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,
Tom
Tuesday, November 10, 2009
Monday, November 9, 2009
STOCK MARKET UPDATE
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,
Tom
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,
Tom
The Family Cottage
Greetings.
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.
http://www.advisor.ca/advisors/tax/estateplanning/article.jsp?content=20090922_170748_5324
Cheers!
Tom
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.
http://www.advisor.ca/advisors/tax/estateplanning/article.jsp?content=20090922_170748_5324
Cheers!
Tom
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.
PERSONAL DIRECTIVE WHAT KIND OF INSTRUCTIONS CAN I LEAVE IN A PERSONAL DIRECTIVE?
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.
http://www.seniors.gov.ab.ca/services_resources/opg/persdir/publications/pdf/OPG1645.pdf
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--
http://www.viha.ca/advance_directives/faq.htm#today
My clients in Ontario, please see--
http://www.culture.gov.on.ca/seniors/english/programs/advancedcare/docs/AdvancedCare.Guide.pdf
ENDURING POWER OF ATTORNEY
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--
http://www.justice.gov.ab.ca/dependent_adults/enduring_powers_of_attorney.aspx
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.
Cheers!
Tom
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.
PERSONAL DIRECTIVE WHAT KIND OF INSTRUCTIONS CAN I LEAVE IN A PERSONAL DIRECTIVE?
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.
http://www.seniors.gov.ab.ca/services_resources/opg/persdir/publications/pdf/OPG1645.pdf
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--
http://www.viha.ca/advance_directives/faq.htm#today
My clients in Ontario, please see--
http://www.culture.gov.on.ca/seniors/english/programs/advancedcare/docs/AdvancedCare.Guide.pdf
ENDURING POWER OF ATTORNEY
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--
http://www.justice.gov.ab.ca/dependent_adults/enduring_powers_of_attorney.aspx
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.
Cheers!
Tom
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