In this spring-fresh edition:

• Feature: High Noon with High Interest
• Market Guy Mailbag: High interest in Italians; Penn West; Gold; TD Real Return Bond Fund
• Trading Notes: Futuremed Healthcare, Dundee REIT, Superior Plus, TransCanada Corporation, RBC O’Shaughnessy International Equity
• The Market Guy’s Closing Bell: My kingdom for a pomegranate

Feature: High Noon with High Interest
If you’re like me, you appreciate having a decent place to park your cash. Maybe you want a temporary spot for your profits before deploying the money elsewhere in the markets; maybe you’re putting money aside just in case of an emergency; or maybe you’re saving up for a big ticket item and don’t want to use credit. Whatever the reasons, a high interest savings account can be a useful tool for your financial life. A few years ago, the choice was clear: ING. Remember when ING used to be cool? Who could forget the commercials with the ING Guy holding an orange, displaying the ING colours and using the indelible catchphrase, “save your money!” Here was a character that made me feel that, at least in terms of high interest savings accounts, ING was kicking ass and taking names.

The ING Guy was the Clint Eastwood of the financial services sector and we respected him for it. No-nonsense. Groovy suit. What’s not to love? Speaking of Clint, the other night I was watching his Oscar-winning turn as William Munny in the western classic, Unforgiven. At the end of the movie, Munny kills tyrannical sheriff Little Bill (Gene Hackman) in order to avenge the death of his good buddy Ned (Morgan Freeman). However, in trying to get out of town, Clint was in danger of being picked off by Little Bill loyalists. So while leaving the saloon, he screams out the following:

“All right now, I’m comin’ out. Any man I see out there, I’m gonna shoot him. Any sumbitch takes a shot at me, I’m not only gonna kill him, but I’m gonna kill his wife. All his friends. Burn his damn house down.”

I’ve always appreciated a man who knows how to make an exit. Anyway, the town was put on notice and nobody did anything to stop Clint; and for a time, no financial institution did anything to reasonably compete with ING. They had the easiest ways of moving your money, the best customer service, and most importantly, the highest rates around. However, gradually other players realized that perhaps the ING Guy was just a man in a suit, holding an orange. That’s not intimidating…it’s just weird. This was reinforced by the fact that more recent commercials have employed the use of a new, generic spokesperson and occasionally some stock footage of the ING Guy. In other words, they can’t even get him to show up or have decided to use other people in the lead role. Now we have an increasing number of players in the high-interest savings arena. Again, all that I’m looking for is a parking spot for my money. So, when searching for such an account, I want a decent rate of interest, ease of moving my money around, and I don’t want to pay any fees.

In terms of rates, ING has been offering 3% since the beginning of the year. The Bank of Canada has raised rates several times, but ING has not followed suit. What gives, ING Guy? Meanwhile, numerous other players have been quite responsive and have raised their rates several times. For example:

• Achieva Financial and Outlook Financial are offering 3.85%. This is 28% higher than ING. 

• Altamira’s Cash Performer, Dundee Wealth’s High Yield Savings, andICICI’s HiSave earn 3.5%. 

• Manulife’s Advantage pays 3.35%. 
  

However, ING has not traditionally compared itself with this group of players. Rather, they always seem to compare themselves to the big banks. OK, so we’ll play by ING’s rules and see how they are doing against this group:

• It beats BMO’s Premium Rate Savings at 2.6%. 

• CIBC’s Bonus Savings pays 3.05% and TD’s Guaranteed Investmentaccount pays 2.9%. However, these rates apply only on balances over $5000. 

• Royal’s account page was too cryptic, but I didn’t see any options that were competitive. 

• Scotiabank’s MoneyMaster account is now paying 3% on every dollar. 

• PC Financial’s Interest First pays 3.05%. Even though PC Financial is not technically one of the big banks, its services are provided via a division of CIBC.

In other words, there is some real competition here. In fact, ING is even starting to fall behind some of the old, boring, supposedly unresponsive big banks. Oh, the humanity. Sure, but ING would trumpet how easy they’ve made it to move your money around. True, they make it considerably more convenient than Achieva or Outlook. However, Altamira, Dundee, Scotia, and PC Financial have made it just as easy. Everything can be done online and its simple to move money back and forth between the high interest account and your external chequing account (see the webpages for specifics). This leads me to conclude that there is something rotten in the state of ING, and it may be that damn orange. However, I still have faith in the ING Guy and will watch for his redemption. Everyone loves a good turnaround story and we all want him to get back to pushing the other guys around. Do it for Clint.

The Market Guy doesn’t want an orange. He wants more cash…unless of course it’s a really good orange. It’s hard to find a really good orange.

The Market Guy Mailbag
In the last edition of the column, I used my experience of winning the Carleton University Department of Psychology Olympic Hockey Pool to illustrate the principles of portfolio diversification. The pool commissioner ruled that we had to draft at least one member of the Italian team. I drafted forward Tony Iob, and noted the following:

This pick was like a high-interest savings account: you don’t want to rely on it for very long and you wish there were better alternatives.

Well, that portion of text led to the first letter in the Mailbag.

Letter #1: Tony Iob of the Italian Olympic hockey team writes:
Getting two goals and two assists at the olympics and tying the oh so mighty Canadians in points. You should be happy.

Hey, I’m thrilled. Your four points beat or tied three of my other selections and given that we’re talking about an Olympic pool, helped me earn bragging rights for the next four years. That being said, you have to admit that your outscoring Simon Gagne and tying Joe Thornton was a bit of a surprise. In any event, you should know that people involved in pools and fantasy drafts develop a peculiar attachment to their players…and it seems to override team loyalties. For example, I wanted Canada to beat Italy…but I wanted the score to be something like 10-5, with you scoring 3 goals and adding 2 helpers. Without the pool, I would have preferred Canada dealing a shutout.

