Financial Jungle

I received a few emails from readers singing the dividend investing tune and craving for more out of this blog. As much as I enjoy these praises, most of the ideas don’t originate from me. I certainly don’t live long enough to survive all the experimental mistakes and live to tell about them. Instead, I mimic dividend investors who have succeeded before me: Stephen Jarislowsky, David Dreman, Tom Connolly and bunyip. But the person who really spring boarded my endeavor into dividend investing is Scott M.(a.k.a scomac).

If you don’t know who scomac is, you owe it to yourself to dig up all the little nuggets he left behind in the Financial Webring and Canadian Business forums. In particular, scomac graciously shared this stock picking template, which I adopted and morphed numerous times over the past 2 years to suit my own investment style. His disciplines have also influenced many forum members/bloggers including Brad911 and Investor99.

To my immense delight, Scott visits my humble blog and even agreed to answer a few personal questions! Thank you Scott!

1 ) I remember reading a prior post of yours that you’re semi-retired. What exactly does that mean? How long have you been semi-retired? Are you working your dream job? How do you spend your spare time?

I would interpret semi-retirement to mean working when you want to, as much or as little as you want to and for reasons other than the need of employment income. I have been semi-retired for a little over three years. If working your dream job means not having to do anything, then I’m probably there.

We have a small farm, so that takes up some of my time, but not as much as it used to since our “herd” now consists of only one dog and one cat. Beyond that, I enjoy cooking, cycling, gardening, golf, skiing and….writing.

2 ) At what point financially did you decide it was time to phase in to retirement? Did you wait until your portfolio income covers your essential living expenses?

I just sort of fell into retirement. There was no grand plan. I had originally intended to go back to school and take some training so that I could enter the financial services industry as an advisor. I took the courses, but haven’t bothered to look for work. I doubt I have the personality for that gig. After I had been “semi-retired” for a year or so, we discovered that we had more than enough income as a family unit to continue living the lifestyle that we were accustomed to.

3 ) You’re a pretty young fellow. 47 if I remember correctly. If you were to travel back in time — but without the hindsight of market peaks and valleys — were there anything that you could’ve done to speed up semi-retirement even earlier?

I wouldn’t have done anything differently. The real wealth generator for me was a concentrated investment in personal business assets rather than the traditional savings and investing methods that are discussed in financial forums. We only began investing in the equity markets in a big way in the last 10 years or so.

4 ) You’re a regular at Financial Webring and Canadian Business. Do you think these financial forums are good training grounds for young people looking to shape their financial philosophies? Or, are they better off cutting out these intoxicating noises and sticking with good financial books, such as Personal Finance for Dummies?

I would advise young people to stick with a few good financial texts rather than spending endless hours on financial forums. I don’t want to downplay the value that these forums can have, but it would be difficult, if not impossible for novice investors to separate the good from the bad. They pretty much have to rely upon experienced forum members to correct any errors, poor guidance or miss-information that is posted. This is handled quite well at some forums, but it can be hit and miss at others. Just because an individual can make a convincing case for following a certain course of action, it doesn’t mean that it is the right path for the reader or even the alternative with the greatest probability of success.

My suggestion for a young person looking to get a good basic grounding in personal finance would be to read the following classic texts:

• “The Four Pillars of Investing” by Wm. Bernstein
• “A Random Walk Down Wall Street” by B. Malkiel
• “The Naked Investor” by J. L. Reynolds

5 ) It’s easy to get carried away and spend over 2 hours each day on forums. For someone thinking of participating in a financial forum, what should one do to make the experience more productive?

Limit your time. There’s more to life than sitting staring into a computer screen. If there are some specific things that you want to know about, then don’t hesitate to ask the questions. Remember that the only silly questions are those that aren’t asked. If you stick to specific areas of discussion that apply to your situation and avoid the heated opinion threads, you will likely find that your time spent was well worth it.

6 ) Forum participants often scoff at the “talking heads” from BNN, but come on! Although buying based on the top picks segments isn’t a sound investment strategy, it’s smart to augment their research with ours. And I’m not ashamed of being the first to admit, some of my favourite BNN guests include Norman Levine, Laura Wallace, David Driscoll, Gavin Graham, Bruce Campbell, Ross Healey and all the guys from Sentry Select. Do you have any superstars on your list?

