Monday, June 10, 2013

Let me teach you some basics of Investing ... Understand Your Goals

For many of us investing tends to be a black box. We are forced to think about investing when we start our first job ( usually out of university ) , and we have the option of contributing to an employer matching plan. Or you have some money saved up, and you would like to put it in some other place than your savings account.

I know many people who are very risk averse, and prefer to keep their money in their savings accounts. Remember over time the purchasing power of your money is decreasing due to inflation. Average inflation over the last 50 years is approximately around 3.9% per year.I would only recommend keeping your money in a savings account if you can earn returns higher than the average inflation of 3.9%. Personally I dont know many savings accounts that provide returns higher than 3.9%.

" So What do I do ? " You ask...

I am going to take you through a series of postings to get you either started or to provide you with better understanding of investing.

Before you start investing your money into different products, you need to understand what is it that you are saving for , and when would you need to withdraw the money . In other words the goal of the investment .

I know this planning to actually purchase something sucks in comparison to just paying for it with your credit card and thinking I'll deal with it latter. It is something we must do to avoid financial hardships and dependence on others over the long term :) ! Might as well pretend we enjoy doing it.

Here are some sample goals that you maybe saving for (Depending on the stage of your live) :

1. Buying a house
2. Buying a car
3. Wedding
5. Emergency Savings
6. Retirement

Please write down your goal. You should write down what is it that you want to do, in what time frame, and how much you believe it will cost you, or how much you want to be spending on it at that point.

For example: " I need to save up 25% down on a $300 000 thousand dollar home , that I plan to buy in 3 years. 25% down on a $300 000 house is $75 000. "

When you start to build your portfolio, this exercise will help you understand where you should be investing your money,what type of investments and what you should be doing to reach your goal.

One of the common complaints I hear about creating a goal is that, "I don't have money for investing". Writing down your goals doesn't cost you money, write them down anyways. You can always revise them, but at least putting them on paper will help you understand what is it that you would like to be doing.

What is Technical Analysis?

There are two major methods for analyzing stocks. One method is Fundamental analysis and the other is Technical analysis. Fundamental analysis analyzes demand and supply of a stock. It tries to explain why a price moved the way it did, and it is based on current demand and supply.

Technical analysis is based on historical data. It can almost be described as identifying patterns, and applying the rules derived from the patterns to future price/volume movements. Technical analysts do not care about the why, they hope to predict price movements based on patterns. These patterns are usually derived from charts created from historical data. The formal definition is “Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”[i] .

There are three key assumptions in technical analysis.

  1. Market price movements reflect all factors
     2.    Prices move in trends

     3.   History repeats itself


Technical analysts believe that market price movements reflect all factors such as supply, demand, political, and psychological. This assumption lets them focus only on price movements , they do not have to worry about the individual factors itself, it should be reflected in the price movements. 

The analysts also believe prices move in trends, and history repeats itself, this is why they use past trends using historical data to predict future movements. These three assumptions form the basis of technical analysis.


[i] Technical Analysis of the Financial Markets, John J. Murphy

Thursday, February 23, 2012

How to go about valuing a company?

1. Understanding the Business

     a. Industry Analysis
     b. Competitive Analysis

     Note : Frame works are just there to help you organize your thoughts. The industry
     and competitive analysis should help you understand what the major challenges and
     opportunities the company is facing in its industry /operating environment .

     c.  Analysis of Financial Statements
     d.  Company disclosure analysis ( e.g. press releases, earnings call )

     At the end of this analysis you should understand the company’s business model.
     A business model is how a company makes its money. The customers it targets,
     the products or/and services it provides, and how it gets these products and services
     to its customers ( supply chain ).

2. Forecasting Company Performance

     a . Forecast sales, earnings, dividends
     b.  Pro Forma Analysis

     Overall company forecasting can be done two ways, top down forecasting or
     bottom up forecasting. Top down forecasting is when you forecast using
     economic factors ( GDB growth), industry ( overall average industry sales number ) ,
     and then specific company forecast. Bottom up forecasting is when you forecast
     based on some factor of the company , for example in retail you might calculate
     individual store sales and aggregate that up to total company sales numbers.