Other strange behavious start coming on-line. For example, you start obsessing over boxscores that previously wouldn’t have been on the radar. For example, I never would have cared about Italy vs. Germany…but you were on my team, so I scanned over the stats and pumped my fist when you scored two points on Kolzig. What’s more is that you never forget how your players performed. I see Joe Thornton playing well during the NHL playoffs, but I can’t forget how he almost screwed my chances of winning the pool. In the world of pools and fantasy leagues, this sort of thing can stick to a guy. Thornton can win the MVP, enter the Hall of Fame, solve the problem of world hunger…it doesn’t matter because all of that will be followed by, “yeah, but he almost screwed my fantasy team.” We also never forget the guys who get the job done. You could never score another goal, get busted for a vice crime, and beat up a Ukranian player after he sucker-punched you twice during the world championships (oh wait…that last part actually happened), and those picking you in a pool would still follow your career with great interest.

All of this being said, I’d love to know what guys in your position think when they line-up against the traditional powers in the game. How do they treat you? What’s it like to play hockey in Italy? Instead of throwing caps on the ice after a hat trick, do they throw gnocchi? Dick in Edmonton wants to know if they have Italian “puck bunnies” and if so, would you care to comment? Perhaps more germane to the column, can a guy make a decent living playing in non-traditional hockey markets such as Italy and Austria? Do you invest at all? Does anyone provide financial advice for the players? Are there opportunities to supplement your income with endorsements, etc? I could go on for days. Anyways, thanks for writing in and don’t hesitate to stay in touch.

Here’s hoping that“Bloggin’ about Iob” will become a regular feature of The Market Guy.

Letter #2: Jennifer in Saskatchewan writes:
Penn West is my largest holding and I see that you’re also an investor. Do you still like it?

I’m still a holder and like the conservative payout ratio, large undeveloped land base, etc. However, I recently pared back on my position. The units ran up this spring, owing much to a sharp increase in the price of oil and the announced merger with Petrofund Energy Trust. Everytime I take profits in the patch, Market Dad gives me the “I didn’t raise you to do stupid things like that” look. He’s waaayyyy overweighted in energy and whenever we speak of investing alternatives, he always brings up the energy names. It’s like the classic Saturday Night Live sketch with John Belushi working in a diner. Customers would order all sorts of different items, to which Belushi would always reply, “cheeseburger, cheeseburger.”

In any event, it seems that with many of the recent trust mergers, unitholders receive units of the combined trust plus shares in a new junior exploration company. Acclaim and Starpoint merged into Canetic and gave us shares in TriStar Oil and Gas. Penn West and Petrofund will merge and we’ll receive shares in some ExploreCo to be named later. The annoying thing about it is that in order to receive any shares of consequence, you have to own tens of thousands of dollars of units in one of the trusts. Otherwise, you end up with a pittance of shares that are hardly worth trading once you figure in the commissions. Of course, there are worse problems to have.

Letter #3: Paul in London writes:
You really blew it on gold. You didn’t like it at $500 and now its $700. Glad I held on. 

First off, this illustrates how silly it would be for anyone to make decisions based on what I write. Second, I hope that you’re taking a few profits, cracking open a top-notch bottle of wine, and toasting the wonder of the markets. It’s good to be alive. However, the way that I invest often means missing out on the latest trends and the hottest sectors. In keeping with the principles of diversification, I should be investing a small portion of the portfolio in precious metals. However, I just can’t seem to do it. The other day, there was a portfolio manager being interviewed on ROB-TV and he was asked about the demand for gold. He mentioned that gold was going up mainly because of investor demand. In other words, it’s going up because people want to make money on it going up. He also said that one of the most important drivers of demand is the wedding season in India . When making investment decisions, I just can’t bring myself to factor the numbers of Indians getting hitched or bring myself to Google “wedding predictions India gold.”

Trying to have a rational conversation about gold is nearly impossible. The gold bugs are curious creatures, many of whom regard bearish talk on the metal to be a form of sacrilege. Gold was a great buy at $800 a few years ago, it was a great buy at $400, it will be a great buy before, during, and after the apocalypse…the time for gold is always now. I’ve received quite a few emails from this group, much like I’d expect to receive email from the religious right if I commented on Jesus. Those in the anti-gold camp can be equally dogmatic about their position, looking upon gold bugs as kooks and zealots, the sum of which is that I just can’t get a handle on this sector…and I’m not investing in what I don’t understand.

Letter #4: Greg in BC writes:
My current allocation is about 12% in bonds at the moment (mostly in the TD Real Return bond fund). I chose a bond fund because I don’t have much experience in the bond market, so I figure its worth leveraging a fund manager’s knowledge in this market. The MER (1.62%) seems fair and the performance has been good for a bond fund (10 year annualized return = 8.77%). I like the stabilizing influence this fund has had on my portfolio.

I’m also a holder of the TD Real Return Bond Fund and share your desire to use a professional manager’s experience. I am looking at the new Canadian iShare that’s based on real return bonds (XRB on the TSX). At 0.35%, its MER is considerably lower, so I’ll be tracking the fund for a while to see if TDs extra expenses are worth it. I’m not sure which brokerages allow you to reinvest the income from the XRBs, but it sure is easy doing it via the actively managed fund. I should mention that I’m also a holder of TD’s Canadian Bond Fund and have been for many years, but use the real return fund as a hedge against inflation.

Letter #5: Marcus in Toronto writes:
I read the article about you in Moneysense and went to your blog. You’re more interesting than I thought.

Actually, I’m decidely less interesting…but thanks for lying! And congratulations on submitting the “backhanded compliment” of the month.

Trading Notes
Futuremed Healthcare Income Fund (FMD.UN on the TSX)
I neglected to mention in the last edition of the column, but earlier this year I participated in the initial public offering of Futuremed Healthcare Income Fund. The position was acquired at the IPO price of $10.00 and an original yield of 9.25%. The company was founded in 1985 and is Canada ’s leading distributor of consumable nursing supplies (incontinence aids, gloves, wound care items) and specialized furniture (patient beds, diagnostic equipment) to the nursing home sector. Without my writing another word, you know that any business related to the long-term care market is the type of demographic play that gets investors whipped into a lather. In fact, I was only able to get 40% of my requested allocation and the units have performed nicely since the IPO.

Here are some points of interest :

• One of the first elements that I look for is market share. Futuremed has 80% market share in Ontario, 73% in Alberta, roughly 23-26% in the prairies and 31% in BC. They currently supply 815 nursing homes and 9 of the 10 largest nursing home operators. 

