Some friends don’t believe that I qualify as a Passive Canadian Investor. They say this simply because I maintain a small trading account rather turn everything over to finance guy to plough into his favorite mutual funds. My trading account, a self directed RSP, represents just 6% of my holdings. The remaining 94% is made up of mutual funds and GICs with more GICs than funds. The portfolio I speak of on this blog is just the trading account and funds. I’d say that’s pretty passive. In fact, active traders would consider such a portfolio to be ultra conservative. Very Canadian eh!
I tend to pay the most attention and have the most fun, with my small trading account. It’s a hobby. Among all the available choices, I believe that ETFs are the easiest to understand and present a best opportunity for a novice investor like myself.
When I first posted about ETFs I failed to mention that most of my trading success, since then, has involved ETFs. Not to say that I’ve never made a decent stock pick but I tend to buy and hold stocks rather than trade them. That’s the difference between trading and investing. Traders buy and sell, investors pick good companies and hold them for the long haul. My trading activities are an attempt to recoup the HudBay Mineral loss as described in my last post.
ETFs seem ideally suited for trading, especially if you stay with commodities. When oil or gold are way up, they inevitably cycle down. At some point on the way down, you pick an entry point and jump in. Hopefully, you catch the bottom, or very nearly, and soon enjoy the ride up.
I’d be fibbing if I didn’t admit to being tricked on occasion. I bought the gold ETF (XDG) once while gold was at $900US having just fallen from $1,000US. I wrongly believed that it would jump back up to and possibly over $1,000US. I misunderstood something about that cycle as gold dropped all the way to $750US. Needless to say, the shares of the gold producing companies held within the ETF dropped off accordingly. I held those XDG units for several months before selling at a very small profit.
I recently bought XDG once again at 19.01. Figuring that a quick 6% gain would be nice, I put in a sell order the following day for 20.20. The following month the transaction was executed at 20.20. A nice return in 40 days. Had I exercised a bit more patience I cold have held them for another two weeks and received 21.00. On the other hand, they are down to 19.13 today.
Wednesday, June 17, 2009
Monday, June 8, 2009
HudBay Minerals - My BIG Mistake
For most of 2007 I held large cap financials in my small trading account. I felt good about my decision to hold Manulife (MFC) and Power Financial (PWF), two of Canada’s premier financial services companies.
During 2007 I watched, from the sidelines, a few corporate takeovers. I learned that the initial offer per share often involved a premium of 20-30% above the previous day’s close. Additionally, I noted that there was often a run up in the share price after the initial offer as the market inevitably anticipated increased offers to come. The Board of the target company would declare the offered takeover price totally inadequate. The aggressor would respond with a revised full and final offer, usually somewhat higher than the initial offer but not even close to the ultimate full and final offer. Just as often, a third company would enter the fray and initiate a bidding war.
An example of the takeover process in 2007 involved Alcan (AL), eventually won by Rio Tinto (RTP:NY), who beat out Alcoa (AA:NY). Closer to home, right here in the west, was the takeover of Agricore United (AU) by Sask Pool (SWP) after out bidding Richardson. In both cases there was a considerable run up in the share price of the target company before the deal was done. My sense was that takeovers are good...if you happen to hold shares of the target company.
In the summer of 2007 I obviously had too much time on my hands, evidenced by the fact that I was watching a lot of BNN, Canada’s business news television channel.
It seemed that every week or so a guest analyst would heap praise upon HudBay Minerals (HBM). The reasons were as varied as the number of analysts. HudBay, I came to understand, had a wonderful balance sheet with nearly half a billion dollars of unencumbered capital and was spinning off nearly a million dollars of free cash flow each day! The price of zinc, HudBay’s principal product, had reached an all time high a few months earlier and was expected to rise again. Could it get any better than that? Almost to a man, the analysts picked HudBay Minerals as one of their top three picks and more often than not, HudBay was number one.
Finally, one day the analyst du jour declared HudBay to be the number one takeover target in North America if not the world! Well, didn’t that push me over the edge! With my newly acquired insight into the world of corporate takeovers I couldn’t wait to get my feet wet and my hands on some HudBay shares. I dove right in.
As a result, I pretty much liquidated my trading account. I sold off Manulife and Power Financial. On July 11, 2007 I bought HudBay at $27.35. Now, all there was left was to wait for the inevitable takeover offer and subsequent run up. NOT!
