Hotel REITs: Should I Stay or Should I Go?

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  • Market Guy Mailbag
    • Riocan revisited
    • Legacy Hotels
    • Canadian Hotel Income Properties
  • Trading Note: Pengrowth Energy Trust
  • A Market Tease

Market Guy Mailbag
Mike from Ottawa-Centre writes:

Thanks for “Market Guy”. I am really enjoying it. I was very interested in learning more about Riocan as two of their properties are close to my heart: Westgate Shopping Centre and Lincoln Fields Shopping Centre (in Ottawa). I lived three blocks from Westgate during my formative years and opened my first bank account there at the age of eight. Lincoln Fields was where I began my illustrious retail career at the late, lamented Woolco, selling polyester ties.

You sold polyester ties at Woolco? Well, I wore leather ties at Zellers. I had a blue one, a pink one, and a black one. Put on a pair of mesh shoes and I was ready to head out on the streets of Miami with my sidekick, Rico Tubbs. I really like how Mike reminds us that many stocks are more than just charts, income statements and balance sheets. Rather, we’re talking about businesses that are woven into the fabric of our daily life. They become part of our routine and our running history. From the opposite direction, many of the businesses in our lives are represented by charts, income statements and balance sheets. And therein lies opportunity.

This reminds me of a story involving the famous money manager, Peter Lynch. His wife came back from grocery shopping after purchasing several containers of a new product, L’eggs pantyhose. Lynch was intrigued. He figured that since she liked the product so much, he’d probably have to buy more. Someone was making money here. So he decided to research the manufacturer, Hanes. The next day he assumed a substantial position in the company and his investment increased by 10-fold in just a few years. This illustrates that investing opportunities are all around us. Think about who is making money off the products you buy, the services you use, etc. Where is all that capital going?

Here’s my example. A couple of years ago, I needed to start going for twice-a-month blood tests. I picked up the yellow pages and located a testing lab that was only 5 minutes from the house. I go down there and notice it’s a busy place. Someone is making money here. That afternoon I started my research and eventually purchased shares in Canadian Medical Laboratories (now called CML Healthcare; CLC on the TSX) at $18.50. Late last year, I sold one-third of the position at $29.75, and the remaining in March at $32. I really enjoyed my discussions with the blood technician. On several occasions she complained about the owners of the place making too much money. Little did she know that I was one of them.

I’m not suggesting that people should run out and buy stock in the companies whose products they use everyday. Rather, looking to your environment is a great starting point for research. And you have to start somewhere.

Let’s head a few miles to the west. That’s where another Mike, this one in Kanata, wrote:

I have been following a couple of REITs especially since you’ve been talking them up so much over the past couple of years. Since I was with hotels I keep an eye on Legacy Hotels (LGY.UN-T) – definitely not a good catch – unless there is some bargain hunting possibilities. They have, as you believe to be unwise, cut their distributions completely because of the flailing airline industry, weak US economy, BSE and SARS. Pretty ugly time to be in Toronto hotels (20% of their fund is in downtown Toronto). I may watch to see if the price dips much more to buy low because it’s not like the bricks and mortar are going to disappear. Toronto WILL be a tourist destination once again.

To borrow from Mr. Burns (of The Simpsons), “I like the cut of your jib!” Investing in the hospitality industry has some intuitive appeal, doesn’t it? People check-in, send up room service, order a movie, and enjoy a $32 bottle of water from the mini-bar. A license to print money, right? As someone formerly in the biz, you know it’s not that simple.

Let’s have a look at Legacy Hotels (LGY.UN on the TSX). This real estate investment trust owns 22 luxury hotels in Canada and one in the US. Think of Château Frontenac, the Royal York, and the Château Laurier. Speaking of the Château Laurier, the Market Gal and I had the opportunity to stay there last year. For most of our vacations, the hotel is largely an afterthought. As long as it’s clean, close to stuff, and has a pool, we’re happy. But when you stay at a high-end joint, the hotel becomes one of the highlights. You just don’t get the same feeling checking into the Best Western. Comments heard during our Château Laurier visit included:


  • Wow
  • I don’t want to go home.
  • Please send up some fresh fruit with the champagne.
  • Put the do not disturb sign on the door.