• Their growth plans include expanding the selection of higher-margin private label products, capturing some of the dental and physician nursing supply market, and hinting that via an acquisition, they could capture market share in Quebec. 

• Guess who contributes a fair amount to the purchase of specialized equipment? The government! The company acknowledges that governmental expenditures in this area are very unpredictable. This is hardly surprising and adds an element of uncertainty.
  

• The company has a supply arrangement with Retirement Residences REIT and Extendicare Canada, nursing home operators that are in play. Should these firms be acquired, it’s possible that exisitjng supply arrangements could be put in jeopardy. However, the company points to the fact that changing suppliers is not an easy task and they have faith in their 20-year relationship with Retirement Residences and 18-year association with Extendicare. Fair enough. I should mention that I also hold shares in Extendicare (EXE.SV on the TSX) and like everyone else, can hardly wait for them decide what to do with the company (outright sale, conversion to trust…who knows?). 

• The prospectus listed a target ratio of 85%, which is a bit higher than I’d like to see. However the first quarter saw the fund come in at 60% and I breathed a sigh of relief. In fact, the quarter led to a rather dull conference call during which several analysts used words and phrases such as, “congratulations” and “great!” Quite boring, actually. 

• The trust has a bit of debt on the balance sheet. This gives the fund less room for error and can really squeeze the cash if there is an unexpected turn in the business.  
  

  Some of us have to lie down…but theMarket Guy stands for distributions

All of this being said, I like the business and was reasonably satisfied with the terms of the IPO. What about new money? As of this column, the units are trading at a yield of under 7%. I look across my other business trust holdings and am concerned when I see this little new offering commanding a yield that’s barely above that offered by Yellow Pages, one of the top dogs in the whole yard. The units are certainly trading at a premium, so I’m not inclined to add to the position at this time. When discussing the rise in unit price with Market Dad, he suggested I take profits and plow the money back into the energy sector. Cheeseburger, cheeseburger. My natural tendency would be to pare back the holding and raise some cash. However, I only received 40% of the requested allocation and didn’t buy any units in the after-market. Therefore, my position is extremely small and won’t influence the performance of my portfolio by a great amount. I’ll hold the units for now and will be very interested in how the next quarter bed-pans out.

Update (subsequent to column being published): Upon further consideration, the premium became too much for me to handle, and so I took the advice of Market Dad and booked some profits. However, I did not put the money back to work in the energy sector! I’ll keep the cash for now.

Dundee Real Estate Investment Trust (D.UN on the TSX)
I participated in the equity offering of Dundee Real Estate Investment Trust at $28.10. The original position was established in the fall of 2003 (seeMG#14). This REIT has been in turnaround mode for the last couple of years, attempting to lower its payout ratio and achieve a focus on the office market. Thus far, its efforts are paying off with a healthier balance sheet and property profile. The REIT is in acquisition mode and is using much of the proceeds from this offering to pay for 800,000 square feet of office space in Calgary . I’m pleased to see Dundee adding to its presence in the high-growth regions of Western Canada. My REIT holdings continue to be Dundee, Primaris, and Calloway, although I have several indirect holdings via a number of actively-managed funds.

Superior Plus Income Fund (SPF.UN on the TSX)
Early last year I cut my position in the trust by one-half at $31.53 (seeMG#26). Well, that proved to be a good move. One very warm winter and two distribution cuts later, the fund is now trading just above $10 and several analysts have begun writing about issues related to debt covenants, the poor outlook for its various businesses, a lack of management credibility, and the potential for more distribution cuts. I’m not waiting around to see what happens, and have eliminated the position entirely. I’m grumpy about the whole thing and don’t feel like determining how I made out. The profit-taking and distributions may have helped me to break-even. When the bile goes away, I’ll figure it out. If I lost money, I’m going to take it out on the weeds on my front lawn.

Freud might regard this as a harmless form of the defence mechanism, displacement. Thanks for the solid, Sigmund!

TransCanada Corporation (TRP on the TSX)
I have increased my holdings in TransCanada Corporation in the low $30-range. The original position was established several years ago at prices under $20, and I’ve added to it periodically. With the recent uptick in interest rates, many of the dividend-paying stocks have been in the penalty box. I’m not trying to call a bottom here and I’m not breaking the bank to make this purchase…I’m just nibbling on a high-quality company with decent growth prospects, predictable dividend increases, and a yield of around 4%. Due to increases in the dividend, the yield on my originally-invested capital is roughly 7% a year. I’ll take it. My other holding in this space is Inter Pipeline Fund (IPL.UN on the TSX).

RBC O’Shaughnessy International Equity Fund
Some of my energy profits were diverted into beefing up the porfolio’s exposure to international markets. Given that I’m not smart enough to learn about such markets, I use mutual funds. I allocated some of the cash to my holdings in the now capped Mac Cundill Recovery “C” fund, with the rest increasing my position in the RBC O’Shaughnessy International Equity Fund. I first mentioned this fund last year (see MG#25) and also have holdings in each of the O’Shaughnessy offerings. The quantitative strategy used by the team has been very successful and removes human psychology from the investing equation. I expect to continue adding to these funds from time to time (note: the US growth version is being capped in June). These funds are worthy of their own column. Using only a few lines would be like going to Arby’s and ordering nothing but a shake…there’s so much more to enjoy!

The Market Guy’s Closing Bell
I’ve made a list of things that I’d like to accomplish over the summer. Some of the items on the list are rather involved, such as “revise first-year psychology class” and “attend a Jays game in Toronto.” I also have a huge number of teaching books that I’d like to read. However, other entries are less complicated, but still worthy of my attention. For example, I’ve never eaten a pomegranate. Upon learning of this fact and my desire to remedy the situation, most people give me one of two looks: the “you’re an idiot” look or the “I can’t believe you’ve never eaten one before” look. The first seems to outnumber the second. In any event, it is what it is.

Here’s hoping your portfolio bears fruit over the summer.

