Preferred Shares in Canada

Generally, Preferred Shares are a type of stock that regularly pays a dividend of a set amount of money out of the company’s profits. On an investment scale, you might consider preferred shares to lay in between Common Shares and Bonds. For most, preferred shares will provide a normal dividend distribution and these are normally paid before a dividend can be issued to the common shareholders. Further, it is often stipulated in the preferred shares articles of prospectus that when a company is unable to pay a dividend distribution due to financial constraints the preferred dividends will accumulate as a liability for the company; this basically means that the preferred shares need to be paid for all distributions that they missed during tough times before any common share holder get a dividend. Further, during a bankruptcy, preferred shares normally have a higher ranking than Common Shares; although this must be stipulated in the prospectus.
During this most recent recession, Preferred Shares have been re-popularized by Warren Buffet. His most notable position was purchasing Preferred Stock in Bank of America (NYSE:BAC) and General Electric (NYSE:GE) during the darkest days of the fall of 2008. These shares did not suffer declines as large as the common stock of these companies and the preferred shares distributions remained the same or accumulated to be distributed during better financial times.

Although the Heading Preferred Stock seems generic, there are many different varieties:

Prior Preferred Stock: If a company has different issues of preferred stock outstanding at the same time, it is common to find some labelled with higher priorities than others. Under this scenario, if a company only has enough money to meet obligations on one of the preferred issues, it only issue a dividend to the preferred labelled as the Prior Preferred or highest priority. As a result, Prior Preferred Stock normally has a lower dividend yield because of the lower risk attached to sustainability of dividend distributions.

Preference Preferred Stock: These preferred shares rank just behind the prior preferred stock. These will receive preference over all other classes of the company’s preferred shares except for the prior preferred’s. When more than one level of Preference Preferred Stock is issued there may again be a ranking.

Convertible Preferred Stock: A Convertible Preferred Stock allows unit holders the opportunity to exchange them for a predetermined number of the company’s common stock. The exchanged is normally allowed at any time an investor chooses regardless of the current market price of the common stock. It is however only a one way deal; once you have converted to the common you cannot convert back. This allows a preferred shareholder the opportunity to participate in significant gains in the common shares.

Participating Preferred Stock: These preferred shares provide unit holders with the opportunity to participate in extra dividends if the company achieves some predetermined financial goals. Normally, if you own these kinds of shares you will participate in regular dividends regardless of how well or how poorly the company performs and if the company does very well you may receive an extra benefit.

Why do Canadians Invest in Preferred Shares?

Basically, Canadian that invests in Preferred Shares are doing so because they wish to hold fixed-income investments in a taxable portfolio. Because dividend income is tax in a preferential way in Canada compared to interest from Bonds, Preferred Shares often result in a greater after-tax return than can be achieved with bonds in many circumstances.

If you currently hold a portfolio that does not have any exposure to preferred shares you may want to consider making some acquisitions. This can be done by simply buying preferred stock of one of the many major companies in Canada or by buying a Preferred Share ETF. I find one of the best ways to find which Preferred Shares are out there take a look at one of the Preferred Share ETFs and research their holdings.

Before embarking on your journey to acquire preferred shares you should read the following article defining the legal implications of Preferred vs Common Shares:

For Example, look at CLAYMORE S&P/TSX CDN PREFERRED SHARE ETF, here is the list with shares listed in order of portfolio weighting:

Preferred Shares vs Common Shares: Legal Implications that must be understood before investing ()

