Financial Insight Investment Letter

Financial Insight, an on-line investment letter is a publication of Insight Financial Corporation, a member of The Heinze Group of Companies. A Canadian letter written in plain English for any investor

Return to Financial Insight's main page.


Your Questions

Index of Questions

This is an archive of questions that we have received and published in Financial Insight. Click on an individual question to jump to the question and our response, or scroll down through all the questions and replies.

November 1994: Are my bank mutual funds guaranteed?

November 1994: With the current uncertain markets, should I cash in my mutual funds?

December 1994: Is it better to hold stocks or equity mutual funds?

February 1995: Since 1994 was not a good year for stocks, shouldn't I wait for the market to recover before I invest in equities?

February 1995: You do not seem to recommend bonds, even though they have performed as well as equities in recent years? (Note that this is a 1995 question)

May 1995: The scales of your graphs are not even. Why is that?

September 1995: You have recommended ignoring the markets, does this mean that once I select a share I should ignore the price and just buy it?

November 1995: Your previous articles have demonstrated how in the long run, equities have far outperformed bonds. Will this be influenced by the current high levels of government debt?

December 1995: Your recommendations and opinions always seem guarded or qualified. Why don't you give more direct advice.?

January 1996: With all the hype of the information age, are the best investments in the technology sector?

March 1996: My Financial Planner suggest that I invest the majority of my RRSP's in a balanced fund. Is that a good idea?

May 1996: I heard that you can receive up to $20,000 tax free dividends from a corporation. Is that true?

September 1996: Can you tell me the difference between segregated and mutual funds? The insurance company I deal with offers segregated funds. I do not see a difference. I asked them about a guarantee to pay back the funds after ten years, but they said that only applied to funds they sell to their individual clients, and I am a group client?

September 1996: Why does the value of a bond go up when interest rates go down? It seems to me that if the rate goes up then it should be worth more.

October 1996: With all the changes going on, I need to know the future, so I can steer my children into careers with a good future. What is your recommendation?

November 1996: I have been seeing advertisements where a company talks about some shares in their mutual fund that more than doubled last year. Would this be a good company to go with?

June 1998: I am currently interviewing Financial Planners. I am considering one in particular. She really seems to know a lot, however I do not always understand her. Do you think she would be a good choice?

September 1998: The TSE 300 has dropped a significant number of points over the last while. How do I evaluate expected returns on my portfolio with all this volatility?

November 1998: What is tax loss selling and is it a good thing to do?

December 1998: I have purchased some stock on the ASE, (my first equity purchase I should add). They have put in an application to trade on the TSE. I know a company can be listed on multiple exchanges but what I cannot quite figure out is what will happen to my stock. It seems that when a company is listed on the ASE & TSE the Alberta exchange quite often sits there like a rock with most of the activity happening on the TSE. So what is likely, typically or historically to happen to a stock like this if & when the TSE listing is approved? Is this a good thing or a bad thing for me?

January 1999: What is the best ratio to look at to choose a good stock?

February 1999: What do you think of all these great internet stocks?

March 1999: Is a lot always 100 shares, and what if I do not want that many?

May 1999: Are broker's fees negotiable at a full service broker?

July 1999: Recently you indicated that the TSE could still break 10,000 in the year 2000. Is that still your prediction?

September 1999: The major indexes have outperformed my mutual funds. Should I consider moving to index funds?

October 1999: You often sound critical of mutual funds. Should I avoid buying them?

November 1999: With all the investment fears around the year 2000, wouldn't it be wise to sell my stocks until after year-end. Just in case?

February 2000: When evaluating how much we made on our mutual funds, my husband says that we should only consider the original investment to be our cost and not consider reinvested dividends. However, these dividends were taxed and are included in our adjusted cost base, so I figure they are part of our cost and should be considered. After all, this is our money reinvested. Who do you think is right?

March 2000: I understand the concerns about companies that are taking off without any earnings. However, it seems to me that a stock is worth what someone will pay for it, and since these exciting technology investments are in demand, their value should continue to go up, based on supply and demand. I do not see why that should change?

April 2000: With all that has been happening in the technology sector over the last few years, if you follow a value approach, what did you do over that period?

June 2000: The Nasdaq has dropped almost 40% from its peak. Is it time to start buying technology stocks now, or should we avoid them because of their volatility?

July 2000: When calculating a price earnings ratio, what value do you use for earnings per share, the last reported year, future years or what?

September 2000: I read your explanation on PE ratios. However, you did not explain what I should look for as a good ratio, i.e. is a ratio of 25/26 a good ratio or should the first or last number be larger? What is considered a good ratio?

October 2000: When evaluating a companies profits, how should I consider research and development costs, and what is their impact?

December 2000: Since the Nasdaq has dropped about 50% from its peak, is this a good time to buy technology stocks, or is it over for technology?

January 2001: Is this a good time to invest in value stocks?

March 2001: Recently you have pointed out how you were concerned about the markets and technology at the beginning of 2000. Does that mean you stayed out of these investments?

May 2001: The market prices of all tradeable financial instruments are affected by changes in interest rates. Why?

July 2001: What is the rule of 72? Does it even exist and how does it work?

July 2001: How exactly do you use the price-to-earnings ratio when analyzing stocks? What does it measure?

October 2001: With the new lower tax rates on Capital Gains, isn't it better to keep your stocks outside of your RRSP's? After all, inside an RRSP, they will be fully taxed when they are withdrawn.

January 2002: You often refer to companies you own. Don't you mean company's you own shares in?

March 2002: My wife and I don't have a lot of money to invest and we've never done any investing. If we decide to, what should we do? Do you have any advice? We're middle age and need to do something to get ready for retirement in the future. How would I go about day trading on the computer and make money? Are there simple easy to use methods of doing this and keeping up with trades where I could sell at the precise time during the day to make profits? I'd like to try that. What would be good stocks to invest in? How about penny stocks/speculating, etc. Any advice or info you might like to let me in on would be appreciated. We don't want to lose our money though/get scammed, etc. What are some good ways to invest money?

July 2002: A friend suggested I use stop losses to limit my losses. Is this a good idea?

October 2002: With all that is going on in the world, is there a safe place I can put my money?

July 2003: I told my broker to buy high quality companies. He said that he will only select high profile well known names. Is that a good way to ensure that I have quality companies?

January 2004: The U.S. dollar has dropped a lot recently. Does that make it a good time to buy U.S. stocks?

January 2009: Since the Bank of Canada has lowered interest rates charged to the banks and moved more money into the system, why don't the banks pass the lower rate on and loan out the money?

March 2012: When the market drops, they say that Millions, sometimes Billions are lost. Where does the money go?


Ads By Google

Google web search:

Google Heinze Group search:


Are my bank mutual funds guaranteed?

Published November 1994;

No, regardless of who sponsors the fund, its security is based on the assets in the fund.

Return to top of page.
Return to Financial Insight's main page.


With the current uncertain markets, should I cash in my mutual funds?

Published November 1994; Republished July 1998

Not because of a little market uncertainty, or as one investor put it, a little market indigestion. This approach of getting in and out depending on current market activity tends to lead to buying high when markets are hot and selling low when they are not. We recommend following IFC Investment rules 1 and 4. Structure or balance your portfolio according to your needs and buy in gradually to smooth out the curves

Return to top of page.
Return to Financial Insight's main page.


Is it better to hold stocks or equity mutual funds?

Published December 1994;

The answer to this depends on you. Holding stocks means that you have better control of your portfolio and saves you the cost (about 2% per year) of paying a fund company to manage the portfolio. The advantage of a mutual fund is that you have professional management and you do not have to spend time managing the investments. In addition, you can obtain more diversity with less money.

Unless you have enough money to diversify, plus the time, temperament and knowledge to manage a portfolio, you are probably better off with mutual funds or something equivalent like a professionally managed portfolio. It is also worth noting that many accomplished investors use funds to provide added diversity and/or to allow them to invest in areas that they can not realistically manage themselves (e.g., international shares).

Return to top of page.
Return to Financial Insight's main page.


Since 1994 was not a good year for stocks, shouldn't I wait for the market to recover before I invest in equities?

Published February 1995;

One of the funny things about the market is that we do not usually realize that it is going up, until it is about to stop. One reason for this is that it often goes in spurts. A good year may only have two or three good months, but those months more than make up for the rest of the year. So, if you wait for the market to go up, there is a very good chance that you will miss it.

Return to top of page.
Return to Financial Insight's main page.


You do not seem to recommend bonds, even though they have performed as well as equities in recent years? (Note that this is a 1995 question)

Published February 1995;

We would not say that we do not like bonds. As part of the balance, we like quality short term bonds, (short term bonds are bonds that mature in five years or less). It is fair to say that we do not like medium and long term bonds, as they can be very volatile, and historically, their performance is only marginally better than that of short term bonds.

It is true that in recent years bonds have performed better than ever before. This is because when interest rates drop, the value of bonds goes up, and when rates go up, the bonds go down. The longer the term to maturity, the greater the effect. Since we have recently gone through an unprecedented long term drop in interest rates, bonds have performed much better than they ever have. We do not believe that more large drops in interest rates are likely.

Return to top of page.
Return to Financial Insight's main page.


The scales of your graphs are not even. Why is that?

Published May 1995;

Most of the graphs we use are logarithmic (log) graphs. The vertical scale is based on logarithms. Remember logarithms from your High School math. Most of us learned them and forgot them, after all, what possible use were they. Well, it turns out they do have some use.

If you look at a logarithmic graph, you will notice that the distance between 100 and 1,000 is the same as from 1,000 to 10,000. You will also notice that as the values go up the scale gets smaller. What this does is makes a 10% curve a straight line. If you think about it, on a normal graph, a 10% increase goes up more when it is based on 10,000, than when it is based on 1,000; ten times more. This is why many graphs showing an investment over a long time period appear to be getting better and better. This may be great for someone promoting the investment, but for you, the investor, it may be distorting the truth.

