Favorite Quotes from Warren Buffet

I thought I would use my final post of the year to share a few of my favorite quotes from the world's most successful investor, Warren Buffet.

“Wide diversification is only required when investors do not understand what they are doing.”

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

“We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'”

“Time is the friend of the wonderful company, the enemy of the mediocre.”

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

“Our favourite holding period is forever.”

“Only when the tide goes out do you discover who's been swimming naked”

“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years”

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

“If past history was all there was to the game, the richest people would be librarians.”

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market”

“A public-opinion poll is no substitute for thought.”

“Lethargy, bordering on sloth should remain the cornerstone of an investment style.”

2008 U.S Dividend Growth

It has been a great year for dividend growth investors with over 60% of the S&P constituents increasing their dividend in 2007. On average the companies comprising the S&P 500 increased their dividend payments by a healthy 9.7%. Total dividends paid by S&P 500 companies broke a new record with a whooping $256.6 billion distributed to shareholders. This is up $31.8 billion from $224.8 billion in 2006.

According to S&P analysts dividends will continue to rise 2008 with the average estimated increase to be 9.3%. However, this growth is not expected to be evenly distributed amongst the S&P 500 group of companies. U.S financials are going to be the obvious laggards as virtually all growth in that sector is expected to be muted by the on going sub-prime fiasco. Many analysts are in fact predicting some significant dividend cuts from the large U.S financials, which account for 30% of the dividends paid by S&P constituent companies. Respected analysts such as Goldman Sach’s William Tanona, Betsy Miller and Neil Sanyal believe that Citigroup will have to cut their dividend by as much as 40% if the estimated $18.7 billion fourth quarter write down occurs.

Citi would not be unique as many other large financial players in the U.S have already slashed their dividend such as and Washington Mutual (WM – NEW YORK),Fannie Mae (FNM – NEW YORK) and Freddie Mac (FRE – NEW YORK).

My personal opinion is that 2008 will be a terrible year for large dividend paying U.S financials. However, I also believe that they will probably be over punished, over sold and possibly ignored by many investors. Thus creating the possibility of 2008 being a once in a decade buying opportunity for quality, dividend paying large cap U.S financials.

Canadian ETFs

Those of you that are pursuing (or interested in pursuing) an index or ETF based investment strategy might find the below list helpful. I’ve listed every ETF that trades on the TSX for your perusal.

iShares CDN S&P/TSX 60 Index Fund (XIU)
iShares CDN S&P/TSX Global Gold Index Fund (XGD)
iShares CDN MSCI EAFE 100% Hedged to CAD Dollars Index Fund (XIN)
iShares CDN Scotia Capital Universe Bond Index Fund (XBB)
iShares CDN S&P/TSX Capped Energy Index Fund (XEG)
iShares CDN Scotia Capital Short Term Bond Index Fund (XSB)
iShares CDN S&P 500 Hedged to Canadian Dollars Index Fund (XSP)
iShares CDN S&P/TSX Capped Financials Index Fund (XFN)
iShares CDN S&P/TSX Capped Composite Index Fund (XIC)
iShares CDN Dow Jones Canada Select Dividend Index Fund (XDV)
iShares CDN S&P/TSX Capped REIT Index Fund (XRE)
iShares CDN S&P/TSX Completion Index Fund (XMD)
iShares CDN S&P/TSX Capped Materials Index Fund (XMA)
iShares CDN S&P/TSX Capped Income Trust Index Fund (XTR)
iShares CDN S&P/TSX Capped Information Technology Index Fund (XIT)
iShares CDN Scotia Capital Real Return Bond Index Fund (XRB)
iShares CDN Scotia Capital All Corporate Bond Index Fund (XCB)
iShares CDN Dow Jones Canada Select Growth Index Fund (XCG)
iShares CDN Scotia Capital Long Term Bond Index Fund (XLB)
iShares CDN Dow Jones Canada Select Value Index Fund (XCV)
iShares CDN Jantzi Social Index Fund (XEN)
iShares CDN Russell 2000 Index - Canadian Dollar Hedged Index Fund (XSU)
iShares CDN Scotia Capital All Government Bond Index Fund (XGB)
iShares CDN S&P/TSX SmallCap Index Fund (XCS)
Horizons BetaPro S&P/TSX 60 Bear Plus ETF (HXD)
Horizons BetaPro S&P/TSX 60 Bull Plus ETF (HXU)
Horizons BetaPro S&P/TSX Global Gold Bull Plus ETF (HGU)
Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF (HED)
Horizons BetaPro S&P/TSX Capped Financials Bear Plus ETF (HFD)
Horizons BetaPro S&P/TSX Capped Financials Bull Plus ETF (HFU)
Horizons BetaPro S&P/TSX Capped Energy Bull Plus ETF (HEU)
Horizons BetaPro S&P/TSX Global Gold Bear Plus ETF HGD)
Claymore Canadian Financial Monthly Income ETF (FIE)
Claymore BRIC ETF (CBQ)
Claymore S&P/TSX Global Mining ETF (CMW)
Claymore Canadian Fundamental Index ETF (CRQ)
Claymore CDN Dividend & Income Achievers ETF (CDZ)
Claymore Canadian Fundamental 100 Monthly Income ETF (RFI)
Claymore US Fundamental Index ETF C$ hedged (CLU)
Claymore Oil Sands Sector ETF (CLO)
Claymore International Fundamental Index ETF (CIE)
Claymore S&P/TSX CDN Preferred Share ETF (CPD)
Claymore Japan Fundamental Index ETF C$ Hedged (CJP)
Claymore Global Balanced Income ETF (CBD)
Claymore Global Balanced Growth ETF (CBN)
Claymore S&P Global Water ETF (CWW)