• GREAT-WEST LIFECO PFD 4.8 SERIES E

• MANULIFE FINANCIAL CORP CL A SR 4

• ROYAL BANK OF CANADA 5YR NON CUM RST PFD

• BK OF MONTREAL NON CUM 5 YR RESET B S-23

• CANADIAN IMPERIAL BANK COMM 5.3%

• ROYAL BK OF CANADA1ST PRF NON CUM 5 YR R

• TORONTO DOMINION BK N-CUM 5YR CL A PFD S

• IGM FINANCIAL INC 5.75% N/C SER A PFD

• ROYAL BANK OF CANADA 5YR PFD SER-AR NON

• MANULIFE FIN COR PFD SHARES

• TORONTO DOMINION PFD SERIES M

• MANULIFE FINANCIAL CORP CL A PFD SER 1

• TORONTO-DOMINION PFD SERIES O 4.85%

• BANK OF NOVA SCOTIA 5% SER 20 26OCT13

• CANADIAN IMPERIAL BANK PFD 4.700% SER 31

• BK OF NOVA SCOITA 5% SERIES 18

• CANADIAN IMPERIAL BANK COMM SER 30 CL-A

• BROOKFIELD ASSET MGMT INC 5YR R/R PFD SE

• SUN LIFE FINANCIAL INC CL A PFD SER 1

• BANK OF NOVA SCOTIA 5.25% PFD SER16

• BANK OF MONTREAL PFD 5.2% SER 16

• BANK OF MONTREAL PFD 4.5% SER 13

• HSBC BANK CANADA 5YR RST CL 1 PFD S-E

• YPG HOLDINGS INC 4.25% 1ST PRF 31/03/20

• GREAT WEST LIFECO INC 5.20% SER G

• SUN LIFE FINANCIAL INC CL A SER 2 CUM PF

• BROOKFIELD ASSET MANAGEMENT SER 10 PFD

• BCE INC 4.4% SER AF 16 PREFERRED

• LOBLAW COMPANIES LTD 2ND PFD SER A

• BCE INC. 5.55% PREF - SERIES 19

• GREAT WEST LIFECO SERIES H PFD

• FORTIS INC. PFD 5.2500% SERIES G

• SUN LIFE FINANCIAL PFD SERIES 4

• FORTIS INC CONV/CALL PRFD SER E

• POWER CORP CDA 5.0% 1ST PFD SER D

• NATIONAL BANK OF CAN IST PFD SER 21

• POWER FINANCIAL CORP 4.95% SER K PFD

• BROOKFIELD PROPERTIES SERIES I PFD

• NATIONAL BANK OF CANADA 1ST PFD SERIES 15

• TRANSCANADA PIPELINES PFD SERIES X

• POWER FINANCIAL PFD 6% SER I

• BROOKFIELD PROPERTIES 6% SERIES F PFD

• BCE INC PFD 5.45 SERIES AA

• BROOKFIELD ASSET MGMT SER 12 PFD

• CU INC CUM REDEEMABLE PFD SHS SER 2

• BROOKFIELD PROPERTIES 5.75% SER H

• POWER CORP. 5.35% PREF SER B

• POWER FINANCIAL 5.25% SERIES E

• NATIONAL BANK OF CANADA PFD 6% SER 20

• GEORGE WESTON 5.20% PFD

• GEORGE WESTON LTD 5.2% SERIES IV

• GEORGE WESTON LTD 4.75% PFD SER V

• CANADA LIFE PFD 6.25% SER.B

• HSBC BANK CANADA 5.1% SERIES 5 PFD

• HSBC BANK CANADA 5.0% SERIES D PFD

• WESTCOAST ENERGY 5.60% SER 8 PFD

• YPG HOLDINGS INC 5% CUM RED 1ST PFD SHS

• ENBRIDGE INC 5.5% SER A PREF

• CO-OPERATORS GENERAL INSURANCE CO

• INDUSTRIAL ALL PFD SHARES

Google Predicts End of Recession?

Google (NASDAQ:GOOG) has recently been touted in the media for the company’s accuracy in displaying real time infection data for H1N1 (Swine Flu). If you go to Google Maps there is an application that tracks the number of people searching for symptoms for the illness. It’s pretty amazing that the graphical representation of this data in real time has been shown to be spot on with data collected by the world’s health authorities who take over three months to compile, analyze and plot their data. The H1N1 tracker in Google is a huge leap forward for the health crisis management effectiveness in the world and you can even zoom right down to see which parts a single city are reporting cases.
So Google can display where people have the flu, how does that predict the end of the recession?

It doesn’t.

The tool that Google does have however is an intimate understanding of advertisement spending. You see, there have been a number of studies undertaken that suggest that web advertising is a leading indicator of the end of a recession. The other interesting thing about some of these studies is that they also claim that Google Adwords (For Advertising) and Google Adsense (For Publishing) are also laggards to the recession. Basically, businesses turn off their online advertisements last and also turn them back on first.

You may have noticed that Google recently reported the company’s third quarter results and advertising was up. This much cannot be said for rival Yahoo (NASDAQ:YHOO) who reported profits up from major cost cutting while revenues continued to decline; however, that’s another storey. Google on the other hand is predicting even more growth in the coming years as well—in 2004 online advertising was $18 billion and by 2013 is expected to top $87 Billion according to PricewaterhouseCoppers.

Simple ways to tell Ad revenues are likely up:

Method 1) Go on Google Adwords and bid on a set of key words. The interesting thing here is that you can search keywords for specific industries to see if ad spending is up.

For example take the Financial Sector:

Keywords to search: Investment, finance, investment advice, stocks, bonds, etf, mutual fund, insurance, savings account, banking, bonds, forex, etc.

Now track the results over a series of time and you can chart and trend that information to predict stock market movements for a single sector or an index like the S&P 500, NYSE, or TSX.

Method 2) If you are a publisher like I am, take a look at your Google Adsense earnings. Compare your average costs per click (CPC) conversions to determine if your average CPCs are increasing or decreasing. This is another easy way to tell if ad spending is on the rise or fall.

Obviously this is not a full proof method to play the stock market; however, it does present an interesting new tool to add to the tool belt and may help reinforce some market expectations and forecasts.

Give this method a test run and let us know at Investing in Canada what your results are like. It should be an easy system to track with an excel spreadsheet.

ETFs are Glorified Mutual Funds

Did you every here of a time when history repeated itself?
It happens all the time. Does anyone remember the many transfers of hegemonies in history? This basically means the dominant world power at a point in history and the transition periods from one dominant society to another have similar circumstances throughout time, War. Let’s make a quick side trip before we get into Mutual Funds vs. ETFs.

If you recall some of the greatest wars have occurred during a state of changing dominant nations. For example, the USSR and the USA fought the Cold War (1945-91) for global hegemony. Other hegemonic transitions occurred with Wars as well: Egypt and the Roman Empire, The United Kingdom and France, etc. A new battle is brewing for world control between China and the USA.

Now, back to mutual funds and ETFs:

Mutual Funds, according to investopedia.com, are investment vehicles made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market funds, and similar assets. Mutual Funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the investors.

It has been stated by many in the media that the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of assets which would be next to impossible to do with a small amount of capital. The main downside has been displayed by the overwhelming lack of performance that mutual funds have achieved compared to the general return of the market they are benchmarked against: NYSE, TSX, Nasdaq, Russell, etc. Further, it is common knowledge that mutual funds charge management expenses ratios (MER) against the total asset value in the fund; if the fund does well or poorly the fund manger still takes a percentage.

