Canadian Finance Blog » Investing

Learning to Fail Fast

Alan Schram — Wed, 01 Sep 2010 09:00:55 +0000

Nobody likes to make mistakes. However, the simple reality of life is that at some point, all of us are going to be wrong, do something bad, or somehow screw something up. That’s just life, and it has been since we learned how to walk, write out the alphabet, and do calculus. We are going to make mistakes. The trick is to learn how to fail fast, so that you can get back to doing things right again. Let’s look at a couple examples and see how failing fast will help us earn more money and save more money.

Small Business

Imagine you are thinking about starting a small business. You want to open a dog sitting company. You’re not sure how much to charge, or how to advertise, but that’s pretty normal when you’re embarking upon a new adventure. Instead of dumping all your money into online advertisements or setting a firm price of $75/hour, recognize that you are going to make a lot of mistakes and set yourself up to learn from them. Spread your advertisement dollars around by trying online ads as well as newspapers, flyers, door to door, cold calling, church newsletters, whatever you can think of. The key here is not to simply spread your money around, but to see what actually works. Do you get a lot of sales from going door to door, but none from picking up the phone? Then recognize that you’ve made a mistake (cold calling), chalk it up as a failure (lost money), and move on.

Budgeting

What about learning to fail while using a budget? Let’s say you take some time on a Saturday, sift through your bills, and build a budget for the next couple of months. You want to keep groceries at $300/month, and you want to cut back on entertainment and restaurant bills. Except you hate keeping receipts and refuse to use cash, so you pretty much have no idea how much money you’re spending. At the end of the month, you realize that you actually spent more than $300 just at the restaurant, and your grocery bill is nearly double that! Instead of buckling down and saying, “Well, this month I will just have to have more self control” and keep on trying to work on a failing budget, chalk it up as a loss and move on. Instead of trying to keep your grocery bill at a certain level, just track back over the last few months, see how much you’re already spending on groceries, and just put that number into your budget. Or, set up a secondary account just for groceries and automatically funnel a set amount of money into that fund. That way, when you’re out of money in the account, you’re out of grocery money. No tracking or receipt counting required.

Investing

Maybe a coworker of yours just let you in on a hot stock tip. He says that this particular stock is just about to skyrocket. So you scrounge around, find some money, and purchase a whole bunch of this stock. Except it doesn’t skyrocket. Maybe it slowly starts to lose value, but your tipster keeps telling you that someday it will go up, you just need to be patient. So you sit on it, and you wait, and wait, and wait, and eventually, you realize that your money has been tied up in this stock for about a year and it’s lost about a third of its value. The company is no longer on the edge of a leap forward, but your tipster has a new stock for you. “Sell that other one”, he says, “and put all your money in here. It will skyrocket”. Instead of just keeping on doing something over and over again that isn’t working, that is failing, then just tell yourself that this is a learning experience, and from now on, I will only put my money into safer investments. Or you can just choose to learn that your tipster isn’t much of a tipster, and really, more a gambler.

The sooner you can realize your mistake, and the sooner you can own up to it, the sooner you can move on with a lesson learned. The only way you will learn is through failure, so if you want to learn how to be rich, you’re going to have to fail a lot. Just think of the lost money as investing in education, and remind yourself that the sooner you can learn the lesson, the sooner you can stop paying for your education.

What have you failed in? What lessons did you learn?

What Is A Price To Earnings Ratio (P/E Ratio)?

Tom Drake — Tue, 17 Aug 2010 09:00:13 +0000

P/E Ratio, also known as the Price To Earnings Ratio, is a calculation that can indicate what the market expects the future earnings of a company to be. A high P/E Ratio likely shows that investors are expecting more future earnings growth than compared to a similar stock with a lower Price To Earnings Ratio. Keep in mind that if it is too high, it may also signal a period of greed or delusion with a particular stock or market. For value investors, it can also help you decide whether a stock is currently expensive or cheap.

Let’s look at how the P/E Ratio is calculated. This is simply done by taking the current market value of a stock and dividing it by the annual earnings per share. So if a stock is selling for $25 and their earnings per share are $2.00, then the Price To Earnings Ratio is 12.5. This means that the market is willing to pay $12.50 for each dollar of annual earnings.

