Tuesday, November 10, 2009

Newsletter Part 2

Greetings. This letter is a follow-up to the last in which I wrote about talented investment managers searching for great companies to grow your money. Let me start by emphasizing that investing is not just about buying stocks. Fixed income investments—high- interest savings accounts, bonds, high yield debt and so on—have an important role in a portfolio. For the moment, though, I’m looking at stock selection. A later newsletter will look at fixed income investing.

But back to my last newsletter where I wrote--

As an investor you want to own the best companies that will grow their stock price over time because they are better at what they do than their competitors. Better companies do well, regardless of broader economic conditions, because they take existing business away from other companies.

So the best companies do two things: build a better mouse-trap and take business away from the other mouse-trap builders. Let’s illustrate this by looking at the example of Ryanair, an investment choice of Geoff MacDonald of Edgepoint Wealth. Anyone who has travelled in Europe has likely heard of the discount airline called Ryanair. You may have even flown with Ryanair and, perhaps, not been thrilled with their service. But you will likely fly with them again because their tickets are 50% or less than the competition and, for many flyers, price matters most. What you may not know is that Ryanair has grown its market share from zero to become the largest airline company operating in Europe in just ten years. They were able to do this because they created a competitive advantage through innovation.

What were these innovations?

1. Sell airline tickets over the internet. This allows for software in the background to provide very sensitive price monitoring and changes moment by moment. For example, you may start filling an empty plane by offering tickets for a few dollars. As soon as the amazing price attracts buyers, you start putting prices up. The software manages the ebb and flow of ticket demand and pricing until you fill the plane, all the while ensuring that you fly at a profit.

2. Fly to alternative airports. Traditionally, every airline wanted to fly into a city’s major airport. That’s where the services were and the fancy airports. The problem is that airlines pay huge fees to the major airport. Ryanair decided to break this monopoly by flying to smaller airports near the major cities, and in Europe there is lots of choice. Just think of all the airport options around London, England. Ryanair enjoyed massive savings by taking advantage of this opportunity.

3. Buy planes cheaply. How do you do this? Ryanair noticed that Boeing and other plane manufacturers operate a cyclical business, meaning that the cost of a new plane varies widely over the course of an economic cycle. In a recession when fewer people are flying, traditional airlines stop buying planes. As a result, a Boeing is desperate for orders of new planes. At those times, Ryanair puts in an order for 5 planes a year for the next 5 years. They are able, this way, to buy planes at a 50% discount which amounts to a saving of many millions of dollars.

I don’t know about you, but I find this stuff pretty neat. But coming back to my point about great companies, Ryanair takes business away from its competitors through discount ticket prices. And this allows them, very simply, to identify a route in high demand—say London to Paris—fly their plane, and steal customers from the other airlines because Ryanair’s ticket is half the price. Over the last ten years, they have been busy filling planes in good economic times and bad: there may be fewer people flying in the recession, but all the more reason to fly cheaply.

The other aspect of successfully investing in great companies is to buy the stock when it’s cheap. An investment manager can do this two ways: [1] identify a great company and its potential before this potential is widely known; [2] buy the company’s stock when it is out of favour or being ignored and its price drops. Geoff MacDonald bought Ryanair during this recent recession when investors sold off shares in airline companies believing that fewer passengers meant airlines would not survive. MacDonald, convinced of the competitive advantage of Ryanair, bought the stock during the sell-off. He and his investors have done very well with Ryanair stock over the last few months.

How long will MacDonald hold on to Ryanair stock? He will sell it off when he’s made a lot of money on it and when he has identified another company that represents a better opportunity for growth than Ryanair.

My goal is to identify investment managers with the ability and dedication to buy great companies. We look to them to grow our money and history shows that the best managers are able to do this for us over time, regardless of economic conditions. Yes, stock investing will have its ups and downs, but over the long term our patience should be rewarded.

Bye for now,


Monday, November 9, 2009


Stock market update: What have markets been doing and what should we make of it?

Greetings to you all.

As you know, I often like to start a current market update by looking at what I wrote in a previous market update. It keeps me honest and allows me to develop a theme. In my market update of March 23, 2009, I wrote--

So for money you've already invested, patience and staying invested are essential. If you have cash on the sidelines that you want to grow? Take advantage of this bear market by investing before it's over, not after.