Recent Canadian Dividend Increases

There is nothing more satisfying to a dividend growth investor than a nice juicy dividend increase. Here is a quick recap of some of the Canadian dividend increases in the last 3 weeks.

1.National Bank (NA) increased their quarterly dividend 3.33% to 62 cents/share.

2.Reitmans (RET.A) increased their quarterly dividend 12.5% to 18 cents/share.

3.Astral Media (ACM.A) increased their semi-annual dividend 25% to 25 cents/share.

4.Canadian Western Bank (CWB) increased their quarterly dividend 11% to 10 cents/share.

5.Bank of Nova Scotia (BNS) increased their quarterly dividend by 4.44% to 47 cents/share.

6.A&W Royalties Income Fund increased their monthly distribution 2.9% to 10.6 cents/unit.

7.Laurentian Bank (LB) increased their quarterly dividend 10.3% to 32 cents/share.

8.Fortis (FTS) increased their quarterly dividend 19% to 25 cents/share.

9.Cameco (CC) increased their quarterly dividend 20% to 24 cents/share.

10.Encana (ECA) stated that they would increase their quarterly dividend 100% to 40 cents/share.

11.Vermillion Energy Trust(VET.UN) increased their monthly distribution by 12% to 19 cents/unit.

12.Agnico Eagle Mines (AEM) increased their annual dividend by 50% to 18 cents/share.

13.Fortis (FTS) increased their quarterly dividend by 19% to 25 cents/share.

14.Westshore Terminals Income Fund (WTE.UN) increased they quarterly distribution by 24% to 36 cents/share.

Santa Claus/Christmas Rally

Every year there is talk about whether or not we are going to have a Santa Claus rally, and like many other phenomenon in the world of investing we can speculate about the possibilities until we’re blue in the face. However, we won’t actually know if there is going to be a rally until after it’s happened.

What is a Santa Claus or Christmas Rally?

A Santa Claus rally is the phenomenon of the stock market rallying in the week between Christmas and New Year (this of course doesn’t always happen).

Why does it Happen?

There is no single reason behind the Christmas rally but there are many possible explanations that have been suggested:

1. People investing their Christmas bonuses

2. General happiness of fund managers and investors due to the festive season.

3. Investors erroneously equating increased sales over the Christmas period to increased future share prices.

4. Money managers pilling money back into the market so that they don’t have to explain why they ended the year with such a high cash percentage when there was no pullback in the market.

5. People investing in the market in anticipation of a Santa Claus rally.

Personally, I pay no attention to Santa Claus rallies, and spend none of my time trying to predict them however, it’s impossible to ignore it altogether as the financial media seem to love talking about it which forces everyone to at least give it a passing thought.

Recession Resistance Portfolio - compiled

As promised here is a compiled list of recession resistant stocks. Thanks to “Thicken my Wallet” and “Money Gardener” for contributing.