Those individuals that take a balanced, prudent approach are those whose opinions I value the most. Ask yourself which one of these characters you would hand a blank cheque to and you will quickly discover whose advice is worth acting upon. From your list of individuals, the person that I would most likely have to manage our investments would be Norman Levine. Paul Gardner, of Avenue Investment Management, has been quite helpful to me on a personal basis on the fixed income side of our portfolios.

6 ) I believe you’re a hybrid stocks/ETFs investor. Tell us about your investment philosophy. What types of stock and ETF whet your appetite?

That’s correct. You can’t be an expert at everything is an old adage that I take to heart with investing. So, with that in mind, I select individual securities where I feel comfortable and use broad market ETFs to gain exposure to other asset classes.

I can be best described as an income investor. I’ve never been completely comfortable with investing solely for capital gains and having to rely on the greater fool theory where someone else will take my shares off my hands at a higher price. I like to be paid to hold investments and then the market value of these securities isn’t nearly so important to me (unless I’m buying or selling).

Our portfolios, in aggregate, are set-up to mimic a pension plan portfolio, so you could say that we engage in “core and explore” investing with the goal to have only about a third of our investments subject to active management with the other two thirds held in passive investments such as ETFs, a laddered bond portfolio and a few dividend paying stocks. The actively managed third could contain pretty much anything that I deem attractively priced from junk bonds to commodities. At the present time, I’ve been accumulating preferred shares, REITs and O&G shares.

7 ) Which tools do you use to research your potential investments? How do you determine the attractive entry prices?

Over the years, I’ve simplified my approach to researching a potential investment. If I’m not familiar with the company then I will spend a fair amount of time researching the company through resources that are available on the company’s web site and/or SEDAR. Once I’m familiar with a company, I’m quite satisfied to use the free historical data that is correlated on MSN Finance. For ETF research, my first stop is always ETF Connect. All of our various portfolios are tracked on the portfolio tracker at Globe Investor Gold. Globe Investor Gold is also my first stop for business news and I will periodically use the advanced stock/bond/fund screener functions.

I’ve used a commercial spreadsheet in the past, but I’m just as happy doing any calculations with my HP 10BII financial calculator. I think folks can get overly confident with their estimates of future value that some of these sophisticated computer programs produce. We can’t forget that it’s an “estimate”. To determine an entry price, I will use Time Value of Money and Discounted Cash Flow calculations that incorporates dividends, book value, growth of book value, growth of dividends and a discount rate that reflects my required rate of return which is typically 15%/annum. Hopefully this provides an adequate margin of safety to mitigate downside risk. As long as the price is reasonable, I’m more concerned that the company I’m looking at has the characteristics of sustainable long term growth that I’m looking for.

8 ) What are some of the core holdings in your portfolio?

• GoC 2021 RRB
• BLDRS (ADRD, ADRE) for international equity exposure
• SPDR (SDY, DSC) for US equity exposure
• Basket of Canadian dividend payers (BMO, BNS, CNR, MRU.A, PWF, SJR.B, SLF)
• Basket of Canadian preferred shares (mixture of financials and utilities)
• Basket of REITs/trusts/small caps (AP.UN, BR.UN, CUF.UN, CWT.UN, PKI.UN, RET.A, RUS)
• Commodities (CEF.A, ESI, NXY, PCA)
• Canadian pooled funds (bond, dividend income)

9 ) The recent market collapse had rumbled along leaving many road kills behind. Are you picking up any bargains these days?

I’ve been buying on a fairly consistent basis through out January. I’ve been active buying REITs, preferred shares and select stocks most notably in the O&G sector. Astute readers may have noted that I re-entered BMO as well. This was a result of a careful examination of the balance sheet after the release of the annual financial results in December. Whether or not my purchases prove out to be bargains only time will tell, but it is my view that they offer good value at the prices I paid. In the mean time, I’ll be quite content to collect the dividends/distributions.