As it turns out, I was wrong about one thing and right about the other [more important thing]. Looking back 6 months from today, we can see with hindsight that March 23 was actually 2 weeks after the end of the bear market. I was right about my view that March 2009 was an excellent time to invest in stocks. Since the market low of March 2009, the Toronto Stock Exchange [TSX] is up 48%, the US stock market [S&P500] is up 60%.

So 2009 has provided good news for investors and the bear [bad] market, which began in the fall of 2008, has been followed by a bull [good] market and patience has been rewarded. Yes, we are looking for more growth to get us back to where our portfolio was, but the strong recovery of 2009 should provide us with confidence the next time we experience a bear market.

Now we turn to the questions of the day. Does the global economy still face challenges? Yes, the banking crisis of 2008 that helped trigger the bear market will not be fixed overnight. And if we want to look for economic things to worry about, we can certainly find them.

Why have stock markets gone up so much in spite of lingering economic problems? Because stock markets anticipate good news [they are what we call a "leading indicator"]. Investors pushed up markets [1] not because they believed the recession was over, but because they felt confident it would end sooner than anticipated, and [2] as they saw markets recover, they wanted to participate.

Here's the last question I want to deal with, one that is most important to investors—Going forward, can we rely on our investment in stocks to grow our money so that we can afford to live when we retire? The answer is it depends. Let me explain.

The most important thing about buying stocks is to buy the right companies. You know the old saying that 50% of doctors finished in the bottom half of their class. The same is true of companies: as an investor you want to own the best companies that will grow their stock price over time because they are better at what they do than their competitors. Better companies do well, regardless of broader economic conditions, because they take existing business away from other companies. How are we going to pick the best companies when it's not an easy task? [You won’t do it by buying index funds which are blind pools, but that’s for another newsletter.]

An important part of my job is to find those mutual fund managers that can identify the best companies to own. These managers will be unusually smart and dedicated to ongoing research and being on the road to meet with company executives. Only this way will these managers really understand a company and identify opportunities. The fruit of that talent and labour will be shown in the out-performance of their mutual funds compared to the competition and the index. This outstanding performance helps me to identify them as I compare the performance of the 5600 mutual funds available in Canada.

The other way I identify the top managers is to meet with fund managers throughout the year. I, and about a dozen other financial advisors, had lunch yesterday with Geoff MacDonald of Edgepoint Wealth. Geoff spoke about the work that went into discovering two of the companies he's bought for investors in his mutual fund, and how these companies have an advantage over their competitors that should result in a rise in the value of the company's stock. Geoff was insightful, excited about what he had discovered, and he had good answers for the questions I asked. And I can tell you that not all managers pass the test as well as Geoff did for me.

I’m excited to tell you about one of the companies that Geoff has invested in, Ryanair, but I’ve written enough for now. I will say more in my next newsletter which I will send out soon.

For investors, a mutual fund can look like nothing more than a name on a statement that’s there month after month. In reality, the funds I choose for investors are all about what’s behind the name: the investment managers that I have researched and chosen because I know them well enough to respect them and what they’ve accomplished. The manager’s ability and dedication to buy good companies is what we rely on to grow our money. History shows that good managers are able to do this for us over time, regardless of economic conditions.

Watch for my next newsletter.

Bye for now,


The Family Cottage


The transition of the family cottage from one generation to the next can be a major issue for many families. This article came across my desk today, so I thought I would pass it on in case it's of interest.




September 21, 2009--Estate Planning Basics

Greetings! My regards to everyone and I hope you enjoyed your summer.

I have a couple of newsletters planned for the next month and will write about the state of investment markets the next time.

This time I want to write in some detail about two planning issues: the ENDURING POWER OF ATTORNEY and the PERSONAL DIRECTIVE [or Living Will]. These two documents are essential tools in your planning for the future, regardless of your age, and take effect should you become unable, due to physical or mental incapacity, to make your own decisions. I encourage you to read on and explore the links that I provide.


Your instructions can be about any or all personal matters that are non-financial, such as:

• medical treatments you would or would not want;

• where you would like to live;• who you would like to live with;

• choices about other personal activities (recreation, employment or education);

• any other personal and legal decisions, and

• who you want to care for and educate your minor children if you are not capable of doing so.