Return to top of page.
Return to Financial Insight's main page.


You have recommended ignoring the markets, does this mean that once I select a share I should ignore the price and just buy it?

Published September 1995;

Not necessarily. We recommend that you pick quality shares, but we also recommend that you value them, and only buy them at a reasonable price. For instance, you might think that a Toyota Tercel is a great car, but you would not pay Fifty thousand dollars for it. You would only pay a reasonable price. It is the same with stocks, in the short run, the market will sometimes undervalue and sometimes overvalue an individual company.

However, in our opinion, valuing the stock has nothing to do with the market, it is about the economic value of the company. We recommend that you value the stock in isolation of the market. Then begin buying slowly when the price is right, and gradually increase your holdings over a long time period. This way you will average into the market, and hopefully, only pay fair prices. This will give you the benefits of both averaging and valuing.

If you are buying mutual funds, just average in and let the manager worry about the valuations.

Return to top of page.
Return to Financial Insight's main page.


Your previous articles have demonstrated how in the long run, equities have far outperformed bonds. Will this be influenced by the current high levels of government debt?

Published November 1995;

We believe that government borrowing has had an impact. We still expect that equities will outperform bonds and other fixed income securities. However, in recent years the difference has been smaller, than the historic difference. After all, this increased demand for borrowing, has kept interest rates fairly high, in relation to inflation, and equity investments.

In the long term, we have noticed that borrowing is starting to go out of vogue, and most of the world is starting to embrace private industry as the engine of growth. So, as governments start to bring their deficits under control, and the baby boomers move into the asset accumulation stages of their life, demand for debt should start to fall. Some have even been bold enough to suggest that this could spur a long term bull market.

These factors lead us to believe that while the gap between fixed income securities and equities has narrowed lately, in the long run, that gap will remain and may increase to historic rates.

Return to top of page.
Return to Financial Insight's main page.


Your recommendations and opinions always seem guarded or qualified. Why don't you give more direct advice.?

Published December 1995;

We would love to be able to do that, but in our opinion that would be misleading and irresponsible. If we knew the future, we could simply tell you what to buy, and when to sell. Since we do not know the future, we have to advise in such a way that our readers can design a portfolio best suited to their needs. Also, since our advice is being read by a wide variety of readers, we cannot tailor it to any one reader. The next best thing, is to try to provide a variety of information, with good explanations, so that readers and their planners can make well-informed personal decisions.

We suspect that some of our readers would prefer that we did not advise in this way, it may even cost us readers. However, our advice, is to be very cautious when listening to advisors who do not express some doubt in their opinion. In our opinion, they are fooling someone, hopefully not you.

Return to top of page.
Return to Financial Insight's main page.


With all the hype of the information age, are the best investments in the technology sector?

Published January 1996;

There is little doubt that this sector is going to grow and provide enormous opportunities. Actually, in 1995, as a whole it was one of the best sectors to invest in. However, it is also an extremely competitive sector, where yesterday's hero will often be today's history. Add to this the amount of interest is this sector, and you have great opportunities for overpricing. So this is a sector that may be very difficult for the average investor to do well in.

As a general rule, we think you will find better opportunities in some of the more traditional sectors. After all, despite the changing technology, people are still going to eat, need shelter, want consumer products, entertainment, transportation and energy. What will change will be the method of delivery. Also, these other industries can benefit from improved technology. We suggest you look for companies who are positioning themselves to take advantage of the new trends and progressively using technology to make themselves more competitive.

You should not rule out hi-tech altogether, but be careful not to become caught in the hype, and make sure that you do not get over weighted in this sector.

Return to top of page.
Return to Financial Insight's main page.


My Financial Planner suggest that I invest the majority of my RRSP's in a balanced fund. Is that a good idea?

Published March 1996;

We are not fans of balanced funds. Balanced funds normally include a mix of equities, bonds and cash instruments. The percentage of each will normally be based on a predetermined formula or may be weighted towards the type of investment that the managers expect to perform best in the future.

The reason for selecting these funds is likely to avoid the trouble of determining a proper balance or to take advantage of market timing. In the first case, we consider it lazy, in the second, we point out that we have always advised against market timing.

We recommend that you follow our IFC Investment Principle number one, "Balance your portfolio according to your personal circumstances."

Return to top of page.
Return to Financial Insight's main page.


I heard that you can receive up to $20,000 tax free dividends from a corporation. Is that true?

Published May 1996;

Yes, however it is not the whole truth. If you have no other income, then you can receive up to about $20,000 dividend income per year from Canadian companies and pay little or no income taxes. This is because the dividend tax credit will reduce your taxes, and in this bracket, the reduction will be close to the amount of your taxes. If you earn more than this amount, the credit will still reduce the effective tax rate on your dividend income by about a third, depending on your circumstances and what Province you live in.

We should point out that this does not really mean that less tax is paid, it just means that less tax is paid on the income (which is after corporate taxes) paid out to shareholders as dividends. Since the income tax rate on large Canadian corporations is in excess of forty percent (depending on the province), the total taxes collected on Canadian Corporate income after distribution as dividends is really very high. For example, if you are in a fifty percent marginal tax bracket, then the total tax is closer to 60% of the original Corporate income.

As a matter of interest, the income tax rate on the first $200,000 of active business income of small Canadian controlled corporations is approximately 20% (again depending on the province). The net effect of this is that after accounting for corporate income taxes and personal income taxes on dividends, approximately the same amount of taxes is paid regardless whether the owners take their remuneration as salary or dividends. This does provide opportunities to tax plan in the area of timing, but ultimately about the same amount of taxes will be paid. You might be surprised how many small business owners have used this to deceive themselves into thinking that they are receiving tax free income.

2012 Update: This was published in 1996. Since then there have been numerous changes to Canadian taxes. Mainly for investors, now qualified dividends (dividends distributed from income subject to the large corporation rate) are subject to a lower rate than dividends from taxes on dividends paid from income subject to the small business rate. Therefore when the corporate tax is added to the dividend tax, the total tax is usually about equal to what is paid on normal personal income.

Return to top of page.
Return to Financial Insight's main page.


Can you tell me the difference between segregated and mutual funds? The insurance company I deal with offers segregated funds. I do not see a difference. I asked them about a guarantee to pay back the funds after ten years, but they said that only applied to funds they sell to their individual clients, and I am a group client?

Published September 1996;

In Canada, the assets of most mutual funds are held in trust by a trust company. This is because they do not belong to the mutual fund company, they belong to the owners of the mutual fund (the investors). In the case of an insurance company, a trust company may not be used, however, since the assets of a mutual fund do not belong to the insurance company, they must be segregated from any other assets. Hence the name segregated.

Often the insurance company, in a bid to get your business, will offer some sort of guarantee on the original investment, but that has nothing to do with the fact that the funds are segregated, it only has to do with what the company decides to do.

For what it is worth, we do not put much stock in these guarantees. Not that the company will not honor them, but usually they only guarantee the original investment, and usually only after a fairly long time period. In your example, ten years. For a reasonably conservative Canadian Equity fund, the chances of loosing the original investment over ten years is minimal. For our August 1995 issue of Financial Insight, we did a study of ten year returns of a portfolio of U.S. stocks based on calendar years starting with 1926. We found that of the 60 possible ten year periods, there was only one when you would have lost money. A dollar invested at the end of 1928 (right before the great depression) would have been worth $0.92 at the end of 1938. In this light, it is easy to see why the insurance company will guarantee the principle.

Segregated funds can offer a couple of other advantages. As they are considered an insurance product, they can offer some creditor protection in the case of bankruptcy. However, this protection may not be as good as many insurance agents claim, so if this is important to you, discuss it with a lawyer. Also, for estate planning purposes, if there is a named beneficiary, in the case of death it may be possible to avoid probate and have the mutual fund transferred directly to the beneficiary. Of course these are unlikely to matter to a group client.

A couple of disadvantages of segregated funds are that they often have restrictive withdrawal provisions and sometimes they have very high commissions. We have also found that some insurance companies are reluctant to inform you about how they are managing your money. So make sure that you know about these before you invest.

Return to top of page.
Return to Financial Insight's main page.


Why does the value of a bond go up when interest rates go down? It seems to me that if the rate goes up then it should be worth more.

Published September 1996;

A bond normally pays a set rate of return, which is determined when the bond is issued. From then on, it pays that predetermined interest or coupon until maturity, when the face value is repaid. Since a bond is a marketable security, it can be traded on the market, which makes it a liquid asset, but it may not trade for its face value.

If interest rates drop after the bond is issued, when you sell it you are going to expect to get a premium, because it is paying a higher rate of return than an investor would expect to get from an equivalent new bond. The opposite is also true, if interest rates go up, then a purchaser would not be prepared to pay the full face amount since they could earn a higher rate of return on an equivalent new bond. So in this case the market value drops.

It should be noted that regardless of the market, when these bonds mature, they will pay out their face value, no more, no less. This makes short term bonds less volatile than long term bonds, because they will pay their predetermined rate for a shorter time and repay their face value sooner.

The above is why bond funds have shown such unprecedented returns over the last few years. Interest rates have been coming down, so the market value of the bonds in the portfolios have gone up creating a market gain. If interest rates continue to fall, then they will continue to show these market gains, however, if interest rates go up the opposite will happen. So if you are considering a bond fund because of its performance, you might want to ask yourself: How much can interest rates go down? Conversely: How much can they go up?

Return to top of page.
Return to Financial Insight's main page.


With all the changes going on, I need to know the future, so I can steer my children into careers with a good future. What is your recommendation?

