The Hardest Thing To Do In Investing

Recently I got into a discussion about the hardest to do in investing. Like it or not, emotions always come into play when it comes to investing. Some investors identify the fallacies and try to remove emotion from the decision making process and succeed, while most people tend to fall for the inherent psychological nature we humans are programmed with. Investing at some point in time becomes more about understanding human/market emotions and psychology than anything else.

Investing to grow our assets over the long run is a shared goal that we all have, but it is also important to remember that it is a zero sum game. Every time you buy a security on the market, there is a seller and vice versa. So, we need to ask ourselves the question: what does the counterparty know that we do not. Is the other person buying or selling with potentially more information/knowledge on the matter or is the move based on ignorance? This is really hard to fathom on a scale as big as the stock or bond market and macro issues that are not under anyone’s control. Chances are, there is no one single answer for all cases. As they say, predicting the future is a fools errand, but so is ignoring market psychology.

With that mind, I wanted to discuss what is the hardest thing to do in investing? I gather it is one of the three options below. Whether you agree or disagree, feel free to share your thoughts in the comments section below.

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Top 5 Canadian Foundation Stocks

Canada This post follows an inspiration I got from reading Dividend Diplomats’ post on Top 5 Foundation Dividend Stocks for a Portfolio. In their post, the Diplomats recommend five stocks that beginner investors can use as foundations of a long term portfolio. The post discusses various stages in the process to whittle down the selection and eventually settles on five companies – McDonalds (MCD), Procter & Gamble (PG), Johnson & Johnson (JNJ), Consolidated Edison (ED), and AT&T (T). These are all fantastic choices and I own shares in two of those companies (JNJ and T), and agree that these companies provide any beginner with a great foundation for dividend investing. In this article, I want to focus on Top 5 Canadian Foundation Stocks.

Why?“, you may ask. If a beginner wants to invest in great companies, whats wrong with the stocks discussed above. Well, short answer is – nothing really. However, an investor may have plenty of reasons for picking Canadian stocks. For starters, a Canadian investor may be looking to build a portfolio in his/her Tax Free Savings Account or non-registered account, which provides better tax incentives for Canadian companies; or simply looking for familiarity of the companies (people like to invest in companies that they are familiar with, as they potentially understand how the business works, and feel more comfortable investing in them). An international investor could simply be looking for blue chip names in the Canadian market to gain some exposure. For this reason, I have put together my picks for the top Canadian stocks with dividends. Note that these are simply my picks, and each investor may lean one way or another and go with different companies. Please perform your own analysis and consult with your financial advisor before investing in any of the stocks mentioned here.

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Alternative Investments – Farmland

Alternative Investments Yesterday, Jay at Thinking Wealthy published an article on alternative investments (Thanks for the inspiration, Jay). This article is quite timely as the topic has been on my mind for a while. With the stock market hitting all-time highs and the lack of easy value pickings, I have been spending my time reading and exploring alternative investment ideas.

Alternative Investments

So what are alternative investments? The classic definition of alternative investment is an investment in asset classes other than stocks, bonds and cash. This can include investments in gold, jewelry, real estate, private equity, art pieces etc.

Real estate is probably the most common alternative investment form used by many. But since my wife and I just bought our house this summer, we think buying a second investment property will have to wait a few years. However, that hasn’t stopped me from doing my research and learning about other investment opportunities out there.

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Investing Lessons I’ve Learned