Over more recent history, the biggest complaint from investors about mutual funds has been their divergence in performance versus the index they are benched marked against. The second complaint has been the front or rear loaded fees charged for selling out the position.

Just a few short years of bad press and wala…ETFs are born.

Exchange Traded Funds (ETF), according to investopedia.com, are securities that track an index, a commodity or a basket of assets like an index fund, but trade like a stock on an exchange. ETFs experience price changes throughout the days as they are bought and sold.

According to Investopedia, because ETFs trade like a stock the Net Asset Value (NAV) is not calculated every day like a mutual fund.

By owning an ETF, you get the diversification just like a mutual fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is lower expense ratios compared to mutual funds because they are not as actively managed.

Let’s get real now though. Under those fancy window dressing definitions is the same investment vehicle. There were many mutual funds that tried to just mirror an index the same way ETFs do. Thanks to the many lazy mutual fund managers out there or maybe we could call them geniuses, many mutual funds bought baskets of stocks/assets that would provided the exact same return as the market index. Some of them even lowered their expense ratios because these funds took a lot less time and energy to maintain.

It’s not rocket science. It’s just like going to the ice cream parlour and ordering Chocolate-Chocolate ice cream instead of just plain old Chocolate. It’s all smoke and mirrors and the financial community is famous for implementing the same things over and over and never learning from mistakes of the past.

Just because you can short an ETF doesn’t mean it’s any different. You could have bought a mutual fund that shorts the market.

Just because you ETFs are designed to track an index dosn't mean it's any different.  Anyone remember Index funds?  Index funds are mutual funds designed to track different indexes.
Just because you can short an ETF that shorts the market doesn’t mean it’s any different. That’s a double negative that gives you the same return as buying the ETF or mutual fund that is not shorting the market.

The only real difference is that you buy and sell throughout the day, but that doesn’t make it a different flavour.

Long Term Investor - How much of a stock should you buy?

http://canadianfinanceblog.com/2009/09/03/carnival-of-pecuniary-delights-22-ufc-edition.htm There are many different strategies that will alter the amount of a single stock that you should buy. This article will focus on the Long Term Investor and provide an example using Potash Corp./Saskatchewan Inc. (Public, TSE:POT).

The method that I am about to explain comes from Van K. Tharp’s ‘Trade Your Way To Financial Freedom.”

The CPR method (best method for long term traders)

The CPR stands for Cash / Position / Risk. The simple formula is this P = C/R.

P: Position, this will be the amount of shares to buy

C: Cash, this will be the total $ amount of your portfolio you are willing to risk on one trade. (Usually between 1-3% of your total portfolio)

R: Risk, the total $ amount of the stock you are willing to risk. For example, the stock is currently $100 and you set a stop loss of $4 then your R = $4.

To come up with the amount of shares to buy solve the formula.

Here is a real example using Potash Corp (TSE: POT)

Assumptions: My portfolio size is $70,000. As a long term trader I want to set my stop loss at a point that I will not likely get forced out in the near term so I set it at 3 times the weekly volatility (3x the difference between the Maximum and minimum price of the week).

Today the ask on POT is $104.38. If I look at the chart in Google Finance I can see that the max this week was $106.72 and the min was $100.54 which is a volatility of $6.18. To set my R I want to use 3 times the volatility: 3x $6.18 = $18.54.

Since this is a personal investment I am will to risk more that if I were managing the account so I will risk 3% of my entire portfolio: 3% x $70,000 = $2,100.

Set up the formula:

P = C/R = $2,100 / $18.54 = 113.27 shares.

Because most stocks trade in lots of 100 shares I will round down and buy 100 shares. By doing this calculation I am not over exposing the risk of my portfolio to a single trade. I will be investing $10,438 in this position and the most I am willing to lose is $2,100 or 3% of my entire portfolio.

Next step: If I get into a profitable position of greater than $2,100 than I will set a trailing stop to lock in some profits.

Obviously this is an expensive stock so if your portfolio is smaller than $40,000 it probably doesn’t make sense to own this stock since your risk exposure will be too large. The CPR method works for any stock though so test it out with anything from penny stocks to expensive stocks.

This article can be seen in the August 29th, 2009 edition of the Weekly Dividend Roundup
This article can also be seen in the September 3, 2009 edition of Carnival of Pecuniary Delights#22

10 Steps to Insider Information

How to Find Insider Information

Have you ever wondered how to find insider trading information for a stock you are interested in buying or selling? Did you ever want to know if the CEO or Director of a company was dumping the stock or buying it up?

This information is all free to the public and required by law that the insiders file their transactions for the public to see. It’s really a very simple process and can be a real life saver if you are on the fence about whether to buy or sell a stock.

For Canadian stocks, simply go to SEDI – System for Electronic Disclosure by Insiders. This is a free website to use with no sign up or any garbage like that. The site is run by the Canadian Securities Association.

Steps to use SEDI:

1) Go to the site: http://www.sedi.ca/ – I have this bookmarked so I don’t forget.

2) Click English or French

3) On the top right hand side of the page click ‘Access public filings’

4) Near the top of the Left hand side of the page click ‘View Insider Information’

5) Click view summary report

6) Click Insider Transaction Detail at the bottom of the page

7) Enter the Company name to search

8) Set the date range for transactions you want to know

9) Select the type of investments you want to view

10) Click search – There’s the information you were after.

4 Steps to Lower Stock Market Risk

Position Sizing to Limit Investment Risk

1) Determine the maximum amount of your capital you are willing to lose on a single position. You may consider this in dollar terms or as a percentage of your entire investment portfolio. For example, if your account size is $10,000 you may consider your maximum loss to be 1% of your entire portfolio or $100.

