In this extra-fluffy and moist edition:
- Feature: The Ralphie Treatment, Canuck-Style
- Market Guy Mailbag: Rothmans, RBC O’Shaughnessey Canadian Equity fund, O’Leary Live
- Trading notes: Primaris Retail REIT
- The Market Guy’s Closing Bell: LEDs and Grinchy-goodness
The Ralphie Treatment, Canuck-Style
Well, there goes what was going to be an extra-angry edition of The Market Guy. In fact, I was on the edge of constructing an expletive-filled tirade, the likes of which hadn’t been since a rat-pack roast. Yes, it was going to be a manifesto, a diatribe, a list of grievances worthy of a Seinfeldian Festivus. And yes, it was all going to be directed at Finance Minister Ralph Goodale. I had pictures comparing him to Michael Douglas’s psychotic character in the 1993 film, Falling Down. I was actually planning on using the word, “enema.” I was ready to bring in reader mail that compared Ralph with Darth Vader and I was going to comment on how we need to play the Imperial March at all of Ralph’s press conferences. Market Gal makes fun of the fact that I rarely get angry, so this was going to be my annual blow-out, an exercise in financial and emotional catharsis, a bludgeoning of all the demons that were aroused by Ralph’s decision to put income trusts in the crosshairs. And then the big idiot goes out and does the right thing by leaving trusts alone and cutting the taxes on dividends. Creatively, I’m crushed. Financially, it’s like having a girlfriend that you think has dumped you for the captain of the football team, only it’s nothing but a Three’s Company-type misunderstanding, and the whole thing means she wants to have lots of sex with you. Where is the downside?
|There’s no need to show a comparison between Ralph and the lunatic from Falling Down. Too bad, because that could have been funny.|
I was watching ROB-TV when I heard the announcement and I promptly called Market Dad. Unfortunately, I was so excited that what came out of my mouth was akin to the telegraphic speech exhibited by a two-year old. Instead of “milk mommy,” I offered, “Dividends. Lower tax. Trust. No tax.” It probably would have been a good time for a sedative. I eventually gained my composure and we were able to have a decent discussion. Here’s the gist:
1. The ends do not justify the means. In other words, all is not forgiven. As behavioural finance tells us, it’s difficult enough to make decisions under conditions of uncertainty without adding extra elements of risk. The Liberals and their decisional paralysis left me with decisional paralysis. For several months I had no idea how to value my trust investments. I was tempted to sell, but worried this might be reactionary and nothing more than jumping in with the herd (I was also reluctant to take any more profits so close to the end of the year). When the trusts were left alone, I felt lucky. However, I’m well-aware of the fact that it could have gone the other way and my trust investments would have been pasted. What’s the punch-line? The Liberals are counting on political moderates such as myself to return them to power. Perhaps they should not be so confident. Even though they did the right thing, I’m still upset and more than a little suspicious…which leads to worries that…
2. We haven’t heard the end of this. The Liberals have a well-developed Darwinian sense of survival and always seem to want it more than the other guys. That being said, I’m quite convinced that the Liberals wanted to tax the trusts. I’m also quite convinced that the “consultation process” was an attempt to find enough like-minded people to justify such a tax. Thankfully the investor community was vocal enough, the securities industry was loud enough, and the prospect of dealing with all of this during an election campaign was unpalatable enough that old Ralphie-boy had little choice but to cave under the pressure. Thank goodness for minority governments. I’ve read a lot of speculation on why the trusts were left alone, but in reality, Ralph could have told us that Jesus made him to do it and I wouldn’t have batted an eye; hey, as long as someone got to him. But consider this: remember how they waffled on foreign investment in the royalty trust sector? And how they waffled on pension fund investment in business trusts? And how we all thought the issue was behind us until last September when they brought it up again? All of this gives me an eerie feeling. Other annoyances that never seem to go away include Celine Dion, Jay Leno, separatists, and that chemical smell that fills my garage ever since I sealed the floor. In any event, the whole consulation process served as a powerful reminder that…
3. Investors should be constructing diversified portfolios. I know it’s boring, I know you’ve heard it before. But hearing it and doing it are separate issues. The only thing that saved me from going insane these past few months was the knowedge that, while my trust investments were getting hit hard, the overall portfolio was only modestly affected. I know the importance of diversification, but that won’t stop me from filing away in my cranium how hard it worked for me this fall. And since I can’t think of a creative segue for the next point, let’s move ahead to the next point…
4. Dividends rule. With the more favourable tax treatment, they rule even more. I’ve said this before, but don’t you love the day when you check your statements and see all that cash coming in? What a beautiful, glorious, fantastic day. Don’t you just want to run down the street, burst into song, and thank the heavens above that you’ve been given a seat on this big, crazy globe that’s hurtling though the cosmos? Bask in the glory that is you….and bask in the glory that are dividends.