So how does a Personal Directive differ from a will? It provides directions about non-financial matters should you, during your lifetime, become unable to direct your own affairs. The Personal Directive allows you to put your wishes in writing and appoint an agent to act on your behalf to see that your wishes are carried out. This is important because your relatives and friends do not automatically have the legal right to make decisions for you.

The Government of Alberta has established a Registry for Personal Directives to make it easier for interested parties, for example medical staff, to find your Personal Directive and contact your agent. Please see the following link to a pamphlet provided by the Government of Alberta on Personal Directives.


When you look at the list above of the potential purposes of the Personal Directive, you may not feel strongly about all the items, or they may be items you have not thought about. But you may feel strongly about your medical care, or who will look after your children during a period of mental incapacity. So don't hesitate to write a Personal Directive now about those things that you feel strongly about. You can add to or amend your Personal Directive at a later time.

The most common reason that individuals write their Personal Directive is to direct their medical care and communicate their wishes regarding extraordinary measures to prolong life in the case of a very serious illness. Without the Personal Directive, doctors are left responsible to use all extraordinary measures regardless of what family and friends may say. The Personal Directive is your way of having your wishes acted upon. Legislation regarding Personal or Advanced Directives varies by province.

For my clients in BC, please see--


My clients in Ontario, please see--



The Enduring Power of Attorney is complementary to the Personal Directive. The Enduring Power of Attorney allows you to provide directions and appoint an agent [your "Attorney"] should you become, during your lifetime, unable to make decisions related to your financial affairs. The Enduring Power of Attorney is cancelled at the time of your death at which point your Will applies to your estate. The Enduring Power of Attorney would allow your agent to keep your financial life going should you become incapacitated. For example, without the Enduring Power of Attorney your family and friends would not have access to your individual bank accounts to pay your bills, or have authority to watch over and direct your investments. To read more about the Enduring Power of Attorney, see--


Needless to say, you will want to choose your agent very carefully. Be sure to consult your choice to confirm his or her willingness to be appointed. Spouses will typically appoint one another. If you are not sure whether you have written a Personal Directive or an Enduring Power of Attorney--this may have been done when your Will was done--check to see which documents are with your Will or ask your lawyer.

Looking after all three documents can be done with the assistance of a lawyer which allows you to benefit from her or his legal expertise. Many lawyers provide this expertise at a reasonable cost, assuming your affairs are not complicated, as a public service. Registry offices and some Drug Stores will have generic, fill-in-the-blank forms which, while lacking personal legal advice, are much better than nothing. Please let me know if you have any questions.

I hope that you will take this newsletter as a prompt to undertake your drafting of a Personal Directive and Enduring Power of Attorney. Clearly we do not hope for a future incapacity. But should it happen, we want to be prepared, we want our wishes to be clear and we want to lessen the stress on our loved ones.



Tuesday, July 14, 2009

Market update from April 29th, 2009

Greetings to all.

Nice to see the sun today and no snow!

I wanted to update my last market update that I sent you. My March 23, 2009 headline was-- Stock markets up over 5% today, 20% in the last couple of weeks. What does it mean?

Today is April 29, 2009. So what's happened since March 23? The Toronto stock market [TSX] is up another 5.1% and the index sits at 9416 points. New York [S&P 500] is up another 6.0% since March 23 and the index sits at 874. It's obviously good news for investors when markets have a good run: we see that markets can go up after they've gone down. And to be fair, I have to point out that markets have to recover much more to get back to where they were.

The TSX peaked at about 15,000 points in 2008, the S&P 500 peaked at about 1550 points in late 2007. How long will it take to recover and surpass those peak levels? Well, bear with me--no pun intended--as I look at some more numbers.

The last bear market ran from 2000 to 2002. We all remember that one which overlapped with the events of 9/11. When the bear ended in 2002, markets went into a recovery rising to the peak, as stated above, of about 15,000 on the TSX. But do you want to guess at the point level of the TSX at its low in 2002? Was it 9000 or 7000 points?