Sin Stocks
CDL.A - TSX
MO - NYSE
ROC- TSX
BUD - NYSE
DEO - NYSE
UTX - NYSE
BA - NYSE
BTI - AMEX
ITY - NYSE
RAI - NYSE
CG - NYSE
TAP.A - TSX

Health Care
JNJ - NYSE
CL - NYSE
WAG - NYSE
TEVA - NASDAQ
PFE - NYSE
BAX - NYSE
CLC.UN - TSX
SC – TSX
MRK - NYSE
CVS - NYSE
GSK – NYSE
PG - NYSE
SGP - NYSE
GILD- NASDAQ

Utilities
TRP - TSX
ENB - TSX
EP.UN - TSX
FCE.UN – TSX
EMA - TSK
CU – TSX
MPT.UN – TSX
APF.UN – TSX
ACO.X – TSX
MPT.UN – TSX
IPL.UN - TSX
PIF.UN – TSX
T-NYSE
T.A-TSX
RCI.B - TSX

Staples
KO - NYSE
THI-TSX
L - TSX
PEP-NYSE
CLX-NYSE

Financials
SLF - TSX
MFC - TSX
GWO - TSX

Recession Resistant Funds and ETFs

If you don’t have a lot of capital to deploy or simply want to limit to your exposure to any individual names here are some mutual funds and ETFs that you might want to consider:

MUTUAL FUNDS

1. Vice Fund (VICEX)
“The Vice Fund invests in companies, both domestic and foreign, engaged in the aerospace and defense industries, owners and operators of casinos and gaming facilities, manufacturers of gaming equipment such as slot machines, manufacturers of cigarettes and other tobacco products, and brewers, distillers, vintners and producers of other alcoholic beverages”

2. T. Rowe Price Health Sciences (PRHSX)
“To invest at least 80% of net assets in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, or the life sciences. While the fund can invest in companies of any size, the majority of fund assets are expected to be invested in large- and mid-capitalization companies.”

3. MFS Utilities (MMUFX)
"The fund focuses on utilities stocks believed to have strong growth prospects. These stocks generally come from the gas and electric utilities, telecommunications, and cable TV industries. A portion of the portfolio is typically invested in bonds and convertible securities.”

ETF’s

1. Utilities Select Sector SPDR Fund (XLU)
The Utilities Select Sector Index includes companies from the following
industries: electric utilities; multi-utilities; independent power producers &
energy traders; and gas utilities. The funds objective is to provide investment results that, before expenses, correspond generally to the price and yield performance of the index components that compose the utilities sector of the S&P 500.

2. PowerShares Dynamic Utilities Portfolio (PUI)
“The PowerShares Utilities Portfolio (Fund) seeks to replicate, before fees and expenses, the Utilities Intellidex. The Intellidex thoroughly evaluates companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. Securities shown to possess the greatest capital appreciation potential are selected by the Index and incorporated by the portfolio manager.”

3. Health Care SPDR (XLV)
The Health Care SPDR tracks companies in the health care sector and includes companies primarily involved with health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. The funds objective is to provide investment results that, before expenses, correspond generally to the price and yield performance of the index components that compose the health care sector of the S&P 500.

4. PowerShares Dynamic Healthcare Services Portfolio (PTJ)
“The PowerShares Dynamic Healthcare Services Portfolio (Fund) is based on the Dynamic Healthcare Services Intellidex Index. The Index thoroughly evaluates companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investments and risk factors. Securities shown to possess the greatest capital appreciation potential are selected by the Index and incorporated by the portfolio manager.”

Building a Recession Resistant Portfolio

As promised in my last post “Recession Proof your Portfolio” here is a list of securities that you can use as a starting point to research your own recession resistant portfolio. Please feel free to add any other picks you feel I’ve missed in the comments section and I’ll post a compiled list.

Sin Stocks
CDL.A - TSX
MO - NYSE
ROC- TSX
BUD - NYSE
DEO - NYSE
UTX - NYSE
BA - NYSE
BTI - AMEX
ITY - NYSE
RAI - NYSE
CG - NYSE
TAP.A - TSX

Health Care
JNJ - NYSE
CL - NYSE
WAG - NYSE
TEVA - NASDAQ
PFE - NYSE
BAX - NYSE
CLC.UN - TSX
SC – TSX
MRK - NYSE
CVS - NYSE
GSK - NYSE
SGP - NYSE
GILD- NASDAQ

Utilities
TRP - TSX
ENB - TSX
EP.UN - TSX
FCE.UN – TSX
EMA - TSK
CU – TSX
MPT.UN – TSX
APF.UN – TSX
ACO.X – TSX
MPT.UN – TSX

In my next post I will list a few mutual fund and Exchange Traded Funds that would be appropriate for a recession proof portfolio.

