DISCLAIMER: “Sowing Seeds” is a 3-part 4-part series about my uneducated approach to investing. Readers should not take any of this content as a sound recommendation. (I am not a financial professional, nor have I been trained as one.) Be a big boy or girl, and make your own decisions.
First: Part 1, Market Value is Imaginary
Then: Part 2, The Economy is Irrelevant
Finally: Part 3, The Second Best Buzz
Bonus: Part 4, Water Your Own Tree, Slowly
” Yeah, but Semple, how do you DO it? What are the specifics?”
I think investing is a lot like growing fruit trees in Israel. It takes a lot of water. And if you dump all your water on the seedlings at once, or expect to have fruitful trees in six weeks, you will fail. Often miserably.
Trickle irrigation and patience are KEY, and, if absent, I think that either enterprise should be abandoned.
I think it’s best to look at every financial enterprise as a cash flow generator for investments. Whether it’s working for someone else or running your own business, the approach should be the same: 1) maximize your income; 2) minimize your expenses; and 3) plant some trees with the difference. Once the trees are bearing enough fruit, they can become the cash flow generator for — PRIORITY #4 — your lifestyle.
Most people shoot themselves in the foot by putting lifestyle second to maximizing income, ignore minimizing expenses altogether, and then hope that a lottery ticket will save them from their laziness and lack of forethought. Good luck.
Trickle Irrigation & Weed-Pruning
Whether investing $1 or $1,000, I would ask myself the same questions:
- What is the time horizon for the investment?;
- What portion of my portfolio does it represent?; and
- What do I think is acceptable risk in light of a) and b)?
My own business is my primary investment. Before getting into anything else, I first safeguard our working capital in fixed income investments like GICs and low-risk money market funds. After that, I focus on investments that I want to hold for ten years or more. That leads to equities and exchange-traded index funds (ETFs) — never any other kind of fund. (More on that in a bit.)
I suppose it’s possible to think in shorter terms — one year, five years, etc — but I don’t have the expertise to make short-term predictions, and even then, after watching the stock market for the past year, I don’t think anyone does. It seems like better luck could be had at a casino.
1) As mentioned, I only keep fixed income investments (cash and GICs) for the dollars we need to run the company. A portion is Canadian and a portion is US. Usually we exchange some USD for CAD, and anything left is in US. The surplus USD is then ear-marked for long-term and goes into equities and exchange-traded, whole-market index funds.
2) I use an online brokerage and do all the trades myself for $9.95 per transaction. (This is important because it cuts out a lot of unnecessary fees and commissions that come from using a broker or from non-exchange-traded funds: high management expense ratios (MERs), higher transaction costs, etc.) Especially important is that it gives broad access to ETFs, which most brokers are reluctant to trade in because they make less money on them.
3) It’s worth noting that I would never use a broker to make trades. It’s kind of like asking a salesman for Toyota if Honda makes good cars. Or as Buffett likes to say, “It’s like asking your barber if you need a haircut.” They have no intrinsic motivation to be objective, quite the opposite. The more you trade, the more brokers make. But frequent trading underperforms over the long-term. Also, they are paid more on certain funds, usually with high MERs, so they will naturally try to sell those first. (That said, I have hired a broker on occasion, but only on an hourly basis when I have specific questions. I would do so again.)
4) You can buy index funds from RBC, TD, etc, but in general their fee structures are high: MERs between 2-3%. (May not sound like much, but over the long-term the opportunity cost adds up.) Also, they take their 3% whether the fund goes up or down, which, I think, is wrong. Worst of all, there usually isn’t a separate line item for their fees, it’s just included in gains and losses. Something weird about that if you ask me.
5) The best indexes to buy are ETFs (exchange-traded funds), because they have the lowest management fees. For example, my lowest MER charges 0.07% per year; that’s 30-40x cheaper than typical funds. If you want to experiment with that, ask your broker what he or she thinks of funds like iShares or Vanguard ETFs. Chances are that your broker wouldn’t make much money if you moved in that direction, so the reception to the idea will likely be luke warm.
6) If I had no interest in reading financial reports or investigating the stock market, I would put everything into a few total-market ETF indexes and buy more at regular intervals (monthly, quarterly or annually). On average, the S&P has averaged 7% per year. Not bad for a hassle-free investment with the lowest expenses. For Canadian dollars, there are iShares (www.ishares.ca) which have MERs ranging from 0.23% to 0.55%. For US dollars, Vanguard ETFs are highly recommended and super cheap with MERs as low as 0.07% per year.
7) The one exception may be, if you have some USD, to buy some Berkshire Hathaway shares. I like to think of Berkshire Hathaway as a mutual fund run by Buffett. And these days, they are 30-some% off their 52-week high. (The inverse means that if they match their 52-week high in the future, they will have gained 40-50%.) No guarantee they’re going to go up, of course, but history tends to repeat itself with Buffett. There are two types of BRK: A shares for circa $104,000 each (yikes) and B shares for $3,499 each. (Buffett doesn’t believe in stock splits, thus the huge price tag. Class A shares started out at $19 each 43 years ago…) The only bad thing is that Buffett doesn’t pay dividends, because he thinks he can do better with the money than his shareholders can.
Real estate… This is something I’m just starting to look into, mostly because I want to cash flow permanent rock climbing, and to do it soon. The upside is that real estate can produce cash flow right now, not ten years from now like stocks. And the cash flow is quite high relative to equity invested, but the evils of leverage have to be in play. Loans are harder to get these days though, and interest rates are not as good as six months ago.
9) One thing to consider is that the stock market tends to lead everything else. The decline started a year ago, but Joe Public just heard about it last month. The same will happen on the upswing. People will still be whining about this myth called the economy after the stock market is raging again. It’s kind of a hoaky method, but I like to use magazine covers as a gauge. A year ago, walking through an airport, you couldn’t find a cover that said anything but, “Stock market all-time high! It’ll never go down!” That’ll be one of my future tip-offs that we’re about to have another crash. Today, if you walk through an airport book store, it’s, “The end is near! Doom and gloom!” Plus every ad you see in the paper is pushing low-yield cash investments. Is that a sign of a turn-around? A buy signal?
10) So back to real estate… I suspect it’s gonna get even cheaper, because it lags the stock market. However, I have no idea how to be sure or how to call the bottom. Another way to approach it may be, “What’s the sweetest deal around these days?” Buffett says equities.
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