just buy a nice vacation home, and finally be finished with Canadian winters.

I never put two and two together and luckily never bought any property (i had never been offered Mortgage backed-securities or asset-backed commercial paper) and i was just as surprised when the meltdown of October-March crippled the global economy.

That being said, i was also lucky enough to be doing a great deal of reading into macro economics, personal finance and DIY investing at this time. (i was so put off by the stock market, i was wondering if there was any other decent alternative to my bonds- which were earning quite nicely through it all..... the answer btw, so far, is NO).

When i finally rounded out my general investment knowledge by looking at the recent works by Nial Ferguson in "the Ascent of Money" and doing some further background that included Nasim Nicholas Taleb, author of "the Black Swan" among other books on chance and investing, i decided this blog was the next step.

This blog represents my conclusion that the whole notion of diversifying an equity portfolio, that you should balance 50% stocks and 50% bonds or anything similar to this, is a myth.

This blog is my attempt to verify or discredit the belief that the most efficient and safest way for your investments to not go down in value, beat inflation, earn a steady return and provide a fully customizable portfolio for your specific needs is.... BONDS (specifically investment grade corporate, provinical and even real-return government of canada bonds).

If you pay any advisor 1% or more of your capital every year just to manage your money, it is a myth that you need to pay that much just to preserve capital and create growth.

I started this blog with the idea that putting anything more than 10% of your assets in an allocation that does not promise to protect your capital is too risky- investing is about assumptions of what will happen in the future and these assumptions always contain risks we ignore or are unaware of and that is why people lose money when they don't have to.

Im happy that the rebound of march- april has restored an average of 25% people's retirement savings (for those that stayed invested). There are a lot of people who lost over 50% and have little to no chance of ever recovering from the peak, but this is why we call the market volatile and why i'm too scared to put a 1/4 of my money into that arena.

when i do put money in the stock market, i realize it's to my advantage to take more risk. I'm already prepared to take a loss so i want to take the most speculative risks. Do all those crazy trader strategies- buy the companies people are terrified of, buy the companies you like that no one has ever heard of and hedge like a mad man. That's the nature of speculation and it's the form of venture capitalism the stock market provides. If you are prepared for the downside of an unprofitable company, but you like their product and you personally believe in it (like some eco-small-cap-companies, or bio-tech, or whatever) you should enjoy the role of capitalist and your economic vote to increase the resources of whatever belief you attach to your preferred company. your money could, obviously evaporate completely, but when you take only 1% of your net worth and throw it away at a cause (which you had hoped would be profitable) you can also consider it a form of charity and the government does allow a tax credit for the loss if it all goes horribly wrong.

frankly, looking at the corruption and admitted failure to make any meaningful long-term progress from some large and established charities, i think the argument can be made that (specific, highly-speculative) investing in the stock market is an equally charitable form of donation.

Sunday, May 3, 2009

buying a bond vs. stock in GE as a medium term investment (about 5 years)

As a Canadian, this dilemma has a serious caveat.
If a Canadian investor wishes to add shares of General Electric Co. to their portfolio they must open a U.S. dollar account and purchase the shares on the NYSE in U.S. currency.
This means that you take the additional currency risk, with respect to the total cash distribution paid out each year, or when you sell all the shares, and convert the money back into Canadian currency (should you choose to do so).
If you want to spend the earnings of your US currency investment inside the states, this isn't a problem
It is still a factor to consider when making an initial purchase (dollar-cost averaging is an applicable strategy that can smooth-out the volatility of currency value, but more transactions also increase the total cost of transaction fees).
If you want to spend the money you earn form your GE shares in Canada you face the additional currency volatility (i.e. if you need money when the value of the Canadian dollar has sunk, it can drastically reduce the buying power of your earnings, hence lower actual cash yield).

taking those factors into account, GE is one of the most diversified, industrial, commercial, media and unfortuantely financial companies in America. The financial hoob-a-joob that took place within that branch of the company has taken the entire corporation to the brink of insolvency.
Fortunately, all major financial institutions in America and around the world are able to borrow money at about zero% and lend it at 5-6%. This is a guaranteed way to keep otherwise bankrupt companies in business during what can be called a mini-depression.

The price of each share was around $25-$35 US ever since it split in 2000. Then in March, when the S&P500 hit 666, it was at about $6.66. Since then, the S&P closed friday at 877 and GE shares were trading at $12.69. The last dividend payment was $0.31 and nobody is sure if it will be maintained or reduced going forward. If you buy the shares on friday, the average yearly cash distribution is (barring a dividend cut) 9.77%.

Can't lie, in the medium term, that is a very, very attractive offer. even if the dividend is cut by 50 or 60%- that's still a good offer, looking at the long-term value of the company (excluding any currency risk).

As an individual investor, look to see if you're willing to go on the roller coaster ride of the future with this company. the value of your capital ($10000-$20000) will be fully put on the line to thrive, survive or decline along with the future prospects for solid revenue growth and the value of the Canadian and US dollars.
If you like what you see, be brave, bold and determined.

Or, if you're just into the idea that instead of taking all the whopping big risks the company has to make for a juicy 9.7% return, you wanted to take an alternate path, providing a great more deal of stability when dealing with the future earning potential of this mammoth and wildly volatile company, avoiding the stock market entirely.

Currently their is a bond issue from GE circulating around most of the retail bond trading desks in Canda. The features of this bond currently are as follows: It matures in june 2014, the original coupon rate was 4.4% and currently is available at 5.3%.
this means that the bond was issued at units of 100 that cost $100 each. your minimum investment is therefore $10000.
But because of all the current global economic uncertainty and decline, investors who sold off their stock (sending the price plummeting an average of 60% from the highs) also sold their bonds, in the belief the company could go bankrupt because of the inherent weakness in the financial arm.
the difference in the sell-off of GE bonds is that the $100 unit price fell to as low as $90 and is currently sitting at around $95 per unit. This means the minimum investment is now $9500, which is why the yield is 5.3% for new investors and still 4.4% for anyone paying $100 per unit.

Also, when the bond matures you will have the additional capital gain. This means your capital will be returned to you in units of 100 that have a value of $100 each. The only reason the cost per unit was reduced was because of investor pessimism. This bond is still A-rated and considered investment grade. The sell-off of the GE Financial bonds was moderate and short compared with the stock. If you invested $9500 originally, $10000 would be returned to you at maturity on top of all the interest payments received before then.
Questions about the future remain, but any bank that can borrow at 0-1% and lend that out at 5-6% is going to make steady money. I also know that my bond payment (guaranteed to be cut only after common shares and Warren Buffets preferred shares) falls in that 5-6% range so it's likely they will be able to make my interest payments untill maturity.

If you feel safe and confident about the company, you press the buy order and the brokerage will transfer the money and you start to receive your payments. You are not dealing with any foreign currency. all of these transactions are available in Canadian dollars.
As the bond investor, if that looks like a good return (about 3% above a similar government of Canada bond) with little to no risk of taking a loss, why take the risk of a big loss just to get the big gain?
money is what you earn, investments are what keep your money safe.

Friday, May 1, 2009

interesting view on canadian banks