Category Archives: Random Thoughts

Where’s Dean???

I thought I would just pop in to let everyone know I’m still here.

To be honest, this year has been horrible for me investing wise. I have literally had the worst year since I started. I don’t know if it’s something that is fundamentally wrong or I happen to be learning a ton of lessons in a short period of time. Either way, I have contemplated hanging up my hat over the last few months. I am still on the fence as to whether or not I should be investing my own money.

I have made some lifestyle choices that should allow me more time per week to focus on investing. I have also made some significant changes to my company analysis, valuation and portfolio management strategy. Time will tell if it works.

Dean

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Random Thought

Not long ago Jim Flaherty announced new rules to cool the Canadian housing market. Some articles can be found here and here.

As a father of a toddler I have a funny analogy. In the world of cheap money I am reminded of when you take your kid to some special event. It can be Disneyland, a big swimming pool, a museum, or anything you can imagine. You have all these ideas of what you will do and how much fun you will have.

When you get there your little one has a different idea. You may find yourself throwing rocks in the sewer, pointing out shapes, or just running around in a circle. You know what your child chooses is not the best way to maximum fun for the day. So you have a choice: you let him/her do what they want or you attempt to force them to have fun in a specific manner. The latter likely leads to a tantrum.

The Bank of Canada has decided its best to show people exactly how to have fun. As a father I get it. If a large amount of time, money and energy has been invested into something you want to maximize fun. On the other hand, it’s kind of selfish you force someone to have fun in a specific manner.

As an investor I worry less about right and wrong and more about outcomes.

FWIW, I think it was a smart move by the Bank of Canada.

Dean

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New Page…Portfolio

I know that posts have been light these days. But I am having trouble keeping up the blog with the recent flurry of activity at work.

I have added a new portfolio page. You can view it and feel free to comment on it.

Thanks

Dean

PS. I have been selectively putting my cash to work in the market.

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HSE Integrated…Argh!!

As usual yours truly was late to (well never actually got to) the party.

The company was HSE Integrated (HSL.to). A friend informed me about the company and made it crystal clear what their potential value was.

They are a provider of health, safety and environmental services and equipment. They have a big presence here in Alberta. The market in Canada is much more fragmented than in the US.

During a time of decent economic growth most companies will contract HSL to provide their services. HSL can do in a short time what it usually takes companies copious amounts of time to design and properly implement. During a recession many companies try to bring this type of expense in house to cut costs. Well in case you don’t know the Alberta economy is growing quite well, at 3-4%. HSL was in a nice uptrend in earnings and revenue. Their market was growing rapidly. HSL was trading at like 4x EV/EBITDA. And EBITDA was growing rapidly.

Why didn’t I buy??? I thought about it for awhile. There was a part of me that wanted confirmation on the earnings growth. Another part of me had a tough time buying into a stock after the price had doubled.

Maybe it was OK to wait, but many of the oil services companies are at really cheap multiples regardless of earnings growth. Even a flat line in activity would likely generate a decent return.

Another lesson learned. I only post this as I am forcing myself to stay disciplined.

Dean

*thanks to sculpin for the idea

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A random thought on market timing…

As much as I don’t want to admit it, it sometimes takes me learning the same mistake a few times before I change my behaviour.

I was watching a company for the better part of 6 months. I figured that at under 0.50 is was OK to purchase based on the value of the assets alone. NCAV was around 0.60. Even better, the company was part of a sector that is recovering strongly from the economic slump of the last 3 years. ROC and revenue was trending nice sequentially. And above all the company is headquarted here in Edmonton. Since the Q3 2011 there was ample time to build a position. There was really no excuse on this one.

Why did I miss it? I have had a tougher time than normal finding companies to invest in. Some of my picks are hitting their fair value and I don’t have anything to replace them with. So I either take more risk or hold cash while I research looking for a potential opportunity.

I was thinking this is a sign of market top as valuations have become stretched at best. What does it mean? Likely poor future returns if you invest in a broad version of the market. I DON’T!! I invest in little obscure companies. They have their own catalysts regardless of the market as a whole. This is the reason I actually have a chance to outperform a team of professionals who have access to more information and, more importantly, more time than I do to pour into analyzing companies.

The company is HYD.to. It is up like 30% today. I will be checking my numbers again. This is a rookie mistake and I am embarrassed that I did it. I feel blogging about it will help me from doing it again in the future. I’ll keep you updated if I buy any HYD.

Dean

Disclosure: The author is NOT long HYD.to, but wishes he was.

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Canada Housing Reality Check…insert scary charts.

There is no shortage of great blogs posts on the Canadian residential real estate market. Garth Turner is an excellent writer who has been the canary in the coal mine for quite some time now. Ben Rabidoux also has stated how the real estate market is overvalued. Saj Karsen and Hardcore Value mention it as well. Yours truly even took a stab at it.