3. Selecting the appropriate valuation model

     a. Pick one based on the characteristic of the company and the
        context of valuation
     b. Some type of valuation models available :

          i.  Discounted Cash Flow model – Value of stock is the present
             value of t expected future cash flows
         ii. The methods of multiples

     c. Three things that needs to be considered in choosing a model

          i.  Model must match the characteristics of a company – For
              example you would choose the discounted cash flow model
              for companies that produce steady predictable cash flows
          ii. Choose a model based on data available
          iii. Pick a model based on the purpose of valuation

4. Converting forecast to a valuation

     a. Tweak output from valuation model using judgment
     b. Perform Sensitivity and Situational Analysis on the model to
         create a stronger valuation.

5. Applying the valuation conclusions

     a. The results from the valuation models can be used for many
        different purposes such as investing in a company, evaluating if
        the current market price of a company is overvalued/undervalued,
        and evaluating if the future strategic direction of a company is
        good or bad.

– From Reading 34 of Equity – CFA Program Curriculum, Volume 4 -

Sunday, October 23, 2011

Are you Happy at your Job ?

Today, I was reading a book called " First, Break All The Rules" , by Marcus Buckingham and Curt Coffman and came across some questions that I felt I must share with everyone.

The authors have done alot of research in the area of employee motivation and productivity in the work place. At the conclusion of their reasearch ( which took about six years ) , they had identified 12 questions that measure the core elements needed to attract, and keep talented employees.

I believe everyone has the capability to be a talented employee, if you dont consider yourself to be a talented employee you are probably at the wrong work place. Answer the questions below and see how well you score. Give yourself a 1 for a yes and a 0 for a no. A low score may indicate that you need to look for a new job !

1. Do I know what is expected of me at work ?
2. Do I have the materials and equipment I need to do my work right ?
3. At work, do I have the opportunity to do what I do best every day ?
4. In the last seven days, have I received recognition or praise for doing good work ?
5.Does my supervisor, or someone at work seem to care about me as a person?
6. Is there someone at work who encourages my development ?
7. At work, do my opinions seem to count ?
8. Does the mission/purpose of my company make me feel my job is important?
9. Are my co-workers committed to doing quality work ?
10. Do I have a best friend at work ?
11. In the last six months, has someone at work talked to me about my progress?
12. This last year, have I had opportunities at work to learn and grow ?

Tuesday, September 27, 2011

Confessions of a Shopping Addict: My $7550 Monthly Credit Card Bill

Two of my credit card bills just came in today. Boy, What a shocker. I have spent over $7550 just last month. I have about $1200 disposable income each month. So I was about $6350 short. Yikes. When I looked at the amount , it gave me a sick feeling in the pit of my stomach. Recently I have started realizing that I have a spending problem( At least I was starting to acknowledge it , and have moved away from the delusional view that I make more than I spend in a month). I believe, as in any addiction, admitting to yourself that you have an addiction is the first step.

Being a very analytical person ( for all the help it did for me from being a victim of the addiction in the first place ) , I decided I am going to analyze my last month’s spending or at least the credit card spending. I don’t carry much cash .
I created an excel expense spread sheet, and categorized each expense . I spent close to $5000 dollars on furniture and house related items, close to $400 on gifts, and close to $700 on charity draws. I really didn’t have any pressing need to spend on any of these items. At that time I had justified the spending as things that brings me happiness or will bring happiness to others.

So today I have decided to take a journey to control my spending. There are probably millions of articles on the internet with some tips for controlling spending (Google returned 99.5 million results). You should read some of them, at the end of the day however, whatever plan you come up with , should be tailored for your personality , and to help fix your bad habits with regard to money.