P/E Ratio =

Price Per Share
Earnings Per Share (EPS)

You can’t simply compare the ratio of a company in the finance sector to another in mining industry. To make this number useful, you need to compare apples to apples. One way to do this is to compare the Price To Earnings Ratio of a stock to the historical ratio of that same stock. Another option is to line up the P/E Ratios of other companies in the same industry. You can also analyze it against the Forward P/E Ratio; that is based on what analysts estimate the next 12 months of earnings will be.

While the Price To Earnings Ratio shows you what value the market as a whole places on a stock, as I mentioned earlier it can also help you find some great bargains in the stock market. You can’t compare stocks on price alone. Maybe you are comparing two stocks in the same sector. One is the $25 example above and another is a $30 stock. Is the $25 stock cheaper? Well it would certainly cost you less money to purchase 100 shares, but that’s not what truly makes it a cheap stock. Not when we find out that the EPS for the $30 stock is $3.00, giving it a P/E Ratio of 10. This means the $30 stock may be a better value since you would be paying less money for each dollar of earnings.

Of course, you should read up on any stocks you are looking to purchase to avoid any unnecessary risk. A low Price To Earnings Ratio may signal a value stock, it may also be a sign of problems with that company. But with the right amount of research, the P/E Ratio can be a helpful tool to narrow down the stocks you are looking at and hopefully find a gem!

Spouses Investing Together, Not As Individuals

Jim Yih — Tue, 10 Aug 2010 09:00:41 +0000

One of the challenges of the privacy laws and the current regulatory system is the bias for spouses to invest on an individual basis, not for spouses investing together. I’ve written in the past about how this is causing all investing to look the same.

When a couple goes in to buy RRSPs, the financial institution must set up separate accounts and acknowledge the separate risk tolerances, time horizons and investment objectives for each spouse. Although you might expect that spouses will get two different and unique portfolios, many couples are walking out with extremely similar portfolios.

Although there can be benefits of spouses having individual portfolios to reflect unique wants and needs, there are also situations where spouses can benefit from working together to maximize tax efficiency and minimize risk. Here’s a great example of a couple working together as a team.

Rick and Cyndi working together on their investments

Rick and Cyndi are in their late 50’s and getting ready for retirement in a few years. They have lived in what I will call the traditional relationship where Rick was the primary income earner and Cyndi stayed at home to raise their three children. Cyndi entered the work force much later in life after staying home to raise the kids.

When looking at their retirement assets, Rick has an excellent defined benefit pension and over $200,000 in his RRSPs. Cyndi has no pension and only $60,000 in her RRSPs. They will both qualify for Old Age Security (OAS) as well as Canada Pension (CPP) but Rick will get more CPP than Cyndi.

Conservative or aggressive?

When it comes to investing, Rick is by nature more aggressive. He likes to play the stock market a little and there have been times he has done quite well. Cyndi is more conservative because she feels she has so much less than Rick and needs to keep it safe. As a result, his portfolio is much more aggressive.

Although Rick has a higher tolerance for risk, one might argue that he does not need to take more risks when investing. In other words, there is s difference between how much risk Rick wants to take and how much risk he needs to take. I call this the difference between his risk tolerance and risk capacity.

Rick and Cyndi feel they can easily live off the Pensions and government benefits alone in retirement. That means the RRSPs are ‘extra’ and Rick does not need to take any risks in his RRSPs. Even if Rick, theoretically, put all his RRSPs in a sock drawer with no interest, they should still be able to enjoy their retirement because of Rick’s work pension, their CPP and OAS.

Growth can cause tax problems

One of the challenges that Rick potentially has with having a good pension is that he may find it difficult to get the RRSPs out in a lower tax bracket in retirement. Even with some of the pension splitting opportunities in retirement, some future income projections show that Rick will be in the 32% marginal tax rate (MTR) for any RRSP withdrawals in retirement. If he continues investing for growth, the RRSPs could potentially become a bigger tax burden at higher levels in the future. Cyndi on the other hand has a lot of room at the lower levels (25% MTR) to get RRSPs out at the lower marginal tax rates.