Published October 1996;

Unfortunately, we do not know the future, but here is our humble opinion. The most important thing your children can learn is how to learn. No matter what route they follow, it will change rapidly. So they must be flexible, able to change and able to learn new skills. As for what industry or skills to learn, none is more important than the skill of being able to learn. We recommend they study what interest them the most, plus get a good variety of general knowledge, this is where they will learn to learn the most. Then during their careers, they can look for opportunities that interest them, and continue to learn.

For what it is worth, we do not think that the recent lack of employment opportunities will continue. Over the long term (measures in decades not years), as the baby boom retires, we expect that there will be a shortage in skilled labour. Since a much smaller labour force will be supporting a very large number of retirees, to survive, Canada must automate in a very big way. This automation may mean the loss of jobs now, but it spells opportunities for skilled young people.

Return to top of page.
Return to Financial Insight's main page.


I have been seeing advertisements where a company talks about some shares in their mutual fund that more than doubled last year. Would this be a good company to go with?

Published November 1996;

Maybe, then again maybe not. Actually, a statement like that worries us, not that it is not true, but it can be very misleading. Most equity mutual funds hold a very large number of shares at any given time. Many hold over a hundred, and some have been known to hold over a thousand. We know that the last couple of years have been very good for North American equities. Therefore, it is probably safe to assume that any portfolio with a high number of shares is bound to have some shares that doubled in value last year. They are also bound to have had some losers.

We suggest that you ignore these types of advertisements, as they really tell you nothing. Look for funds that demonstrate good long-term results and sound management practices.

Return to top of page.
Return to Financial Insight's main page.


I am currently interviewing Financial Planners. I am considering one in particular. She really seems to know a lot, however I do not always understand her. Do you think she would be a good choice?

Published June 1998;

The fact that you do not always understand her worries us. There are many planners out there that know how to use a lot of jargon and make themselves sound smart. Regardless if she is knowledgeable or not, if she is to do a good job for you, then you must easily communicate with one another. We suggest you ask more questions and see if she takes time to explain things so that you understand them. You might also ask a question to which you know the answer, as the answer you get may be very revealing. If you do not get satisfactory results, or are not comfortable, keep looking.

Return to top of page.
Return to Financial Insight's main page.


The TSE 300 has dropped a significant number of points over the last while. How do I evaluate expected returns on my portfolio with all this volatility?

Published September 1998;

Short term volatility is a fact of life with equity investments. Sometimes it is volatile on the way up and sometimes on the way down. There never has been and never will be a steady return. However, studies have shown that since 1925, equities have averaged a compounded annual return (including dividends) of about 10 percent, bonds (including Treasury Bills) have averaged around 4 percent and inflation has averaged around 3 percent.

Considering the above, a long term average return (say 10 or more years) of about 10 percent per year on your high quality blue chip stocks is probably a reasonable goal. This may not sound like a lot but it is a reasonable expectation and it is over 3 times the historic rate of inflation.

A word of caution though, the above only reflects the past average of a very broad group of investments, your investments may turn out to be very different in the future, which is why we continually stress our four IFC Investment Principles.

Return to top of page.
Return to Financial Insight's main page.


What is tax loss selling and is it a good thing to do?

Published November 1998;

In Canada (and many other countries) when an investor sells a stock or other investment for a gain they have a taxable capital gain (in Canada the gain is 75% taxable). This gain can be offset by deducting losses on the sale of other investments. So near the end of the year, many investors sell some of their losers to offset the gains realized on their winners. This is referred to as tax loss selling.

We are not advocates of tax motivated selling. If you hold an investment that you do not feel is a good investment, you should get rid of it, either right away or when the time is right. Right away if you feel the quality is not there or is deteriorating. If you think that it is not a bad investment, you just do not feel as strongly about it and wish to use the money elsewhere, then you might take advantage of a market rally, like what we are experiencing now (first week of November) as an opportunity to liquidate it.

Selling an investment to take advantage of a tax situation has a tendency to cause people to sell for less than they would have if they had ignored the tax aspect. It is not wise to just lose a dollar, even if it does save you fifty cents.

2012 Update: Currently in Canada Capital Gains are 50% taxed.

Return to top of page.
Return to Financial Insight's main page.


I have purchased some stock on the ASE, (my first equity purchase I should add). They have put in an application to trade on the TSE. I know a company can be listed on multiple exchanges but what I cannot quite figure out is what will happen to my stock. It seems that when a company is listed on the ASE & TSE the Alberta exchange quite often sits there like a rock with most of the activity happening on the TSE. So what is likely, typically or historically to happen to a stock like this if & when the TSE listing is approved? Is this a good thing or a bad thing for me?

Published December 1998;

Generally, if a company previously listed on the ASE (Alberta Stock Exchange) is added to the TSE (Toronto Stock Exchange), this is a good thing. The listing requirements on the TSE are a lot tougher. So this is an indication (but not a guarantee) that the company is growing and becoming more stable. It will probably be more liquid as well (it may trade a higher volume) as this is a bigger exchange. It may cease to trade or trade very little on the ASE as investors and brokers will naturally gravitate to the TSE where there is more liquidity making it easier to buy and sell. However, the prices on the ASE will very closely reflect the prices on the TSE. Otherwise, traders will exercise Arbitrage (the practice of simultaneously buying a security on one exchange and selling it on another for a profit), which would quickly bring the prices closer together.

On another note, we suspect that this is just one company that you bought because it interested you. However, if you are starting to buy stocks, you may want to make sure that your base equity portfolio is built up with a few larger high quality stocks (or high quality mutual funds), like those found in the TSE 35 (you can get a list from the TSE site http://www.tse.com) before you invest too much in the smaller more exciting stocks. This will add a certain comfort and security to your portfolio. A publication that we would strongly recommend to help you get started in finding those stocks is The Successful Investor. It is mailed monthly (with weekly email updates) for about $100 per year. Their web site is at www.thesuccessfulinvestor.com.

Return to top of page.
Return to Financial Insight's main page.


What is the best ratio to look at to choose a good stock?

Published January 1999;

In our opinion there is no one ratio or piece of information to look at and nothing should ever be considered in isolation. The world is much more complex than that. A valuation indicator might suggest that a stock is under or overpriced, however, without knowing the reason or circumstances, it could be very misleading. For example, resource companies often have the highest price earnings (PE) ratio when their price is the lowest, even though a high PE is usually an indication that the price is high. This is because the price of resource stocks is usually lowest when their profits are low, and since resource profits often swing wildly, the PE ratio can be misleading.

The more information you can review the better. By being well informed, you can determine which information is relevant and which is misleading, or you may be able to better interpret the information. However, taking any one piece of information in isolation is a very dangerous practice.

Return to top of page.
Return to Financial Insight's main page.


What do you think of all these great internet stocks?

Published February 1999;

The internet is starting to have a profound effect and is going to have a much more profound effect on all business. Therefore, it would be naive for anyone or any business to ignore its impact. However, you should be very careful when considering the hot internet stocks, or anything else that is hot for that matter. Remember Dave's rule for January; "If you grab hold of something really hot, be prepared to get burned." Most of these stocks, some of which have yet to produce any significant sales, let alone profit, have market valuations that assume future profits that may not be achievable and many will disappear before any significant profits are realized. Some will be big winners, even in the long run, however, they will probably be a small minority.

Obviously, you will have to decide for yourself how to play this one, however, here is what we are doing. We are picking a few high quality companies, that we think are acceptably priced (based on reasonable expectations), have proven business records (they have histories of making money) and that we believe are in a position to profit (either directly or indirectly) from things like the growth of technology, increased demand for computers, the internet, Y2K issues and other future developments. These are unlikely to be the most spectacular short term picks, but they are the companies that we believe will be around and prospering over the long term. So in our opinion, they should be very good long term picks. Who could ask for anything more?

Return to top of page.
Return to Financial Insight's main page.


Is a lot always 100 shares, and what if I do not want that many?

Published March 1999;

A board lot is a regular trading unit, while an odd lot is an amount other than a board lot. According to the glossary on the Toronto Stock Exchange web site, for shares trading for one dollar or more, a board lot is 100 shares. For share's trading between $0.10 and $0.995 a board lot is 500 shares. For share's trading between $0.05 and $0.095 a board lot is 1,000 shares. So if someone wants 5 board lots of a share trading at $20.00 per share, it means they want 500 shares.

You can buy or sell odd lots of a share. Many prefer not to do this as they believe that you may have to pay more per share or receive less per share and pay a higher commission. While it is true that you may lose a little in the bid and offer spread and that depending on the broker's formula, you may pay more commission, the difference is often negligible, especially if you plan to hold the shares a long time. For a small investor, this may be the only choice. For example, say there is a company that you really like trading at $80.00 per share. If you are a small investor, buying 100 shares for $8,000 may not be a practical solution. Maybe you only have $2,000 available to invest, and $8,000 would make that share a higher weighted holding than you would like. In this case, you have two choices, do not buy the shares and buy something else that may not be as well suited or buy an odd lot. In this scenario, it would seem that buying the odd lot would be the better alternative. While, as a percent of the total investment, the commission might be a little higher than if you invested more money at a time, this is likely to be the case regardless if the lot is odd or not. Also, you might lose a little in the ask-bid spread, but the amount is likely to be minimal (especially if you put a limit on the price). So, in the long run, the benefits of choosing the best stocks and properly diversifying the portfolio will likely out way any disadvantage of buying or selling an odd lot.

One extra recommendation. When buying or selling an odd lot, or shares of a stock that does not trade in high volumes, it may be wise to put a limit on the price, just to ensure that you do not get stuck with a fluke price that you are not happy with and the you can put in a limit price above the ask when buying or below when selling.

Return to top of page.
Return to Financial Insight's main page.


Are broker's fees negotiable at a full service broker?

Published May 1999;

In Canada brokerage fees are negotiable at a full service brokerage. However, how negotiable, and what can be negotiated, will depend on the broker, and what they are prepared to negotiate.