The Market Guy Mailbag
Geez, it’s been a while. Let’s see what’s going on in the mailbag.
Letter # 1: Peter in Toronto writes:
You haven’t written anything since September. Are you dead?
It depends on how you look at it. I’m part of a program at Carleton that’s designed to change the nature of first-year university. Plus I’m helping out on a huge number of research projects, chairing a committee, and just went through the tenure application process (I got it…as always, those in power have no idea what they’re doing). All of these activities have been huge consumers of my time. Not only have I been negligent with the column, but I’ve also missed more editions of Market Call: Trust Factor Edition than I’d care to mention.
Letter #2: Dave in Kingston writes:
I know that I’ve been at you for about a year now to unload your Rothmans. Given the recent B.C. court decision allowing the government to go after the company for health care expenditures, aren’t you willing to finally take a pass?
Let me think about this for about a half-second. Ummm.nope. I did unload 1/3 of the position, but this had as much to do with portfolio rebalancing than anything else. I’ve written about this company before (see MG#14) and would echo those comments here. If reading the old column, remember the stock was recently split 2 for 1, so it’s been an even better investment than the one I wrote about in November of 2003.
In any event, you highlighted the recent court decision. In response to the ruling, Rothmans made the following pronouncement:
“Studies prepared for Health Canada have already concluded that British Columbia receives more in tobacco tax revenue from the sale of tobacco products in the Province than it spends on related health care.”
Nobody talks about this, but it reveals just how addicted the government is to those who are addicted. In my introduction to psychology class, we just finished talking about addiction and the nature of dependence. In a sense, the government has become dependent on the money from big tobacco. Like an addict who needs more and more of the drug to experience the same effect, the government wants more and more of the money to experience the same ineffect (i.e., their propensity to waste). But perhaps more importantly.
“In the decision, the Supreme Court left open novel and complex legal issues which it did not need to resolve to determine the constitutional validity of the legislation. These issues all but ensure many years of expensive litigation in which the Province of British Columbia seeks to recover a level of monetary damages that the Province knows is well beyond the means of the Canadian tobacco product manufacturers to pay.”
In other words, it’s going to take a long time before any government in Canada sees dime one from these companies. Meanwhile, I’ll continue to collect all those sexy quarterly and special dividends. As before, I’ll use them to offset the taxes that I have to pay to treat the health problems of the 1/3 of Canadians who still smoke. The government has decided that smoking is legal and insists that I pay for the health care expenditures of those that use. Taking dividends from Rothmans seems like a logical way of getting something back for what I pay in. What a wonderful world in which we live. Note to philosophy majors: Feel free to poke holes in my argument.
Letter #3: From loyal reader Ron:
You seem like a special kind of guy. An informed investor makes a better investor. Sharing knowledge with other investors with no conditions attached is really special.
I have nothing to add.
Letter #4: From none other than The Market Gal:
This is Market Gal, I was wondering when you were going to fix the shower head in our bathroom. It has been seriously leaking for over 3 weeks now. I’m pretty sure this is not market guy approved as you are paying for all that water that is leaking out. What a waste of hard earned money! So.to save money how about fixing that shower head!
So much for being special.
Letter # 5: Dan in Florida writes:
I just read your column on mutual funds and can’t understand why you’d be investing in actively-managed funds. Index funds and exchange-traded funds outperform the majority of actively-managed funds year in and year out. You mentioned owning the O’Shaughnessy Canadian fund, but it’s underperforming the index by a significant margin. Why wouldn’t you buy the market-based i60s, enhance your performance and reduce your fees?
Let’s compare the performance of the i60s (blue) with the RBC O’Shaughnessy Canadian Equity fund (red) and we’ll go back as far as theGlobeInvestor charts will allow. Looking at the data, why am I supposed to be re-evaluating my investment choice? Am I missing something here?
True, the fund has underperformed this year. However, I’m not concerned with underperformance in any given year. Sure, I would have been in better shape had I moved out of the mutual fund and into the ETF at the beginning of this year. But I’m an investor, not a trader.