Comments heard during our visit to a Best Western in Virginia included:


  • Can damp be a smell?
  • You look pale.
  • Do you think the car is safe?
  • I’ll leave the baseball bat behind the door.

Despite having a superior brand, Legacy Hotels just announced the suspension of their second quarter distribution, and the stock immediately declined by over 10%. Although a reduction in the distribution was widely-anticipated, few expected the outright cancellation. I can’t help but wonder if the company could have done a better job of managing investor expectations. In any event, I think management deserves considerable slack on this one. The problems facing the hotel industry have been well-documented, and it’s hard to imagine how the corporate brass could have positioned the company any differently. On the plus side, event-driven problems sometimes create opportunities. I agree that Toronto will become a tourist destination once again. And the Legacy brand is tops. Like you, I’m concerned about the Canadian tourism sector in general. Add the strong C$ to the list of problems and it could take a while to navigate through this storm. On July 22nd, the company will release second quarter results and update their outlook for the rest of the year. We have to wait until September to find out if there will be a third quarter payout. In the meantime, I like your strategy of hoping for additional weakness in the stock price. This would make Legacy an even more interesting speculative play.

Just a side note: It’s not that I believe distribution cuts are unwise. In fact, a cut is advisable if business conditions are seriously limiting the cash available for distribution. I’d rather have a cut than have the distribution funded from debt or equity. The former strategies would compromise the integrity of the balance sheet, and that’s not positive. Rather, I believe a company that pays a significant distribution will behave differently than those that don’t. Distributions leave management more accountable to shareholders and less likely to initiate risky strategies. And if management is expected to announce a payout, there is less cash on the table to fiddle with. But despite this, I prefer a conservative payout policy (% of available cash distributed to unitholders). I want the company to have enough cash to fund operations, pay down debt, make accretive acquisitions, and the like. If a lower payout stabilizes distributions over time and cushions the company (and me) from a nasty surprise, then I’m all for it. The point is that I prefer owning companies that place some cash in my hands (say it with me: give me the cash…ohm). And if they have to pay me, it means they have less money to buy those magic beans on the side of the road. Of course, this is all in theory. But as we’ve seen with Legacy, sometimes their just isn’t enough cash to go around.

The only hotel name I’ve ever owned was Canadian Hotel Income Properties (a.k.a. CHIP; ticker: HOT.UN on the TSX). This real estate investment trust owns or manages 36 properties, with over 8000 rooms across 10 provinces. The portfolio consists mainly of mid-market and full-service hotels such as the Delta Edmonton South and the Crowne Plaza Ottawa. Fortuitously, only one of the properties is in the Toronto area (Mississauga). The annual payout settled at $0.90 after a post-September 11th cut. A respected, internalized management team (meaning there is no costly external management contract) has maintained a strong balance sheet. Through the first quarter of this year, they seemed to be sidestepping any serious hits to their occupancy rates and revenue per available room (RevPAR). No doubt this owes much to geographical diversification. However, the problems facing the Canadian hotel industry spread beyond Toronto. For example, CBC News recently interviewed a representative from the Calgary Stampede. Apparently the advertising campaign to attract US tourists has been suspended. They don’t believe many Americans will be coming this year. Of note, 10 of CHIP’s hotels are in Alberta. What’s the punchline? Should I reinitiate a position? Well, I like the trust, but I’ll stay on the sidelines for now.

This concludes the second edition of the Market Guy Mailbag.

Trading Note: Pengrowth Energy Trust
Earlier this month, the position in Pengrowth Energy Trust (PGF.UN on the TSX) was eliminated at $17.09. This is one of the largest energy trusts in the business, with a market cap over $1.8 billion. Pengrowth is one of the higher cost producers, does not use an aggressive hedging strategy, and has a very high payout ratio. All of this renders the trust (and the distributions) extremely sensitive to commodity price swings. This is great when prices are increasing. But energy prices are at historically high levels and I think a correction is inevitable. The last straw for me was favourable mention of Pengrowth by a US money manager in Barron’s magazine. Well, the Americans swept in and the unit price shot up immediately. Nobody buys stocks like the Americans. Unfortunately, nobody sells stock like Americans and I’d rather sell when they’re buying. I’ll revisit the units when the energy price correction is well underway.

