2015 Goals Update - My Year in Numbers

Back on January 14, 2015, I set three financial and two non-financial goals for the year. Although there is still one business day left this year, I feel comfortable reporting on my progress now so that I can enjoy the last weekend of the winter holiday. Instead of droning on about each of my goals, I decided to report some pertinent numbers instead.

1. Increase Expected Forward Dividend Income by $1,800/yr 
Status = Achieved
Numbers:
41 dividend increases (including 8 in December)
3 dividend cuts (Kinder Morgan and PHX Energy Services twice before I sold my position)
8% dollar weighted average dividend increase pre-Kinder Morgan dividend cut
4% dollar weighted average dividend increased post-Kinder Morgan dividend cut
18 long-term Buys
6 Sales of long-term holdings
24.6% higher forward expected dividends at YE15 vs YE14
4.4% dividend yield on my portfolio at YE15 (vs. 3.9% at YE14)
1:1 CAD/USD exchange rate I use to calculate forward dividend income in CAD
1.39:1 CAD/USD actual exchange rate on December 30, 2015

2. Complete the Transformation of my RRSP by Year End
Status = Nearly Achieved (Just have to sell Royal Bank in RRSP)
Numbers:
4 companies I sold in RRSP after adding to positions in my TFSA and unregistered account (BCE, CJR.B, Telus, RCI.B)
1 company I sold in my unregistered account after establishing a position in my TFSA (HR.UN)
27 companies in my portfolio at YE14
26 companies in my portfolio at YE15

3. Give Twice as Much to Worthy Causes as in 2014
Status = Achieved
Numbers:
2.1X the donations to worthy causes I made in 2014
12 Charities and charitable organizations I supported during 2015
2 Causes I gave to more than once during the year
20% more I plan on giving to good causes in 2016

4. Keeping My Weight Under 160 Pounds
Status = Achieved
Numbers:
159.6 pounds I weighed this morning
163.6 pounds I weighed December 26th after returning from Christmas at my in-laws
165 pounds to keep under initially before revising downward in July 2015
7 pounds I lost one day that I was sick last February
0 weight goals I will have in 2016

5. Average At Least One Blog Post a Week
Status = Achieved
Numbers:
81 posts in 2015
4 hours spent moving and updating my Blogger site to my new domain name this morning
1.5 posts per week was my pace from January - June
2 posts per week was my pace from July - November
1 post per week was my pace in December
299 Twitter followers at December 30, 2015 (vs 0 on January 1, 2015)
14X more pageviews in December 2015 than January 2015
3 most popular posts this year (in order of popularity):
 - Why I Will NEVER Share My Net Worth Online
 - Nibbling vs Gorging on Stocks
 - Four Lessons from Buffet's & Munger's Biographies


Did you achieve all of your investment goals in 2015? Do you have your 2016 objectives set?

My Biggest Hits & Misses of 2015

As a kid, I loved listening to radio stations on new year’s day when they played their countdown of the biggest hits of the year. With a week left in 2015, I thought it would be a fun to take a look back and recap my biggest hits and misses. Why include my biggest misses? Simple, I learn more from the misses than the hits.

Hit: The Canadian Dollar Depreciating Relative to the US Dollar

The Canadian dollar has fallen about 17% against the US dollar since the beginning of 2015. On the downside, the weak Canadian dollar has made it more difficult as a Canadian investor to find US stocks with an adequate margin of safety. On the flip side, since about a third of my investment holdings are in US companies, a more expensive US currency has boosted my portfolio value and led to a higher inflow of dividends from my US holdings.  Although I don’t see the Canadian dollar depreciating by another 17% in 2016, depending on the price of oil, the level of interest rates on both sides of the border, and the performance of the Canadian economy, our dollar could very well fall further.

Miss: Kinder Morgan

When Kinder Morgan’s management cut their dividend by 75% earlier this month, I felt like the biggest loser on the block. My dividend growth rate for 2015 went from 8% to 4%, my forward dividend income decreased by a material amount, and my faith in management of all corporations (particularly that Kinder Morgan) was lost. Even worse, I added to my position in Kinder Morgan during the first week of November, when I should have known better. Now, I continue to hold my shares in Kinder, as I process the dividend cut, and try to determine my course of action.