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. Basing any decisions on his column would be really, really stupid. In looking at the cast of characters for the upcoming Miami Vice film, he noticed “Aryan brother,” “Powerboat operator,” “Miss Jamaica,” “Salsa dancer,” and “Drug cartel operator.” Clearly, they’re trying to cover all of the bases. Recharge your 80s classics over at mail@marketguy.ca

In this meaty, beaty, big and bouncy edition:

• Welcome to new readers
• Feature: How I Won the Department of Psychology’s Olympic Hockey Pool
• Market Guy Mailbag: Getting started; Market Call on ROB-TV; Gold; Asset Allocation
• The Market Guy’s Closing Bell: The Pride of the Inbox

Welcome to new readers
Welcome to all the new folks who’ve signed up after reading about the column in the December/January edition of Moneysense Magazine. It’s good to have you aboard. I should mention that I’m not a financial advisor and so I don’t provide any financial advice. I just enjoy writing about the markets and what I’m doing to make a few extra bucks. If you find something in the column that can serve as a springboard for your own research, fantastic! If you end up regarding the column as a burden you have to bear and a bear you have to cross, then you have plenty of company.

How I Won the Department of Psychology’s Olympic Hockey Pool 
Like most Canadians, I look back on the 2006 Turin Olympics with a sense of ambivalence. On the one hand, there was Cindy Klassen and her 5 medals, the women’s hockey team, and the fact that our country finished third in the overall medal count. On the other hand, there was the men’s hockey team, over a dozen fourth-place finishes, and the CBC’s Brian Williams. Ordinarily hockey, and even Team Canada for that matter, ranks far down on my sports hierarchy below baseball and the Toronto Blue Jays. I suppose this makes me the antithesis of the stereotypical Canadian. In any event, I found my interest in the men’s Olympic tournament much higher than usual, owing almost exclusively to the fact that I was playing along in the Carleton University Department of Psychology Olympic Hockey Pool. More importantly for you, what the heck does this have to do with investing in the financial markets? Patience, my young padouan. As Grandpa Simpson said of his revitalizing tonic, “all questions will be answered, all fears will be allayed” (or something to that effect).

Participating in an Olympic hockey pool is not unlike assembling an investment portfolio. Here are some of the similarities:

• Past performance heavily influences your decision-making. The players most likely to be selected in the pool are apt to be the players who are leading the scoring tables in the NHL. The stocks and mutual funds that attract the most attention are those that are currently the top performers. 

• Judgements are made under conditions of considerable uncertainty. Hockey has injuries, penalties, and a variety of intangibles such as team chemistry. The markets have scandals, world events, and organizational culture.  

• All decisions are influenced by your own level of risk tolerance. I’m relatively risk-averse, so I’m not interested in gambling on Peter Forsberg’s health in the same way that I’m not interested in gambling on Nortel’s balance sheet or RIMs chances of retaining market share. 

• There’s added pressure due to social comparison processes. Simply, we’re not only curious about how we’re doing, but we also want to know how others are doing (especially if we deem such others to be similar to ourselves). Given that I was a first-time participant in the pool, I didn’t want to embarrass myself. I suppose the same thing goes when it comes to investing.  

• Feedback on your decisions can be obtained almost instantaneously. Hockey has box scores, while the markets have stock quotes. Hockey has TSN and Sportsnet, while the markets have CNBC and ROB-TV. I watch all four, much to the chagrin of the Market Gal. 

• The decision-maker is faced with a dizzying array of choices. Olympic hockey has players from different countries; the markets have stocks in different sectors.

However, given the short duration of the Olympic hockey tournament, it more accurately resembles a stock-picking contest rather than the construction of an actual portfolio. Let’s break this down: Both are events of short duration and therefore playing it safe is typically not a winning strategy. More often than not, one has to assume a considerable amount of risk in order to obtain the highest return. You don’t win a hockey pool by having a player from every single country and you don’t win a stock contest by picking an index fund. Now if we’re talking about a multi-year approach (or even a hockey pool that’s based on a complete season), that’s a different story. So what is a participant to do?

Well, it makes sense to place most of your eggs in a very small number of baskets. To win a hockey pool, you have to bet on the performance of a small number of teams. So if you think Team Canada is going to the finals, then selecting a heavy percentage of players from their roster would represent a logical strategy. For a stock-picking contest, a similar approach makes sense. If you believe that energy names are going to be the top performing sector, then you’d overweight the contest portfolio in favour of energy names. There’s little incentive to diversify.

OK, but most of you aren’t going to be joining a stock-picking contest anytime soon, so let’s keep the discussion focussed on the construction of an actual portfolio. Investing guru Warren Buffett suggests that if you want to outperform the market, then you need to adopt overweight positions from time to time. He’s done this quite successfully, as much of his portfolio is based on insurance and consumer products. He also suggests that if you diversify too much, then you’re going to end up with market returns. When you factor in trading fees, this means that a completely diversified portfolio won’t even match the performance of the markets on which it’s based. That’s depressing. So in my own portfolio I try to stay diversified but will overweight certain sectors and markets from time to time. I decided to apply this approach to the Olympic hockey pool. That is, adopt a modest overweight position in the team that I thought would score the most goals and reach the tournament final. However, I also wanted to include representation from each of the teams that I thought had the best shot at moving beyond the preliminary round.

Figuring that Canada , Russia, the Czech Republic, Sweden and Finland had the best chances at a medal, I wanted a player from each of these teams on my roster. Similarly, I believe that dividend-paying stocks, companies with solid cash flow and low debt give me the best chance at investing successfully over the long haul. So I overweight these stocks in my portfolio. In the Olympics, I was prepared to forego Slovakia, Latvia, Kazhakstan, Germany, Switzerland, and the United States. Similarly, I tend to forego stocks that don’t pay me anything, have high debt, and are expensive.

With stocks, I generate a list of companies that fulfill my criteria and monitor them closely. In hockey, I prepared a list of the top forwards from each of the favoured countries and decided to overweight Team Canada. It seemed like the logical and most psychologically-satisfying thing to do. With that, I headed for the draft. Here’s what transpired:

Even Warren Buffett would have been overweighting Team Canada.

A few days before the tournament, we all gathered in an office overlooking the Rideau River in Ottawa. Here were the ground rules: In the first round, we had to select a goalie; round two had to involve drafting a member from the Italian team; rounds 3-8 were open and you could draft any player, provided he hadn’t been drafted in an earlier round. Let’s examine my picks and how each can be related to my portfolio.