2) Determine your stop loss on the investment. Many people employ a 3 times the weekly volatility stop. To do this you need to calculate the range a stock moves during a week, multiply that by 3 and then subtract that number from your entry point if you purchased a stock. Set that as an automatic stop trigger so that your position sells immediately if the stock drops below that point. If you are a longer term trader 10 times the volatility is often more beneficial. For example on Yellow Pages Income Fund YLO.UN 3 times the weekly volatility (maximum price to minimum for last 5 trading days $5 to $5.21) represents a stop loss of $0.21 * 3 = $0.63, which translates into a stop for a Tuesday Morning Entrance of ($5.01 – 0.21 = $4.80. This helps eliminate the noise of the market from your investment.

3) Take the maximum loss in dollar terms determined in step 1 and divided that number by the percentage loss the stop loss would represent ($0.21/$5.01 = 4.19%). For example, on Yellow Pages Income Fund YLO.UN you would calculate $100/4.19% = $2,386. This represents the dollar amount that your could hold of the stock while sustaining the maximum loss you are willing to tolerate in your portfolio.

4) The amount of shares you should buy is simply the dollar amount determined in #3 divided by the current share price ($2,386/$5.01 = 476 shares). It normally only makes sense to buy shares in lots of 100 so you need to decide whether you want to round up or down since it will affect the overall risk slightly here.

Obviously, the lower the volatility in a stock the larger the position size your could have. Also, the larger your account size the larger the positions.

Everyone is different and can sustain different levels of losses and still sleep at night. Investing should be fun so if you find you lose sleep at night thinking about your profits or losses you probably need to lower your risk.

The next step is then to determine when do you take your profit; this is the hardest part of investing.

Preferred Shares vs Common Shares: Legal Implications that must be understood before investing.

I recently read a news article written by an investment advisor about the benefits of investing in preferred shares. At first glance this article seems to be extremely accurate, at least from a financial perspective. For example, I presented the ‘bare bones’ of this case to some of my colleagues (investment professionals) and none seemed to have any major quarrels with any aspect of this article. It seems the legal implications of many of the statements made throughout this article are not held as common knowledge by the majority of investment professionals, which is unnerving as these are the people whom are though to have specialized knowledge with regards to all aspects of investing.

Discussing the investment terms presented in this article seemed basic and at first I was uninterested. Financial professionals distinguish between two kinds of shares on a daily basis: preferred shares and common shares, but is it really that plain and simple?
Preferred shares are thought of more as a debt security as the article suggests. The general consensus is exactly the position of the article: a regular fixed dividend, a chance of share appreciation, leading position over common shareholders when a company is wound up, and no voting privileges. After income taxes, preferred shareholders are though to collect their dividends ahead of the common shareholders and these dividends are also thought to accumulate if not paid.

The article goes on to discuss different terms that are very regular with preferred shares. Preferred shares tend to be bought for their regular cash flows and as a result, like debt, their price appreciates when interest rates fall and vice versa. Common features of preferred shares are presented in the article: retractable / callable, the shares may be bought back by the company at the company’s or unit holders option…they may participate in profits through extra dividends…some have variable dividends with a floating rate…and they may have warrants attached or be convertible to Common Shares.

Common Shares on the other hand are though to carry the right to vote to elect the board and the right to receive dividends when they are declared; upon windup they are thought to receive the last ‘pick at the pie’.

Even a seasoned investment professional would not appeal the presentation of preferred shares provided in the article; however, from a legal perspective there are many incongruent statements produced that should be understood by all professionals in the investment industry, especially if they want to avoid any potential law suits.

The first thing to notice is what kinds of securities the law distinguishes. The consensus is wrong to automatically think common and preferred shares. These are not kinds of shares, only marketing jargon. Within the law in British Columbia there are two kinds of shares according to S.52 of the Business Corporations Act (BCA): par and non par. Par shares meaning they have a stated value on the books, while non-par shares have no underlying value. This distinction comes from old law that sought to keep previous owners and new share owners on equal grounds when purchasing shares; however, the majority of Provinces today no longer allow for par shares, and instead require all shares to be of the non-par variety.

The second thing to notice is what a share actually is. From a financial perspective, even many professionals still believe that a share is a part ownership in the underlying business. This is incorrect however. The legal definition of a share is a ‘choses in action’ or ‘the right to sue’. What shares really are is a bundle of rights produced by the constitutional documents of a company according to S.56 of the BCA; the name preferred and common have no legal distinction within the BCA.

Some other key features of shares may be clarified by discussing major sections of the BCA with regards to the legal nature of shares. S.107 provides that a share certificate is produced when shares are created; these days it is uncommon for the certificate to be transferred to a share owner, instead the certificates are held in trust. S.111 provides that a central list of the share owners is kept by the corporation, which includes the number and class of shares held and the amount held by each share holder.

The next major sections to notice are S.113 and S173. S.113 states that a share is transferable as provided by the articles of the company. This may affect the liquidity of the shares and should be known before purchasing. S.173 provides that unless the articles state otherwise, all shares carry one vote per share. This could have major implications on the actions taken by the company since without restriction, common and preferred shares will have the same vote.
One of the more interesting sections of the BCA governing shares includes S. 64, which states that a share must not be issued until it is fully paid; however, a share can be paid in a number of ways: money, property, or past services actually performed.