I am going to share mine, in the hope that it might inspire someone with a similar problem to do something about their addiction.
Here it goes :

1. As you saw from above, one of the things I spend the most money on was household items/ improvements, and these were improvements that were not needed. The question now is , how am I going to control this spending. I am going to go cold turkey. There are no pressing repairs needed or items needed for the house at the moment. For the next 6 months, I will not purchase anything for the house. I am taking an oath today.

2. The second highest item on my list was charity lottos. I am going to apply the same strategy here, and will not buy any more lotto tickets till next September.

3. The hardest item for me to tackle would be gifts. I have always really enjoyed giving people gifts. Over the next 6 months, I am going to try to minimize the monetary gifts I would be giving my family and friends. For the gifts I must , I will try to use the gift cards I have.

These are my 3 action items to help control my spending. After three months , I am going to evaluate where I am, and tackle the rest of the type of spending on my credit card. Wish me luck!

Credit Card Debt, Personal Finance

Wednesday, August 10, 2011

All you need to know about RESPs ! Remember anyone can open an RESP for a child not just the parents.

I have a tiny god daughter who is about to turn 1. She is so adorable. Oh the joy kids bring you in the first few years of their lives. Ever since I have heard of or read about the option of gifting RESPs , I have been wanting to start an RESP for her. I think she’ll make a great lawyer ( we’ll see how that turns out ). So being the control freak that I am, I trolled the net for information on RESPs. I am summarizing what I have found in one place in the hope it helps someone else.

What is it and What is so great about it ?

• I figured we start with the question of “What is an RESP ?” – RESP stands for Registered Education Savings Plan, and it is pretty much a plan to save up money for a child’s education. What is really cool about RESPs is that the government will match a portion of your yearly contribution which is similar to employer matched RRSP payments (Yay! Free money). The second cool factor is that the money in the RESP can grow tax free. The government will match :

o 20% on RESP contributions regardless of family net income up to a maximum of $500 a year.
o Additional 20% if your family net income is $41544 or less
o Additional 10% if your family net income is between $41544 to $83088

Note: To find the family net income checkout line 236 of Notice of Assessment. If you are married/common in law add both of your line 236s.

• Some children are eligible for up to $2000 from the government regardless of how much contribution the child has in the RESP. If your child receives the National Child Benefit Supplement as part of the Canada Child Tax Benefit than he/she is eligible to receive a onetime payment of $525 and than $100 every year till they are 15 in their RESPs. That’s $2000 free, the only thing you would have to do is open an RESP account with a provider who will apply for this benefit (It is called “Canada Learning Bond”).

• As you already know, each year you are eligible to receive a maximum of $500 from the government, but if you were not able to contribute the amount required to receive the $500, you can carry forward that amount till the child reaches the age of 17.

How and where do I open one?

• All that is needed to open an RESP is a RESP provider and a SIN number for your child.
• You can open an RESP account at many places such as banks, insurance companies, credit unions etc..
Two important notes when choosing an RESP provider:

o First , make sure the RESP provider offers the option for you to apply for the government grant, and additional 10%, 20% grants, and the Canada Learning Bond option. Surprisingly not all providers offer the ability to apply (I don’t understand why, but not all do ). To see a complete list of providers and the grants they offer, check out this page: Providers

o Second, pick a provider that offers a plan that provides flexibility and minimum fees. This involves asking questions and reading the documents they give you . Make sure to pick a plan that doesn’t have a minimum deposit requirement, and one that will let you make payments whenever you want to ( in other words , don’t sign up for an RESP plan that requires mandatory monthly payments ) . All of us need financial flexibility at certain times in our lives; it doesn’t make sense to create a payment obligation when we don’t have to. If you need help with self discipline, set up automatic payments from your pay cheque. Also make sure the plan doesn’t have penalties, if you choose to close the RESP plan early. Also remember to pick a plan that lets you invest the RESP money in different kind of assets (whether it be stocks, mutual funds, GICs etc ).

