Best stocks and stock splits

Everyday, we realize that something doesn't work, even with the things in which we have some faith. For instance, I've lately realized that my best friend is perhaps not my friend anymore for no particular reason. He just doesn't seem interested in spending time with me anymore. But hey, life is a balance. Perhaps I've never had so few friends over the last 10 years but I've never had so much money. If my portfolio continues to grow every year, I'll probably have no more friends in a year or two. But, who cares. Who fucking cares about having friends?

On the stock market, there's also strange things that don't seem to work or make any sense. I'm talking here about stock splits. There's been stock splits with TJX, Ross Stores, Alimentation Couche-Tard, CCL industries and today, Enghouse Systems. We're talking here about la crème de la crème, mes amis. Yes, try to find better cream on the market and you'll find it pretty hard.

We all know that stock splits have no other use than create a lower price for ignorant investors who think that the price of a share indicates if it's pricey or cheap. In other words, these people invest on the stock market while ignoring the signification of a PE ratio. These people never realized that buying 10 shares at 100$/piece represents the same global price than paying 1 share for 1000$.

What it means is that even the best managers in North America manage their stock while thinking about idiots. They know that a percentage of people will be more inclined in buying their stock if it's price is 50$ instead of 100$. So, they accept that nonsense and, in a way, they encourage it, which disappoints me a bit.

If I was a CEO, I'd try as much as possible to have the higher possible price for my shares. In that regard, a reverse-split would be better in my opinion. I'd prefer to give 10 shares at 100$ to people who currently own 100 shares at 10$ each. Thus, you get rid of a percentage of speculators. 

How come a CEO wants to have a share artificially more expensive just because people buy it because of it's "low" price? 

Simulations Plus (SLP)

I don’t like nano and micro-caps. I’m not even sure that I like small caps. But, once in a while, there’s an interesting name here and there, and even if I usually don’t plan to buy them, I keep an eye on them.

Simulation Plus (SLP) is an interesting stock. It looks like a Computer Modeling Group (CMG.TO) for the pharma industry: They design and develop pharmaceutical simulation softwares for use in pharmaceutical researches and in the education of pharmacy and medical students. But while CMG is related to a cyclical industry, SLP is related to a steady industry. 

Like written before, that stock is on the frontier between micro-caps and small caps. The market cap is about 320 million dollars. 

Here’s a list of the pluses and the minuses. The size of the company is both a plus (a lot of room to grow) and a minus (not established business).

Plus :

Good predictability : 75% according to Value Line

Good industry

Very low Beta (around 0)

No debt

31% insider ownership

Good net profit margins (around 24%)

Good return on equity (around 20%)

Annual growth last 5 years: 21%

Estimated annual growth next 5 years: 20%

Minus :

Very small business (63 employees in november 2018)

High payout ratio for a growing business (around 60%)

Some dilution of the float (which is however normal for a growing company) but maybe they wouldn't have to issue shares if they didn't have a fucking payout ratio of 60%. 

Very expensive (current PE ratio: 40, Forward PE ratio: 36)

Overall, it looks like a good company. I like many things, such as the debt-free aspect and the high insider ownership.  The company looks healthy. But, we could find easily a stock with a growth slightly lower and a PE way lower. 

So, for me, SLP is to keep an eye on, but it should be at least 30% cheaper to interest me.

How much to retire?

On a cyclical basis, I’m thinking about retirement. I don’t know for you, but me, after a few years at the same place, I’m tired of my job. I wonder if I’ll ever find something which will suit me for a long time. I’d say that it looks impossible.

So, how much would be necessary to say goodbye to it all?

I’m often tempted to say that 500 000$ would probably be enough, given the fact that the market has an average annual performance of about 10%. Which means that you could pay yourself an income of 50 000$ on an annual basis (with some deductions if a part of that money is on your retirement account) and your portfolio would continue to grow, or at least, stay steady.

With 50 000$ a year, you'd get something between 3000 and 4000$ a month. If you live in Vancouver, you'll probably die after 2 months with that money, but everywhere else in Canada, you're probably gonna be OK to pay the grocery, the city taxes, some clothes, some trips. You’re not rich, but no poor either.