There are also some financial products where the fee is set and is not negotiable, this usually happens on things like Canada Savings Bonds, insurance products, and mutual funds with trailer fees where the fee is paid by the issuer, rather than the buyer.

Return to top of page.
Return to Financial Insight's main page.


Recently you indicated that the TSE could still break 10,000 in the year 2000. Is that still your prediction?

Published July 1999;

Of course, we do not know the future, so any prediction may only be worth the paper it is written on. Which becomes even more interesting since this is an electronic medium. However, to answer your question. The TSE must rise a little over 40% from its current level of around 7000 to 10,000. If the world recovery continues and commodity prices continue to strengthen, a rise of 40% over 18 months for the Canadian market could easily happen. On the other hand, any little set back could delay that rise. One setback that could easily happen is that many Asian countries may not be adequately prepared for the year 2000. So, while it would not surprise us if the TSE300 broke 10,000 in the year 2000, if we had to predict, we would now predict that that will happen in the year 2001. Kind of makes you wonder what we will be predicting next year. Doesn't it?

Return to top of page.
Return to Financial Insight's main page.


The major indexes have outperformed my mutual funds. Should I consider moving to index funds?

Published September 1999;

First, you need to determine if you want your investments to mirror an index. Then if you do, there are several options to consider.

The biggest advantage of an index investment is that it avoids the risk of a manager making major mistakes. It does that by not making decisions or judgement calls. On the other hand, a manager's judgement may be very valuable. A good manager might reduce losses or increase profits by holding the right stocks, or by not holding the wrong stocks. Also, recent returns may be deceiving. Your funds may be more conservative than the index that you are comparing it to, or the manager's recent performance may be because he or she is holding or has been acquiring a number of out of favor companies that will eventually take off. You might change just before the benefits of this strategy are realized. So, the question is; do you just want to invest in the market, or do you want some management?

To be honest, when the choice is mutual funds, rather than doing our own stock selection, we have been leaning more towards the index route lately, but it depends. We will select a fund that we really like, managed by a manager we really respect and sponsored by a company that we trust. If we cannot find one with all of these attributes, then we will purchase an index.

If you wish to go the index route, four alternatives come to mind. The first is to purchase derivatives (options, futures etc.). We discourage this route. It sounds very glamorous, but can be very risky. The second alternative is to purchase the stocks in the index. However, this requires a very large portfolio and can be very cumbersome and expensive. The third option is to buy an index fund. While we prefer this to the first two approaches, it is usually significantly more expensive (in terms of management expenses) than the next alternative, and you may still be at the mercy of a fund manager. The final alternative is one that we have written about before and plan to discuss in the future. That route is the use of Index Participation Units. These are units managed by the stock exchanges and are sold like stocks on the stock exchanges. The units hold the stocks in the index and their performance closely follows that of the index in question.

In Canada, there are two. The first is the TSE 35 Index Participation Units (TIPS). These are traded on the Toronto Stock Exchange under the symbol TIP. These units hold the TSE 35 stocks. The second is TSE 100 Index Participation Units (HIPS). These are traded on the Toronto Stock Exchange under the symbol HIP. These units hold the TSE 100 stocks. In the United States, there are several options managed and traded on the American Stock Exchange. The first is called Diamonds, which hold the Dow Jones Industrials and trades under the symbol DIA. The next is called Spiders, which holds the Standard & Poor's 500, and trades under the symbol SPY. These are the main two, but if you are interested in technology, the Nasdaq 100 Units, which trade under the symbol QQQ, might interest you. Or, if you are interested in other countries, consider WEBs which cover many different countries and are also traded on the American Stock exchange. For more information visit the TSE's web site or the American Stock Exchange's site.

Return to top of page.
Return to Financial Insight's main page.


You often sound critical of mutual funds. Should I avoid buying them?

Published October 1999;

We have a lot of concerns about mutual funds. We also have concerns about many of the people who sell them and we believe that there are certain types of funds that should be avoided. As our goal is to help you to be more informed, we discuss these concerns, so that you know what to look out for. If you are going to invest, and sooner or later everyone should, you will either have to manage the investments yourself or to pay someone else to do it. For most people, paying someone else to do it is the only realistic option, and for most of them, mutual funds are probably one of the best ways to do it. We even use them in our portfolios in order to get coverage in areas that we can not adequately cover ourselves. So the answer is No, we do not think you should avoid buying mutual funds, however, you should stay informed so that you understand your options and know what to look out for.

Return to top of page.
Return to Financial Insight's main page.


With all the investment fears around the year 2000, wouldn't it be wise to sell my stocks until after year-end. Just in case?

Published November 1999;

It is true that no one knows exactly what will happen on midnight December 31, 1999. There will certainly be some computer crashes and some problems with inaccurate data etc. The question is a matter of degree. This problem has been known for some time and we doubt that many Canadian or U.S. companies will suffer devastating blows. So chances are very good that if you sell your high quality stocks now, you will be rebuilding your portfolio for more than you sold it for, possibly a lot more. This might be great for your broker, but not so good for you. So, yes there is some risk, but we think that there is a greater risk in selling. Needless to say, we have not sold any of our stocks nor do we plan to.

What we do recommend that you do is ensure that you have kept paper copies of all your accounts and transactions etc. and that you have backed up all your computer data. This will cost you nothing and is something you should be doing anyway.

Return to top of page.
Return to Financial Insight's main page.


When evaluating how much we made on our mutual funds, my husband says that we should only consider the original investment to be our cost and not consider reinvested dividends. However, these dividends were taxed and are included in our adjusted cost base, so I figure they are part of our cost and should be considered. After all, this is our money reinvested. Who do you think is right?

Published February 2000;

This is a very interesting question that is not easily answered. In fact you are asking where to measure from when evaluating returns, your original cost or your adjusted cost base. Actually, to further complicate matters, there is a third answer to consider, and that is the market value at a given time. Let us use some examples to explore this issue.

To calculate how much a fund or investment has grown; you need to have a time period, which would include a beginning and an end. For example, let us say that you had held two stocks (Stocks A & B) for five years and that you had originally invested $1,000 in each. You never added any new money, but Stock A paid a regular dividend that was reinvested in more Stock A. After the five-year period, you had $2,000 worth of both stocks. So in either case you doubled your money. Now ask your self, ignoring taxes, which one had the better return. The answer is that in either case you earned 100% over five years, so the return was the same. This would also be the case if we had used mutual funds instead of stocks. The key is that before tax, both investments doubled your money over five years. Now if we consider taxes, and assume that all dividends and capital gains are taxed equally, then we would have to say that after taxes, Stock B had a slightly better return, as all the taxes were deferred until the stock was sold.

Let us look at another example where we consider taxes. We will use Stocks A and B again, for five years. We will assume that each year Stock A paid a dividend of 10%, which after deducting the taxes it caused is reinvested in more Stock A. We will also assume that Stock A's share price stays the same. We will assume that Stock B does not pay a dividend but its share price grows 10% per year. We will also assume a tax rate of 30% on all dividends and capital gains and that at the end of five years you will sell all the stocks. In this case, it is clear that both investments have the same return, however, it is distributed differently and therefore taxed at a different times.

Since Stock A's dividend is taxed each year at 30%, you only get to reinvest 70% of the dividend, reducing its annual return to 7%. At 7%, after 5 years $1,000 would grow to $1,403. Put another way, after taxes, investment A grew 40.3% over five years.

In the case of Stock B, there was not any tax until the end, but at the end of the period 30% of the gain was taxed away. So each year, the full 10% return was reinvested. At 10%, after 5 years, $1,000 would grow to $1,611. Then we would pay 30% tax on the $611 growth, which would equal $183, leaving you with 1,428. Put another way, after taxes, Investment B grew 42.8% over five years, which is a little better return then Stock A produced.

So we are not sure if we should say that you are both a little bit right or both a little bit wrong. Your husband is right to say you should start with the original cost, after all reinvested dividends are actually the returns of the investment. Without the investment, you would not have the dividends to reinvest. Your comment that this is your money that you put back in, is a fair one, but actually, it is all your money. A more accurate question might include a time period. For example, your return for the last year, should start with the full market value (including dividends reinvested up to that time) from a year ago and end with your full current market value. But your return for the last five years should start with your full market value five years ago, (including all reinvested returns up to that time) and end with your full current value now.

On the other side, it is fair for you to want to consider the taxes on the dividends received; after all they do reduce your overall return. However, it may be more realistic to reduce your final value by the amount of the taxes than to increase your original cost. Presumably, you kept all the money invested and paid the taxes from other sources, so while your investment may have grown a certain amount, say for example $500, it would have resulted in taxes of say $150 (using the example rate of 30%), which means your wealth grew $350 as a result of this investment. This calculation does not quite account for the time value of the past taxes, as they were paid before the end of the period, but it should tell you what you want to know.

So to calculate how much you made on a fund after tax, you should determine how much the investment grew in total market value for the period in question, and reduce it by the taxes that the investment caused.

As you can see this is not really a simple question and it is no wonder that you had trouble coming to terms with it. We hope this explanation helps to clarify things a little.

Return to top of page.
Return to Financial Insight's main page.


I understand the concerns about companies that are taking off without any earnings. However, it seems to me that a stock is worth what someone will pay for it, and since these exciting technology investments are in demand, their value should continue to go up, based on supply and demand. I do not see why that should change?

Published March 2000;

Of coarse supply and demand will prevail, that is not the issue, the issue in this case is how will demand change, or why will it change. Here are some examples of when investors probably felt as you do now, but likely regret following that philosophy:

Okay, so we are a little premature with the last item, and maybe it will never make the list, but do not be surprised if it makes it very soon. We are almost certain that sooner or later, it will belong on the list. It is just a matter of when demand changes.