The only remaining energy name in the portfolio is similarly-sized, ARC Energy Trust (AET.UN on the TSX). I like the holding because ARC, a) is a relatively low-cost producer; b) has been actively hedging production at these high prices; c) has a more conservative payout ratio; d) has a strong balance sheet. Current distributions are $0.15 a month (est. 35% tax-deferred). Distributions should decline along with oil and gas prices, but the more conservative approach to running the business should make the ride less bumpy than with Pengrowth. The production profile is 55% gas and 45% oil. I’m holding.

A Market Tease
Now I’d like to prime you for some upcoming columns. I plan to write about my worst investment experience ever (yup, the Market Guy got his money ass handed to him on a platter…I have no idea what that means), my first experience with an IPO, strategies I’m using to play the low interest rate picture, what behavioural finance has to say about our sell decisions, and maybe, just maybe, how quotes from the 80s television show Miami Viceand the movie Highlander can be used to help us understand the markets.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. This past weekend he finally took his mitre saw out of the box and installed baseboards in the kitchen. Many cuts at a 45 degree angle. If you have an angle, cut over


Riocan Can

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In this exciting edition:

  • Launch update
  • Market Guy Mailbag
  • Feature story: Riocan Can

Launch update
Thanks to everyone for helping make the launch of The Market Guy a big success. Already the number of subscribers has increased by over 38% since the first edition. The fact that some of you became subscribers against your will and better judgment is beside the point. If you’d like to share the column with a friend, colleague, or enemy, go right ahead. Make sure they contact me by e-mail and I’ll add them to the list. Do you know of anyone who might be interested? Remember, it’s for all yourMarket Guy needs.

Market Guy Mailbag
The mail is rolling in and I love it. It’s great to hear from you.

Bouch in Embrun writes:
Congratulations on your inaugural issue. Very entertaining and informative. Did you set up a website, or will it be distributed via email?

Thanks Bouch for being the first to write in. I’m glad to hear you like the content. You are obviously quite ill. In terms of a website, yes, that’s in the works. For now, I want to be as intrusive as possible and what’s more intrusive than e-mail? I’ll let you, the home readers, know when the site is up and running.

Lamont in Connecticut writes:
Your e-column brought about some numbness, but I was able to imagine that theoretically it would be very interesting.

I think everyone feels that way, Lamont. It’s a burden we all have to bear, a bear we all have to cross.

And that concludes the first edition of the Market Guy Mailbag.

Feature Story: Riocan Can

Let’s start off with a photo:


Would you want this guy investing some of your hard earned money? I sure would. Meet Edward Sonshine, President and Chief Executive Officer of Riocan (ticker: REI.UN on the TSX), Canada’s largest real estate investment trust (REIT). Riocan owns and manages many of the open-concept shopping centres that have been popping up all over the country. Chances are, they own property in your neighbourhood. Let’s check with a selection of Market Guy’s loyal readers:

Dick in Edmonton? You can visit Mayfield Common.
Ozner in Barrhaven? Head over to the Riocan Centre.
Mike in Kanata? Have fun at The Centrum.
If I knew anyone named “Larry” in Saskatoon, he’d shop at Confederation Mall.

I’d provide a complete list of properties, but there are 171 across 8 provinces. Market Gal is so used to me babbling on about the company, that she’s started pointing out many of the sites. It gives me a warm glow when she says, “That’s a Riocan property!” I just assumed she’d been doing the correct thing and ignoring me.

Browse their list of top ten sources of revenue by tenant and you’ll see names like Wal-Mart, Loblaws, Staples, and Canadian Tire. These aren’t fly-by-night outfits. They are large, anchor tenants that provide a predictable source of revenue for the company. In 2002, the occupancy rate was a hefty 95.8%. But what about the danger of fleeing tenants? Well, Wal-Mart’s average remaining lease term is over 14 years.

Why I bought the stock
In 1999, people were making so much money on their tech stocks and I figured they’d be in the mood for some serious spending. I didn’t want to buy any retailer in particular, as the sector can be volatile and potentially disastrous for investors (Eaton’s being one example of retail road kill). Over the course of my research, I learned about commercial property REITs as a lower-risk way to participate in the sector without being subjected nearly as much to the nasty swings in consumer sentiment and behaviour. I also wanted to add another yield play to the portfolio. Enter Realfund, a small-cap REIT investing in shopping centres. Also thinking the stock was a good buy, Riocan swept in with a takeover shortly after my purchase. After spending some time learning about the company, I decided to keep my capital in play with the now larger Riocan.