Now that some of the more prominent sections of the BCA have been discussed it may help to clarify the distinction of classes of shares by looking at some case law. From International Power v. McMaster for example, the judge makes it clear that calling a share common versus preferred does not determine which shareholders participate in the residue of a company when it is wound up. The distinction is made through the articles of incorporation and if there is no distinction or restriction made then all classes of shares will participate equally in any residue.

A further application that we learn from the case of Devall v. Wainright Gas Co. Ltd is that dividends, even if stated in the articles as cumulative are not payable unless and until the board declares them. If the board deems it more beneficial to the company to setup a reserve fund then the board is not incorrect in doing so as long as it is in the company’s best interest.

Common and preferred shares are not as easily distinguishable and generic as I once thought. The most important thing to remember is that the constitutional documents will determine the exact rights and restrictions on the different classes of shares. Understanding the exact details provided from these documents can dramatically affect the liquidity (ease of share transfer), and value of a security. It is very surprising that the legal implications of share rights and restrictions are not even discussed within the Canadian Securities Course or Canadian Practices Handbook—the financial industry licensing requirements. Hopefully the Canadian Securities Institute, investment licensing body, will update their training materials to include such important lessons in the near future.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio

Canadian Dollar: How to make money on the increasing value of the Canadian Dollar.

The Canadian Dollar hit a 130 year high on November 7, 2007 at $1.1027 (U. S.). This new valuation of the dollar will take some getting used to. Already there have been some business outcries for the Bank of Canada to step in and lower rates to cool off the appreciating dollar. This I do not believe to be the proper course nor do I think the economic situation to be so dire.

There are a number of reasons why the Bank of Canada should not step in.

First, lowing interest rates will only cause inflation throughout the Canadian Economy. The primary responsibility of the Bank of Canada is to keep inflation reasonable stable between 1-3% a year. Currently we are sitting at 2.5% and that is exactly where we should be.

Second, suggesting that a higher Canadian dollar will cause massive job cuts is ridiculous. The unemployment rate is near record lows; talk a walk down the street in Vancouver or Calgary and you will find it impossible not to be inundated by all the help wanted ads. These jobs won’t completely dry up just because our goods have become more expensive for Americans.

Third, all the banter about cutting rates is coming from the manufacturing sector. It has been displayed overtime that situations such as a higher dollar only leads to efficiency. Either become more cost efficient at producing or you shouldn’t be producing at all. This is the type of situation that yields major innovations.

Fourth, the U.S. Dollar is depreciating relative to all major currencies. The world has become a much more global atmosphere than we have seen in the past and as a result markets are able to react much more efficiently. As a result, by lowering interest rates the Canadian Economy will not keep pace with the other major currencies.

Fifth, there is a global power shift going on. The U.S. has been the dominant economy for many decades and that is changing as economies like China, India, and even the European Union as a trading block fight to become the new dominant trading powers. While this competition occurs, Canadian exports will shift from the U.S. to these other areas.

Sixth, Canada is resource rich and Uncle Sam is hooked. Canada dominates the commodities market because it is the safest source of oil, gas, metals, energy, etc. The world sets the prices for these commodities so the United States will keep coming back to Canada to buy these inputs as the price will not be affected by a higher dollar.

How to Make Money with the Soaring Canadian Dollar:

There are a number of ways to do this and I will describe a few:

1) Simply buy in to the Canadian Economy. The simplest way and safest way to do this would be to purchase some high grade Canadian Government or Corporate Bonds. These will yield a respectable percentage, most likely between 4 and 7 percent and at the same time you may also extent your return through a tax free currency appreciation.

2) Buy the TSX index. This way you are diversified and can reap the benefits of an expanding Canadian economy. The TSX has averaged over 10% annually over the past number of decades.

3) Buy the Canadian Banks: the Banks have outperformed the market significantly over the past decade. There are a lot of smart people working at the banks and they always seem to find better investment opportunities than even a sophisticated individual. Take the old adage 2 heads are better than one and augment it to 1000 heads are better than one.

4) Buy Commodity Stocks: don’t sit on the sidelines. If commodities are hot like they are and there is a global infrastructure boom going on and increasing buy, buy, buy. Lot for the next big commodity. Currently my favorites are uranium and natural gas as both should see boom times again soon.

5) Buy Companies that service Commodity Companies: These companies experience a boom at the same time as there are more new projects to service.

6) Be a Manufacturing Vulture: look for large quality manufacturing companies that the market

has hammered as a result of the higher Canadian dollar. This is when these companies are innovative and develop better efficiencies. When they become more efficient they become more profitable and huge gains can be made.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.

Online Broker Survey: Who Should You Invest With?

The online brokerage business has been growing rapidly within Canada and the United States. The Big Banks are not the only major players as there are many independent Brokerages participating and this has lead to dramatic cost cutting and improved services.

According to the latest Globe and Mail Survey of the online brokers dated October 6, 2007, more and more brokers are now charging under $10 a trade as long as the investors account has a minimum of $50,000 to $100,000; this is a huge reduction in costs to investors who were previously paying $24 to $29 per trade.

This Globe and Mail Survey evaluated the online brokers based on 7 points: Costs and Fees, Customer Satisfaction, Tools and Research, Website Utility, Website Security, Trading Platform, and Investment Selection. The survey results were interesting because the top two brokerages were independents followed by the cash rich banks.

The online brokers surveyed included 14 and ranked as follows:

1. Qtrade Investor
2. E*Trade Canada
3. TD Waterhouse
4. BMO InvestorLine
5. Credential Direct
6. RBC Direct Investing
7. ScotiaMcLeod Direct Investing
8. Questrade
9. TradeFreedom
10. Disnat
11. CIBC Investor’s Edge
12. National Bank Direct Investing
13. HSBC InvestDirect
14. eNorthern

In this ranking, the target audience considered is mainstream investors who have RRSPs, are interested in more than stocks and the focus for the evaluation was online service.