So what will change demand? Well it could be a gradual shift, or happen all of a sudden. The sudden shift could be a result of a change in the fortunes of a couple of major players. For example, there are several companies that are very hot, have never turned a profit and have no idea when they will. They are in effect concept stocks and not profitable companies. In the most important cases, they have sales, and sales are growing, (and so are loses), and unfortunately, thanks to investor enthusiasm, they have very large market capitalization's, so they significantly influence some market indexes. As long as investors are enthusiastic things will continue nicely. When they need more money they just issue more stocks. Who needs profits, or debt for that matter? However, sooner or later they will disappoint investors, as all companies do from time to time. This could be because losses are greater than expected, sales do not rise as expected, or strangely enough, because they turn a profit, and the notion of reasonable profits suddenly kicks in. When this happens, the shares of the company in question will fall significantly, perhaps collapse. This will put the company between a rock and a hard place. They will need cash flow, but it will not come from operations that are losing money, they cannot issue more shares without further hurting the share price and no one will loan them money. The result could easily be bankruptcy.

All it would take is for the above to happen to a few, or maybe to one or two of the right players, and investor sentiment could change overnight, which would greatly effect the demand for these stocks. Or we might be witnessing a gradual shift already.

We are noting some broadening of the market, and more and more analysts seem to be promoting the benefits of following a value approach. It is a very subtle change, but nonetheless we are starting to sense it. If we are right, more money will start to move into other areas of the market where there are some real opportunities to purchase high quality companies at discount prices. As this shift happens, the relative return of many of the lower quality but hot stocks will reduce, which will disappoint investors with unrealistic expectations. This will drive more money towards quality, and the process will be under way. The end result will be that the last item in our list above will eventually belong on the list.

This is not to say that the Internet and other technology will not significantly change the world. They have already and they will continue to. Also, there will be some great successes in these industries, but it may well be like the automobile industry where out of hundreds of manufacturers, only a few survived, and even those that did had some pretty rough times. This is why we cannot stress enough the importance of sticking to the highest quality companies and never becoming over-weighed in any one sector, no matter how appealing it might be.

Return to top of page.
Return to Financial Insight's main page.


With all that has been happening in the technology sector over the last few years, if you follow a value approach, what did you do over that period?

Published April 2000;

This is a question that a few people have asked us recently. Actually, we would not say that we follow a strict value approach; our approach is really a mixed approach. Each individual stock is bought, held or sold for a number of reasons relative to that stock and to the overall portfolio. However, it is fair to say that we favor high quality companies with good growth prospects, and we like to pick them up or accumulate them when they can be purchased at a bargain. So the question is valid, as our approach would tend to lead us away from, and has lead us away from the hot sectors. Here is what we usually answer.

We have not changed a thing. We have been quietly accumulating bargains over the last while. In a way, this market has been good for us. All this attention to technology and away from the quality companies has created many wonderful opportunities. It is kind of funny when you think about it. Who would have thought that in the middle of this great bull market, and possibly a great technology bubble, there would be great bargains to be had? So our approach has been to take advantage of it. We must admit that we have added some of the higher quality technology stocks, when we felt that the prices were reasonable, or somewhat reasonable. Believe it or not, from time to time, some of the best companies in that sector have been acceptably priced, when you consider their histories of good earnings coupled with phenomenon growth rates. In these cases we usually pay what we think they are worth, as they rarely present real bargains, however, based on our evaluations, we are not overpaying. On the other hand, as we indicated, we are adding other stocks to, so our balance is not changing, plus we do not buy junk.

Yes, this approach has hurt our performance over the last year, as while our returns were good on a historic bases, we have significantly under performed the market recently. On the other hand, we have only been under performing for a year, and even on a two-year basis, our relative overall performance has been very good. So our approach is to hang in there and take advantage of the opportunities being offered. This approach is rarely best in the short-term, however, history has shown that it is an excellent longer-term approach and we are confident that in time the wisdom of our ways will become apparent. Actually, we think that in the last month or two, we have already started to see the benefits.

Return to top of page.
Return to Financial Insight's main page.


The Nasdaq has dropped almost 40% from its peak. Is it time to start buying technology stocks now, or should we avoid them because of their volatility?

Published June 2000;

At the beginning of the year, when technology was still hot, we warned that a correction of 40% in technology should almost be expected. We were not warning people away, just warning them that they should be prepared for such an event. At the time we also stressed the importance of proper diversification and proper balance, something we do continuously. We believe that technology is going to continue to drive the future. We also believe that there are many great companies that will benefit or continue to benefit from these changes. Some will benefit by creating the technology, others will benefit by applying the technology and still others will benefit from both. To ignore this sector would be a mistake. On the other hand, to become overweighed in this sector would also be a mistake, as that approach exposes you to too much risk, not to mention that in the long run, it may be the users of technology that benefit the most.

If you are a mutual fund investor, then we recommend that you stick to high quality, well diversified funds, and let the fund managers do the selecting. We further recommend that you avoid specialty-funds, after all, if your other funds are properly diversified in the first place, then there is no need to add any specific sector, or special region for that matter.

If you are investing in stocks directly, then review your portfolio. If you are low on technology, then this is likely a good time to beef up that area. If you are overweighed in technology, then dump the questionable stocks and only keep the highest quality ones. If you are overweighed in any one stock, then consider reducing your holdings. Actually, this is good overall advice. You should regularly review your portfolio to ensure that your overall mix is about right and that all your stocks are of good quality, then make adjustments as required.

Return to top of page.
Return to Financial Insight's main page.


When calculating a price earnings ratio, what value do you use for earnings per share, the last reported year, future years or what?

Published July 2000;

For the benefit of other readers, price earnings ratio is the share price divided by the earnings per share. The simplest answer to your question is yes, but always keep in mind which earnings you are using. More specifically, we normally prefer to use the most recent earnings number available, which is usually the total of the last four quarters. For example, in June, for a company with a December 31 year end, we would likely be able to obtain the earnings per share for the 3 months ended on March 31 of the current year and the 3 months ended on Dec. 31, Sept. 30 and June 30 of the previous year. If we total these 4 amounts, we have the earnings per share for the most recently reported 12 months. This is usually, but not always, the number reported by most financial publications. By using this number, we know the most current price earnings ratio. However, sometimes it may be beneficial to use other amounts.

You will often hear reference to the price earnings ratio based on future or forward earnings. This can be beneficial, as we are interested in where a company is going rather than where it was. So sometimes, it makes sense to project future earnings and see how the ratio looks, which will help to indicate where the company is going. Also, there are times when current earnings are distorted for one reason or another, in which case, the ratio will be distorted. In these cases, it is usually wise to try to determine what earnings would be if it were not for the temporary distortion or what it is likely to be for future periods. Finally, sometimes, we look at past ratios in order to help us understand how share price has acted in the past so that we can better understand what it is likely to do in the future.

Return to top of page.
Return to Financial Insight's main page.


I read your explanation on PE ratios. However, you did not explain what I should look for as a good ratio, i.e. is a ratio of 25/26 a good ratio or should the first or last number be larger? What is considered a good ratio?

Published September 2000;

For the benefit of other readers, PE or price earnings ratio is the share price divided by the earnings per share. We presume that in the example above, the ratio of 25/26 would mean a share price of 25 divided by earnings per share of 26, which would result in a ratio of almost one. Usually, share price is higher than earnings per share, so a more common example might be where the share price is $10, while earnings per share are $1.00. In this case the PE would be 10 (10/1=10).

You might say that this is the million-dollar question as there is really no simple answer. Generally, all other things being equal, the lower the PE ratio the better, as a lower PE indicates a lower share price in relation to earnings. However, an extremely low PE might also be a warning signal, suggesting that there may be factors effecting the stock's price that are not evident yet. Normally, the PE should be a result of the expected growth rate in earnings per share and the amount of risk inherent in the stock. For example, the higher the rate that earnings per share are expected to grow, the higher the PE ratio should be. On the other hand, the riskier the company, or the higher the risk of not meeting your expectations, the lower a PE should be, as you would require a higher rate of return for a more risky investment. We must admit though, in the short run, sometimes the market does not seem to follow this logic, but in the long run, good logic will usually prevail.

We ran some simple calculations to show you the effects of the above.

First, to show the effect of growth rates, we calculated what the PE should be on a stock where we had a required return of 10% with varying growth rates for the next 10 years. The results follow:

A ten-year growth rate of 0% should have a PE of 10.
A ten-year growth rate of 5% should have a PE of 14.
A ten-year growth rate of 10% should have a PE of 20.
A ten-year growth rate of 20% should have a PE of 40.

As you can see the higher the expected growth rate, the higher the PE should be.

Then to show the effects of risk, we calculated what the PE should be on stocks with an earnings growth rate of 0% but where we increased the required rates of return due to increasing amounts of risk.

A stock with a required return of 5% should have a PE of 20.
A stock with a required return of 10% should have a PE of 10.
A stock with a required return of 20% should have a PE of 5.

As you can see, the higher the risk, the lower the PE ratio you should be prepared to accept.

So the PE ratio should be a result of two often-conflicting factors. A high expected growth rate should push up the share price and consequently the PE ratio, however, as risk increases, share price should drop (bringing down the PE), as investors should require a higher rate of return to justify the risk that they are taking.

As to your specific question; "What is considered a good ratio?" For a solid blue chip stock, in times of normal earnings, we have generally liked to see PE ratios in the 10 to 20 range. However, when looking at the ratio, or anything else for that matter, it is important to carefully consider all the factors and watch out for anything that might be temporarily distorting the picture.

Return to top of page.
Return to Financial Insight's main page.


When evaluating a companies profits, how should I consider research and development costs, and what is their impact?