Hit: Opening a Registered Education Savings Plan Account

Had I done a hits and misses list for 2014, my biggest miss would have been failing to get my act together and open a Registered Education Savings Plan ("RESP") for my son. All it took to receive a risk-free $500 grant from the Government of Canada was an hour of paper work, scanning some identification documents, and mailing a cheque for $2500 off to my brokerage.  Even though I managed to take over a year to complete the required submission, I still received that 20% return on the deposit toward my son’s education this year. Now I just have to figure out which ETFs to invest in, and I'm off to the races!  I’m a big fan of free money, and since I don’t expect as much of it from the new Liberal government, I’ll be happy to keep accepting the $500 grant yearly on behalf of my son.

Miss: PHX Energy Services Corp

As I wrote about in my most costly stock picking losses entry, I bought a position in PHX in September 2014, and held onto the oil well driller through 2 dividend cuts and increasing scary financial results before finally selling it in August 2015. Although PHX represents a big miss for me, learning to always have an exit plan when speculating on a security will help me in the future. As will my plan to only make short-term purchases in companies I don’t mind holding for the long-term.

Hit: Sticking to My Plan

One of my goals for 2015 was to transform my portfolio to make it more tax efficient and easy to manage. By shifting my position in H&R REIT into my TFSA, moving holdings in Canadian companies from my RRSP to my unregistered account, and decreasing the number of companies I own, I stuck to my plan. Although there were temptations to add shares in other Canadian companies in the bear market of 2015, I’m happy to have held a steady course and should reap the benefits come tax time next April. 

Miss: Not Holding Onto Suncor

This one might sound odd given the current depressed level of oil prices, and my plan to decrease my number of investment holdings, but I regret not holding onto my Suncor shares during the 4-times I bought and sold it during 2015. When oil prices eventually recover, I’d love to own a position in Suncor to act as a hedge against gas prices. I drive past a Petro-Canada station (Suncor’s retailing arm) five days a week taking my son to day care, and my main observations are that there are always cars at that station, and that their gas price has remained stubbornly high.  Even though I consider the current price of Suncor’s shares expensive, it remains a company I'd love to hold for the long-term.

Now that my Casey Kasem inspired hit (and miss) list is complete, it’s time to relax and enjoy the holidays.  Here’s wishing everyone a Merry Christmas and Happy New Year!

What were your biggest hits and misses of 2015?

Diversification vs Diworsification

"The only investors who shouldn't diversify are those who are right 100 percent of the time."
- John Templeton

"An investor should act as though he had a lifetime decision card with just twenty punches on it."
- Warren Buffett

"Diworsification is investing in too many assets with similar correlations that will result in an averaging effect."
- Concept made famous by Peter Lynch in 'One Up On Wall Street'

The three quotes above speak to the inner turmoil I feel when I think about how to diversify or further concentrate my holdings in 2016. I know for a fact that I'm not right 100% of the time, and therefore must diversify. However, I fear as I add investments to my portfolio, diworsification is real risk. Many of the asset classes I invest in as a dividend growth investor ("DGI) are highly correlated. I'm also a big fan of the Warren Buffett 'punch card' approach, and prefer to concentrate my money in companies in which I have the most confidence and understanding.

Among the many things I struggle with as a DGI located in Canada, sector diversification is near the top of my list. Although nearly 20% of my investment holdings are in the Canadian banking sector, banks actually account for 39% of the TSX Composite Index. Similarly, my 17% weighting of energy and pipelines is slightly lower than the 18% weight in the TSX Composite Index. 



After completing the above table last weekend, a couple of observations stood out:

Home Country Bias
With about 34% of my holdings in Canadian companies, I'm not as globally diversified as I should be. However, one of the big reasons for my home country bias is the favorable tax treatment of Canadian dividends, and unfavorable tax treatment of foreign dividends. Unless I receive foreign dividends in my RRSP, there is withholding tax deducted, and I also may be taxed at my marginal rate on net foreign dividends received.