So, I’d say that, when you’re at a point where you just want to say a big fuck you to everyone, you could do it with a portfolio of 500 000$. But if you still have some patience in you, you could wait 5 more years and wait for the 1M$ mark (you’ll get there 5 years later if you achieve a 14% annual performance). Then, with 1M$, it’s obvious you’ll be OK for retirement, whatever your age is. With that money, you could do whatever you want for the rest of your life if you’re not too much into luxury. You’ll surely be able to travel at least twice a year, you’ll be able to eat well, dress well, have an OK car and have an active life.

And you won’t have to work along people you don’t like in a context you don’t like either. How many days do we really enjoy yearly? If the proportion appears too low, retirement as soon as possible should be your main objective. Because life is short.  

Are we really homo sapiens?

Sometimes, I have a moment of great lucidity. I fully realize that humans are way less intelligent than they think. 

Humans believe they have a soul. Many people believe they will live after death. Unable to cope with an ending similar to a TV screen going black, they live their life following some crazy books written by pedophiles and murderers (usually both). And they despise people following another crazy book. 

Not less crazy than that is to realize that nihilism is the path to follow by intelligent people. But how intelligent is it to be a nihilist? How intelligent is it to believe in nothing and contemplate every day the absurdity of everything. Is that really intelligent? 

There's no escape my friends. Whatever we'll do, it won't be that intelligent.

That was the despair intro. Now, let's go to an observation about people on the market. There's gonna be a little bit of despair there too.  

My dear friend whom I've initiated to the market recently called me. He said to me that he sold about 30% of his stocks in december, in the eye of the storm. And now, mid-january, things looked better so he asked me about some new stocks to buy. 

What the fuck? Sell low then buy high? My friend looked perfectly comfortable with that approach. And I consider him as an intelligent guy. The problem is that he keeps on seeing the market as a vague thing where stocks go up and down randomly. I don't think that he understands that the trajectory of a stock is related to it's financial performance (which should be the basis for anyone investing on the market). And he vaguely reproached me to recommend negatively Tesla to him while the stock recently going up something like 10-15%. What the fuck? He knows where I live and what I drive. How could he believe that my opinion about a stock is always linked to it's performance? I should live in a mansion and drive a car way more recent than my 2010 shit if I was always 100% right.   

I didnt't have anything to answer about the Tesla comment. It would have been like arguing about my paranormal skills. 

The greatness of Visa and Mastercard

There's probably 100 or 200 great businesses in the stock market (don't have a clue about the exact number but there's surely not 1000 great businesses). However, there's probably not more than 20 or 30 incredible businesses. To me, Visa and Mastercard are part of that very select club.

They have a moat which appears to be one of the widest on earth. And what's their closest competitor? American Express. And Amex is not even close.

For those who don't know the concept, Visa and Mastercard take no risks at all. They don't lend money like American Express. They offer the payment network to link you to merchants. And the big banks associate with Visa and Mastercard to lend money to consumers. So, when you load your credit card, you pay back what you owe to some bank. Visa and Mastercard only offer the technical facilities to pay with a credit card and they get paid when you use their cards at any shop.

There's less and less money around us. ATM machines are not a tendency for the future (remember that good old Directcash Payment recommended by some well known name, anyone?). Visa and Mastercard are used in most countries of the world, excluding China (where nothing from our demonic western civilization is welcomed).

Both companies have great financials. Low debt, high ROE, high growth. They both buy back shares. They're both essential to the majority of the population. Have you seen their net profit margins? 44% for Mastercard and 50% for Visa in 2018. Find me something that beats that. Find me some fucking weed stock that beats that. Find me some fucking Tesla that beats that. 

Some people will say that they'll wait for a better entry point for these stocks. You may wait, but don't wait too much and don't set a fucking specific price you want like these assholes on Seeking Alpha who keep writing shit like "I'll buy when the stock is in low 80's" (talking about a stock that's never been cheaper than 100$ for the last 5 years).