Published October 2000;

This is an interesting point. Most companies write off research and development (R&D) directly against profits in the year they are incurred, even though they actually benefit future profits. This is in contrast to capital spending that is set up as an asset then charged against future earnings through amortization or depreciation. When looking at R&D there are two main considerations. The first is how will it influence future earnings; the second is if you should add them back to current earnings to see how the company is really doing.

First there is future impact. Is the company spending sufficiently to maintain its competive position? Also, is its spending effective or not? That is, are they getting value for that spending, or is it just a sinkhole? These questions are difficult to answer. You can gain some insight into this by comparing the companies spending to that of their competitors (and potential competitors), both in real dollar terms and as a percentage of revenue. You can gain further insights by reading articles about the company and its industry, and by paying attention to any other coverage. Always keeping in mind the source of the information and its reliability. If you determine that the company is not spending sufficiently or that the spending is not effective enough, then you might be wise to avoid the company.

The second question is how to treat R&D when measuring earnings. There are those that make the argument that you should add back R&D as it is really for the future and should positively impact future earnings. While we agree with the point, we also point out that in most cases it will be necessary to continue to spend on R&D indefinitely; otherwise the company's future will be put in jeopardy. So it might make sense to deduct current R&D spending to determine current profitability, but only if you also deduct the past R&D spending that is responsible for current profits. On the other hand, we suspect that current spending rather than past spending will better reflect what is necessary in the future, so leaving R&D as is, is what we prefer to do.

So in a nutshell, we believe that R&D should usually be left alone when considering current profitability, but that in many industries, it is very important to satisfy yourself that there is adequate R&D spending to ensure a bright future.

Return to top of page.
Return to Financial Insight's main page.


Since the Nasdaq has dropped about 50% from its peak, is this a good time to buy technology stocks, or is it over for technology?

Published December 2000;

Our position continues to be that you should maintain a well-diversified portfolio of high quality stocks. This portfolio should hold some of the better quality technology companies, but should not be over weighted in this or any other sector.

While we expect technology to drive change, we should point out that it might not be the technology sector that is the biggest benefactor. Companies in other sectors that use technology efficiently and effectively will also be large benefactors of technological advances. In the technology sector, there will be some large winners, however, this is a very competitive industry where today's breakthrough can become tomorrows duster. So there will also be many big losers.

If you are under weighted in this sector, then this is probably a good time to start beefing it up. However, stick to quality and be careful not to overload yourself in this or any other sector. There are a number of sectors that could easily be the next big mover, technology, resources, finance, medical, utilities and consumer products to name a few. We could make a very compelling case for any one of these to be the next hot sector. So it is fair to say that no mater what sector you pick to be the next hot sector, chances are that you will pick the wrong sector.

Return to top of page.
Return to Financial Insight's main page.


Is this a good time to invest in value stocks?

Published January 2001;

Would you believe? Yes always, well not as good as it was a year ago when momentum stocks were all the rage, well, yes always, well it depends what you mean, and actually that is probably the wrong question. How is that for covering our bets?

Okay, this is a fair question, but it does have multiple answers. We will start with yes always. If you follow the theory that it is best to buy low, or lower, and that any stock that is currently undervalued is a value stock; then yes always. We must admit to having a bit of a value bias. For us, this means that when we have new money to invest, while we only buy great companies that we like, we do tend to add the ones that are out of favor at the time as opposed to the ones that are currently hot. Generally, at any given time, of the companies we own or want to own, there are some that are hot and some that are not. We have also found that which ones are hot or not changes or rotates over time. So we can usually build our portfolio over time by following this approach to some degree, but we do not stick to any hard and fast rule, as we also prefer to use a mixed approach to ensure a good balance.

We say not as good as last year, because a year ago the general attitude was that all value investors were dinosaurs. We presume that by that logic they are now pretty smart dinosaurs, as in 2000, value investing appears to have been a very successful approach, which is likely what triggered your question.

It depends what you mean, because there are many definitions of value investing. If you mean pure value investing in accordance with a specific criterion, then we warn against looking for easy hard and fast rules. If you mean an approach like ours, where we buy and hold a diverse portfolio of great companies and try for the most part to pick the better-valued ones at the time as you add new money, well yes, always. Then again, who are we to knock our own approach?

While the question is good and is a fair one, we say that it is probably the wrong question because it suggests that you may be trying to rotate your approach, portfolio, or funds according to what style is likely to do best next. If that is the case, we must warn you that at any given time there are a lot more ways to be wrong then to be right. So you may, in fact are likely to, discover that you are very good at moving out of last years dogs and into last years winners just in time to see them swap places.

Our advice continues to be to follow a good overall philosophy, like our Four IFC Investment Principles, stick to your overall approach and ignore the market's short-term turbulence.

Return to top of page.
Return to Financial Insight's main page.


Recently you have pointed out how you were concerned about the markets and technology at the beginning of 2000. Does that mean you stayed out of these investments?

Published March 2001;

Well l l l l, ........NO. However, we did not overload in them or buy poor quality ones either. We have always preached a balanced approach and that is what we stuck to. We held some of what we considered to be the better quality high tech companies and even increased our position in some over the last year. But by not being overexposed to any one sector, we often avoid taking a significant hit as a result of a meltdown in that sector. Also, by holding only high quality companies we usually fair better in the bad times, an approach that paid off in spades in the year 2000, and come to mention it, again in February, 2001.

Return to top of page.
Return to Financial Insight's main page.


The market prices of all tradeable financial instruments are affected by changes in interest rates. Why?

Published May 2001;

This is a very relevant question. We are always discussing the effects of interest rates, however, we seldom discuss why they matter.

Interest rates affect the entire economy and therefore they affect the value of tradable securities in a number of ways.

First there is the direct effect on return expectations. If interest rates go up, then you would expect a higher return on all your investments. For example, for fixed income securities, like deposits and bonds etc., your expectation would be for a higher interest rate. Therefore, if you held a bond that matured in five years with a fixed coupon or interest rate, and interest rates increased, the market value of the bond would decrease, as someone purchasing the bond would demand either a higher return or to pay a lower price for the same return. Paying a lower price effectively increases the return on their investment. The longer the term to the maturity, the greater the effect, as the purchaser would be expecting a higher return for a longer time period. Conversely, if interest rates dropped, then the bond would be worth more, as a purchaser would require a lower return on the same investment.

Interest rates also affect stocks in a similar way. For example, if you expected a long-term return on stocks of 10%, would you be prepared to buy them if Government Treasury Bills were paying a return of (or yielding) 10% also? Of course not, as you expect a higher return for the risk of the stocks. Therefore, if interest rates go up, stocks become less valuable in relation to other investments and their value drops. Again, conversely, if interest rates drop, then the stocks become more attractive and their price goes up.

The other fairly direct effect is that increased interest rates means that it cost more to borrow. So investors who are using borrowed money to invest are less likely to continue borrowing and investing, as it will become harder to earn a higher return than the cost of borrowing. This reduces demand for all investments, which ultimately reduces their market value.

In another less direct way interest rates affect the value of investments by effecting profitability and risk. When interest rates rise, the cost of doing business for both government and industry increases. For industry this lowers profits as more money is spent on debt servicing. Since future profits are ultimately what you are buying when you are buying a stock, or at least hoping to buy, decreased profits means that the companies are worth less. For both business and government, increased borrowing cost also means increased risk of failure, at least to some (sometimes very small) degree. This again decreases their attractiveness and therefore, lowers demand which in turn lowers price.

Finally, there is the macro effect. Increased interest rates tend to take money out of the economy, by increasing borrowing costs. This means that over time, consumers are less likely to spend, companies will have less to spend and governments will have less to spend. This in effects slows the economy reduces profits even further and consequently reduces the value of investments like stocks.

While we would not claim this to be a complete list, we think it is easy to see from the above why interest rates have such a significant effect on all tradeable securities.

Return to top of page.
Return to Financial Insight's main page.


What is the rule of 72? Does it even exist and how does it work?

Published July 2001;

This is probably one of the most used rules. We use it very regularly to estimate returns and values of investments. Essentially, if you know the expected compounded return of an investment, you can estimate how long it will take it to double by dividing 72 by the return. For example, if you expect your portfolio to grow at an average rate of 10% per year, than we divide 72 by 10 to learn that it should double in about 7.2 years. Alternatively, if you know how long an investment will take to double, you can estimate the return. For example, if the investment is expected to double in 10 years, then you can divide 72 by 10 (the number of years) to determine that the return is about 7.2 percent.

While this rule is very handy for making estimates, it should be remembered that it is not exact. For example, at 5%, the rule says 14.4 years to double. The actual time is about 14.2 years. At 3% the rule says 24 years. The actual time is about 23.5 years. At 1% the rule says 72 years while the actual time is closer to 69.7 years. On the higher side, at 10% the rule says 7.2 years. The actual time is closer to 7.3 years. At 15% the rule says 4.8 when the actual time is closer to 5.0 years. At 20% the rule says 3.6 years when the actual time is closer to 3.8 years. At 40% the rule says 1.8 years when the actual time is closer to 2.1 years. Finally to round out the picture, at 72 the rule says 1 year. However, the actual time is closer to 1.3 years.

That is the rule of 72. The reason for using a number other than 100 is that due to compounding, at 10% it takes less than 10 years to double your investment as after the first year, you are earning 10% on the investment plus the profits. So you need a lower number. Why does 72 work so well? We could give you a complicated mathematical explanation, but the truth is we would not know what we were talking about. We believe that there is nothing magic about 72; it just happens to be the number that gives the closest estimates, and as you can see, the estimates, while not exact, are pretty close.

One final note on compounding: If an investment doubles every 7 years, that means in 14 years there are 2 doubling periods, and in 28 there are 4, etc. You might mistakenly expect an investment to increase 4 times after 4 doubling periods. However, after 4 doubling periods it will increase by 16 times. Put another way, after 1 doubling it is 2 times, after 2 it is 4 times, after 3 it is 8 times, after 4 it is 16 times, after 5 it is 32 times and so on. So you can see the benefits of starting early and sticking to it.