I think it's remarkable that the TSX was as low as 5,695 in 2002. The recovery took it from 5,695 to 15,000 in 2008. That's a climb of over 9000 points or 168% from the low. Has the TSX had that kind of recovery before? In the 1990s, the market recovered 203%, 253% in the mid-1980s, 288% the mid-1970s.

Should the market climbs 160% again--from where it is today at 9416--that would take the TSX to near 25,000 points. That's well above its 2008 peak of 15,000. No one can say how long the climb would take, but we can say that the markets have done it before.

Cheers! Tom

PS-so what is the TSX index anyway [more properly known as the S&P/TSX]? The index was invented to measure the rise and fall of the Toronto stock market over time. The index includes about 70% of the largest companies whose stocks trade on the Toronto Stock Exchange. If, on average, these stocks rise in value today, then the index will go up accordingly. The index value in points--e.g. the TSX closed at 9416 points today--has no absolute meaning, it's all relative: the index is measured each day so that we can compare to what the index was yesterday, a month ago or 20 years ago.

Newsletter April 6th, 2009

Greetings! All of us have probably read in the newspapers how the current environment is encouraging thrift. One challenge of trying to save money is that there are so many items in our budget that are "must-haves" and therefore hard to trim back. What if some of the must-haves could be bundled together to save money?

All of us probably use two or more of these services: TV, phone and internet. Bundling refers to buying a package of two or more of these services from a single service-provider with a resulting savings. And we may already have two or more services from a single provider but because we have not applied for bundling pricing, we may be paying too much.

Take for example Shaw and Telus. Shaw provides cable, digital phone and internet. While I'm well aware of Shaw cable and internet, it had not dawned on me that Shaw was now in the [landline] phone business with long distance packages. Check out their site to see how bundling might save you money-- http://www.shaw.ca/en-ca/ProductsServices/BundlesAndPricing/default.htm

Telus, of course, provides landline and mobile phones, long distance packages, internet, but they are also into TV now. You can check out their bundling options at-- http://promo2.telus.com/tm/09/q1/bundle/ab/index.html

Speaking of long distance, here's an interesting option that I use-- 10-10-969 is a long distance calling provider for landlines that you can use on almost any landline. It does not require you to sign a contract and the service travels with you anywhere in Alberta and the BC lower mainland, Okanagan and Victoria. I even use it at home on my second landline because I do not do enough long distance on that line to justify signing up for a Telus long distance package. From what I've seen, their pricing is very competitive. Just dial 10-10-969+1+area code+ number. The billing will show on the statement of the landline provider. Check out the details at-- http://1010969.ca/

Happy bundling!


Monday, March 23, 2009

Stock markets up over 5% today, 20% in the last couple of weeks. What does it mean?


Stock markets are up over 5% today, 20% in the last couple of weeks. What does it mean? Let me write about what we do know, and what we don't know.

We do know--

--That investors--both individual and institutional--have cash they want to grow by investing in the stock market. A 5% gain on the markets today proves that investors will put money back into the market when they find a trigger that creates optimism. This need to grow money will be one factor that will bring the recovery in stock markets.

We don't know--

--Whether the last couple of weeks are the beginning of the recovery. They might be, but we don't know. Just as the end of bull [good] markets cannot be spotted in advance, the end of bear [bad] markets is not seen in advance. It's only in the rear-view mirror that we will know that the bear market hit its bottom on such-and-such a date.

We do know--

--That investors who wait for a sign that the bear market is over will miss the start of the recovery. There are two reasons for this: [1] The end of a bear market is not announced in advanced. [2] Growth in the stock market happens on just a few days when the market makes a powerful push upwards. Let me elaborate on this second point because it is very significant to understanding how stock markets really work. Consider this--

--Take the example of the US stock market [S&P 500] between 1993-2007 [that's 15 years or 5475 days]. An investor who stayed invested in that market for those 5475 days grew his money at 10.5% per year. But the remarkable thing is this: if the investor missed the best 30 days during those 15 years, he would have grown his money at only 2.2% per year. And if he missed the best 60 days, his return was negative!

By far, most days on the stock market are inconsequential. The growth in the market is delivered only on those rare days. If you miss those days, you miss the growth. So for money you've already invested, patience and staying invested are essential. If you have cash on the sidelines that you want to grow? Take advantage of this bear market by investing before it's over, not after.