(Disclaimer: As always please do your own research and make your own decisions on which investments on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)

Recession Proof your Portfolio

If you’re like many other small investors out there you might be feeling a little pang of worry about the possibility of a recession and are starting to unload some of your more cyclical and economically sensitive names. You could simply take the proceeds of your sale and dump them into fixed income products but with bond yield so low what’s the point? Unless of course your only goal is capital preservation as current yields will just barely beat inflation. For those of you nervous about the future of the economy but want to stay invested in equities you might want to take a look at the following three recession resistant areas:

1. Sin Stocks – These would include companies involved with: booze, cigarettes or weapons. Do you know anyone who’s stopped drinking or smoking when they’ve fallen on economically bad times? Wars continue on regardless of the state of the economy.

2. Health Care – Even if the economy is in rough shape people will continue to visit the doctor, continue to take their prescriptions and continue to treat their ailments. As the North American population ages the demand for health care products is going to continue to rise regardless of the state of the economy.

3. Utilities – Regardless of the state of the economy the lights will remain on, the phones will remain connected and houses will continue to be heated in the winter and cooled in the summer.

In my next post I will provide a list of names you can use as a starting point to assemble your own recession resistant portfolio.

Recession

There has been a lot of talk recently in the financial news about the big “R”… recession. If you’ve tuned in to any business channel in the last week you would have inevitably heard at least one talking head espousing their prediction of whether or not the US will enter a recession. We all know that a recession is bad but what exactly does it mean? And how do we know when we get there?

There is no absolute universal definition of a recession however, the definition used in the press and financial media is simply “two or more consecutive quarters of real GDP decline.” However, I prefer the description given by the National Bureau of Economic Activity (NBER):

“It's more accurate to say that a recession-the way we use the word-is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when the economy is contracting. The following period is an expansion. Economic activity is below normal or diminished for some part of the recession and for some part of the following expansion as well. Some call the period of diminished activity a slump.”

The above description describes why it’s so hard to both predict recessions and determine if we are in one. By their very definition you have to use historical data to identify the “trough” or “slump” between the periods of economic expansion.

Retirement Nest Egg at the Close of Dec 3, 2007

-up 1.4% from last month
-up 7.9% in 2007
-CDN 64%
-U.S. 32%
-International 4%

TRP - 4.37%
CSH.UN - 4.24%
GWO - 4.91%
PFE - 5.12%
POW - 4.52%
BA.UN - 0.37%
WAG - 3.37%
L - 2.81%
UNS - 2.50%
GZ - 2.06%
TD - 14.29%
EIT.UN - 2.49%
JNJ - 5.95%
MMM - 3.65%
C - 3.06%
ATD.B - 3.35%
BCE - 5.77%
O'Shaughnessy’s Global Fund - 3.78%
American Growth Fund - 0.95%
CDN Value Fund - 3.44%
Small Cap Growth Fund - 4.01%
Chou Associates Fund - 10.06%
Money Market Fund - 4.92%

I made a few changes over the last month, I initiated a half position in C and took a full position in BCE. The 1.4% increase in my portfolio was a result of contributions and not share appreciation. Discounting my contributions in November my nest egg was actually down 2% from the end of October and up only 5.9% in 2007. The majority of the decline was a result of the underperformance of three of my holdings L, ATD.B and CSH.UN. I will continue to watch all three of my decliners and am considering selling L for tax reasons and switching into WN.

Purchased BCE

Shortly after Friday’s post I decided to take a full position in BCE. I am fully aware that there is some risk in this play. However, I believe that the risk reward favours investing in BCE. The worst case scenario as an investor is that the buyout does not occur and I’m left holding a position in Canada ’s largest telecommunications company.

Although the possibility exists that the deal will not go through here are the reasons I believe it will:

1. The Teachers Pension plan is not dumb and they are aware that there has always been regulatory risk and rumours regarding the opening of telecommunications markets in Canada.

2. The bond holders trying to block the deal are Bell bondholders not BCE bondholders.

3. Credit markets are in disarray due to the sub prime mess, which could cause problems raising the necessary capital. However, if financing cannot be obtained they have other options such as: increasing the amount of capital invested and refinancing later.

4. The consortium could simply walk away from the deal. However, I think that is highly unlikely as there is a $1 billion dollar break free in addition to the teachers losing hundreds of million of dollars on their existing shares of BCE.

If you want more information on the deal here is a link to the privatization page at BCE.

I would just like to reiterate that I am making an educated gamble and that buying BCE at this juncture is NOT RISK FREE so please do your own research and make your own decisions.