To determine if opening an online direct investment account if right for you answer the following 5 questions:

1. Have I acquired the amount of investment knowledge to invest successfully?

2. Do I know where and how to research stocks, bonds, options, futures?

3. Do I know what types of investments are RRSP eligible?

4. Do I have the time to research investments to make informed decisions?

5. Will the cost savings outweigh the time and effort required for me to invest effectively?

If you answered no to any of the above questions then opening an online brokerage account is not the best method for you to invest. Under this scenario an investors is better served by receiving guidance from an investment professional such as an investment advisor. Why face the ‘sink or swim dilemma’ when there is a boat?

Personally, I have toyed with the idea of opening an online brokerage account; however, I feel that I get a lot more out of employing an investment advisor who can provide me with lots of great ideas and opportunities that I otherwise would not encounter; further, I feel spending my time on my career and family is more important than saving $50 a trade.

The Best Place to Start Investing in Stocks: Canada’s Big 5 Banks

Royal Bank of Canada (RY)

Toronto Dominion Bank (TD) * Michael Assoline’s Pick (Analyst @ Raymond James Financial)

Bank of Nova Scotia (BNS)

Bank of Montreal (BMO)

Canadian Imperial Bank of Commerce (CM)

Add National Bank of Canada (NA) to get ‘the big 6 banks’

If you wanted to find consistency and a healthy income stream from a stock where would you turn?

Investing in Banks is a great base for stock portfolio investment because of the steady cash flows they offer and there performance consistency. Banks are ‘cash cows’ as they are mature businesses with relatively slow yet consistent growth and produce steady cash flow streams through dividends.

According to Michael Assouline, investment analyst at Raymond James, “Want to beat the market? Put your money in Canada’s Big Five banks. It’s as close to a sure-fire bet as you can make.” Mr. Assouline’s claim is not speculative, data from the past decade is proof: The top performing of the big 5 banks, the Royal Bank of Canada (RY) has blown the S&P/TSX index out of the water producing an average annual return of 19% while accumulating a 484% return inclusive of dividends over the decade, beating the S&P/TSX index by a substantial 330%.

Well of course the Royal Bank of Canada (RY) outperformed the market; it is the top performer of the big 5 you say! However, even the laggard of the group, the Bank of Montreal (BMO), outperformed the market by 160%. This seems outrageous; however, the cumulative return inclusive of dividends over the past decade for the Big 5 Banks was about 18% a year.

So when should I buy and which Bank stock should I buy?

The Key features that must be considered when evaluating Bank Stocks are P/E ratios and Dividend yields; although, many other variables may be considered. My advice is to look to the P/E and Dividend yield for entry points and if you think yourself more astute than the market sell when things become too good in your view.

If you buy any of these banks your investment is very likely to beat the market if you hold the investment long enough. This means even if you bought at a market top you can still be profitable over the long run. The best time to buy though is when the market turns its back and beats up the stocks: probably when yields creep up above 4 or 5 %.

Ethical Investing and Socially Responsible Investing: Where to Begin

Ethical Investing and Socially Responsible Investing

Ethical Investing and Socially Responsible Investing tend to be used by investors interchangeably.

So what exactly is Ethical Investing and Socially Responsible Investing?

Before discussing Ethical Investing you must first have a basic understanding of Investment in general.

Investment can be though of as placing discretionary funds (money that is left over after paying all expenses) to work with the anticipation of use at some point in the future. In return for saving those funds today, an investor requires compensation.

When determining how an investor would like to be compensated they will need to consider two elements simultaneously: risk and reward.

Risk refers to the amount of risk investors are prepared to take in order to receive a certain return. A very basic definition of risk would be the probability of a successful outcome investors may assign to a certain investment, generally, the greater the uncertainties the greater the risk. To determine what investments are right from a riskiness perspective an investor will need to consider the following: Are you risk averse (don’t want risk)? Risk neutral (willing to take on a degree of risk in order to receive a greater return)? Or Risk loving (willing to take large risks with the potential of receiving larger returns)?

Reward is the desired amount you would like to receive from an investment. Risk and Reward tend to be correlated very strongly—as the potential reward increases so does the potential risks.

Ethical Investors just throw a third variable into the mix: Responsibility.

Responsibility can mean different things to different people. This is a variable Taylor made to individual preferences; however, a generic definition is the way that a corporation conducts its business: Is there goal to increase profits or leave the world a better place?

For example, an investor who deems investing in weapons or cigarettes to be unethical would not invest in a company that produces either because they believe it irresponsible.

To determine what a company invests in and to what degree you will consider a company unethical can take some detective work. You will need to ask yourself questions like: would I invest in a company that supplies companies involved in what I deem as unethical and will I invest in companies that buy products from companies I deem as unethical.

For example: Would I be willing to invest in a mining company that sells iron to a weapons manufacturer who will turn this raw material into a weapon. Or would I invest in a company that buys paper from a company that also makes cigarettes. Another concern would be whether an investor would consider investing in a company that produces alcohol for example but donates to an AA Group to help alcoholics with their problems.

Combining these three variables you get the 3 R’s of Ethical Investing: Risk, Reward and Responsibility. The degree to which you incorporate each variable and the significance of each in your investment decisions will guide your investment strategy.