It’s time for a tangent. In the 2002 annual report, Riocan talks about the lure of new-format retail centres. My favourite passage offers W.P. Kinsella’s quote, “build it and they will come,” made famous by the film, Field of Dreams. This film makes my top 10, easy. If you didn’t get choked up (even just a little) when Ray starts playing catch with his dad, then you have ice in your veins. In terms of emotional power, this ranks right up there with Bambi’s mother getting shot and the spider dying in Charlotte’s Web. This holds true even though I’ve seen the film 800 times.

How it’s worked out
The position was initiated at a pre-takeover equivalent of $8.58. In early 2001, additional units were purchased at $9.90. The stock currently trades at roughly $14, with 2003 distributions expected to come in at $1.14 a unit ($0.095 per month). Distributions have increased each and every year since the inception of the trust. Based on the two purchases, my annual yield is 12% (just over 8% to those buying today). Incidentally, almost 38% of the 2002 distributions were tax-deferred. Music to my ears.

What I’m afraid of
Rising interest rates and REITs aren’t supposed to be good friends. The argument is that, with rising rates, the yield on REITs such as Riocan will be less attractive compared to other income investments that carry less risk. For example, the Government of Canada 5-year bond runs at around 3.25%. This is one of the safest investments around. But what if rates go up, to say, 4%? 5% 6%? If you own a 6% bond and plan on carrying to maturity, is it worth taking on the added risk that comes along with Riocan’s 8%? So that means investors will want to receive extra compensation. That means a lower stock price.

But even if they may not be good friends, does that mean they have to be enemies? Here’s my line of reasoning: Rates typically rise when the economy is doing better. If the economy is doing better, the companies in Riocan’s lease book are apt to be among the beneficiaries. And what’s good for the lessee’s is good for Riocan. I also think rates would have to go up a significant amount (and quickly) to make this a bad story. I just don’t see rates jumping aggressively in the short term. Just one guy’s opinion.

For me, more troublesome is the advance in the share price. I would have been content to just receive my distributions and only a modest level of capital appreciation over time. If the shares keep chugging along, I may have to pair the holding. As you can see, I’m very concerned about capital and profit preservation. By the way, Market Dad thinks I’m nuts to be troubled by a rising share price. All he could do was shake his head and say, “geez!” In any event, I think the share price is getting a bit frothy. But I’m not ready to trade. I’ll hold and continue to grab the monthly distributions.

What’s the punchline?
My experience with Riocan illustrates several aspects of my investing philosophy:

I gravitate to investments that pay me a little something. I want the cash. Having to distribute a portion of the income imposes an extra layer of discipline on a company. They know that if anything happens to the distributions, there will be hell to pay when the market opens. See what happened to Trans-Canada Pipelines when they chopped their dividend a few years ago? Total carnage, with the management team out the door shortly thereafter. No management team wants that. If there was a Market Guy mantra, it would go something like this: “give me the cash…ohm.”

Also, you don’t need to invest in volatile, flashy companies in order to build your capital. Sometimes it’s the relatively boring instruments and the one’s that stay out of the headlines that get you where you want to go. Warren Buffett, when asked about his investing acumen and ability to pick the winners, replied that it was more about his ability to avoid the losers.

Now have another look at the picture of my buddy, Edward Sonshine. As David Letterman would say, he looks like the guy who approves your cheque at the supermarket. In reality, he’s the guy who approves the cheque from the supermarket. And I’m keeping my money with him.

The Market Guy is an instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. This past weekend, he and the Market Gal welcomed the masses to their annual garage sale. Throw your garbage on the driveway, and they will come. Throw your comments and stories at

Are Men Better Investors Than Women

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  • E-mail news!
  • Are Men Better Investors Than Women?
  • Trading Note: Enerplus Resources Fund

E-mail news

The Market Guy can now be reached at Accept no substitutes.

Are Men Better Investors Than Women?

