This week’s odds and ends post consists of utterly random things that have come across my desk:

1. Well respected and independent research firm Veritas Investment Research issued their most recent report on the Canadian banks this week- they gave Scotiabank a positive rating, put Royal Bank, TD and National Bank in neutral (hmm… they may want to rethink the National Bank rating after yesterday’s news of a Q4 loss) and are avoiding BMO and CIBC. Sorry no link- legal reasons. As usual, please conduct your own due diligence and please remember that all research has a short-term focus to it.
2. I have been getting a lot of telemarketing calls recently and wondering what’s happening to the do not call list that the government was supposed to set up.  Not good news at all.
3. Free Money Finance has an interesting take on money saving tips on the 10 most hated money saving tips.
4. Financial Blogger has run a pretty interesting series on the brokerage Primerica which tends to evoke love it or hate it reactions from people. The link is to the latest post in the series.

I may make my first real shopping trip for the holidays this weekend. Wish me luck. If I don’t post next week, you’ll know I was trampled by bargain shoppers. Have a good weekend.

A reader recently asked me this question and one that I am pondering myself as I am investigating the possibility of investing in some rental properties (not sure whether it will be commercial or residential). As a complete coincidence, please read Million Dollar Journey’s post today on rental property and income taxes and deductions as a companion piece since there is some over-lap on the tax implications of holding rental properties in a corporation. As a huge disclaimer, I speaking generally of Canadian law (although some general principles apply) and tax system and please seek independent legal and accounting advice about anything to do with your finances.

Pros:

1. Credit Proofing: The Corporation’s name is on title and not your own your so there is one less asset for a creditor to seize (although financing will still usually require a personal guarantee).
2. Exit Strategy: If you have several investors purchasing together, it may be beneficial to purchase through a corporation and enter into a shareholders agreement (which is an agreement governing the relationship between the owners of the corporation) with a “shotgun provision” (sometimes known as a buy-sell agreement). A shotgun allows you to either buy out another shareholder or be bought out. Its a much more elegant exit strategy if you want to leave before the property is sold than going to court or endlessly arguing about valuation (since in a shotgun clause, the party that triggers the clause has to set a price for what they think ownership is worth).
3. Deductions/tax rate: Subject to the below con, corporations are taxed at a lower rate than individuals.

Cons

1. Taxes: Income made from rental properties can be classified as passive income. If a corporation makes more than 10% of its income in the form of passive income, it is subject to the passive income tax rate (approx. 48% in Ontario) rather than the small business tax rate (approx. 18% in Ontario).  Your accountant can structure the corporation to be subject to the lower rate but it does require some analysis (read $$$) on their part (again, this is a general information overview of the law in Canada; I understand the U.S. has a different regime). This is a very complex topic so please speak to your accountant about this issue.
2. Costs:  Incorporating and properly organizing a company does cost money.
3. Paperwork: It is time-consuming and, frankly, annoying to do the paperwork for a corporation.

Holding a rental property in a corporation makes the most sense if you are purchasing with several other people or you intend to be in the “business” of real estate investing. If you hold a condo/townhouse and receive a few hundred dollars profit a month, it doesn’t make much sense to incorporate a corporation to hold title since the costs and opportunity costs will eat up your profit. As always, please seek professional advice. Good luck.

For a wide variety of reasons, the big old financial industry starts to gear up this time of year in conjunction with all the retailers trying to sell you things you probably don’t need (if you watch television, you would think that civilization started with the advent of the cellphone that plays MP3’s and you need one much like you need a SIN card). The industry doesn’t hit 2nd or 3rd gear until the RSP season but I have been getting a lot of invitations lately to attend this financial seminar and that financial seminar- buy before year end so you can enjoy your holiday! Its like the financial industry views buying a mutual fund like buying any other holiday gift.