In fact, when you look at the bigger picture, there may be advantages in keeping Rick’s portfolio more conservative and Cyndi’s portfolio more aggressive, which is the opposite of what risk tolerance suggests. Since higher rates of return in Rick’s portfolio could actually mean more tax in retirement, putting the higher risk investments in Cyndi’s name is better because higher growth rates does not mean more tax for Cyndi because she has more wiggle room to get the RRSPs out in the lower tax 25% bracket.

Overall, from a tax and risk perspective, Rick and Cyndi are better off working as a team on their investments. Rick should invest his RRSPs more conservatively, while Cyndi puts all the growth oriented investments into her RRSP. Overall, they might target the same balance between stocks, bonds and cash but instead of balancing the mix within each of their RRSP accounts to reflect their individual needs, Rick might be loaded with the safer investments and Cyndi’s with the growth investments.

Utilizing other accounts like the Tax Free Savings Accounts (TFSA) is another great place for Rick and Cyndi to invest in higher growth investments because there will be no tax on the growth.

There are many examples and strategies where couples can implement good financial strategies together like spousal RRSPs, income splitting, and cashflow strategies but don’t lose sight of the merits of working together when it comes to investing as well. Good planning makes all the difference.

Canadian Royalty Trusts

Guest — Thu, 29 Jul 2010 09:00:27 +0000

The instability of the stock market has investors looking for stable high yield investments. Canadian Royalty Trusts are a great alternative to traditional stocks.

A Canadian Royalty Trust, also known as a CanRoy, is a corporate trust that is set up to legally bypass high corporate taxes in order to funnel profits back to trust holders in the form of distribution payments. A CanRoy usually controls an operating company that uses the money invested in the trust to buy oil and gas producing properties. While approximately 40% of CanRoys invest in energy-related businesses, the remainder back other types of organizations. In this structure, money also flows the opposite way as the royalties and interest payments from the properties flow back through the operating company and into the trust. Eventually, these funds are paid out to investors in the form of distribution or dividend payments.

US Royalty Trusts vs. Canadian Royalty Trusts

While US Royalty Trusts are not allowed to purchase additional properties after they are initially formed, CanRoys have the advantage of being able to continually add new properties to their portfolio. The result of this difference is that all US Royalty Trusts will eventually deplete their oil and gas resources which will result in declining cash flows over time. On the other hand, Canadian Royalty Trusts could theoretically continue forever.

CanRoys Make an Attractive Investment Option

The extremely high dividend or distribution payments that are typically paid on a monthly or quarterly basis to the shareholders or unit holders make Canadian Royalty Trusts an extremely attractive investment option compared to other Canadian dividend stocks. In fact, the yearly rate of return can sometimes be as high as 10% of your investment, and this payout could continue as long as you own trust units. How could any company pay dividends like that and continue to make a profit? The secret is that a Canadian trust doesn’t have to pay any corporate income taxes if they distribute all of their income to their investors. This means that almost 100% of the money that a CanRoy receives from the oil and gas properties in the form of royalties and interest payments is paid out to the people who have purchased shares or units in the trust.

Choosing a CanRoy Investment

If you have the basic knowledge to invest in the stock market, you don’t need to know anything additional to choose a CanRoy. However, investors need to make sure that they are not blinded by a Canadian Royal Trust’s most recent distribution payment and choose hastily. A smart investor will make sure that they research the trust to determine if the dividend income they receive will be stable. Once you determine that a CanRoy is stable, the most important thing to consider is the dividend coverage ratio or yield. After all, the yield is your final goal with this investment. In basic terms, if a CanRoy reports a 10% yield last year, their investors received distribution payments equal to 10% of their investment value.

