A Comment -- General Comments From an Expert (A Commentary)

Market: He is not a macro investor. He is a bottom up. He is systematic. He looks for value according to his model price. It is easy to find bargains. Last two years everything went up but now he feels you have to be a trading investor rather than a buy and hold investor. Yield is not valuation. People are paying a lot for dividend yield and ignoring valuation.

Market: He does not try to forecast where the market is going. Research has shown that you cannot forecast the market over time. The market reacts to all available information. He wants cheap, pure, tax effective and broadly diversified investments.

Caller’s situation: 80% in GICs and rest in dividends. At age 50 and even with chronic illness, he says no more than 45% in GICs.

Flow through shares are not going anywhere and have been around for 30 years. He doesn’t think this budget will be passed.

Japan: The market has bounced back fairly well, so there was an opportunity to capitalize on the disaster a week ago. All time high was in 1989, however.

Employee Stock Purchase Plans: Cause you to stay concentrated in one company. If the company is matching or contributing, then you might want to do it, but take the money out as soon as you can to diversify all but 10% of it. Don’t have more than 10% in one company.

Investing on your own – Caller’s situation: 25% of investments are in the banks own products (not necessarily bad, but a red flag), 1% in emerging markets (if less than 5, it’s not worth having) and the rest in bonds (bad prognosis going forward so he would not have the rest in bonds). When you change, the instruction charges $100-$125 PER ACCOUNT in transfer fees. The descent thing for the next institution to do is to pay these fees, but unlikely with discount brokers.

Caller’s situation: 80% in GICs and rest in dividends. At age 50 and even with chronic illness, he says no more than 45% in GICs. Age times decimal of your age as percentage in fixed income is his general rule.

ETF coming out in the future based on the Venture Exchange: Venture capital is riskier and therefore should have higher returns. You take away the risk of the individual companies.

Components of a Portfolio: Age times Decimal of your age as a percent in fixed income; Remainder divided equally among: Canadian Equity, US Equity, Emerging Markets Equity, International Equity and Tangibles (inflation protection). If you are young enough, he doesn’t get caught up in dividends.

Huge profits in high dividend stocks – do you take profits? No, set stop losses and hang on.

Market: When interest rates go up, REITS will be under pressure. They compete with the kinds of interest rates consumers can get, such as GICs. It’s really about spreads. The REITs borrow money and then have to earn a spread on that. You have to pick good quality.

Markets: Owned a lot of oil stocks and that were impacted by Libya. He is conservative. One thing he knows is that you are ALWAYS going to be surprised. You need a portfolio that allows you to surmount these events like Libya and Japan. He is bullish on inflation. We are already seeing inflation in cotton and food impacting consumers. He thinks this is only the beginning and that we will see much higher inflation next year than we have seen in the last 30 years. With fixed income he wants to hold short durations. Perpetual preferred shares should be short so you don’t get locked in to a low dividend. He is buying US companies to take advantage of the level of the Canadian dollar, but he thinks it will stay that way as far as the eyes can see.

Markets: It’s hard to get excited about 3%-10 year bonds. We are back to seeing some value in the emerging markets. Recent events in Japan have seen them get a little more attractive. If a foreign currency rises and the yield picks up, you get a double benefit. We are with a ‘risk on’ period, so treasuries have been sold and spreads have widened with other bonds.

Stripped Bonds: Bond yield (coupon) is separated from the principle (residual) and sold separately. In bankruptcy, interest payments stop (worthless) and company funds are divided between the owners of the residuals. Coupon is more risky than residual.