Sectors Not Represented
Certain sectors, such as mining, infrastructure, retail, and transportation are missing from my portfolio. Although there are specific, rational reasons for some sectors not being represented (like my complete lack of knowledge regarding mining), other reasons are irrational (like being burned once by SNC in the infrastructure sector, and choosing to avoid being burned again), or completely lacking (Magna is a successful Canadian transportation company with a global presence and an impressive history of dividend growth).

Cash Level is Low
In contrast to 2014 during which I made a couple large purchases using cash contributed to my brokerage account quarterly, in 2015, I contributed to my brokerage accounts each month, as a way to encourage myself to make regular, smaller purchases. Since I've made regular, smaller, monthly purchases, I now have a lower cash balance to take advantage of exceptional opportunities as they arise.

Relatively Low Number of Holdings due to Monitoring
I pared down my number of investments from 29 at the end of 2014 to 26 currently. I find it's still a stretch for me to monitor so many holdings, even with six Canadian banks whose results are highly correlated. Although I see many other DGI bloggers with portfolios of 30-60+ companies, I simply can't effectively monitor that many investments given time constraints. Although, through Alaris, I gain exposure to 14 different companies, which further increases my sector and geographic diversification.

As I formulate my investment plan for 2016, I'm interested in hearing from my readers how they balance diversification and diworsification. Any tips, techniques, or insights you have regarding balancing monitoring, diversification across asset classes and geographically, and eliminating home country bias in your portfolio, would be much appreciated.

Do you consider your investment portfolio diversified? 

Why I Will NEVER Share My Net Worth Online

There was an excellent post last Monday (November 30th) featured on Rockstar Finance by Mark titled Why 185 Bloggers Are Sharing Their Net Worth. Mark's article was well researched, informative, entertaining, and gave many reasons including honesty, progress, hope, motivation, accountability, inspiration, control, and freedom why people share their net worth online. I commend every one of the 185 bloggers who have the guts to update and post their net worth every month for all the world to see.

On the other hand, I will NEVER share my net worth online. Additionally, I can't think of a situation during which I'd share my net worth with anybody in real life. When asked to give my approximate net worth while applying for mortgages, credit cards, and opening brokerage accounts, I tend to give a nice round number that might have been applicable 10 years ago. There are multiple reasons why I choose to keep my net worth private, and I'll explain the main ones below. 

Fear

What’s so scary about posting one’s net worth online? The fear of family, friends, colleagues, acquaintances and strangers judging me based on an irrelevant number (see reason 3). Everybody who posts their net worth online runs the risk of having people associate them with a number. We’re all complex, multi-faceted people that should be defined by more than just a financial figure. Yet, reading that blogger X has a net worth of $XXX could lead others to form conclusions on the individual that have little to do with reality. 

I also fear repercussions if I post my net worth online. I’m perfectly happy working for my employer, and the thought of them knowing exactly how far down the road to financial independence I am scares me. Through my own experiences and observations, I’ve seen employees let go from different companies for a variety of justified and arbitrary reasons. If a company is trying to decide to let go off a high net worth employee or a low net worth employee with a similar skills set, my bet is that they’d let go the higher net worth employee.

Privacy

In an era when people willingly give up their privacy to make their online presence more engaging, I prefer to leave a little mystery. Although I understand that providing an increased level of disclosure about your financial position makes it easier for readers to identify with you, it’s simply not a trade-off that I’m willing to make. That said, I completely understand why a blogger who is dependent on their website as an important source of income would make this trade-off in an effort to better connect with their readers.

Upon reflection, I think privacy is closely related to my fear. Even a technological dinosaur like me realizes that finding out the identity of an “anonymous” blogger is not a huge challenge for someone who is motivated and has the necessary resources and abilities. Since blogging is only a hobby for me, I’ll continue to avoid a high level of financial disclosure on-line.

Irrelevancy of Net Worth

Out of the three reasons I choose not to share my net worth, this will likely be the most controversial: I feel net worth is an irrelevant figure when it comes to assessing financial independence. The personal circumstances of an individual, like their family, work, and hobbies are ignored. Net worth says nothing about the income and expenses of an individual, and how those might change over time. The figure also does not speak to the ability of an individual to generate income from the asset components of their net worth, nor does consider the rates of interest associated with the liability component. I’d argue that when assessing financial independence, the percentage of an individual’s regular yearly expenses that are covered by their yearly passive income stream is a much better indicator of progress. Add in the expected percentage growth in passive income compared to an expected future inflation rate relating to regular expenses, and I think you’d have a highly relevant metric to judge progress toward financial independence.

