Buying Dividend Stocks After A Market Crash

I made some recent purchases during the volatility in the stock markets. Being quite new to stock investing, I feel like a bit of a “green recruit” being tested in the first skirmishes of a war. I think in “A Random Walk Down Wall Street” they talk about investing on paper (not actually buying the stocks, just tracking an imaginary portfolio) is like a virgin reading about sex. The real experience is different.

Losing money isn’t fun. At the end of the dot-com bubble, I lost about 75% of what I’d invested ($15K of a $20K investment). As bizarre as it may seem (you might not believe this if you’ve been reading my blog for a while), I’m actually not all that motivated by money and I pretty well just shrugged my shoulders and carried on with my life. a couple of years ago I finally sold my position (it hadn’t done anything since) and just recently got around to re-thinking about the stock market and getting into it again.

I *really* wish I could have put that $20K into Canadian dividends 7 years ago, but such is life.

Most people don’t seem to react this way. Losing 75% of their money would make them freak out in a major way (like jumping out of a window). I’ve always followed the advice “don’t invest what you can’t afford to lose”, which is maybe what lets me be a bit more detached.

Losing 5-10% recently was nothing. More then anything I worried about missing the bottom, which as I mentioned yesterday I may have done with NA. I guess this makes me more greedy then fearful :-). If the market dropped enough to trigger a margin call, as I mentioned yesterday (say 20%), I *HOPE* that I’d respond by paying the call and transferring in more cash and buying more.

Buying on margin was scarier than I expected. My $28K margin debt is the second largest debt I’ve ever had (my $95K mortgage is the largest). With both of these debts, the things they were used to buy (the condo and the stocks) are still there and still worth money. Its *NOT* the same as $28K credit card debt. I’m not losing sleep over either debt (which I tend to be a worrier, so I think that means I’m very comfortable with them).

With both the BMO and the NA, I’m comfortable with the businesses. Every time the prices drops 5% from the lowest price I bought at, it seems to me that they’re worth buying more of (if it was worth X, its should definitely be worth 95%of X). I’m confident these are secure, strong companies that will be around for the long term (or at worst, would be acquired for a healthy portion of what I’ve paid). I felt the same way when I signed on the dotted line to purchase my condo, and that’s worked out well so far.

Personal Finance

The High Cost of Being Frugal

I previously wrote about my experiences paying a lot of extra money because I wanted to save money. I’ve been recently reminded, as potential employers try to figure out how to grind me down to the lowest possible salary, how salary negotiations VERY OFTEN play out in the same way.

When I was a fresh-faced undergrad, about to get my undergrad degree in computer science, I got talking to the CEO of a startup down in San Francisco (this was at the tail end of the dot-com boom). While I was talking on the phone to the CEO, he asked me my salary requirements. I told him what my classmates were getting in their offers, and said I’d like to get something at least around that level. I wasn’t sure what to make of it when he started sputtering and said “Well, we can definitely pay that, if someone offers you more though, talk to us first, don’t just accept their offer… we’re able to negotiate…”. I got the offer from him shortly after our call and it was for double what I’d mentioned. Shocked, I happily accepted and headed to SF.

After I’d been down there, I got to know quite a few of my co-workers quite well. One of them, named Simon, was actually involved in the hiring decision and I mentioned how I was shocked to get an offer so much higher then my expectation. He told me that after the interview, the CEO was gloating about how they were going to pick me up dirt cheap from Canada and that he was getting a half-price developer. Simon told me he’d said to the CEO “yes, we can get him cheap, but once he comes down to the Bay area and realizes how much more everyone else is earning, a competitor is going to steal him away and we’ll have relocated him for nothing”. Simon then made me buy him a beer :-), however in my opinion his perspective was absolutely in the best interest of the company (and I worked very hard and loyally while I was there).

Employee retention and negotiating hard on salary are inherently at odds with each other. You can get a good deal on staff expenses, and deal with higher turn-over, or you can pay a competitive salary that will keep staff around as long as you want them. Even if someone makes a commitment for a certain length of time to a company, if a red hot job market hits us and they see friends getting huge raises by moving to a new company, the reality is commitment or no, things might get sour in a hurry (slavery and indentured servitude aren’t legal in Canada, so if they want to leave a company there isn’t much the law can do to keep them there). Heck, at the end of a rough day having a friend say “I can get you a job at my company for $5K more then you’re making” will tempt some people.