The other day, the Market Gal and I were grocery shopping and came upon the periodicals rack. I was looking at the sports magazines, while she was making fun of two covers: one featuring very few of Shania Twain’s clothes, another featuring a whole lot of Jewel’s breasts. While I quickly re-evaluated my browsing choices, she noticed another cover and said, “Hey there’s that Buffett investor guy you’re always talking about.” I looked and couldn’t find any pictures of Warren Buffett, the world’s most successful investor. Pointing, she said, “it’s right there!” Finally I found the cover she was talking about. It was a picture of Jimmy Buffett, singer of Margaritaville. I’m not trying to poke fun at the Market Gal (well, maybe just a little) but like most couples, we each have areas of expertise that sometimes fail to overlap.

Within my circle of friends, the overwhelming numbers of those interested in the markets are guys. Perhaps this gender breakdown mirrors the world of finance. Since I’m a geek, I have a habit of turning my everyday experiences into research questions. After grocery shopping, I decided to revisit the subject of gender and investing in order to determine if men are more successful investors than women.

What do the media have to say on this issue? This is certainly relevant, as the media plays a powerful role not only in presenting a version of reality, but in creating that very reality. In 1996, I conducted a study titled, The Social Construction of a Stock Market Crash: A Discourse Analysis. By examining media accounts of the 1987 stock market crash, I noted that the financial press characterizes female investors in passive terms, emphasizing dependence and a lack of financial knowledge. In contrast, males are depicted in active terms that stress independence and market savvy. It never hurts to have the mass media in your corner.

Advantage: Give this one to the guys.

Let’s narrow our focus to real investors and what they actually bring to the table. In a study conducted to determine if personality differences existed between successful and unsuccessful investors, Baker (1971) administered a series of personality tests to his subjects. The personality characteristics associated with successful investing were flexibility, tolerance, psychological mindedness, self-acceptance, sense of well-being, and intellectual efficiency. Overall, these personality characteristics were more representative of the women in the study than of the men. Chalk one up for the ladies.

Advantage: Women

Knowing a little something about investor personality only gets us so far. We need some information as to what people actually believe and do. Lewellen, Lease, and Schlarbaum (1977) analyzed the brokerage records of 972 individual investors. They noted that men rely less on their brokers for information, conduct more transactions, believe that returns are more highly predictable, anticipate higher possible returns, and spend more time and money on security analysis than do women. The point that men rely less on brokers may reasonably indicate a sense of confidence in their investing ability. Why do I need to pay someone to tell me what I can figure out for myself, right? But are men actually more confident?

Enter Estes and Hosseini (1988), creators of a study on investment decision-making and investor confidence. It was discovered that women do in fact express significantly lower levels of investor confidence than men. This was the case even when age, business experience, credit hours in accounting and finance courses, investment experience, and knowledge of common stocks were statistically controlled. Even when men and women were found to make the exact same investment decision, the female investor exhibited lower levels of confidence. According to Estes and Hosseini (1988), women are often perceived as lacking the financial acumen to invest successfully, and therefore do so less confidently. However, in their study, females invested at a success rate equal to that of men. This finding speaks volumes.

Advantage: Toss-up.

Good research offers more questions than answers. Thank goodness for Barber and Odean (2001) and their study, Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment. They reiterate the finding that in areas such as finance, men are more overconfident than women. However, they offer the assertion that overconfidence leads to more trading and the more you trade, the less you make. They examined the account data for 35 000 households from a large discount brokerage and poured over the common stock investments for men and women between 1991 and 1997. That’s some study. It was revealed that men trade more excessively than women. In fact, men make 45% more trades than women. How does this influence performance? Trading reduced men’s returns by 2.65% a year as opposed to 1.72% for women. It was also noted that single men trade 67% more than single women, further compromising investment returns. The authors noted that married people influence each other’s investment decisions are thereby reduce the gender differences in overconfidence.

Advantage: Married folk

But people don’t always invest as individuals or as couples. Harrington (1999) analyzed the performance of investment clubs and noted that clubs made up of men and women together earn higher returns on their stock portfolios than clubs made up of men only or women only. No differences emerged between male only and women only clubs. The performance differential was attributed to the fact that members of mixed-clubs are more willing to debate investment ideas and buy-sell decisions. In contrast, same-gender groups strive for agreement and discourage alternative points of view. Mixed-gender groups usually consist of co-workers, while same-gender groups consist of close friendships.