I agree, the majority of fund managers have been having a heck of a time matching the performance of the broader market indices. However, I’m not buying all of the available actively managed funds. I’m only interested in buying the really good ones. Clumping all funds together is like clumping all teachers together. Clearly, some are really bad, some are average, and some are downright exceptional. If I were a student, I’d want to be taught by the teachers who are downright exceptional. And when I invest my money, I want to do so with the managers who are downright exceptional. Remember that human abilities are best represented using a normal distribution or bell curve and the management of mutual funds is a human ability. Also remember that despite what traditional economics might suggest, markets aren’t very efficient. I believe that some managers are downright exceptional at identifying and exploiting the inefficiencies in the market. Provided they are doing so with lower than average fees, they have a shot at managing some of my money. For more of my thoughts on mutual funds, check out this column from last year.
Unfortunately, the whole debate on active vs. passive investing has been characterized by either/or thinking. Either you’re a proponent of active investing or you’re a proponent of passive investing. This isn’t religion, people .you are allowed to subscribe to more than one faith! To illustrate my multi-faith, I use a combination of actively-managed funds with some passively managed index ETFs…and I sleep very well at night. If Oprah can go on Letterman, then surely we can figure this out.
A few more random thoughts: Look at the behaviour of the chart during the1999-2000 period and how the i60s were disproportionately influenced by the effect of Nortel. We can’t go back and say, “yeah, but if you eliminate the effects of Nortel, the results might have been very different.” When it comes to an index, it is what it is. Right now, the i60s are 60% financials and energy, so an investment here is relying heavily on the performance of just two sectors. Just because you own the index doesn’t necessarily mean you’re diversified. Incidentally, it’s more appropriate to compare the fund with the S&P Total Return Index and when doing so, the results don’t change much at all.
Letter #6: Danielle in Windsor writes:
OK, so you mentioned being a fan of Kevin O’Leary. Have you seen his new show? It’s good, but doesn’t seem to work as well as Squeeze Play and he’s on this weird week-on, week-off thing.
Yes, I’ve seen O’Leary Live, which is supposed to air on ROB-TV on Mondays at 4:30, but for some reason not every Monday. It reminds me of the first season of Star Trek: The Next Generation: awkward, uncomfortable, trying to find its groove. But in the final analysis, you have the feeling that it’s going to work out in the end. On the first program he spoke about “the dark and sinister forces of left-wing communism” and when asked if he wanted to run for prime minister, he responded, “it doesn’t pay enough.” Very entertaining. Of course they could light the studio with a 40-watt bulb and have Kevin sitting on a milk crate and I’d still watch the show. Now if they could only do something about that cheesy music! At least the music forSqueeze Play makes me feel as if something important is coming. TheO’Leary Live music makes me think I’m watching the Food Network. I defy you to listen to that music and not think you’re about to watch a baking show.
Primaris Retail REIT (PMZ.UN on the TSX)
I recently added to my holdings in Primaris when the whole REIT sector took a nosedive. See MG #28 for an outline on why I initiated a position a few months back. It’s still trading at a substantial discount to the other retail REITs and I like what I’ve seen so far. Although I’ll never love the way I did with Riocan, Primaris is still showing me a good time. Gotta love those relationships when you’re on the rebound.
The Market Guy’s Closing Bell
Remember National Lampoon’s Christmas Vacation and the attempt by Clark Griswold to cover his entire house with bright lights? Well, Market Galwants to do the same thing. If it were up to her, we’d have Santa on the roof, reindeer on the lawn, and those ridiculous 5-foot, phallic candles on each side of the front door. The thought of all this has left me playing Grinch to her Griswold. But on the matter of the lights, as long as she uses LEDs, there is a chance that I may carve the roast beast. They’re 95% more energy efficient than regular incandescent. I enjoy the savings and she enjoys the lights: “And then the true meaning of Christmas came through, and the Grinch found the strength of ten Grinches plus two.”
|Maybe the Grinch would have moved to Whoville if it had a Canadian Tire that sold LED lights.|
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…so do your homework before making any investment decisions. He was recently seen at concerts by Aerosmith and U2. How could Aerosmith fail to play Dude Looks Like a Lady, Love In an Elevator and Janie’s Got a Gun? I would have settled for the Dude in an elevator with a lady named Janie. Send love but no guns email@example.com