The following post is written by Bryan, the founder and blogger at IncomeSurfer.com
Hello! I am Bryan, the founder of IncomeSurfer.com. On Income Surfer you will read about techniques and strategies to live a fulfilling and balanced life, both financially and relationally. I offer a monthly newsletter that includes changes in my family’s portfolio, assets we are looking at buying/selling, and interesting articles that give a historical perspective to the capital markets. You will also read articles about my family’s quest for balance, our travels, and how we have changed our lives to be more fulfilling. My business partner and I currently have three outstanding valuation tools under development. Income Surfer is also on Twitter, @IncomeSurf.
My wife calls me a helper. I like to help people. Stranded motorists, confused neighbors, the homeless in our community. I genuinely enjoy helping people. I believe I’m paying it forward, because so many people helped my family build our life. With that in mind, below are 10 investing lessons I’ve learned. I hope some of you can benefit from my successes, failures, and general ideas. 
Investment fees: You get what you don’t pay for- I know I’ve spent a lot of time writing (my most recent article) about how fund expenses and fees are detrimental to your investment returns. Worse yet, costs compound just like returns. In fact a 2.5% fee deducted from an 8% investment return, would reduce the theoretical portfolio return by 50%….over a 40 year time horizon. While a 2.5% fee sounds expensive, many investors pay even more. Suggestion: Know your expenses and minimize them where possible
No one cares about your money like you- This may come across as common sense, but many investors need to be reminded from time to time. It is far easier for an investor to be lazy and blindly follow the suggestions of a broker or financial planner, than it is to ask questions and put in the time to learn what is going on. “That’s what I pay them for” you might say, but the fact remains that your hard earned money is on the line. Ultimately you are responsible for your money, and your lifestyle would suffer if something went terribly wrong in your portfolio. Suggestion: (If you use a financial professional) Ask lots questions and put in enough time so that you are comfortable with: 1. Your investment professional, and 2. The investment approach and allocation you settled on.
By the time your investment thesis has been embraced by the news media, it’s too late-How many times have a family member or friend told you about their new “can’t miss” investment idea……which in your mind has been a well established theme for months or years? This has happened to me more times than I can count, and it usually ends very badly for those last to the party. The fact of the matter is that most retail investors have horrible timing. Whether it was rental housing in 2006, Chinese stocks in 2007, or internet stocks in 1999, the top was near. While there isn’t a hard and fast way to recognize that an investment theme has gotten frothy, some easy clues can be found in the news media. When national magazines and television shows are full of features of investors who “hit it big” with a given asset, or the financial projections where a given asset class will grow forever……recognize that the end is near. Whether the result of competition, speculation, or “irrational exuberance”, such booms always end. Suggestion: Don’t invest in something when everyone you know is already invested in it. More times than not, you’ve missed the boat.
Best values are often found in out of favor assets- As I mentioned in my article a few weeks ago, I often find my most compelling investment ideas in “out of favor” sectors or companies. While not always the case, these groups of shunned and beguiled companies are a great place to search for investments. As I documented in the free March Newsletter, I began to invest in emerging market stocks again during the late January/early February sell off. At that point, most emerging market index returns had been negative for the 6 month, 1 year, and 3 year time periods. Investors had largely given up on the “emerging markets story”. Suggestion: When you’re looking for new investment ideas, take a cautious look at the worst performing or least liked investments. 
Time is your friend- I can’t stress this lesson enough to young people. Many of my best investments, were my earliest investments. Within our dividend growth portfolio, it is incredible how much the quarterly dividends have grown since the investments were originally made. This is an example of giving companies time to grow their profits and dividends. Suggestion: Begin investing in your financial future as soon as you are reasonably ready.
There are as many investment styles as there are investors- Each person’s personality and investment style are different. One of my best friends is a stock trader….and a very good trader. In fact, his portfolio did better than mine from 2008 to 2011. He used leverage and had fantastic returns over those years. I began to wonder if I was doing something wrong, because my results lagged his, and I was still investing how I had in the mid 1990s. I have always made a few swing trades per year, but I began to think about making more and riskier trades. Fortunately, I realized that his returns weren’t taking anything away from my returns……and that my fundamental value style was better suited to me. Ironically, after increasing his money 5 fold in three years….he quit stock trading all together. He found it to stressful, so perhaps it wasn’t suited to him either. Suggestion: Utilize the investment approach that fits YOUR goals and needs.
You can trade junk (if you must), but only buy quality assets- Keeping with our discussion of trading, I believe it’s fundamentally important to only buy quality assets. I ONLY buy assets that I can see owning for the next 10 plus years. Anything else, isn’t worth my time or investment capital. The fact of the matter is that I’m not good short term market timer, but if I can old quality assets for longer periods of time…..I don’t have to be as precise in timing my purchases. Suggestion: Be sure to differentiate between mediocre and quality assets. Only buy the quality assets.
Save Early, Save Often- This goes back to my discussion above about time being our friend. The sooner you start saving, the more you can save, and the more time you can give your investments to perform. It’s a simple mathematical exercise to demonstrate why a 25 year old needs to put away dramatically less money (per year) than a 45 year old, in order to achieve the same result years later. If you don’t save money, then you won’t have any money to invest. Do yourself a favor and start early. Suggestion: Begin saving in an automatic and consistent way, as soon as you are able.
Get better investment returns by knowing and understanding yourself- I wrote a whole article on this point, last month. I feel it is essential to understand your strengths and weaknesses, and do your best to capitalize on your strengths and minimize your weaknesses. Many investors are impulsive and emotional, for example. I’m certain that those investors would benefit from employing a dollar cost averaging approach to investing. That way they are not tempted to buy (or sell willy-nilly), and instead stick to a program. Suggestion: Take some time to understand yourself, especially your strengths and weaknesses.
Follow YOUR plan- This is my most important suggestion. It has elements of each of the lessons listed above, but is wrapped in a comprehensive shell. It’s fine to reanalyze your plan every couple years to be sure it’s working out as planned, but something may be wrong if you change your strategy that often. The number one thing you shouldn’t do is change your plan every year to reflect the approach that made the most money the prior year. As silly as it sounds, I know several people that chase returns in this way. Surprise, surprise, their portfolio dramatically underperforms the indices. Suggestion: Once you develop your plan, be very slow to deviate from it.
What have I missed? What lessons would you like to share?