At that time, the price of zinc had popped to very near its all time high. Shortly thereafter the whole commodity sell off began. It has yet to come back. At about the same time HudBay was in the news because its Flin Flon smelter was revealed to be contaminating the entire town and surrounding area. Not good for share prices.
These two factors, the drop in the price of zinc and news stories about contamination, combined to kill the HudBay share price. In 2007, I knew nothing of stop losses. I wish that I had taken the time to learn.
I road my $27.35 shares down to $15.69 before bailing on January 18, 2008. For me, a huge loss! The HudBay share price eventually bottomed at $2.90 last December. They have since recovered to about $8.00 as of today.
The worst thing about my HudBay experience was that I was so excited the day of my purchase, I dashed off an email to family and friends recommending that they get on board. As far as I know, no one took my advice as they are, as a group, more passive than I. I believe that most of them hold only mutual funds and do not even have a trading account. For this I am thankful. Never again will I recommend a stock to family or friends.
During 2007 I watched, from the sidelines, a few corporate takeovers. I learned that the initial offer per share often involved a premium of 20-30% above the previous day’s close. Additionally, I noted that there was often a run up in the share price after the initial offer as the market inevitably anticipated increased offers to come. The Board of the target company would declare the offered takeover price totally inadequate. The aggressor would respond with a revised full and final offer, usually somewhat higher than the initial offer but not even close to the ultimate full and final offer. Just as often, a third company would enter the fray and initiate a bidding war.
An example of the takeover process in 2007 involved Alcan (AL), eventually won by Rio Tinto (RTP:NY), who beat out Alcoa (AA:NY). Closer to home, right here in the west, was the takeover of Agricore United (AU) by Sask Pool (SWP) after out bidding Richardson. In both cases there was a considerable run up in the share price of the target company before the deal was done. My sense was that takeovers are good...if you happen to hold shares of the target company.
In the summer of 2007 I obviously had too much time on my hands, evidenced by the fact that I was watching a lot of BNN, Canada’s business news television channel.
It seemed that every week or so a guest analyst would heap praise upon HudBay Minerals (HBM). The reasons were as varied as the number of analysts. HudBay, I came to understand, had a wonderful balance sheet with nearly half a billion dollars of unencumbered capital and was spinning off nearly a million dollars of free cash flow each day! The price of zinc, HudBay’s principal product, had reached an all time high a few months earlier and was expected to rise again. Could it get any better than that? Almost to a man, the analysts picked HudBay Minerals as one of their top three picks and more often than not, HudBay was number one.
Finally, one day the analyst du jour declared HudBay to be the number one takeover target in North America if not the world! Well, didn’t that push me over the edge! With my newly acquired insight into the world of corporate takeovers I couldn’t wait to get my feet wet and my hands on some HudBay shares. I dove right in.
As a result, I pretty much liquidated my trading account. I sold off Manulife and Power Financial. On July 11, 2007 I bought HudBay at $27.35. Now, all there was left was to wait for the inevitable takeover offer and subsequent run up. NOT!
At that time, the price of zinc had popped to very near its all time high. Shortly thereafter the whole commodity sell off began. It has yet to come back. At about the same time HudBay was in the news because its Flin Flon smelter was revealed to be contaminating the entire town and surrounding area. Not good for share prices.
These two factors, the drop in the price of zinc and news stories about contamination, combined to kill the HudBay share price. In 2007, I knew nothing of stop losses. I wish that I had taken the time to learn.
I road my $27.35 shares down to $15.69 before bailing on January 18, 2008. For me, a huge loss! The HudBay share price eventually bottomed at $2.90 last December. They have since recovered to about $8.00 as of today.
The worst thing about my HudBay experience was that I was so excited the day of my purchase, I dashed off an email to family and friends recommending that they get on board. As far as I know, no one took my advice as they are, as a group, more passive than I. I believe that most of them hold only mutual funds and do not even have a trading account. For this I am thankful. Never again will I recommend a stock to family or friends.
Monday, June 1, 2009
My Home Run! (Part 2 of 2)
At the end of 2002 the value of the three remaining funds was about 66% of the original investment. By the end of 2003 they'd recovered to the 76% level. These three funds would test my resolve to never sell at a loss.
In mid 2004 my patience ran out and I undertook a serious review of these holdings. I made the decision to transfer the investment in the Canadian Fund to a very attractive Income & Growth Fund that was performing much better than anything I was holding. By year end, the revised holdings were worth 87% of the original amount.