It's simple, it's just a matter of historical valuation. If the stock has an historical forward PE of 20 and the growth of the past looks comparable to the growth of the future (which is the case for Visa and Mastercard in my opinion) and the stock is selling at a forward PE of 30, don't fucking buy it. However, if it's selling for 18 times next year's earning, then fucking buy it. Don't hope to buy it for 15 times next year's earning because you'll only pay that price when all the rest of the market will be avalaible for 8 times next year's earnings.

The only risk I see for these businesses is if management goes crazy. It may happen, but it's one of the few businesses where the brand is so solid, so established, so part of everyday life, that management will have to act really like mofos to destroy the company. And another company will have a lot of work to do to start from scratch and rise to the same level. Just like Google, in a way. 

I don't understand why people take risks with other stocks than Visa and Mastercard. Why paying an expensive price for a growth much less predictable than these two? Why paying for Tesla, hoping for profit in the long term while there's been profit for ages with Visa and Mastercard? Of course, don't put 50% of your portfolio in these two, because they're a bit expensive, but I'm pretty sure that, in every portfolio of canadian individual investors, I'd find at least 2 or 3 stocks that should be replaced by Visa and Mastercard. Why pay 8 times earnings for some crappy stock when you can buy an incredible stock for 20 times next year's earnings? I know it sounds a little weird but paying a slightly expensive price is usually the right thing to do. 

10 years of investment on 100 lines

Almost every long-term investor will tell you that they've made huge mistakes that made them lose a lot of money. I've read that at the moment I started as an investor. And even if I knew it was a danger, I've made exactly the kind of mistakes that all these people were talking about. Because, at a moment or another, we're all tempted to go out of the official road and find a shortcut in the woods. And that's where we get fucked.

Last fall, it was 10 years since I was on the stock market. I thought it would be a good moment to look back and see the path I've been through.

It all begins in 2008 with my colleague/office neighbour who's a long-time investor. He talks to me about the market and I'm getting more and more interested. During the fall, the subprime crisis has begun. I open an account and my first buy is 49 shares of Scotia Bank. Then, some Royal Bank shares. In may of 2009, my portfolio looks like this:

Royal Bank: 35%

Scotia Bank: 25%

Transcanada Pipelines: 19%

Yellow Pages: 15%

Biosyntech (an obscure bio-crap penny stock now dead): 6%

I don't really know what I own at this time. Of course, I know that Royal and Scotia banks are banks. But how strong are these businesses? I don't know. I'm seduced by the thoughts of my colleague about "blue chips" in that turbulent period. When everything crashes and the apocalypse is ringing at the door, what's better than a big company that's gonna survive? Obviously, with some perspective, I can now see that if I'd knew how to find a great company back then, I'd have much more money now. But it didn't turn bad. It was an OK start but not much better than "OK".

In 2009, it's still the crisis. In march of 2009, the market reaches an absolute low and it's completely crazy to read all the articles about how long it will take for the market to recover. We don't know that the market will soon start to recover. We all think that it may stall there for a lot of time. Anyway, at this time, I have a relatively small portfolio, so, the apocalypse isn't destroying all my lifetime's saving. I'm zen, or so.

In 2010, I'm still easily influenced or even manipulated by what others think (actually, I'll be easily manipulated for many years to come). My portfolio now includes all the stocks of 2009 (minus Biosyntech which is now dead) plus Johnson and Johnson (I bought it because of my neighbour and because of a post of Bernard Mooney on www.lesaffaires.com) and Cominar, because of it's juicy dividend (such as Yellow Pages). I know a bit about the sectors in which operate my stocks, but I still don't know what are their economic strenghts or weaknesses. I don't really care about it. I just want dividends first, than appreciation of the capital.

In 2011, the market has recovered a lot from the crisis. I'm starting to be much more informed about the market. I read a lot of stuff on the Internet and I've read some interesting books about investment. In may of 2011, my portfolio is as weak as the one of 2010, but at the end of the year, I own some good businesses, which makes me understand that I've learned some important stuff along the year about ROE, PE ratio and the very abstract notion of "a good business". I still own some crappy stocks but I also own MTY Food Group, Grainger, Boyd Group, Mastercard and Apple. I'll sell all these great stocks in the months or years that will follow. So, 2011 appears like a brief moment of discernment.