I have a few observations about this year’s selling season:

1. There’s a whole cottage industry now of billionaire who teach you how to do it “their way.” To avoiding having my butt sued off, I will not list names. But the pitch is basically the same- see Mr. or Ms. Money Bags speak on their experiences making billions and they can teach you to become one too for a mere [insert price here]. The organizer gets a cut of any materials purchased that night (usually 20%-33%) and the products the billionaires push have really good commissions paid to them- which is never disclosed to you. Some of these programs are great and some are not. But, to paraphrase someone who once put one of these on, leave your cheque book at home and think about it. The “seminar show special” will be available at some other point in time.
2. Skip the product and master the strategy first. As I wrote in my last post, my mistake is I started following the shiny lights (i.e. sexy products) rather than come up with a prudent and sensible strategy first and then find product to buy. Start with reading some books- reading allows you to mull things over in quiet space. Canadian Capitalist lists some good personal financial resources.
3. Before you go to anything, sit down and plan out your cash flow. It makes no sense to purchase any financial product-mutual fund, real estate, insurance- without making sure you can pay the holiday bills and the rent/mortgage afterwards.

This post is part of Canadian Money Advisors’ Canadian Tour of Personal Finance Blogs. Check out the rest of the posts.

Approximately 18 months ago, I started looking at purchasing shares in Saputo. Saputo makes cheese and they do it quite well with operations in Canada, United States and Europe. It is a consumer staple stock- a nice, safe, recession proof stock paying a steady dividend.

The thing about cheese though is that it is subject to quotas- i.e. government regulation- and Saputo was going through a series of regulatory challenges on the price it could charge, how much it could sell etc. etc. So, I looked and looked and looked and never bought it. This week, the State of California issued a very favorable ruling for cheese makers and Saputo’s stock shot up. Saputo stock is up over 20% this year- pretty good considering how the year is going for stocks. Now, I turn green like bad cheese every time I read positive news about Saputo.

What happened? I simply out-thought myself and got distracted by the shiny lights the financial industry flashes. Here’s what especially gets me- I read Saputo’s financial reports for the last two years and still didn’t buy it. I started looking at all the flashy stocks the industry was touting (cheese isn’t very sexy is it?) and forgot about Saputo until it was too late.

Three lessons from this eposide.

1. Plot a game plan: Do you like dividend stocks? Passive investing? Foreign investing? Bond trading?  Get a game plan on what type of strategy you want to pursue first and ignore the product until you get a strategy in place. I was slowly working my way to a strategy of purchasing dividend yield stocks (for tax effectiveness and price appreciation) but had not gotten there yet. So, I kept focusing on product and not the strategy.
2. Stick to it: I believe it was Napoleon Hill in Think & Grow Rich who wrote the difference between the rich and the poor is that the rich make up their mind quickly and change their minds slowly and the poor make up their mind slowly and change quickly. If you believe in a strategy, apply, apply, apply and then apply again.
3. Ignore the shiny stuff: If you have to get a baby to focus on a camera, what do you do? You dangle something shiny next to the camera to get its attention and divert its focus. The same thing kept happening to me. I was getting too many reports and analysis from the financial industry. I kept getting distracted by oil and gas, gold, REITS- I lost the plot (as the English like saying) through information over-load. I think this was my fatal flaw on not buying Saputo. The strategy was coming into place to buy dividend yield stock but I got distracted and forgot #2.

I am working on some rules to keep to these lessons which I will share with you but if there is one thing you should take from this post is that sometimes having too much information is a fatal flaw in investing. Slow it down and focus on a few factors that fit into your strategy. Hope you avoid my mistake.

This post is an entry into Canadian Capitalist’s three year anniversary contest. Check it out and, speaking against my own intersts, enter as well. Congrats Canadian Capitalist on your milestone. Many happy returns!