Additionally, consider for a moment how many assumptions need to be made when attempting to calculate the net worth of an individual. If the individual owns a house, they would need to assess the value of the home (something even real estate agents with comparable home sales struggle with), real estate commissions, land transfer taxes, moving expenses, mortgage penalties, future mortgage rates, etc..  Are you part of a company pension plan? Congratulations! Now if you want to calculate your net worth all you have to do is accurately forecast future salary increases, rates of return on the plan, the year of your retirement, and a reasonable discount rate. Are any of your income producing assets in tax favored accounts? An accurate net worth calculation requires you to predict future income tax rates, additions and withdrawals to the accounts, and rates of returns on those assets.

In summary, I’ll never post my net worth online as I fear providing an irrelevant figure could cause people to judge me and might cause negative consequences if my privacy was ever compromised. It’s worth re-iterating that I have a great deal of respect for the 185 bloggers who post their net worth monthly. If updating the figure online monthly helps them track their progress, hold themselves accountable, motivate and inspire others, all the better! It’s just not for me.

Do you or would you post your net worth online? 

Four Lessons from Buffett's & Munger's Biographies

Part of my plan to improve as an investor is to learn from the successes and failures of others. Who better to learn from than two of the most successful investors of our time? Earlier this week, I finished reading 'Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger'.  It was Alice Schroeder's 'The Snowball: Warren Buffett and the Business of Life' that prompted me to read Mr. Munger's biography.  Below are four key lessons from the biographies of Warren Buffett and Charlie Munger.

1. Patience

Reading about how Warren Buffett waits for "fat pitches" and advises others to limit the number of punches on their lifetime decision card to 20 made me question my own patience. Charlie Munger's credo of "Preparation. Discipline. Patience. Decisiveness" is representative of his and Buffett's practice of investing a large percentage of their funds into companies in which they had great confidence. Looking at my trading activity in 2014 and 2015 objectively, it seems I've become a less patient investor. During 2014, when I was making quarterly contributions to my investment account, I tended to save up my funds to make a couple of large purchases over the course of the year. In 2015, as I made monthly contributions to my investment accounts, it is rare that I make it through an entire month without adding shares to one of my holdings. Clearly, I need to do a better job of emulating Warren and Charlie and wait for "fat pitches" to swing at.

2. Long-term Horizon

One of my favorite investing quotes is from Buffett's mentor, Benjamin Graham who famously said "In the short run, the market is a voting machine but in the long run it is a weighing machine." Buffett echos this sentiment with his assertion that he buys with the assumption that the next day the the stock market could close for five years. Mr. Munger also focuses on the long-term, as evidenced by his quote "Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things." In the last couple weeks, witnessing the downward spiral of Kinder Morgan's stock price, I'm convinced that most investors are incapable of focusing on the long-term horizon. Instead of obsessing on the rising cost of capital and leverage of the firm, I've been asking myself if the market shut down for five or ten years, would I worry about Kinder Morgan being around when it re-opened? The answer to that question is evidenced by the fact that the company remains one of my investment holdings. 

3. Buying Wonderful Businesses at Fair Prices

Warren Buffett credits Charlie Munger for helping him see the benefits of buying wonderful businesses at fair prices instead of fair businesses at wonderful prices. Quite simply, paying fair prices for quality companies, instead of focusing on "cigar butt" type businesses helped the two build Berkshire Hathaway instead to the low maintenance, decentralized, cash generating machine it is today. I feel that dividend growth investors have an advantage in the area of identifying wonderful businesses - we know that cash is king. When we see a company that generates increasing amounts of cash each year, and has a history of paying out more cash to their shareholders, we get excited. Personally, I have a much harder time determining fair prices for wonderful businesses. Despite accounting and finance designations, my faith in dividend discount models, P/E multipliers, and peer comparisons is less than 100%. That said, when various valuation metrics all point toward the same conclusion, that a wonderful company's stock is below or near it's fair price, action is warranted.