Return to top of page.
Return to Financial Insight's main page.


How exactly do you use the price-to-earnings ratio when analyzing stocks? What does it measure?

Published July 2001;

The Price Earnings ratio (PE) is a ratio used to determine how reasonable a stocks price is. It is calculated by dividing the stock price by its earnings per share. In a nutshell, ignoring compounding, it tells you how many years' earnings it will take to pay for the stock. Or if you divide 100 by the PE it effectively tells you the return of the company's earnings as a percent of your investment. Generally, the lower the PE the better the price, although an exceptionally low PE might suggest some hidden problem.

When evaluating PE's it is important to realize that there are two sides to the calculation. There is obviously the stock price, however, there is also the earnings part. If the earnings amount is not representative of normal earnings, than the PE can be totally misleading. For example, if earnings are unusually high or low due to unusual events, then the ratio may be an anomaly and misleading. Also, levels of risk and expected growth rates largely effect what makes a good PE. For example, the higher the growth rate, the higher the expected PE. One rule of thumb is that if the PE is about the same as the earnings per share growth rate, than the share price is reasonable. While this is a good starting place, there are always other factors to consider. Another key factor is level of risk. The less risky the investment, the higher the PE you should be prepared to live with, as lower risk investments do not or should not demand as high a return on investment. Although, we must admit that sometimes in the short run the markets seem to behave differently.

Return to top of page.
Return to Financial Insight's main page.


With the new lower tax rates on Capital Gains, isn't it better to keep your stocks outside of your RRSP's? After all, inside an RRSP, they will be fully taxed when they are withdrawn.

Published October 2001;

A lot of people are wrongly making this assumption, as it seems logical until you run a complete example. The question assumes that while money is fully taxed when it is withdrawn from an RRSP, it is not fully taxed if left outside. This assumption fails to consider that the money inside an RRSP is not taxed when it is earned (by virtue of the tax deduction it creates) while money outside the RRSP is fully taxed when it is earned. Since a front-end tax has the same ultimate impact (assuming identical rates) as a rear end tax, the fact is that both ways the investment is fully taxed; the difference is the tax on the income or growth in-between. To demonstrate, if you earn $1,000 and it is taxed at 40%, you will have $600. If you double that, you will have $1,200. Alternatively, if you put the money in an RRSP, you would keep the full $1,000. If you double that, you have $2,000. If you then withdraw it and have a 40% tax rate, then you will get to keep $1,200, the same as before. So the difference is not at which end the money is taxed, it is how it's income is being taxed, as that effects your actual after tax return on investment and therefore your rate of growth. Here is a simple example.

Say you are in a 40% marginal tax bracket and Capital Gains are one half taxed. So extra income is taxed at 40% while capital gains are 20% taxed. Let's say you get $1,000 bonus. If you put the money in a stock that grows 10%, then you sell the stock, you will have $648 left after taxes. Here is why. First, the government taxes the bonus ($1,000 X 40% = $400), leaving you with $600 to invest. Then you gain 10% or $60, but the government takes 20% or $12, leaving you with an after tax gain of $48. This leaves a total of $648 after all taxes. However, had you put the original $1,000 into an RRSP then bought the shares, you would have started with the full $1,000. Then made 10% or $100. Had you then withdrew the money, $1,100, the tax at 40% would have been $440. This leaves you with $660, which is more than the $648 you were left with when you did not use the RRSP.

So as you can see, the RRSP still makes sense.

Return to top of page.
Return to Financial Insight's main page.


You often refer to companies you own. Don't you mean company's you own shares in?

Published January 2002;

While we are referring to companies that we own shares in, we also mean company's we own. There are two main reasons for using this terminology, the technical and the psychological. Fist, let us deal with the technical.

While sometimes it may not seem to be the case, companies are owned by their shareholders, no one else. Any shareholder, whether they own one hundred dollars worth or one hundred million dollars worth, is an owner, has the right to certain financial data, to attend shareholders meetings, ask questions (even the ones that embarrass management), make motions and vote on those and other motions. Management works for the shareholders. Collectively, the shareholders hire the Board of directors who in turn represent them and hire the company's management and direct that management (on a macro scale) on how to manage the company. Obviously, shareholders with more shares (or voting rights of more shares) have a bigger influence then smaller shareholders as each share gets one vote and bigger shareholders therefore have more votes. However, the fact remains, the shareholders all own the company, and they all have certain rights.

The other reason for referring to companies we own is psychological, and perhaps more important. As long time readers know, we like to buy high quality companies and to own them for long periods of time. Therefore, it makes sense to only buy companies that we consider great and would want to own for a long time, perhaps forever. Talking about our companies perpetuates this attitude. After all, our shares are only pieces of paper (or electronic signals) that are easily discarded or traded. But our companies, they are much more than just a piece of paper. So we believe that owning them is more personal and has a greater value than just being a shareholder, and that is the attitude that we want to encourage.

Return to top of page.
Return to Financial Insight's main page.


My wife and I don't have a lot of money to invest and we've never done any investing. If we decide to, what should we do? Do you have any advice? We're middle age and need to do something to get ready for retirement in the future. How would I go about day trading on the computer and make money? Are there simple easy to use methods of doing this and keeping up with trades where I could sell at the precise time during the day to make profits? I'd like to try that. What would be good stocks to invest in? How about penny stocks/speculating, etc. Any advice or info you might like to let me in on would be appreciated. We don't want to lose our money though/get scammed, etc. What are some good ways to invest money?

Published March 2002;

Before we begin, we must stress that since we know nothing about you other than what is written, we cannot give you specific advice. However, the following might help you avoid some pitfalls, point you in the right direction and help you find a professional advisor who can give you specific personal advise.

First let us recommend against looking for a great trading strategy. We would all love to find one of those. However, very few are successful at trading, and often people are just successful enough to get cocky before they discover they are not really as good as they thought they were and lose a lot of money. Generally, those who are successful at trading have made a carreer of it. However, included in that carreer is a lot of education, training and mentoring from those with more experience. Also, most of those who do make a carreer of it spend a lot of years working on the trading floor of large organizations, not at home managing their own money.

We can only advise you on our overall approach and then point you in the right direction. Our approach includes building a high quality well diversified portfolio over a long period of time that is structured to you personally. Based on what you have written, it appears that you are new to investing and financial planning. Therefore, we recommend that you find a reputable broker or financial planner to work with. This planner should be prepared to sit down with you and review your needs and experience then derive a plan that considers all your financial needs, both now and in the future. Probably the best way to find a planner is to talk to friends and relatives whose opinions you trust. Then go interview 3 or 4 and see if you like one. When making the selection look for someone with experience, that is appropriately registered and that you are comfortable communicating with.

Chances are that for the investment part of your portfolio they will recommend a mix of mutual funds. Based on what you told us, that is probably your best option, at least to start. One thing we would look for is a planner that suggests a balance of interest vehicles like GIC's or money market funds, some bonds (we prefer to stick to short term bonds) and stocks (both Canadian and foreign). That balance should not be canned; it should be customized for you. The investments can be held directly or indirectly through mutual funds, although in your case we would expect to see most of the stocks in mutual funds as opposed to being held directly. In time that may change, but to start, it is unlikely you are ready to build a personal stock portfolio. The other thing we would suggest is that you avoid anyone trying to fix you up with the newest hottest investment vehicle. For the stocks, look for basic Canadian, U.S. and International mutual funds. Avoid specific region or specific industry mutual funds as it is doubtful that either you nor your planner can time that accurately, and after all, that should be the fund manager's job.

Further to that, continue to read Financial Insight and other informative publications. Some other good sources of financial information for Canadians includes the The Globe and Mail, Pat McKeough's publications (416) 756-0888, and MPL's Publications. We hope this helps you get started.

Return to top of page.
Return to Financial Insight's main page.


A friend suggested I use stop losses to limit my losses. Is this a good idea?

Published July 2002;

For those unfamiliar with the term, a stop loss is an order to sell a stock if the price drops below the order price. When the price hits the stop loss price the order becomes a market order and the stock is sold at the market price, most likely the current ask price. This is used to limit losses, as once the stock is sold you cannot lose any more money.

Professional traders will tell you that limiting loss is one of, if not the most important part of their work. So for them, things like stop losses are very important. However, these are people who make their living trading. They will move in and out of a stock in a very short time, sometimes minutes. They are not buying quality companies for the long term; they are making money on the swings of what are usually the most volatile stocks. A very risky and often high stakes game, so loss control is critical.

If you are going to use stop losses the first question you must ask yourself is where to set the price. If we had set a stop loss of say 20% below our purchase price of all the stocks we have purchased, we would have sold most of our best stocks at a loss and our returns would probably be negative. The fact is that markets swing. However, if you are holding high quality stocks you can ignore these swings, as you know that your companies are good ones and that in the long run they will make you money, that is they will if you do not sell them too fast.

So if you follow a style similar to ours, we recommend you do not use stop losses, as they will probably do more harm than good. Yes, you will make mistakes, but you want to be sure not to limit the chances of your best companies which should more than make up for the mistakes. If you do not follow an approach similar to ours, than we really cannot advise you on this.

Return to top of page.
Return to Financial Insight's main page.


With all that is going on in the world, is there a safe place I can put my money?

Published October 2002;

Every investment carries a degree of risk. The question is what kind of risk do you want to take and to what degree. If you hold cash, there is the risk of currency devaluation (inflation) or even failure. You can buy government bonds or put your money in an insured deposit account. These will offer you a small return with little risk of loss. However, after tax and inflation it is doubtful if they can hold their value, let alone grow. You can hold precious metals or physical assets but these carry a variety of risk. Then there are stocks that can offer better returns over long periods of time but then you carry a higher risk of loss.