Round 1: I opened up with Marty Brodeur (CAN), which seemed to be an obvious pick. It’s like pizza, sex, and investing in one of the big-five banks…all are good even when they’re bad.

Round 2: Tony Iob (ITA), mainly because he’d played some junior in Canada. The fact that he was lighting up the Austrian League was, strangely enough, a plus. This pick was like a high-interest savings account: you don’t want to rely on it for very long and you wish there were better alternatives. Now let’s move on to what most of us considered the “real” part of the draft:

Round 3: Joe Thornton (CAN). A couple of us went with him, although Jagr, Heatley, Iginla, and Lecavalier also went. Thornton was having a strong NHL season, played well in the World Cup, and is a perennial All-Star. Simply, he’d been doing well in both the short and long term and seemed like a solid pick.

Round 4: Simon Gagne (CAN). Nobody else got him, preferring Alfredsson, Sakic, Nash, Bertuzzi, Satan and St.Louis, among others. After this round it seemed like a perfect opportunity to talk smack. However, this was a room full of research psychologists, so I exercised caution. I can only imagine what a poker tournament would be like. In any event, the overweight in Team Canada is analogous to my overweight in the income trust sector. However, all good overweights must come to an end; and so began my effort at diversification.

Round 5: Ovechkin (RUS). This was a popular pick here, along with Kovalchuck and Selanne. Picking a Russian in the pool is like owning a bond until maturity…where’s the downside?

Round 6: Mats Sundin (SWE). Nobody else picked him. My reasoning was that I needed a Swede, Alfie was already gone and perhaps Sundin would flourish when surrounded by some actual talent. Other people went with Zetterberg, Richards, Smyth, Cole, Hossa, among others. It’s like when I cycled out of Riocan because it was too expensive. I still wanted exposure to the REIT sector so I looked for some cheaper alternatives.

Round 7: Straka (CZE). Again, I was flying solo with this pick. I wanted a Czech and believed there was a decent shot that Straka would be playing alongside Jagr and Rucinsky (his linemates in New York). Others went with Datsyuk, McCabe, Modano, Hejduk, and Yashin, among others. Being a Senators fan, I have to note that picking Yashin for the pool is like hiring Kenneth Lay to run your company. Another random note: I was surprised by how many Americans were selected. It’s like overweighting precious metals; you may be right, but I just can’t bring myself to understand or accept it.

Round 8: Olli Jokinen (FIN). Kovalev, Prospal and Malkin, also went. My choice here was determined almost exclusively by the fact that I needed a Finn to round out the roster. The last pick in the draft is like the last purchase in a diversified portfolio: you know the least about it, but have to make it anyway. These are the international equities in my portfolio.

So there you have it. I’d created a diversified roster with a modest overweight that nicely mirrored my diversified portfolio with a modest overweight. So I sat back and assumed that one of those assuming a heavily over-weighted roster (e.g., mainly Russians) would walk away with the top prize. Through the preliminaries I stayed in the top-three, and as we entered the medal round, I was hoping that my Canadians would come through in the clutch. Well, my overweight became just plain over…and did so in a hurry, as Canada was promptly bounced by the Russians. However, my diversified approach meant that I had a whack of forwards still playing. Heading into the final, I was tied for first, with two players still alive (Sundin and Jokinen). The competition had only one (Alfredsson). Well, my guys fetched a couple of assists, Alfie was shutout, and that was the end of that.

So I won the pool and walked away with a prize that has yet to be determined! Even though my overweight to Team Canada was a colossal failure, the fact that I was still relatively diversified saved my Canadian bacon. I was surprised to win because diversification rarely means that you’re the top performer over a short period of time. In fact, you’re rarely the top performer over any period of time. However, I believe that my approach gives me the best chance at succeeding over the long haul without undertaking undue risk. And who knows? The fact that I won the pool illustrates that it’s at least possible to finish on top from time to time. However, I don’t recommend playing too many games against a room full of psychologists.

What happens when two Canadians, a Swede, a Finn, a Czech, and a Russian skate onto a rink? The Market Guytakes home the hardware!

The Market Guy Mailbag
Letter #1: Tomasz in London (grade 11) writes:
I’m hoping that you may address the following topic in your future column:
How to begin investing with a relatively small amounts of money, (ex. $1000), especially when it comes to diversification?

Getting an early start on your investing career is to be commended, so nice going. All that I can do is talk about how I started out. I had roughly the same amount of money as you and began investing in mutual funds (after a brief time spent with GICs…they were yielding double-digits at the time). I began with a balanced fund and contributed to the fund as often as I could. It was a great place to throw my lawn-mowing money. After that, I had compiled enough cash to branch out into a Canadian equity fund, a US fund, and a bond fund. After that, an international equity fund was added. Around that time I started dating, so obviously there wasn’t much cash left over for investing. So I started working at Zellers and this gave me some extra money to throw in the portfolio. As these positions grew and I had a few more bucks for investing, I started looking at individual stocks. In other words, it took a few years to get the ball rolling. The first few years didn’t seem very glamorous, but it’s in the early years when compounding does its heavy-lifting. The important thing is to keep learning and having fun. Thanks for your wonderful letter, Tomasz…and thanks to all of those who consider themselves to be “newbies” who took the time to write in with their stories.

Letter # 2: Navdeep in Toronto writes:
What do you think about Market Call on ROB-TV? Do you ever use it as a source of investment ideas?

Ah, Market Call. The show involves ordinary investors calling in to ask questions of a money manager or analyst. I must confess that yes, I do occasionally watch the program and yes, I do occasionally fetch an idea or two. Lately I’ve been more interested in the Friday edition of Market Call, which is devoted to a consideration of income trusts. Permit me a tangent, as I have a bone to pick with the host, Jim O’Connell. He seems to ask the same questions each week and usually receives the same answers.again and again and again. I thought it might be fun to offer his usual questions, the obvious answer that we hear each week, and some alternative responses that would spice things up a bit.

Jim’s question #1: “What makes for a good income trust?”
Obvious answer, the one we hear each week:

“A company with decent market share, some pricing power, a steady and predictable stream of cash, low capital requirements, sufficient liquidity, the potential for modest growth, proven management, a strong track record, operating in a relatively boring sector of the market (or some combination of the above).”