To DRIP or Not To DRIP

Dividend Reinvestment plans (DRIPs) are investment programs run by publicly traded companies to invest in them and provide shareholders with partial shares reinvested back in the company instead of paying out cash dividend each quarter (or whatever the dividend schedule is). This is advantageous to the companies since they can keep the money in the company where it can be put to good use while providing investors in more stake of the company through the share reserve. Companies usually run these programs through a Transfer Agent or a Brokerage firm. This article takes a look at the overview of the DRIP program and the various advantages and disadvantages to investors using this methodology.
When investing via DRIP, there are couple of terms used liberally and I want to include them here as I use them in the article below. A Share Purchase Plan (SPP) allows you to buy more shares in the company in the future.  This is usually a recurring event that you setup with the Transfer Agent or Broker. An Optional Cash Purchase (OCP) is a one-time optional purchase of more shares in the company. 
The following are the advantages and disadvantages of the DRIP program.

Advantages of DRIP

  1. Commission-free: Enrolling in the DRIP program does not cost the investor any money. The program is sponsored by the company and so, there are no brokerage fees or transaction fees to worry about.
  2. Partial shares: Investors can choose a certain dollar amount to contribute by enrolling in the SPP or using the OCP to buy partial shares in the company. When dividends are scheduled, partial shares from the reserve are allocated instead of distributing the dollar amount.
  3. Faster Reinvestment: This point is best illustrated by comparing synthetic and full DRIP. Synthetic DRIP is the DRIP supported by most discount brokers, where the dividend amount needs to cover a whole share. Full DRIPs, on the other hand, work with partial shares as well. The advantage of Full DRIP is that money gets reinvested immediately, even with partial shares, and investor’s money can be put to work effective immediately.
  4. Discounts: Some companies provide discounts for registering in the DRIP program. These discounts can vary anywhere between 1-5%, which means higher dividend rate and yield-on-cost on your overall returns.
  5. Dollar Cost Averaging: Enrolling in SPP or using OCP offers investors with the opportunity of taking advantage of dollar cost averaging. This is one of the cornerstones of long term investing and you are able to build your equity slowly.

Disadvantages of DRIP

  1. Setup Effort: Setting up the program and getting started takes a lot of time and effort. Also, getting your first share and setting up is confusing for starters which deters people from enrolling in these programs.
  2. No Control on Stock Price: Due to the way the payment structures are setup with SPP  or OCP, the investor can only choose the amount of money invested and has no control of the price paid on the stock. The Transfer Agent or Broker simply takes the closing market price of the stock on the date it chooses to execute the plan.
  3. Where’s the money? If you depend on and need to withdraw income from your investments, DRIP programs do not work out, as you don’t actually see the money. All you get is more equity in the company.
  4. Taxation: Although listed as an advantage by a lot of writers (due to dividends being taxed favorably), taxation can be a double-edged sword. I consider taxation more of a disadvantage than an advantage due to the fact that there is no tax-shelter when investing using a DRIP program. Consider all the taxation involved when investing via DRIP – (a) the companies pay out their dividends after it has paid its due taxes, (b) you are investing in the company after paying your income taxes, (c) you pay taxes on the dividends received, and (d) you pay taxes on the capital gains. If the money was invested in registered accounts instead, you would be sheltered from some of the taxes mentioned earlier.
The taxation point is a big thorn for me personally. Even though I have a DRIP account with one company – The Bank of Nova Scotia (BNS), I am not convinced that DRIP programs are that great. Do you think there is any value in DRIPping outside tax-sheltered accounts (even with the DRIP discounts)?
To learn more about DRIPs, go to DRIP Primer and DRIP Investing.
Disclosure: I am long BNS. See my full list of holdings here.