4. The Value of a Supportive Partner

Buffett and Munger derive great value from using the other as an objective sounding board to discuss investment ideas. Neither gentleman is a 'yes man', and both seem totally comfortable critiquing and questioning the assumptions of the other. Although few formal partnerships exist in the blogging community, it's interesting to see how much constructive and informed dialogue occurs. Frankly, I find the feedback from other bloggers and commenters is much more civilized than on other platforms (i.e. Seeking Alpha). Regarding Warren and Charlie, one of the more eye-opening aspects of their biographies was learning how they both completely immersed themselves in their investment analysis. Reading how Mr. Buffett's life revolves around reading annual reports, papers, and trade journals, at the expense of spending time with his family, showed me how much work being a great investor takes. I don't think many marriages could survive having one spouse totally immersed in their own pursuits, and I give the wives of Warren and Charlie a lot of credit for tolerating their husbands' obsession.

Incorporating the four lessons above into my investment process can only help me improve as an investor. I yearn to be a "learning machine" like Warren and Charlie, but have to steer clear of immersing myself in investing at the expense of spending quality time with those I care about.  

Have you learned any important lessons from Warren Buffett, Charlie Munger, or other famous investors? 

December Stock Watch List

With the exception of my quarterly goal updates, monthly watch list posts have quickly become my favorite recurring entry. These posts help me focus my research and monitoring efforts on a handful of companies. With the North American markets still trending sideways heading into 2016, there are several companies that I’ll be keeping a close eye on this month.

Royal Bank (TSE = RY): Target Price = $72 (vs $72 last month)

The main reason that Royal Bank continues to be on my watch list is that I need to pick-up some shares in my unregistered account so that I can sell the corresponding position in my RRSP (after waiting a month to avoid tax penalties) in order to complete my portfolio transformation. Although I’m currently overweight Royal Bank, I continue to think it’s reasonably priced (P/E ~ 12X). I don’t mind collecting quarterly dividends (yield over 4%) while I wait for an opportunity to pick up shares on a dip.  On the flip side, if the share price climbs over $80, I’d likely sell my position in my RRSP as I feel Canadian banks’ results will suffer in 2016 due to the prolonged slump in the price of oil.

Bank of Montreal (TSE = BMO): Target Price = $72

After starting my position in BMO late in 2008, adding more shares during March 2013, I’m looking to complete my position in this bank on weakness in share price. After announcing a dividend increase today (the second this year), the shares are up over 1.5%. However, the shares are still reasonably priced (P/E just over 12X) and yielding 4.2%. 

Enbridge Income Fund (TSE = ENF): Target Price = $28

After trading into and out of Enbridge Income Fund three times in November, I’m considering keeping a position in my RRSP over the winter. Each time I sold my temporary position in my RRSP last month, I felt sad about getting rid of this fairly price (P/E ~16X) pipeline asset play yielding almost 6%, with a likely 10% dividend hike coming this Thursday. Part of the reason I’d like to keep this in my RRSP over the winter is the fact I pay my monthly gas bill to an Enbridge subsidiary, and the monthly dividends would help hedge my gas bill if this winter turns out to be another cold one. At the very least, I plan to be a shareholder in my RRSP this Thursday when I anticipate an announcement of the previously telegraphed dividend hike.

Digital Realty Trust (NYSE = DLR): Target Price = $68

Although I put Digital Realty Trust on the list, generally what I’m looking to do is to take advantage of an expected US interest rate hike in December to add some diversification to my current US REIT holdings of Realty Income and Omega Healthcare. Ideally, I’d like to invest in a type of REIT that I can’t buy on the Toronto Stock Exchange. Other options include Tanger (discount shopping centers), Chatham Lodging (hotels), or Extra Space Storage (storage). I admire Digital Realty Trust due to their strong balance sheet (BBB/Baa2 credit ratings), history of dividend growth, and the wide moat management has created with their business model.

As with other months, I always keep some cash aside to take advantage of great opportunities that might occur as market sentiment shifts. That said, with the exception of possibly adding a bit more to my overweight Alaris position, my bet is that any buys this month will come from the above list. Here’s wishing all my readers fruitful pickings in the last month of 2015 :)

What companies are on your watch list this December?