Journey of an Investing Webmaster

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In this extra-special deluxe anniversary edition:

  • Revisiting the first column (Transalta)
  • Whose idea was it to keep an archive? (Apple)
  • Don’t feel insecure about your endowment effect
  • Even more from the Market Guy Mailbag
  • Market Guy’s Closing Bell

Well, the column is celebrating its one-year anniversary and I’m feeling a tad retrospective. Of course, being retrospective is nothing new for me. Many of my drives to work are accompanied by a CD of 80’s classics and in a couple of weeks I’m going with my buddy Lamont to see Journey perform at Casino Rama. There’s something quite satisfying (and moderately amusing) about Steve Perry belting out Don’t Stop Believin’ or Who’s Crying Now? The point, if there is one, is that I’m going to use this edition to reflect on a year in the life of an investment web column.

My buddy Lamont (shown here) can hardly wait to sing along to lyrics such as “Anyway you want it, that’s the way you need it.”  

OK, so this column won’t be taking us back to the 80’s. However, that shouldn’t prevent us from engaging in some meaningful reflection. So join me, won’t you, as we travel back in time to the spring of 2003. The world was a far different place. At that time, the Americans were having trouble in Iraq, Martha was having legal problems at home, and the Sens were reflecting on a season that fell short. My how things have changed. Anyway, the very first edition of Market Guy dealt with Canadian electricity generator, Transalta (TA on the TSX) and how I’d been trading my position. Specifically, I was outlining a number of reasons for taking out the holding. Well, Larry in Montreal has asked for some follow-up:

What about Transalta? It has a high yield and the stock has been beaten up. Are you buying in again?

I receive a considerable amount of mail, but rest assured, if your name is Larry, your chances of getting into the column are 10x better than anyone else. I have no explanation for this. In any event, I have fond feelings about this stock, owing to the fact that it’s always made me money. It indulged my addiction for dividends and income product at a time when I was just starting out. In fact, it was the second stock that I have ever owned. But let’s fast forward to the 2004 edition of TA. Here’s the good news:

  • Its yield is nearly 6%, which is basically impossible to get from a common stock (Rothmans being an exception; see MG#14).
  • The stock is roughly $3 off its 52-week high and I like buying when there’s a sale.
  • It’s widely held, reducing the volatility that comes along with some of the relatively illiquid power trusts. 
  • Management seems really focused on cleaning up the balance sheet and reducing the debt load.

Now let’s weigh the cons:

  • The debt load, although declining, is still very heavy
  • They may have to sell some assets to keep the credit rating agencies at bay. And selling assets could further erode the earnings picture.
  • It’s going to be tough growing earnings with a significant number of maintenance projects occurring at several plants and a couple of other plants of questionable economics.
  • Interest rates are rising and 6% may not look so good a year from now.
  • There’s no dividend growth to speak of. In fact, the payout ratio on this thing is over 100%.

It seems to me that the only reason to own the stock is for the yield. If I’m interested in a power company that offers a high yield, I might as well pick up a power income trust. In fact, Transalta sponsors an income fund called the Transalta Power LP (TPW.UN on the TSX). It currently offers a 9% yield, with the distributions almost entirely tax-deferred. As I mentioned in MG#19, I’ve already unloaded my holdings in this fund, largely due to the rising interest rate environment. However, if forced to choose between TA and their income fund, I’d pick the fund.

Whose idea was it to keep an archive?
From the very beginning of this little experiment that is, I decided to include an archive. That way, newcomers could be brought up to speed and longtime readers with masochistic leanings could have another look at the older editions. What’s interesting about an archive, is that it affords a sense of permanence to the words of the author. In the world of investing, that can mean treading on some perilous ground. Overall, I think the columns hold up well. But every family has at least one crazy uncle or problem child. For example, last July I wrote negatively about the stock of Apple (AAPL on the NYSE). It was trading at $19.85 with a trailing price-to-earnings (PE) ratio of 122, forward PE of 70. I panned the stock as expensive and questioned the growth prospects of the company. At the time, investors were excited about Apple’s new online music store and I questioned its profitability. Well, the music store continues to have only a modest effect on Apple’s bottom line. However, the stock is now trading over $32. Now I feel like Jamie on the final episode of WB Superstars USA. Simply, I’m torn between embarrassment and feeling the rest of the world is wrong. Heads, we’ll go with rest of the world is wrong, tails it’s embarrassment. Heads it is! Are you going to argue with the coin? I thought not.

Apple has been aggressively trying to diversify and the iPod music device has been the cornerstone of this process. Last year I thought Apple was a computer company that also happened to make gadgets. Soon they will be a gadget company that also happens to make computers. This tidbit drives the point home: iPod shipments now exceed PC shipmentswith percentage of revenue coming from PC’s on a steady decline. In fact, I read one report estimating that PC’s will account for only 55% of Apple’s revenue by the end of 2005.