As you can see, there is no single right answer. We believe that a person's best bet is to build a balance between physical assets (like a house), secure investments like government bonds, and higher risk investments like stocks to try to reduce the risk of loss while providing an opportunity for long term growth. You see, it is not a matter of eliminating risk as there are always risks, but it is a matter of managing them in a manner that is suitable for you.

Return to top of page.
Return to Financial Insight's main page.


I told my broker to buy high quality companies. He said that he will only select high profile well known names. Is that a good way to ensure that I have quality companies?

Published July 2003;

High profile and well known companies, let us name a few: Dome Petroleum, Bre-X, Principal Trust, Nortel, Enron and the list goes on. These were all well known companies, you might even say the darlings of the market during their time. However, in the end they were disasters for many investors who believed they had the best investments ever and would hear no different. This might be a good time to re-read our January 2000 issue (see link on the Financial Insight main page), which talks about the last two decades. Do not confuse quality with well-known or good investor marketing.

High quality companies have a good business that is profitable, they have good future prospects, manageable debt and sound management. They may be large or small and well known or relatively unknown outside of their industry. When we evaluate quality we look for a good earnings history with good potential to continue making profits. We also want to satisfy ourselves that the debt levels are easily manageable, even if there is a significant downturn in the business climate. Finally we want good management. Managers with a track record, that know their business, will make good long term decisions and admit when they made a mistake. Most importantly we want honesty in our management. Do not tell us what we want to hear to support the stock price, tells us the truth, because in the long run it is not how investors feel today that determines stock price, it is stability and profitability that will make us money. These are factors that we think are important when evaluating management.

When we build a portfolio we always look for quality, then we try to build in diversity. Some of our companies will be well known while others will be hardly known at all. It is the latter that excites us most, but we still expect to have some of each. Size is also a factor in building diversity and stability but not in determining quality. Some small companies are of very high quality, just as some large companies are of poor quality. Nonetheless, larger companies do tend to be more conservative and more stable. So we like to have a good representation of larger more conservative companies with a mix of smaller more speculative companies included. The exact mix is a personal call. Of course diversity also calls for diversity by industry and geography, but we will save that for another day.

Return to top of page.
Return to Financial Insight's main page.


The U.S. dollar has dropped a lot recently. Does that make it a good time to buy U.S. stocks?

Published January 2004;

The simple answer is yes and no. From a pure timing perspective, maybe, but luckily we are not market timers. Relative to the Canadian dollar (and several other currencies for that mater), the U.S. dollar has dropped significantly over the past few months. The question is where does it go from here. We doubt it will drop a lot further, but we must point out there are a lot of experts with a lot more reasons and resources to study this who both agree with us and who disagree with us. Maybe some of them will be right. However, relative to proper balance, we do see the low U.S. dollar as an opportunity.

We have been trying to use this as an opportunity to top up our U.S. holdings. However, this is more complex than it looks. For each portfolio we constantly review our mix of individual investments considering the balance of economic sectors, U.S. and international verse Canadian holding, and our balance for risk. The one overriding rule is that the mix must be suitable for the portfolio's owner, regardless of the market. Then we tinker. That is, we make minor adjustments to readjust the balance. The low U.S. dollar gives an opportunity to top up the U.S. holdings as long as there are securities that we want to buy or to increase our position in that also improve the overall mix.

The result is that we have been buying and selling some of both Canadian and U.S. securities. Overall though, we have probably been increasing our U.S. positions, and we must agree that we have put a little extra emphasis on that in recent months. However, it is important to note that what we have been doing has only amounted to tinkering as we try to build positions that we will want to hold for years, perhaps decades.

In conclusion, we see this as a good time to put some more emphasis on U.S. securities, so long as you pay a lot of attention to quality, your overall mix and above all, no matter what, never over indulge in anything, no matter what the temptation or how certain you are. In fact, be extra careful whenever you are certain, as that may well be your best warning signal that you are likely to be wrong.

Return to top of page.
Return to Financial Insight's main page.


Since the Bank of Canada has lowered interest rates charged to the banks and moved more money into the system, why don't the banks pass the lower rate on and loan out the money?

Published January 2009;

This is something that makes great headlines and gives the politicians something to crow about to make themselves look good, but it does not reflect the whole story. First, on the question of why they do not lower interest rates by the full amount of the interest rate drop. If the Bank of Canada rate represented the banks full cost of borrowing, then it might be fair to expect them to pass on the whole interest rate drop. However, this is only a small part of their borrowing. The majority of the funds that the bank's loan out comes from other sources, mainly bank accounts, some of these accounts like GIC's have a fixed interest rate and some fluctuate. So while a cut in the bank of Canada rate does lower a banks' cost of capital, a one point cut in the rate does not mean a cut of one point in the banks cost of capital. It is fair to expect them to lower rates, and they do, but it is not fair to expect them to match a point for a point.

On the second part, why don't the banks start lending? Our information is that despite popular opinion, or what the press are leading us to believe, they are. From what we understand, overall, Canada's major banks are lending and money is available, however, we believe there may be a drop in demand as borrowers and banks are being more careful about the borrowers ability to carry the loans. Also, we understand while money is available from the major banks, there is a major shortage of funds available in the secondary markets that provide a lot of financing to Canadians and businesses, but that is not under the control of the major banks.

Another point worth noting is that Canadian's are being well served by the fact that our banking system is rated number one in the world. This is largely a result of conservative lending requirements. So while we want the banks to keep the money flowing, it is very important that people and business only receive the credit that they can afford. Otherwise both will be worse off. Remember, it was lax credit policies that created this mess in the first place, and both lenders and borrowers are now paying the price, not to mention the rest of the public and the economy.

Return to top of page.
Return to Financial Insight's main page.


When the market drops, they say that Millions, sometimes Billions are lost. Where does the money go

Published March 2012;

This is a really interesting question because it states what at first seems like the obvious question that no one asks. It does sound like all that money or wealth just falls into a black hole, but obviously not.

The simple answer is it goes nowhere, it just reflects a redistribution of wealth. Let us explain. For every transaction there are two parties, a buyer and a seller, and the number of shares bought always equals the number sold. So if there are more sellers than buyers, or more supply than demand, then the price drops until the supply (which ultimately/eventually should reduce due to lower prices) equals the demand (that ultimately/eventually increases due to lower prices). It might not seem to act this way, as sometimes at first a sort of pact mentality seems to kick in, but in the end, supply will equal demand. When you think about it, what else can happen? It might be interesting to ask: What if everyone sold all their stocks and there were no buyers. In theory, the price would fall to zero and no sales would take place, but in reality, before that happened (except maybe but not necessarily in the case of a bankruptcy) some buyers would see an opportunity and sellers would start to reason that it is no longer worth it to sell as they would get almost nothing, as broker fees start to be equal or nearly equal the total proceeds.

Now we have talked about the market, but that may not answer the original question. So let's look at a simple example. Let's cut out all the noise for a minute, and assume that there are two people, persons A, and B. A has $1,000 and B has 100 shares of Company X, worth say $10 per share or $1,000. One might argue that there is $2,000 of wealth in this 2 person economy. However, in fact what there really is is $1,000 plus 100 shares of Company X. At this stage, the $10 per share is an arbitrary value that we gave, given our infinite wisdom, or lack thereof. Now let's assume that A wants some shares and offers to buy 50 shares for $15 a share or $750 and person B agrees. Now, the total shares have a market value (assuming there is a buyer) of $1,500. But really, A now has $250 plus 50 shares and B has $750 plus 50 shares. So this economy of two still has a total of $1000 plus 100 shares of X. No one has printed any new money and no new wealth has been created by this transaction, it has just been redistributed. The same is true if the share price drops. Let's say that A now changes his mind, maybe for good reason, or maybe not. So A offers to sell his shares to B for $5 per share or $250 and B agrees. Again, now the total market value of the shares is $500, but really A now has $500 and B has $500 plus 100 shares of X. In total there is still only $1,000 plus 100 shares of X. All that has happened is that the wealth has been redistributed, in this case mostly from A to B.

There is nothing magical about the Market. In reality, it just represents the sum of the transactions that take place between individuals for the shares of different companies. We would argue that the market facilitates wealth creation as for example, who would invest in business if there was no chance to eventually get their money out, but the market does not print money, create companies or grow those companies. Likewise, it does not destroy money or destroy companies. All the market does is redistribute the ownership of what already exists, sometimes more efficiently than other times. So in answer to the question: Nothing happens to the money, it is just distributed differently, and while the perceived wealth may have changed, the amount of money in the system and the number and size of the companies that exist does not change just because the market prices changed.

Return to top of page.
Return to Financial Insight's main page.


IFC Investment Principles

The following are four basic principles that we believe to be the foundation of sound investing practice. By regularly referring to these principles we hope to avoid any major mistakes and ensure a satisfactory return on our long-term results. The four principles are:

1. Balance your investments according to your personal circumstances.
2. Always diversify your investments.
3. Invest in quality.
4. Invest regularly and gradually.


Ads By Google

Google web search:

Google Heinze Group search:


Return to top of page.
Return to Financial Insight's main page.

If you have any questions or comments, please email us.
To reduce spam, we have removed the period before the com in our email address. Please insert a period between heinzegroup and com to read heinzegroup.com to make the address legitimate. Also, we do use spam filters, which sometimes filter legitimate email, so please confirm that we received your email.

Go to Heinze Group Index Page.


Financial Insight provides information to help its readers make informed investment decisions. We are not connected with any financial institution, nor do we guarantee or recommend any investments. Professional advisors should be consulted to insure that your specific investment needs are properly considered.

Committed To Your Financial Independence

This site was created by Dave Heinze.

All contents copyright ©
Insight Financial Corporation.
All rights reserved.