What someone should say to spice things up:

“A company on the edge, Jim. Purchase companies that are extremely sensitive to even the slightest change in economic conditions or currency valuations. Weakening cash flow, high debt and no competitive advantage whatsoever are also good attributes.”

Jim’s question #2: “Are there some companies that should not be income trusts?”
Obvious answer, the one we hear each week:

“Not all companies represent good candidates for the trust model. We choose to invest only in the companies that meet the criteria that we’ve already discussed.”

What someone should say to spice things up:

“More importantly Jim, let’s talk about the sectors that should be joining the income trust market. I’m talking about porn and the world of adult entertainment. You know what I mean, Jim? Sure you do. What sector has a more reliable stream of cash flow, sufficient liquidity, and just think about all those analysts tripping over themselves to cover the sector, I mean those conventions in Vegas can get pretty.um.what’s wrong Jim? You look pale.”

Jim’s question #3: “Is there a bubble in the income trust market? Some say it’s getting too pricey.”
Obvious answer, the one we hear each week:

“Yes, some names are getting overextended, but it really depends on what name your talking about. It’s more important to approach the income fund sector on a trust by trust basis. In this respect, it’s just like any other sector of the market.”

What someone should say to spice things up:

“Hell no. Everything is a screaming bargain Jim. Buy them all. Every last one of them. Go into mind-numbing debt if you have to.”

or

“They’re all crap, Jim. Avoid with extreme prejudice. Can we go home now?” (This is known as the Ross Healy response).

At least Jim dropped the “what exactly is an income trust?” question that he’d been asking for 5 straight years. I can’t tell you how glad I am to see that out of the rotation. Oh, and feel free to “Play the Jim” next Friday and try to guess when he’s going to ask his favourite three questions. I’m guessing that all will make an appearance before the halfway mark of the show.

The Market Guy can understand the need to educate…but “what is a trust?” eventually became like fingernails on a blackboard.

Letter #3: Paul in Ottawa writes:
I was reading the latest issue of MoneySense and was fortunate to have come upon your blog site. You spoke at length on topics such as oil and gas trusts, REITs and select mutual funds, though I was curious as to your take on precious metal and gold investments.  

Of the ‘golds’ in my portfolio, I presently own Goldcorp, which does pay a small dividend, but whose story is largely based on aggressively growing through acquisitions at this early stage of the gold bull run. I also have a mid-tier company, Yamana, which follows the same strategy, though likely will not have a dividend for some time yet.  Both have done well relatively recently, so I am just parking these and holding for the long term.  I believe golds will one day be on the cover of newspapers on a daily basis, though we’re still some time away from that.

Thanks for the note and congrats on doing so well with Goldcorp and Yamana. I have to confess that my knowledge of the gold market wouldn’t fill a thimble, so you’ve hit on one of my glaring inadequacies. Thanks! The fact is that I don’t understand the case being made by the gold bugs. In the early 1980s, gold was trading over $800 and now it’s in the mid-$500s. I was reading in the Globe and Mail last week that in order to approach the old highs in present dollars, gold would have to exceed $2000. Yet each and every year, the gold bugs tell us that now is the time to buy, the metal is going to move big-time, and all those who disagree are misinformed or naïve. I recently had lunch with a gentleman who told me that we’re headed for a worldwide economic collapse and so its time to begin hording precious metals in our basements. Eventually, the bugs may be right..but I could also be dead for 50 years when that happens. Now if only these companies would start paying some hefty dividends, then I’d consider joining the congregation. Otherwise, I’ve found gold to be an interesting trade rather than a long-term investment.

If I were to adopt a gold position, I’d limit it to 5% of the portfolio. In terms of specific names, I’d probably go with the available SreetTracks gold ETF (GLD on the NYSE). It invests in actual bullion, rather than gold stocks and carries an MER of 0.4%. If the thought of buying a $US ETF was freaking me out, I might consider the iUnit ETF (XGD on the TSX). However, 46% of the fund consists of only two names, Goldcorp and Barrick, so this is highly dependent on a limited number of names. On the plus side, the iUnit pays a modest dividend and has a decent MER of 0.55%. My preference for ETFs in the sector owes much to my lack of confidence in picking specific names. In any event, your prediction of gold as front page news may very well be realized.and if that happens, what a perfect selling opportunity!

Yosemite Sam always wanted the gold. Stay away Sam, because theMarket Guy doesn’t have any. Why don’t you try asking that long-eared galoot?

Letter #4: Margaret writes:
How about a suggestion of what diversification one should have within their equity portfolio?

Your question is one that I receive quite frequently, and it’s a question that I continue to struggle with. Asset allocation decisions should be based on many different factors, including our risk preference, financial goals, time horizon, age, and financial situation. A starting point might involve trying an on-line asset allocation tool. Most brokers provide this service. For example,

http://www.efgi.com/personal/investing/questionnaire.html
http://eadvisortwe.tdassetmanagement.com/home.asp
https://www.bmoinvesting.com/InvestorProfile/questions.asp?sIPLang=E

I found these links on the Financial Webring Forum, which is located at:http://www.financialwebring.com/forum/

The Market Guy’s Closing Bell
With apologies to Lou Gehrig, I must be the luckiest man on the face of the Earth. I don’t have to tell you that fun follows me around, and I don’t want to brag.but over the past few weeks I’ve received unsolicited emails from complete strangers offering the following wonderful things:

• Discount prescription drugs, most of which promise to enhance my sexual pleasure.
  
• Huge discounts on the software titles that I use every day.
  
• A substantial sum of money from the direct descendants of a wealthy African businessman, if only I agree to join in a certain business venture.

In other words, so long suckers!

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. Basing any decisions on his column would be really, really stupid. He predicts the Toronto Blue Jays are going to win 95 games this year, the Dallas Cowboys are going to sign a decent kicker, and that Arby’s will eventually open a restaurant in Eastern Ontario. Send your slow-roasted, marinated beefs to mail@marketguy.ca

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.