• Now that you have a RESP provider , what should you invest in ? The answer to this question depends very much on your risk tolerance, level of knowledge, and your overall financial state. The goal of this investment is a child’s education, so you don’t want to put it in anything where there is a large threat to the loss of principal. That leaves you with GICs, well rated bonds, and etc. If you have a little bit more financial freedom, my recommendation is that you choose a mix of bonds and stock index funds. If you are starting to invest when the child is very young you have a somewhat large investment horizon (18 to 19 years). You should start off with 75% invested in the stocks index fund and 25% in bond index fund. When the child is 10 years old you should switch to 75% in bond index fund and 25% in stock index fund.

Withdrawal and Taxation

• If the child reaches 18 and attends a post secondary institution, the RESP withdrawals will be taxed in the hands of the child. The portion that is taxed is the income earned on the contributions, the contributions themselves are not taxed. If at that time the child doesn’t have any other income, the withdrawals are tax free.

• If the child doesn’t attend a post secondary institution, the earnings from the contribution is taxed at the contributor’s marginal tax rate, and a 20% penalty will be applied to it. One way to avoid this marginal tax rate and 20% penalty is by transferring the RESP to the contributor’s RRSP. In order to do this the contributor must have leftover RRSP contributing room. The government contributions must be returned, and there is no tax on the contributor’s contributions, only on the earnings of the contributions.

• An RESP can stay open for 36 years, which gives the child a lot of time to complete some sort of education after high school.

Where can you find out more information about RESPs ?

I found canlearn to be a great resource. Hope you learned something new.


Child Education, RESP

Tuesday, June 14, 2011

How to get a 278% return Vs. a 10% return using the same amount of initial investment.

Borrowing to invest if done correctly can magnify gains. However it’s a double edged sword, it can also magnify your loses. Any investment that has the potential to earn you lots of return also should have the potential to lose a lot of money for you. If someone says otherwise, I recommend you get out :). Important concept here is your risk tolerance. Let’s take a look at an example.

If you borrowed $100 000 @ 6%, and earned a return of 10% on this money this would be your return. Remember interest expense on an investing loan has a tax advantage.

i.The cost of your debt is 6% which equals to $6000, however you only pay in interest, interest expense * ( 1 – marginal tax rate). Let’s say you are in a 40% marginal tax rate, than your interest expense on the 100k would be :
• 100000* (.06)(1-.4) = $3 600
ii.The return on your investment was 10% of 100k which equals to $10 000. If all of the $100 000 was your money , and you had a 10% return than your rate of return is 10%. In this case the $100 000 was not your money, you borrowed it to invest. Your cost was just the interest cost of $3 600. In this situation your rate of return is : ( 10 000 / 3600 ) * 100 = 278%
iii.How about that ? 10% return versus 278 % return :) .

The above scenario has a downside as well. If you had a bad year and lost money resulting in a -10% return if all of the $100 000 was not borrowed money, than your rate of loss is -10%. However if you had borrowed the $100 000, than your rate of loss now jumps to -278% :).

Debt/Leverage if used responsibly can help increase your capacity to earn returns. The key concept here is “ if used responsibly”. Now, what does that mean?

1. Only use debt for investing if you can tolerate the risk. If there is a queasy feeling in your stomach at the thought of using debt for investing, that’s a sign to stay away from it

2. The 10% return on the example is not an easy amount to attain. On average Majority of mutual fund managers don’t hit this return. So you need to have an understanding of what is the average type of return for the asset class you have invested in. That’s a good starting indicator for the type of return you can expect.

3. Only borrow to invest, if you have the capacity to service the interest and principle, and have the capacity to take on a reasonable amount of loss on the borrowed principle without pushing you in to financial distress territory ( fancy term for bankruptcy) . If you are already carrying a lot of debt, taking on more debt to invest is not a good move for most people. Wait till you have gotten rid of some of your debt, than look into using debt for investing.

Credit Card Debt, Investing,Leverage, Taxes