I ended up finally finishing Get Smarter: Life and Business Lessons by Seymour Schulich (non-affiliate link). Schulich is a millionaire best known for his association with various resource companies and is a well-known philanthropist in the Toronto area (the York University MBA school is named after him). The book is basically divided into bite-sized chapter offering advice on different topics. Thus, you can open the book at any chapter and just start reading. Some really interesting life advice (love is a chemical reaction that fades; in the end, all you should have is loyalty and mutual respect- wow, what a romantic!) but I picked out some great nuggets of investing wisdom including (to paraphrase):

1. Don’t invest just because you have money sitting around. You tend to get into bad investments that way. He used a good example of Buffet sitting on money after he sold his business and then finally buying stock on the cheap thus beginning a very long and famous career.
2. At the end of the day, the most important indicator in a business is the amount of cash they have on hand; great advice for both entrepreneurs- look at cash and not sales!- and investors- you cannot fake cash in the financial statements.
3. Buy assets which are inflation protected such as real estate and commodities.
4. You can only know a few countries well so concentrate on them when you invest (actually this one is from Jim Pattison, who owns half of British Columbia).
5. Look at long term historical trends and not the short term to provide a guide to investing.

A good book.

A couple links of links for your weekend reading pleasure:

1. Globe and Mail lists 5 dividend stocks which aren’t banks.
2. Million Dollar Journey addresses how much to tip? Quite appropriate this time of the year (check out the comments for a general over-view)
3. Don’t know what to do with all those horrible holiday presents? Finance and Fat writes about turning junk into cash

Have a great weekend. Don’t burn out those credit cards shopping!

I wanted to follow up on my post last week on bank stocks. Clearly the end is not near any time soon- the latest numbers in the United States show housing starts surprisingly up but building permit applications down- which means things are ok in the near term but not great for the future.

But look at the valuations of the selected banks below (which I picked as a cross section of large financial institutions in the United States and Canada). I am going to concentrate on two financial ratios: price to earnings (how much are you willing to pay for $1 of earnings) and price to book (which compares the price of the stock against the book value of a company’s assets and arguably a more accurate measure of bank stocks; remember book value is cost of acquisition and not the current value of the asset; for inflation protected assets like real estate book value is traditionally lower than its true value today).

As a basis of comparison, value investors consider a price to book (p/b) of under 1.5 to be a value stock (in other words, for every $1.00 of book value, the stock trades at only a 50 cent premium) and in the last 50 years the average price to earnings (p/e) for the S & P 500 is 12 (in other words, someone will pay $12 for every $1 dollar of earnings). Thus, I will assume a p/e under 12 is a bargain stock or a dying stock. If I am losing you, just keep in mind1.5 and 12; anything below 1.5 and 12 is considered to either be a dying company or a value/bargain stock.

I took the ratios as of closing on November 20:

Bank of America: p/b 1.41 and p/e 9.70

Wells Fargo: p/b 2.12 and p/e 11.51

Citigroup: p/b 1.25 and p/e 8.45

Royal Bank: p/b 2.83 and p/e 11.95

TD Canada Trust: p/b 2.31 and p/e 13.10

ScotiaBank: p/b 2.67 and p/e 12.43

(I own both Royal Bank and TD).

Some observations:

1. Scotiabank and TD Canada Trust appears not to be a value stock given it has a high p/b and p/e. I believe, as a shareholder, TD stock is over-priced (not that I am complaining); it seems to be the darling of the Canadian banking sector because it has done so much lately (financed the BCE deal, bought a bank in the United States etc). Scotiabank has the least amount of exposure to North American financial woes; its high p/b may be due to the fact it has a much higher proportion of assets in cash than its counterparts (at least as of last quarter’s financials)
2. Citigroup and Bank of America are the 1st and 2nd largest bank in the United States and they both have value stock range p/b and p/e. This means either the market is overly punishing their stock for the subprime and asset-backed commercial paper issues or they are dying companies. I’ll let you draw your own observation but if the 1st and 2nd largest bank in the United States are in financial trouble then we got a lot more to worry about then some mortgages being lent out to the financially unworthy.
3. The ratios tend to support the argument that Canadian banks are over-valued relative to their global counterparts. Royal Bank always has high valuations because of its branding and the fact it is designed to be a retail friendly stock for Canadian investors (the CEO has publicly stated in the past that they try to cater to the retail investor). With BCE being de-listed, we may see more money be invested in Royal Bank as a tried and true widows and orphans stock.
4. Funny observation- what does Buffet know that we don’t if he’s consolidating positions in Wells Fargo when its p/b is higher than its larger counterparts? Citigroup was already under some pressure from the market for being too big and not nimble enough but it is interesting that Buffet buys a bank that has higher than desired p/b.
5. I have said this several times- I am not sure when the end will come (no one is) but if the investing horizon is quite long (5 years plus) and you don’t believe that banks are dying companies, this sector may be something to explore. If the horizon is short then please look elsewhere. In the short term, the Canadian banks begin reporting Q4 results in 7-10 days; the comments that accompany the financials will be interesting to read. As usual, please do your own due diligence. Thanks.