In mid 2005 I rolled the weaker of the two Global Funds, which never went above 66% of the original value, into the Income & Growth Fund. Two months later the other Global Fund recovered to the a level whereby I was able to sell the units and put a full measure back into my GIC ladder.
Half way to recovering the investment in the Fab Four and they were all gone. Two back into GICs and two rolled into the new Income & Growth Fund. For the remainder of 2005 and most of 2006 the value of the Income & Growth Fund units fluctuated between 84 & 87% of the original investment.
In the fall of 2006 I wondered why a small holding in my RSP account seemed to be outperforming everything else. I learned that this was an Index Fund, simply mirroring the TSX. As the TSX was doing well, so was the fund. At the same time, I was becoming disenchanted with the inability to sell mutual funds when the price is up. The value of fund units are set once daily, at the end of each day. If you decide to get out of a fund you have to make the decision by about 1:00 pm Eastern time. If the market and the value of a fund’s holdings fall off the cliff later in the day you take the hit, having made the decision to sell some hours ago.
I began looking for something that would provide some control over valuation and timing. I’d been paying attention to the rise and fall of energy and gold for a number of months and had come to believe that there was an opportunity if one could move quickly and time things correctly. In addition to my various funds I have a small trading account with a discount broker. I sent a note off to them asking if there was anything like an index fund that could be traded more like stocks than mutual funds. Welcome to the world of Exchange Traded Funds!
After studying and learning a bit about ETFs, (iShares) Energy Sector (XEG) and iShares Gold Sector (XDG), I took the giant leap (for me) in late September. I cashed out all the units of the Income & Growth Fund, then valued at 86% of the original investment, and put the proceeds into XEG and XDG on a 60/40 split. I bought the Energy ETF (XEG) on September 25 and the Gold ETF (XDG) the following day.
On November 30 I sold XDG for a 26% gain in 65 days! On December 14 I sold XEG for a gain of 15% in 80 days! As a result of these two trades, I was able to rebuild my GIC ladder, returning it to its original state. A ten year roller coaster ride. I had learned that this investing stuff is not for the faint of heart!
In mid 2004 my patience ran out and I undertook a serious review of these holdings. I made the decision to transfer the investment in the Canadian Fund to a very attractive Income & Growth Fund that was performing much better than anything I was holding. By year end, the revised holdings were worth 87% of the original amount.
In mid 2005 I rolled the weaker of the two Global Funds, which never went above 66% of the original value, into the Income & Growth Fund. Two months later the other Global Fund recovered to the a level whereby I was able to sell the units and put a full measure back into my GIC ladder.
Half way to recovering the investment in the Fab Four and they were all gone. Two back into GICs and two rolled into the new Income & Growth Fund. For the remainder of 2005 and most of 2006 the value of the Income & Growth Fund units fluctuated between 84 & 87% of the original investment.
In the fall of 2006 I wondered why a small holding in my RSP account seemed to be outperforming everything else. I learned that this was an Index Fund, simply mirroring the TSX. As the TSX was doing well, so was the fund. At the same time, I was becoming disenchanted with the inability to sell mutual funds when the price is up. The value of fund units are set once daily, at the end of each day. If you decide to get out of a fund you have to make the decision by about 1:00 pm Eastern time. If the market and the value of a fund’s holdings fall off the cliff later in the day you take the hit, having made the decision to sell some hours ago.
I began looking for something that would provide some control over valuation and timing. I’d been paying attention to the rise and fall of energy and gold for a number of months and had come to believe that there was an opportunity if one could move quickly and time things correctly. In addition to my various funds I have a small trading account with a discount broker. I sent a note off to them asking if there was anything like an index fund that could be traded more like stocks than mutual funds. Welcome to the world of Exchange Traded Funds!
After studying and learning a bit about ETFs, (iShares) Energy Sector (XEG) and iShares Gold Sector (XDG), I took the giant leap (for me) in late September. I cashed out all the units of the Income & Growth Fund, then valued at 86% of the original investment, and put the proceeds into XEG and XDG on a 60/40 split. I bought the Energy ETF (XEG) on September 25 and the Gold ETF (XDG) the following day.
On November 30 I sold XDG for a 26% gain in 65 days! On December 14 I sold XEG for a gain of 15% in 80 days! As a result of these two trades, I was able to rebuild my GIC ladder, returning it to its original state. A ten year roller coaster ride. I had learned that this investing stuff is not for the faint of heart!
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