CanRoy Tax Implications

For Canadians, the tax implications are virtually the same as with any other investment income. However, there are a few things that US taxpayers should consider. Typically, a CanRoy dividend will qualify for the maximum US tax rate of 15%. However, Canada will apply a 25% non-resident withholding tax on distributions to anyone who does not live in Canada. This is usually dropped to 15% for US residents due to a treaty between Canada and the US, and investors can recoup a portion of the total by applying for a foreign tax credit when they file their yearly income tax return. New Canadian laws that will take affect in 2011 will mean that most trusts will have to start paying corporate taxes. This could mean that their yield will drop dramatically.

Bio: Guest post submitted by Dividend Stocks Online, covering high dividend stocks and value investments.

Investing IN Retirement Is Different Than Investing FOR Retirement

Jim Yih — Tue, 27 Jul 2010 09:00:16 +0000

I just got back from speaking to a group of industry professionals (Registered Deposit Brokers Association –RDBA) about how investing IN retirement is different than investing FOR retirement.

I think investing FOR retirement is a well-covered topic. This makes sense because the majority of Canadians are still not retired and still planning for retirement. Most of the articles and books and magazines are geared to investing FOR retirement but there is not as much on the topic of investing IN retirement.

I think things are about to change! Investing IN retirement is going to become a bigger and bigger deal – a huge deal! It will represent the future because of a group of people known as the Baby Boomers. The baby boomers have changed social and economic patterns ever since the day they were born. The first wave of baby boomers turned 60 in 2006. For the next 15 years, all the boomers are getting ready to retire and they will begin to bring massive changes to the field of retirement and investment planning. It’s already started.

Investing IN retirement is different

Retirement is a time when we begin to shift our thinking from saving to spending. That’s not always easy to do, especially for good savers. I’ve always said that it’s difficult for savers to become spenders overnight just like it’s tough for spenders to become savers overnight. Habits are tough to break – both the good habits and the bad habits. Retirees who do not spend their money in retirement can also lead to unintentional outcomes such as a dying with too much money. Many retirees don’t realize that higher returns can sometimes mean more tax in the future. Their focus should be shifted to estate planning.

That means we would shift our investment mindset from growth to income. Instead of growing capital we would be looking to preserve or even spend capital. Although higher returns on investments is the goal of every investor, regardless of what stage of life they are in, I would argue that through the course of retirement, returns become less important than other issues like simplicity of managing money, control over income, personal health, and quality of life become more important. Investors, who place too much emphasis on return and little or no emphasis on risk of loss, can get hurt when the market changes.

In retirement, portfolios should move from pre-authorized chequing plans (PACs) (where funds are transferred from personal accounts to investments accounts) to Systematic Withdrawal Plans (SWPs) (where the opposite happens cash flow comes to your operating account from your investments on a planned basis). To achieve this, there should also be a shift in thinking about the need for higher returns in order to manage risk. This is a critical change to be aware of because the math that once worked for you with dollar cost averaging now works against you.

The bottom line is there is a difference between pre-retirement investing and post retirement investing. As a result, retirees need to re-evaluate their investment portfolios the closer they get to retirement. I suggest that people who are three to 5 years from retirement need to get serious about it and start making sure their portfolios are positioned so there are in control over their retirement plans. Sometimes this period has been labeled the retirement risk zone. If pre-retirees don’t take the time to review their portfolio prior to retirement, they may join the thousands of people who have delayed, cut back or gone back to work in their retirement.

10 Canadian Stocks To Keep An Eye On

Guest — Thu, 20 May 2010 09:00:55 +0000

If you are just beginning to invest in Canadian stocks and are unsure of where to start, this article will hopefully give you a little insight on what is out there. These are some “hot” stocks that are topping the charts. Always remember to do your own research with each company before investing. Under no circumstances should this article be construed as investment advice.

Yamana Gold (AUY) Yamana Gold is a Canadian-based producer of gold with compelling gold production, exploration properties, and land locations in Argentina, Brazil, Chile, Colombia, and Mexico. Yamana plans to maintain building on the foundation through existing and operating mine expansions and the progression of new mines. Yamana is the lowest cost cash producer in the industry, and committed to managing capital expenditures, operating costs, and trying to keep costs down.