This week’s real estate Wednesday post deals with my mortgage company: Firstline Mortgages. Firstline Mortgages is owned by CIBC but, once upon a time, was an independent mortgage company. Considering that your mortgage may run upwards of 20 years, it is pretty important that you have a mortgage company that you feel comfortable dealing with. Let’s face it- if you have a half-decent credit score, you can eventually get a financial institution to match the lowest mortgage rate you can find shopping around; so, a low rate should not be the differential given it can be found with enough effort. But it is the customer service with the mortgage company that will make a difference.

Firstline Mortgage is my mortgagee by accident; I am a life-long TD man but my mortgage broker found FirstLine which has friendlier underwriting practices for self-employed individuals. So, it feels a bit like being forced into a date with your friend’s cousin- they may be a nice person but you didn’t pick them per se. Without further ado…

The Good

1. Friendly towards self-employed borrowers (friendly being a relative term)
2. Well trained customer service reps

The Bad

1. Their on-line system frequently crashes and looks and feels about a generation old
2. Their back office infrastructure doesn’t appear very reliable. If you call them, their customer service reps are good but they have to ask about 3-4 people about why something isn’t working.

As I have previously mentioned, I use to practice law and did several real estate closings. Firstline did lend to my clients several times so my comment about poor back-office infrastructure is partially attributed to my experiences with them in another context (and various colleagues grumbling about them). Thinking back, Firstline and BMO had back-office issues, Scotiabank and TD were good (Scotiabank had a particularly good on-line system), B2B very bureaucratic and all the B lenders just generally a pain to deal with (I guess they have to be control freaks given that their borrowers were not the safest of risks). B2B is especially problematic because they administer a lot of mortgages in RSP’s and they are really the only game in town for these types of products so you are really stuck with them.

Anyone have any good/bad experiences with their mortgage company?

Warren Buffet had himself quite a week last week; it was announced that he added holdings in banking and railways, gave advice on Alex Rodriguez on re-signing with the Yankees, giving A-Rod advice on making an end-run around his agent who gave him horrible advice (if A-Rod was really smart he would refuse to pay his agent’s fee as well) and a soon to be released study by two professors at the American University and UNLV found that buying what Buffet bought for the last three decades would have yielded you 24.6% on your money (or approximately twice the return of the S & P 500 over the same period) even accounting for the fact that Buffet would not legally have to report his earnings for up to four months after his purchase.

Just a couple of comments on Buffet’s latest moves:

1. Buffet’s buying banks:  Buffet added positions in U.S. Bancorp and Wells Fargo- two regional powerhouses (as a side-note, there is speculation that U.S. Bancorp could be a take-over target for a Canadian bank) with reputations for maintaining prudent lending practices (recent history notwithstanding). Over the long term, banks tend to make money in bad times and outrageous money in good times but many seems to be forgetting this lately.  Love the unloved as the saying goes.
2. Buffet’s buying railways: Buffet increased his stake in Burlington Northern Santa Fe Corp. (the 2nd largest railway in the U.S.) but reduced positions in two other railways. Railways interest me for several reasons: Buffet and Bill Gates (through his charities and trusts) own significant stakes in railways and these guys aren’t stupid. I did some research and it makes perfect sense: there are only 5 major railway players in North America, each has a dominant market share in their region (for example, CNR and CP split up Canada into east and west), barriers to entry are very high (you require government approval, a new market player would have to rent the lines off a competitor or build a whole new one (where?), significant capital investment is required etc. etc.), the technology is pretty stable so there is a lot of free cash lying around to buy back shares or increase dividends rather than put money in R&D and its not a “sexy” stock which means there is less speculation on it than, say, a tech or bio-tech stock. Finally, it is a domestic stock that will benefit from the rise of China as trains are needed to transport goods from ports into the interior. The share price of Canadian Railways is taking a beating lately because of the Canadian dollar- I am keeping a watch on it (please do your own due diligence).
3. Buffet loves old people. Buffet has now purchased 61 million shares in Johnson & Johnson: makers of pharma and health-care related products. What is interesting to me is that Buffet has been adding J n J even though the share price has increased- makes you wonder if there is more appreciation in store…

Here is a more detailed summary of  Buffet’s stock holdings. Has someone created a ETF that tracks what Buffet holds? That would be a product I would buy…

On a sports related website this week, a reader commented that the holiday decorations at their local Starbucks went up on November 8th this year, meaning that 13% of the year will be spent promoting the holidays. Thus, I am pleased to report that my link of the week goes to the latest fashion trend towards cheap sportswear. You can buy almost 10 pairs of Nike basketball shoes for the same price as these new shoes. And, the kids love it so you don’t have to be accused of being cheap and unfashionable. Who knew, in this day in age, frugal would be cool?

Some brief odds and ends for this week:

1. There’s a great on-going series on first time home buying being posted weekly on Quest for Four Pillars. I linked the last part but read from the beginning. An enjoyable series especially if you know the neighborhoods the writer is looking in and a look at the dark side of buying a house called the bully offer which happens a lot in Toronto.
2. Riscario Insider tackles the benefits of Universal Life Insurance. I am in the process of applying for a universal life policy so this is a good prelude to a post on this topic (I have slightly different outlook on the product than he does).
3. The Sun’s Financial Diary has an interesting take on investing in Chinese stocks if you are thinking of investing abroad.

Have a great weekend.

Here’s my statistic of the week: Bloomberg reports that that Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns will earn a combined $28 billion this year down 8.3 percent from last year. Merrill Lynch and Bear Stearns reported some substantial write-downs from subprime mortgage/asset backed commercial paper. So, despite all of that, financial institutions continue to make money. But 2008 may be an equally rough year right? Bloomberg estimates these same firms will reach $32 billion in profit in 2008.

Financial institutions generally don’t lose money. Did they do some utterly crazy things such as lending out subprime mortgages? Of course. But, large, diversified financial institutions also have other sources of revenue- M&A, wholesale lending, wealth-management, foreign exchange, credit cards, wealth management, traditional banking, trading activities etc. etc. They just shift their resources elsewhere and they are doing it with our deposits. A financial institution is other people’s money to the extreme.

Stocks in this industry are taking a beating but it is compared to expectations. We have had an approximately 5 year run on banks and expectations got too high. RBC reports a 14% earnings increase two quarters ago and the market punishes their stock. Things are little out of whack when that happens but remember that the expectation is “how much money are you making” and not “are you going to make money?”

In an industry like tech, when the industry is in a slump, companies are going bankrupt. In an industry like financial institutions, when the industry is in a slump, companies are making good, but not obscene, money. Every once in a while, a player goes down but the industry keeps going onward and upward.

I am not going to guess if we have hit rock bottom but, if I was 25 again, I would sign up for a share subscription plan with a large bank with a lot of different revenue streams and just keep buying. In 10 years, I suspect one would be very happy. Instead, I spent my 20’s buying bad mutual funds.

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