Some valuable resources for ethical investing include:

Canada
Ethical Funds
Social Funds

America
Socially Responsible Investing
Corporate Socially Responsible News Wire

Just remember when engaging in Socially Responsible Investing or Ethical Investing personal choice is key to the Responsibility Variable while the goal is still to maximize profits while minimizing risk. Also, it has been displayed over the past 20 years that many investments deemed socially responsible have outperformed peers and this may be a direct result of management at many companies adhering to higher standards.

When to Buy and Sell Stocks

When to Buy and Sell Stocks:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS), etc.

How to Buy: check for cushion in earnings to eliminate risk that a fall in earnings could erase dividend. Buy when yield is attractive relative to stock’s’ history.

When to Sell: Fundamentals start to deteriorate (losing market share, adding too much debt, acquisition of unrelated business, no research and development or share price has appreciated 30 to 50 percent and yield becomes unattractive)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Often huge companies: Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL), Kraft Foods (KFT)

Grow in 10 to 12 percent range with high degree of certainty.
Can be bought when undervalued for 30 to 50 percent gain.
Offer good protection from recessionary times, (Sub Prime Mortgage Meltdown)

How to Buy: Value, with historically low P/E

When to sell: P/E rises above historical average, or if growth starts to slow down, or new products fail

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG), etc.

How to Buy: Make sure plenty of room for expansion, Note whether expansion is speeding up or slowing down. Be careful if the P/E on the stock is greater than the growth rate of the business.

When to Sell: Watch for end of rapid growth phase. Sell if P/E ratio is well above the current growth rate or if company has expanded as much as it reasonable can (Watch out Starbucks (SBUX)). Also, look upon unanimous Wall Street buy recommendations and heavy institutional ownership as sell signals.

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense, manufacturing.

Ford (F), Honda (HMC), Toyota (TM), Boeing (BA), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Sales and Profits rise and fall in response to an expanding or contracting economy. Timing is everything and stock swings are huge.

How to Buy: Watch sales and inventory trends and cost cutting plans. Buy after extended period of misery when business conditions start to look better.

When to Sell: economic slow down begins potting up in the media, inventories begin to rise, hiring ceases, the Fed indicates possible rate cuts may be necessary. Some Cylicals are front runners while others are laggards so look for where a specific industry falls in its cycle.

Turnarounds (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur (Be the Vulture).

Magna International (MGA), General Motors (GM), Merck (MRK), Pfizer (PFE)

How to Buy: Ask touch questions. Can company survive raid by creditors? How much cash and debt? What’s left for shareholders? Is the company simultaneously cost cutting and growing sales?

When to Sell: After it’s turned around and all troubles are over. Also if inventories start to rise faster than sales, or debt increases, or if P/E ration gets too high in light of earnings growth. At least take some of your profits once the company is back on track.

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

How to Buy: Ask probing questions: What’s the value of the assets? How much debt is there and is debt increasing? Is there a catalyst (corporate raider) in the wings to help unlock the value?

When to Sell: After the market appreciates the value of the assets. Once it’s in the news you know it is time to, at minimum, take some profits.

Major Stock Categories

The Major Stock Categories:

Slow Growers (Cash Cows): utilities, railroads, banks, financial companies

AT&T (T), Verizon (VZ), Duke Energy (DUK), ExxonMobil (XOM), Union Pacific Railroad (UNP), Bank of America (BAC), Bank of Montreal (BMO), JPMorgan Chase (JPM), Bear Stearns (BSC), Goldman Sachs (GS)

Medium Growers (Stars): Large established companies that continue to grow at a moderate pace.

Coca-Cola (KO), Procter and Gamble (PG), Colgate-Palmolive (CL)

Fast Growers (?): smaller aggressive companies with growth estimates above 20% a year (Most will have very high P/E’s). A lot of tech companies can be found here.

iROBOT (IRBT), 1-800 Flowers (FLWS), Baidu (BIDU), Google (GOOG),

Cyclicals (Boom and Bust): autos, airlines, tire companies, steel, chemicals, defense.

Ford (F), Honda (HMC), Toyota (TM), Delta Airlines (DAL), Michelin Group (ML), Alcan (AL), Dow Chemical (DOW), Allied Defense Group (ADG).

Turnabouts (Nightmare to Love Affair): Normally established companies with turbulent times. If they can turn things around huge stock movements can occur.

Magna International (MGA), General Motors (GM)

Asset Plays (Finders Fee): Railroads usually land rich, may have mineral and timber rights that the market is unaware of.

Canadian National Railway (CNR.TO), Union Pacific Railroad (UNP)

What is the Bottom Line?

It does not matter which Major Stock Category an investment falls under. A successful investor will always need to answer to the best of his or her ability the 5 most important stock investment questions:

1. Why this company?
2. Why now?
3. What return is expected?
4. Over what period of time?
5. What could turn this into a mistake?

A Note on Technical Stock Analysis

Technical Analysis

1. Support and Resistance Levels: derived from human behavior
   
2. Resistance levels are found at previous highs and previous lows: when a stock goes above highs; it has "broken out". When a stock goes below lows; it has "broken down"
   
3. Conservative clients should stay away from volatile stocks
   
4. Stock Traders thrive on volatility for buying and selling opportunities
   
5. Helps establish psychology influences of stock performance

Technical analysis tends to only be useful for making short term decsions such as establishing entry and exit points in the near term. For investors with a long term focus the emphasis should be on Fundamental Analysis.

Another use of technical analysis is for options pricing. When looking at the (VIX) - Stock Market Volitility Index - an options trader can establish whether option premium levels are good or bad. Good premiums are usually afforded by high volitiliy and Bad from stability.