Bell Canada (BCE) Bell Canada is one of the largest communication businesses in the industry. They provide consumers with all of their communication needs. Some of the services they offer are wireless communication, high-speed Internet, telephone service, and VOIP (voice over IP), to name a few. In 2009 the dividend increased 3 times, by a total of 19%. Bell Canada is one of the most productive dividend yield stocks in Canada right now.

Gold Corp (GG) Goldcorp is a low costing and fast developing gold producer. They are targeting low political risk countries throughout the Americas. Goldcorp has over 10,000 employees worldwide, and their headquarters is located in Vancouver. Gold is considered a safe bet when times are tough, and there is also a finite amount of gold available.

Magna (MGA) Magna is a leader in global supplies of advanced automotive components. They have also been ranked as the world’s fourth automobile parts supplier. This company shows a solid growth track record, since they have has 24 years straight of increased sales.

Manulife Financial (MFC) This leader of financial services have customers stretching over 22 countries. They provide financial protection and wealth management to individuals, as well as groups. Some of the services include: long-term care services, pensions, annuities, health and group life insurance, and of course banking.

Pengrowth (PGH) Pengrowth Energy Trust has a focus on low risk and low cost opportunities. They are an oil and gas functioning company with some conventional and some unconventional assets. The plan for the future for this company is to create oil and natural gas, as well as coalbed methane.

Canadian National Railway (CNI) Canadian National Railway plays a large role in transporting commodities. This includes importing energy from the US and exporting of timber and metal. The freight and transporting industry is crucial for the economy, and as time goes on you will see nothing but good things come from this company.

Toronto-Dominion Bank (TD) This company is a high profit, low risk, and stable company to look into right now. Even though, some say that financial investments are hit or miss. TD posts solid growth and earning time after time.

Cameco Corp (CCJ) Cameco Corp is the world’s largest, and low costing uranium producer. Over 20% of the world supply comes from Cameco. With global warming on the rise, emission-free nuclear power is welcomed.

FNX Mining (FNX) This company deals mostly with copper and nickel mining and has returned almost 4300% over the past 10 years. FNX doesn’t only produce and explore copper and nickel, but also, gold, cobalt, and platinum. As of March 2010, they announced that they were going to be merging with Quadra Mining, located in Vancouver.

You now have a starting point to begin your journey. Do research and read about any company that you are thinking about investing in. Good luck!

Bio: Melissa Tamura writes about online degrees for Zen College life, and recently ranked the best online colleges. The author owns stock in PGH and AUY.

Tax Refund – Will You Invest It?

Guest — Thu, 06 May 2010 09:00:14 +0000

Most people know that April 30 was the tax filing deadline for individual taxpayers. But the big question, in terms of maximizing all your benefits is this: What are you going to do with your tax refund? Will you spend it or invest it?

Here are six tax efficient ideas for building wealth with your tax refund:

Pay off expensive, non-deductible debt, like credit card balances. (Then vow to budget and live within your means, saving first, before spending.)
Save within a TFSA—that’s the new Tax Free Savings Account. It’s a great place to park money and earn tax free investment income. Remember to file your return to build TFSA contribution room.
If you have taxable income, invest in an RRSP. You will reap immediate tax savings in the double-digits, money you can then use for a TFSA contribution.
If you have children, invest the money in an RESP/REÉÉ—a Registered Education Savings Plan, and benefit from the Canada Education Savings Grant.
If you have a disabled dependant, invest the money in an RDSP—a Registered Disability Savings Plan, and benefit from the grant and bond structures available here.
Invest the money outside registered plans in your non-registered accounts, with a view to earning tax efficient income like dividends and capital gains.

However, if you must consume frivolously, it will stimulate the economy! But, think about this as you do it: the trick to mastering your money is to take control of the first dollar you earn, hold on to it the longest through wise investment choices, and then, pass along the most to yourself in your retirement and your heirs at death.

Evelyn Jacks is President of The Knowledge Bureau and author of Master Your Taxes, Make Sure It’s Deductible and Essential Tax Facts. Readers may sign up for a free subscription to Knowledge Bureau Report at www.knowledgebureau.com.