Early in 2012, I sell all my banks shares, which means that I sell what I don't understand (banks are hard to understand). It's a step in the good direction and it shows that I was knew more what I was doing, even if these banks weren't bad investments. It's also in 2012 that I discover Constellation Software which is by far my best investment of all-time. I buy 50 shares for a little less than 90$ each. I'm proud about that buy because, at the time, that stock wasn't very popular. Very few people talked about it and to me, it was obvious that it was a great stock. On my check-list (which I developed during that period), CSU scored incredibly high. Here's the top 5 of my portfolio in may of 2012:

Apple: 12,3%

MTY Food group: 7,4%

Advance Auto Parts: 7,2%

Intel: 6,3%

Boyd Group: 6%

In 2013, I'm heavily into high ROE stocks. In the beginning of the year, I own a very solid portfolio of great stocks. But, towards the end of the year, I discover the venture stock exchange (TSV) and I start to gamble a bit with crappy stocks like Macro Enterprises (MCR.V), Loyalist Group (LOY.V), NTG Clarity Network (NCI.V) and Rifco (RFC.V). At the end of the year, 25 fucking percent of my portfolio is on the Venture.

In 2014, I start this blog because I like Jason Donville and his picks. Now, he's my guru and I follow him like people follow Forrest Gump while he's running in the desert. Here's the top 5 of my portfolio in may of 2014, just a few weeks before the inception of this blog:

Constellation Software: 10%

Rifco: 9,9%

Cipher Pharma: 8,1%

CGI Group:  7,6%

Valeant: 7,3%

In 2015, I'm crazy about Valeant. Because a lot of people are. It's probably the period where I'm the less intelligent as an investor, because I have enough knowledges to do well but I don't use these knowledges. I rely on the opinions of so-called great investors. At less, in 2008, I had the excuse of little experience for making bad choices. In 2015, I don't have any excuse. Here's how my portolio looks in august of 2015, at the height of the Valeant madness:

Valeant: 15%

Constellation Software: 10,4%

CGI Group: 9,3%

Gilead: 8,5%

Portfolio Recovery and Associates: 8%

In 2016, it's a violent awakening. With the Valeant fiasco (and some other fiascos such as Concordia Healthcare), I understand that a lot of so-called great investors improvise much more than what we think. They look confident and even cocky in front of a camera, but they're not smarter than a guy who has read 5 or 6 classic investment books and has invested for 5 or 6 years. So, in 2016, I start to despise most investors which now appear like a fucking bunch of pee-wees to me (and still do, to this date). It's in 2016 that I almost close every orifice of my head to the opinion of others. And I go back to my approach of 2011-2012 with some adjustments. The shock is brutal and a lot of money vanished with it, but I'd almost say that it was necessary. There's nothing like losing 50 000$ to change your mind about something (well, perhaps that we learn even more when we lose 60 billion dollars like Jeff Bezos after his separation).

In 2017, my approach to investment has reached a mature level. I'll probably keep on getting better over time, but I really think that from this year, I really know what I'm doing. I put a lot of attention on forward PE ratio, ROE, Beta and predictability of the results. It helps me to build a very solid conglomerate of stocks that grow more than the market but are also not much more expensive than the market, with a smaller beta.

It's the approach I have to this date and it served me well. I know it may sound pretentious, but I'm convinced that I'll now beat the market most of the time. I've suffered enough to learn a lot.

I think that my advices would worth a lot of money to a new investor. I've lost so much money on the market, doing so many mistakes, that I really do think that, if a new investor would come to me directly, seeking advices, he'd probably do much better than all by himself.

In retrospective, it's hard to tell how long it took me to become a good investor. I think after 3 years, in 2011, I started to do the right things. But I tried another approach in the following years which served me badly. I became really independant-minded in 2016, after about 8 years. So, it's been a long journey.

And you, how long did it take to become a good investor? Or, if you're not a good investor, for how many years have you been learning?

How the market moves

It's so sad to see how these market drops aren’t based on solid stuff.