Trading Notes
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 tomail@marketguy.ca

In this very special back to school edition:

• Feature: The Dissonance of Disaster: Making Money in the Patch
• Trading notes: Real Resources, Saxon Financial, Penn West Energy Trust, Primaris Retail REIT
• Market Guy Mailbag: Pengrowth A vs B units; resources on yield
• Market Guy’s Closing Bell: The return of Amanda, Kevin andSqueeze Play

The Dissonance of Disaster: Making Money in the Patch
Earlier today the Globe and Mail Business section ran an article looking at the “winners and losers” in the wake of the hurricane Katrina tragedy. Among the obvious winners identified were the energy companies. Although not expressed in the article, the latent message was that business will continue, irrespective of what is going on in the world. As I read the article, I started thinking about the energy sector, human tragedy, and how to conduct myself as an investor.

I like to think of myself as a person with a social conscience. Politically I’m probably a “red tory” which means that those on the left can find redemption for my soul whereas those on the right won’t accuse me of eating granola and wearing sandals with socks. I don’t hate people as much as those on the far right, but I don’t like people as much as those on the far left. In other words, I’m smack-dab in the middle, the prototypical Canadian of today. But here’s the thing: Is it possible to have a conscience and take great pleasure from the run-up in energy prices? Quite simply, there isn’t an investment today that relies more heavily on human misery. Let’s review a short list of events that are positive for energy investments:

• Hurricanes
• Terrorism and jihads of any kind
• Sabotage
• War
• Fear
• Panic
• Mass hysteria
• Accidents and associated explosions
• Strikes
• Political unrest
• Swarms of angry locusts

It’s all misery, but it’s all positive for oil. If you’re heavily invested in the patch, then you’ve driven by gas stations and the “$1.20 a litre” signs and it barely registers on your radar screen. The other day I was speaking with a colleague at Carleton who once raced from a departmental meeting to check the price of his energy puts and calls. His face lit up as we discussed oil’s spike past $70. My buddy Dick in Edmonton is from Ottawa, but now works for the Alberta government. I know he’s become an Albertan because he’s ready to join a militia to prevent Ontario and Quebec from sucking profits away from King Ralph. In any event, I’m sure both men would agree with the following assertion: If you can make enough on your energy investments to offset the extra cash it takes to fill up the car and heat the house, then you’ve successfully constructed a hedge against one of the more annoying forms of personal inflation. They would likely add that there is nothing to be gained by having your declining personal wealth added to the list of human misery. In other words, an investor has to do what an investor has to do. It’s not suggesting that one needs to think as Jack Larkin, the famed investment banker from the 1990s series, Traders. When informed of a devastating mudslide affecting thousands in South America , he offered, “What grows in a mudslide?” Rather, it’s about being faithful to the central purpose behind portfolio construction: to improve one’s circumstances.

If you’re like the Market Guy, you miss the crazy antics of Jack, Sally and Adam over at Gardner Ross Cunningham.

All of this reminds me of Leon Festinger (1957), who believed that we experience feelings of discomfort when our behaviour is inconsistent with our attitudes or when we hold two conflicting attitudes. He called this state of psychological tension, cognitive dissonance and it’s one of my favourite theories from social psychology. It makes sense for us to become uncomfortable when we become aware of our inconsistencies. For example, “I am a good person” vs. “I am making money from tragedy” are fundamentally incompatible beliefs and likely to produce tension. What’s more interesting are the tactics we may use to reduce the tension:

1. We may change a belief that is creating the tension. For example, we could switch to “I’m not such a good person” but that would likely result in problems of another sort. A more likely option would be something like “I’m not really making that much money” or “I’m really investing in economic expansion, not oil or tragedy per se.”
2. Add a belief that is compatible with our pre-existing thoughts. For example, you might suggest that “Making money is what investing is all about.” I like this one.
3. Change our behaviour. One option would be to stop investing in the energy sector. For me, this is not going to happen. A more realistic option is offered by Mark in Peterborough who says that he plans on taking some profits (specifically, paring back on Encana and Peyto) and donating some of the money to the Red Cross and a couple of other charities.

For myself, I expect to engage in several of the above and will be using the dissonance-reduction combo to help me navigate my way through the patch. I expect the belief that “many factors influence the price of oil, all of which are out of my control” will figure prominently in my psychology. Speaking of taking profits.

Trading notes
Real Resources (RER on the TSX)
I’ve sold 1/3 of my remaining position in Real Resources at $23.51. The shares were originally purchased in the summer of 2004 at a price of $7.40 (see MG#21). With no dividend to speak of, Real had became somewhat of an oddity within my portfolio. When I initiated the position, I was speculating on the direction of energy prices and was hoping that Real would convert to the trust structure. Well, the talk of conversion petered out, even though daily production achieved levels at which so many others had made the switch. But in the final analysis, who cares? The price of oil advancing to over $70 was good enough to send Real’s stock price soaring well over 200% in one year. That made it easy to pare back the holding for a second time. I won’t lie to you.I’m very pleased with myself about this one and plan on being insufferable for at least a week.

When you get one of these, bask in its glory..soak up every moment of the joy.

Saxon Financial (SFI on the TSX)
In the last edition of MG, I mentioned placing an expression of interest in the initial public offering of Saxon Financial. Well, I received 100% of the requested allocation at $16.50 and was pleased with its strong debut on the TSX. The shares popped to $19.50 but have since traded back to just a few cents over issue. Fair enough. I’m holding based on management’s track record and a shift to lower MER fund offerings.

Penn West Energy Trust (PWT.UN on the TSX)
Earlier this summer, I initiated a position in Penn West Energy Trust at $29. Formerly a traditional exploration and production concern, it recently converted to the royalty trust structure. With roughly 100,000 barrels of oil equivalent per day this one is huge and should be a lock for inclusion in the TSX index. Many in the investment community are adopting a “wait and see” attitude, given some of the lukewarm results that have plagued several other recent conversions. There are also some question marks regarding PWT’s capital efficiencies. These factors have combined to hand the trust a lower than average valuation when compared to the leaders in the sector. Penn West has the following attributes:

• a payout ratio of roughly 50%, lower than average for the group
• originally targeted payout ratio of 60%, leading some to speculate that a distribution increase or special payout is in the offing
• management has expressed willingness to pursue a NYSE listing, which would provide an opportunity to capture some of that tasty American capital.
• it has the largest undeveloped land base in the sector
• a balanced production profile with roughly 52% oil and 48% natural gas
• based on my purchase price of $29, a yield just shy of 11%; current trading yield of just over 9% (it’s jumped $5 since my purchase)

Beyond the obvious effect of energy prices, the risk is that Penn West has trouble adjusting to the trust structure and fails to address the capital efficiency issue fast enough to soothe investors. In any event, with all of the plusses, I’m willing to assume this risk for now.