An informal survey of the Market Guy’sfirst-year students revealed that 10% of them own aniPod.  

Overall, the stock still trades at over 50x trailing earnings and over 40x forward earnings. Projected growth rates were 10% a year ago, but now I’m seeing 15-20% in most of the research. Music lovers have embraced the new iPod Mini, although it furnishes lower margins than the standard version. Apple is very expensive, still doesn’t pay a dividend (for me, a stock without a dividend would be like Vegas without the Strip), and still faces a brutally competitive environment. Who knows what the next big thing will be? More importantly for investors, who knows which company will be leading the charge? I’m still content to sit this one out.

Don’t feel insecure about your endowment effect
Over the past year, I’ve also learned that people develop very emotional attachments to their investments. For example, Mitch in Toronto writes:

I don’t know why you’re so negative on Nortel. I’m a Nortel shareholder and I think this company is a Canadian leader. Sure, they’ve had problems, but they’ll figure it out. Just be patient and give it some time. The stock is ready to head up and not by just a little amount. I bought in at $10 not too long ago and the shares are worth far more than that.

Thanks for writing in, Mitch. This reminds me of what behavioural finance people refer to as the endowment effect. This refers to the tendency of people to attribute extra value to items in their possession. For example, I have an old Houston Astros jersey that is in rough shape and objectively worth about $1. However, it would take a lot more than that (say $50) for me to sell it. The item has been endowed with added value due to the fact that it’s mine. And how much would I be willing to pay for someone else’s Astros jersey? About $1.

Sometimes we see the effect manifested at garage sales, with buyers and sellers being insulted by the spread between bid and ask prices. Get into a conversation with the sellers and you discover they earnestly believe their items are worth far more than anyone is offering. It works in reverse: When they head over to a neighbour’s garage sale, they assume the role of buyer and correspondingly assign a much lower value to items on sale. What’s especially interesting about the effect, is that we don’t have to own the item for a long time and the item doesn’t have to be worth very much in order for the effect to occur. Nobel-prize winning economist Daniel Kahneman, along with Jack Knetsch and Richard Thaler (1991) were able to demonstrate the effect with students at Cornell; and they did so using nothing more than coffee mugs. So, if it works with coffee mugs, it sure as heck can work with our investments.

Even more from the Market Guy Mailbag
Sometimes when you’re up against it and the breaks are beating the boys, it’s best to hang your head on the good stuff. For me, the good stuff has been your letters. Let me illustrate with a fair, objective, and completely trustworthy assessment offered by a fine, upstanding, intelligent reader:

Caroline writes:

I happened on your site when doing a search for Manitoba Telecom on Google. Never did I think I would come upon your little treasure trove of columns on a subject near and dear to my heart – Canadian dividend paying stocks and income trusts. I appreciate your breezy, personal writing style on your approach to investing. Entertainment and informative analysis – what a killer combo. Again please add me to your mailing list for FREE, my most favourite of terms.

Know that I lap your praise up like a parched dog. Additional feedback was offerered by Richard in Kingston:

I really enjoy the investment material, but I’m not sure what to make of your constant harping on burgers, the 80’s, and your peculiar assortment of friends. I’ll let you know when I decide. Just curious: How old are you?

The assortment may be heading to Kingston, Richard. There are plenty of reasons for a trip to your town. The waterfront, the museums, and the feel of the place are all fantastic. But I’m more interested in the Arby’s on Division Street, which just happens to be the closest franchise on this side of the border. Perhaps I’ll see you there for a round of Beef n’ Cheddar’s! As for my age, a picture is worth a thousand words:

The Market Guy(shown here) at last year’s Halloween party.  

Market Guy’s Closing Bell
As part of my website package, I can track the search engine keywords that result in a hit for “Riocan,” “Manitoba Telecom,” and “Income trusts” rank at the top of the list. Makes sense. But I especially enjoy looking to the bottom of the list, for the peculiar and not so obvious terms that web surfers have been using. Over the past year, I’ve been treated to the following bottom-dwellers:

  • “Who has dollar margaritas in Las Vegas?”
  • “Outdoor garbage receptacle”
  • “Jimmy Buffett financials”
  • “Kathy Lee Gifford smoking cigarettes”
  • “Rusty wheelbarrow for sale”
  • “Is it wrong for a guy to look at another guy’s penis?

And the Google IPO may be worth $2.7 billion. All right, then.

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. At this year’s convocation ceremonies, he served as one of the beadles. You’re always more important than the fifth beadle over at