We hear and read some comments about a positive turn-around between China and USA and, all of a sudden, everything looks good again on the market.

I knew it wasn't world war III. But I'd expected it to last a little longer. Which is sad for me because I planned to put a lot of fresh money at work in the coming weeks. Now, it looks that I won't get the bargains I'd expected to get. Surely that Donald Trump will sooner or later tell some crap that will worry the market, but he's now halfway through his mandate, so he'll probably play a little safer now.

I really hope that we'll see once again the S&P500 at an annual low, because that's a buy signal for everyone in my opinion. That's probably the only moment when you can buy your favorite stocks without too much analysis. I like these no-brainer times which don't occur that often.

So, I hope that violent movements will continue even if it makes me believe that most investors are complete retards. Come on, Constellation Software was selling for less than 840$ on monday and two days later, it reached 915$, without any news. When such a quiet stock goes up that way in such a short period, it's because the market is driven by mindless hords of poultry.

Hypothèque, refinancement et REEE

For once, here's a post in french. It's a subject that may interest all canadians, but my perspective is from Quebec, so it's gonna be written in that beautiful poetic language where even swearing sounds like a melody. 

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Je parle beaucoup d'actions sur ce blog, mais on oublie régulièrement que la situation financière d'une personne se compose d'autres éléments. Par exemple, possède t'on une maison et, si oui, est-elle entièrement payée ou est-elle fortement hypothéquée? Possède t'on un terrain? Possède t'on un condo en Floride? Et ainsi de suite... Tous les actifs n'ont pas la même valeur et ne sont pas associés aux mêmes frais d'entretien, mais ils contribuent tous à la richesse d'une personne. 

Outre mon portefeuille d'actions, j'ai une maison dont l'hypothèque restante représente environ 20% de la valeur marchande, ce qui est peu. J'ai donc le potentiel de refinancer substantiellement. 

Je peux donc aller chercher de l'argent aisément chez mon prêteur hypothécaire contre un taux d'un peu moins de 4%. Dépendamment de l'importance du prêt et de notre profil, le prêteur peut attribuer un refinancement sans exigences relatives à l'utilisation des sommes. Ainsi, l'emprunteur pourra rénover la maison mais aussi s'acheter une nouvelle voiture ou se faire refaire le visage avec l'argent. Et, bien entendu, l'emprunteur-investisseur peut utiliser cet argent en investissant à la bourse. 

Notons par ailleurs que les taux hypothécaires sont historiquement très bas, ce qui indique que même si ces derniers pourraient baisser, leur potentiel à la hausse est nettement supérieur au potentiel de baisse à long terme. C'est donc une bonne période pour emprunter sans se ruiner. 

Ainsi, j'ai récemment fait une demande de refinancement pour un petit montant. Rien d'exagéré (je veux que ma maison soit payée à court terme donc j'agis en conséquence). Mais je me suis dit que je pourrais contribuer au REEE de mes enfants pour 3000$ avec de l'argent emprunté à 4%. Le 3000$ investit dans un REEE (qui est un fonds commun d'actions) bénéficiera des subventions fédérales et provinciales de 30%. Ce qui donnera 900$ de bonus. Donc, 3000$ deviendront 3900$. Ensuite, le fonds commun qui reproduit la performance du S&P500 devrait selon moi aller chercher un rendement similaire à la moyenne historique, soit 10% par année en moyenne. 

J'emprunte donc de l'argent à 4% qui obtient automatiquement un 30% de rendement plus le rendement espéré de la bourse qui est de 10% de façon annuelle. C'est le meilleur placement qu'on peut faire (à part si nos enfants meurent en bas âge ou ne font pas d'études post-secondaires). 

J'investirai le reste de mon refinancement dans mes divers comptes. Je pense que cette stratégie est bonne. Je ne paierai qu'un peu plus de 1000$ d'intérêt sur la somme empruntée. Je figerai dans le béton mon taux d'intérêt pour les 5 prochaines années, ce qui sera presque suffisant pour payer le reste de la maison. Le REEE va être nettement gagnant à long terme et j'investirai à une période où la bourse est plus abordable.