Primaris Retail REIT (PMZ.UN on the TSX)
I initiated a position in Primaris Retail REIT via a secondary offering of units at $14.85. Here are a few characteristics of the REIT:

• managed by Oxford Properties, one of the most experienced names in the sector (external management contract)
• 731 tenants, with no one tenant representing more than 5% of annual rents
• 14 properties in 12 markets
• overall occupancy stands at just under 97%
• have been hard on the acquisition trail and can add more debt, if necessary
• recently announced a distribution increase
• payout ratio of roughly 85%
• geographic diversification, with assets spread across 6 provinces
• focus on mid-market properties in the large centres (e.g., Toronto and Calgary ) and dominant properties in the secondary centres (e.g., Kelowna and Guelph )
• recent quarter showed a solid increase in AFFO
• trades at a substantial discount to Riocan and Calloway in terms of P/AFFO
• based on my purchase price of $14.85 a yield of 7.7%

I believe that many of the larger names in the sector have become very expensive. Therefore, I’m becoming more interested in some of the lesser-known, more value-oriented plays. Initiating a position in Primaris is consistent with this philosophy.

The Market Guy Mailbag
The mail continues to flow in and I’m getting behind. So without further delay, let’s see what’s in the Market Guy Mailbag. As always, when considering my responses, keep in mind that I’m just a putz with a website.

Letter #1: Ken writes:
I was wondering if you have any understanding of why the Pengrowth A trust units are “worth” 50% more than the Pengrowth B trust units.  The A units are the ones held by people living in the USA , and the B units are the ones held by Canadians. The company split the units into A and B in anticipation of governmental requirements about how much of a trust company can be owned by foreigners before the company no longer qualifies for the trust company’s Canadian tax benefits. 

The two kinds of units receive exactly the same distributions (so the yield is a lot less for the more valuable A units).  I asked the company PR people why the A units sell for 50% more than the B units and the reply, basically,  was that the A units are more popular in the USA than the B units are here in Canada .  That hardly seems possible. Do you have any understanding of this?

From my understanding, the Pengrowth PR folks are giving you the correct information. It’s all a matter of supply and demand. There are so few of these products for sale in the large US market, while there is plenty of product available in the small Canadian market. I also visited some investor discussion boards heavily populated by American investors and the A vs. B issue seems to be a popular topic. The punch line of their discussion seems to be “if only we could get in on the B units!” If they could, they’d swarm all over the B’s, subsequently driving the yield right down to the A level. Given the relatively high level of confusion, I’d say Pengrowth hasn’t been very successful at explaining the dual-class to investors. I even saw an “expert” on ROB-TV’s Market Call get this wrong, which had me cringing at the TV more than if forced to watch 5 minutes of Jay Leno. I can’t remember who was hosting that day, but if it was Jim O’Connell, he should have slapped the guest silly. I’m guessing this would never happen, but it should. Jim seems like too normal a guy. Can’t you picture having him over for a BBQ? For some reason I have a mental image of him standing by the BBQ, saying something positive about the potato salad, and then offering, “so, did you purchase that tank or are you going with the propane exchange?” This has nothing to do with anything.

Letter #2 Denise writes:
Where can I find listing of all dividend yielding stock or REITs units only, etc (for TSX). Newspaper,  website  …?

Norm Rothery’s Stingy Investor site has everything nicely organized for you:

http://www.ndir.com/SI/strategy/tse60.d.shtml

Note the links on the left of the page under “high dividend yield.” Just select the index that you’re interested in, and it will take you directly to globeinvestor’s data sheets.

Another way of doing it is to visit globeinvestor.com directly. Under Investor Tools select Market Indexes, select the index group of choice along with “price report % change.” This will bring up a list of several indices. Select the index of choice and then organize the output by clicking on “dividend yield”.

For REITs, considering visiting the GlobeInvestor.com Trust Centre and clicking on their REIT price report link on the right side of the page.

Market Guy’s Closing Bell
The 80s had Hall & Oates. The 90s had Ren & Stimpy. The current decade has Kevin and Amanda. September 6th marks the return of Amanda Lang from maternity leave and Kevin O’Leary from summer vacation to staff the helm of ROB-TVs best program, Squeeze Play. Billed as a show about “money, power, and politics” I find it to be smart, informative, occasionally funny, and a compelling hour of television. And with the return of Kevin and Amanda , I can barely contain myself. Now I can abandon my count of how many times Libby Znaimer uses the word “interesting” (”this is interesting” or “here’s what I find interesting” or just plain “interesting”). Vegas had it on the board with the over/under pegged at 10 per hour. With Amanda back we can return to good conversation, great questions, smooth segues, and someone who isn’t afraid to challenge Kevin.

Thank goodness all will be as it once was and the natural order will have been restored

The two hosts seem to genuinely enjoy being in the studio together, even though they often disagree. Their chemistry adds so much to the show and brings a sense of humour that is typically missing from business programming. Amanda was clearly missed when other hosts were brought in on a rotating basis. On some nights Kevin had that “get me the hell out of here” look on his face and I fully expected him to suffer a psychotic break. Now he’ll be content, fresh, and ready to resume a tandem that clearly brings out the best in each other.

Kevin approaches every situation and every guest with a “how can I make money from this?” angle and it helps keep the show focused. On September 6th, I’ll be focused on Squeeze Play. The show will be running from 5-6pm weekdays. As a side note, Market Gal is convinced that I have a crush on Amanda, so I’ll have to play this up as much as possible. I had to listen to her lengthy account of what it was like to attend Mama Mia so it’s payback time.

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’s up for tenure this year, which means he’s close to a lifetime supply of stationary! Life is never stationary over atmail@marketguy.ca