Final Advantage: Mixed-gender investment clubs for married people?

Do these things actually exist? How can we get in on such a thing? Wait a minute. I don’t think the Market Gal would be interested. Instead, I think I’ll go buy Margaritaville.

Market Guy Trading Note: Enerplus Resources Fund

Same ground rules as before. I’m not a professional advisor. I’m just a guy who loves investing and talking about the markets. With that said…Last week on price appreciation, the position in Enerplus Resources Fund (ERF.UN) was eliminated at $33.86. It was a challenge to sell, as the stock was part of the portfolio for many, many years. I still love the company, production mix, reserve life, conservative management, outstanding monthly distributions, and overall financials. However, the stock has experienced a remarkable short-term advance, worth taking advantage of. We’ll talk more about investment trusts later on…believe me!

The Market Guy is an instructor with the Department of Psychology at Carleton University. This past weekend, he continued to struggle with a pesky lawn grub problem. Your stories and comments are welcome

The Beginning

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Welcome to the first edition of The Market Guy. This irregularly-scheduled column provides an opportunity to share my thoughts about investing. I may talk about previous investing experiences, stocks on my watch list, and what I’m doing in the markets. Expect the occasional item from the field of behavioural finance, my old intellectual stomping ground.

Here are a few minor details: I have absolutely no professional qualifications, no stable of insiders, and no on-the-job business experience. I’m just a guy who enjoys investing and talking about the markets. Many of you know this already. If you don’t want to receive the letter, fine, be that way. Just send a note.

Let’s begin with some thoughts on Canadian electric generator, Transalta Corporation (ticker symbol: TA):

In early March I purchased shares of Transalta, paying $16.06 a share. The company had just announced a $240 million equity offering at $16 a share and the stock was snapped up overnight. The speed at which the shares were gobbled up tells me the offering had strong institutional support. In fact, the syndicate of underwriters decided to exercise their over-allotments, adding another $36 million to the deal. It would have taken several days, if not weeks, to peddle such an offering to retail investors. With the big boys on-side, I felt better about the safety of the $1.00 annual dividend (roughly 6% yield). A CEO that goes to market and then slashes the dividend might as well start stealing office supplies while waiting for the security escort out the door. So I was happy to pick up a batch of shares at $16.06.

When I buy a stock for its payout, I’m usually content with a chart that flat-lines. Who cares if the stock moves up? As long as I’m getting the cash, life is sunshine and lollipops. Through mid-May, the market continued to express its enthusiasm for income product and TA was going along for the ride. Thank you, low interest rates. When the stock traded above $18, I decided to eliminate my position, settling at $18.10. If you can earn the equivalent of 2 years dividends in 2 months, sell. Put another way: If I can pocket the equivalent of 24 months of dividends in 2, then if I sell, anything I make in the next 22 months puts me above my original investment goal. That’s a long time to enhance the return on capital! Plus, I get to keep more of my profits because, in Canada, capital gains are more tax-efficient than dividends.

This investment scenario also illustrates an aspect of my investor psychology. To borrow from my days studying behavioral finance, I typically exhibit risk-aversion in the domain of gains (more on this another time).

Back to Transalta. Earlier today the company announced a $24 million charge to earnings as a result of a “clerical error.” That’s just great. Shouldn’t a company of this size (market capitalization touching $3.5 billion) have rigorous safeguards designed to identify and prevent this type of problem? And why is it that when I turn on Report on Business Television, all they are talking about is the indictment of Martha Stewart? They keep showing clips of her entering a New York court building. Incidentally, the arrest provided an opportunity for Martha to display a lovely cream-tone umbrella, no doubt secured while antiquing through Westport. But ROB-TV should have been showing pictures of Transalta’s Steve Snyder (CEO) and Ian Bourne (CFO) going for lunch in Calgary. Canadian investors have just lost millions ($150 million to start). That’s not a good thing.

In any event, total return after commissions: 12%.

Let’s be interactive. Your thoughts, comments, questions, ideas, corrections, feedback, rants, reflections, and recipe ideas are welcome