After reading Demographia international housing, I needed to see for myself. It seemed like Edmonton wasn’t as overpriced as I had once thought. For the record, I don’t remember who gave me the report.

I have compiled some data in regards to Edmonton specifically. I wanted to see where we are if I looked at the Edmonton market historically. Just like equities I needed some sort of valuation measurements to see “fair value” and make any necessary decisions.

Full disclosure, I bought my house in 2004. It wasn’t a function of what I thought the real estate market would do, it just made sense at the time relative to renting. It is a really small 50+ year old house. Being as debt adverse as I am, I put 25% down and made it my goal to pay it off by the time I am 30. Since then I have rethought that approach and have focused on paying off the mortgage and saving for my retirement through the purchase of public companies in tax sheltered accounts.

Here is a price chart for average residential real estate price since 1962. I pulled the data from this site.

This doesn’t say too much other than prices go up over a long time. The chart below shows inflation adjusted prices. I grabbed the CPI numbers from the government of Canada website. The numbers in the 60s are for Canada as a whole, after that I have Alberta specific numbers.

You can see a wicked run unlike anything seen in the last 50 years starting in 2005. I also put in a price channel to show what happens in oil country when we have an oil boom. You can see that during the last oil boom we had a big run in prices as well. The most recent run has eclipsed the last. In order to get back to the top of the channel prices have to fall 24%. To get to the bottom its 42%. If you look closely you can see that in real terms if you bought at the previous high, it took you 20 years to make a profit from price appreciation.

Here I took the data and added in a range of 30% above and below the average price. Why 30%? I needed a wide enough variance to account for cyclical peaks and troughs. 30% seemed like a decent number. The inflation adjusted price spends 68% of its time within the 30% +/- range, so it seems like a decent valuation measurement.

In order to get to the top of the range prices have to fall 24%. To get to average they have to fall 40%. To get to the bottom they have to fall almost 60%.

So by measure of historical value we are at best overvalued by 25%.

Moving to price to personal income. I feel the best measurement would have been price to household income after debt service costs. I used personal income from the government of Canada. The numbers were calculated a little different over the periods so I have to blend some together which is likely leading to a distortion.

Pretty much the same story as before. You can see the big run of the last 5-7 years followed by a period of stability. I also added at 30% range like before.

It’s interesting to note that at the previous peak in the late 70s early 80s, the price/income stopped at the 30% range. It is only now that prices have made a new channel, although likely temporarily. This time we spend 80% within the range.

To get to the top of the channel prices need to drop 7%. To get to average prices need to drop 27%. To get to the bottom of the channel prices need to drop 45%.

I like this measurement best, but it can be distorted.  Things like more income earners per house over the last 50 years could play a factor. More importantly is  the cost of borrowing.

Last go around we had falling interest rates to act as a cushion. Top that off with record personal debt levels in Canada means there is a strong chance of mean reversion.

Some scuttlebutt

Here are some quotes from people that I have asked about the residential real estate market in Canada.

“Can’t go wrong owning property. I don’t know why you waste your time on stocks when you can just buy property and forget about it.”

-Real estate “investor” who owns 4 rental properties

“You should absolutely consider your home as part of your net worth. Even if you never plan to sell it or earn income from it.”

-Financial Planner at the local bank

“Sure prices have moved quite a bit in the last 10 years, but that doesn’t mean that they will fall.”

-Real estate agent advertising in the community newsletter

“We’ll see who’s smarter in 10 years… me or you.”

-My neighbour

What does it all mean?

Expect some sort of mean reversion in the Canadian housing market. Vancouver and Toronto are the most exposed, while this phenomenon is almost nationwide. The CMHC is encouraging this behaviour which it kind of scary and upsetting at the same time.

The only thing that has me doubting myself on this one is the fact that so many people are sounding the alarm bells on this. Maybe it’s just the internet allowing us to connect in ways that we never have before.

I won’t try to time it, but I have made some steps to minimize the impact. I will write another post to share what I think is best for me and my family.

Dean

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Yet More Updates…

I have been making some changes to the portfolio. To keep track I have been just spitting out one sentence reasons as to why. These positions deserve more than one sentence in the middle of a post. I will do a post for each sell after I have taken the action.

Why would I do this? I doubt people reading the blog care. I need to track my thinking at the time in order to monitor performance long term. I am still reluctant to post on anything other than investments. I did have a post on the housing market, but that was to track what the mentality was at the time of writing. I was ready to post/rant something on labor unions, but have decided against it.

Petty Cash is about helping me, and hopefully other beginner investors. I do better analysis when I know someone else can read it. There are enough blogs out there that provide more useful information than mine.

I will do a post for each WJA, FES and EQI (all on the TSX) outlining my reason for selling.

Dean

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