Most Important Qualitative Analysis For Stock Picking

Qualitative Analysis to pick the "best stocks"

The Key to winning stock picks is an investors ability to seek outstanding companies at sensible prices, not mediocre ones at bargain prices!


The top 13 Questions to use to find Red Hot Stocks:

1. What is companies primary business?
   
2. Do you understand that business?
3. Are future results predictable?
   
4. Is the company a leader (number one or two) in its industry?
5. Does the company have a record of generating substantial free cash flow? (allows company to with stand slumps, seize investment opportunities, increase dividends, or repurchase shares)
6. Does the company produce an attractive product(s) or service(s) that are needed and likely to be needed for a long time in the Future?
7. Lack competition?
8. Low overhead?
9. Portable?
   
10. Free of regulation?
11. Management competent?
12. Likely to become better, not just bigger?
13. Can you buy it below intrinsic value?

Basic Stock Evaluation

How to do a Basic Stock Evaluation

There are a few common variables to assess when evaluating a stock:

1) Profitability: Does the company make a lot of money?
2) Growth: past, present, future—major driver of stock price
3) Financial Health: Strong Balance Sheet—the company can weather a storm.
4) Value: the stock is available at a discount (on sale) compared to its historical value, compared to its competitors, compared to its intrinsic value.

1) Profitability: (Return on Capital and Return on Equity) (ROC) & (ROE)

Return on Equity (ROE)
(ROE) Low numbers (> 12%), especially if declining, (Look elsewhere)
Steadily increasing ROE speaks well of company management.

Measure of profitability
Also indicates internal growth potential (ability to self-finance growth without borrowing money or issuing new common shares)

2) Growth:
Earnings and Sales Per Share (EPS)
Primary determinant of share price movement
Rapid and consistent growth is highly desired
(harder to manipulate through accounting practices than earnings)
Look at Value Line Charts (visual of cash flow growth)
issue of more common stock (dilutes EPS)

Dividend Growth
Some companies pay out too much in a good year and then reduce them in a bad year (can hammer stock)

3) Financial Strength
Capital Structure: Excessive debt? Shareholder risk increases with the proportion of debt in a company’s capitalization
A company with zero debt can’t go bankrupt!
(Free Cash Flow Per Share): Cash Flow – (dividends + Capital spending): Capital Spending requirements that deplete CF over long haul is bad, Short term good.

Long Term Debt:
Examine long-term debt load in terms of absolute numbers and its trendàstable or declining trend suggests good financial health

Current Position
To asses solvency: pay attention to cash and marketable securities; monitor receivables closely. Receivables increasing at rate faster than sales (perhaps some money owed to company is not being collected)
Inventories: should not grow faster than sales (Red Flag)

4) Value:
High/Low
The valuation of a stock relative to its own history: P/E, Price/Cash Flow, Price/Sales, Price/Book Value compare past 5 years (Watch out for cyclical companies)
The valuation of a stock relative to others in its peer group: compare to see if stock is above of below where it traditionally sites in terms of the entire market of stocks
Quickest way to evaluateà compare cash flow line (the value line) or earnings line to see if company is above or below the line (stocks at or near line may be undervalued)

Best Way to Find Hot Stocks

The Best Way to Find Hot Stocks is to do some research. Once you have made a list of stocks you are interested in it is beneficial to do a full analysis of each company or get someone with more knowledge of investments such as an investment advisor to carry out the rest of the research.

The Best Place to research stocks for initial discovery is through Research Reports, Newsletters, Magazines, and investment blogs.

There are many good sources to discover stocks: Investors Digest, the Money Letter, The Money Reporter, the Zweig Forecast, The Economist, Wall Street Journal, etc.

The newest method to find great stocks to invest in is to search blogs. Google Search: Investment Advice Blogs -- and you will find a number of great blogs listing hot stocks and good opinions about the stock market in general.

Another place to look for stocks to invest in is through Annual Reports and Broker's Packages. You can usually get these by phoning up any public company and asking to be sent a 'Broker's Package'. Do note that these are usually glossy sales packages that make the issuer look as good as possible. Make sure you look at the Auditors notes at the end of the Annual reports for 'juicy details'.

The common element in all of this research is that once it is printed it is old news and the future is anybodies guess. You can make more informative decisions about the future by doing your research however. So if you want to take the luck and gambling aspect out of investing do your homework. You can never eliminate all of the risks from the stock market but you can significantly improve your chances of success.

Investment Theory

Investment Theory

Modern Investment Theory or Modern Portfolio Theory can become quite complex; however, the basic theory of investing revolves around a couple of key concepts: capital is a scarce resource, and return is a variable of risk. In other words, money available for investment is not infinite so people are willing to pay to borrow it and generally, the greater the risk associated with an investment, the greater the potential rewards.

The goal of portfolio theory is to diversify your investments in a way that will maximize your returns while minimizing the risks associated with those returns. This is done by investing in a number of different investment vehicles as well as investing in a number of uncorrelated/unrelated industries.

For example,
40% Fixed Income (bonds, debentures, commercial paper), 40% equities (stocks), 15% cash (GICs, term deposits, savings account), 5% derivatives (options, futures)

Further, within these fields your investments should be diversified through unrelated sectors:
Resource, Financial, Technology, Health Care, Industrial, etc.

This is not an exhaustive list but a very basic outline. Each individual is faced with a unique set of qualities that will effect how much they should invest in certain sectors and how much they should invest in each type of security.