I think a lot of business owners are used to negotiating, and it only seems natural to get the best deal possible on labour costs. The thing that’s different with employees, as opposed to other expenses, is that you have to work with and rely on them to actually operate the business. If you hire someone and pat yourself on the back for getting a good deal, they’re probably starting their employment thinking they got a bad deal, which isn’t really the best attitude for them to have. The only exception to this is if someone isn’t bright enough to realize they’re being underpaid, but unfortunately I haven’t ever met a good developer who was stupid.

My plan has been, if I’m ever in a position to hire technical staff, to get the best people and pay them fairly. If I deviated away from fair, I’d move in the generous direction and expect that they’d know they’re being paid well and would put that much more into their job.

Does anyone have experience negotiating the salaries of the people you then manage? What has your experience been like?


Real Rate Of Investment Return

I was talking to a friend recently and made reference to the real rate of investment return and had the thought that it would be a very useful concept for anyone who hadn’t encountered it before. Basically the real rate of return is the annual rate of return on an investment minus inflation.

For example, stocks apparently average around a 10% return over a long period. With 3% inflation, we’d say the real return is 7% (10% cash in your pocket minus 3% lost to inflation). If you’re happy about the 5% you recently got on a GIC, the real return on it would be 2%.

You might ask, “Why do I care what the real return is? The money I get is cash in my pocket!” Great question. You care because you won’t get the cash until a later date. The real return tells you what that money will be worth in TODAY’S DOLLARS at that later date. Its easier to calculate your return in future dollars, but it can be hard to shift gears and realize a dollar is worth less in the future than now.

Suzy Orman (among others) loves to tell people how much they’ll have when they retire if they save $X amount. Say you inherit $5,000, invest it an index fund returning an average of 10%. When you retire in 30 years, you’ll have $87,247.01 (5000*(1.10)^30) they say and you’re suitably impressed. What is $87K worth 30 years from now though? Given that a movie will probably cost $25 bucks, it wouldn’t go as far as $87K would today.

A comparable investment would have a real return of $38,061.28 (5000*(1.10-0.03)^30). This is $38K which would buy $38K worth of goods today (so basically after 30 years the $5K investment will give you enough to live a pretty respectable lifestyle for a couple of years, enough to buy two nice cars or enough to take a number of pretty deluxe vacations – about 7 times the buying power of the $5K today).

I like to do all my investment projections in real returns (as Bernstein recommends). This lets you factor inflation into your plans, yet still understand at a glance what sort of buying power your money will have.

You can use all your current numbers for expenses, and if you’re comparing them to the real return of your investments you don’t have to do anything else. For example, my current living expenses are around $1200 / month. If I’m working with real returns, I can use this as my living expenses when I’m 65 and it will still be valid (I can compare expenses in today’s dollars with returns in todays’ dollars). Otherwise I’d have to adjust my expenses for inflation to compare it to future dollars.

E.g. my $1,200 expenses would be $2,912.71 (1200*(1.03)^30) 30 years from now (after inflation). The $87,247.01 above would pay for my living expenses for 29.95 months (87247.01/2912.71). The real return would cover my expenses for 31.72 months (38,061.28/1200). Basically the same results (living expenses for 2.5 years), but much easier to calculate. The difference is due to rounding errors and the fact that 1.07*1.03 ~= 1.10 (but not exactly). No one can tell you exactly what the market returns or inflation will be over the next 30 years so all these predictions are far from certain (and a slight difference between the numbers isn’t a big deal – these AREN’T precise calculations).

Clear as mud? If anyone thinks they can explain this better than I have, feel free to take a shot at it in the comments or link to better explanations (I won’t be offended 🙂 ).

Real Estate

Real Estate Valuation

I was recently up at my condo (there have been problems with the fuse box, the dryer keeps blowing out fuses) and I got talking to one of the neighbours I’ve seen up there a few times. He was quite interested in what I’d paid for the condo and has told me repeatedly that he wants to sell his 3 bedroom condo (and usually says he wants to sell it to me and tries to get an offer from me).

I’ve avoided the subject in the past, and have just reminded him that I got a really good deal on the condo I bought (which is why I bought it) and that prices in the building aren’t going up quickly (he paid $174K for his 3 bedroom years ago and there are similar units in the building being listed for that now). I mentioned this to him and warned him that it’d be tough to get a lot more then he paid for it from his unit.

Finally he managed to wear me down and I admitted to him that I’d run the number and if I was putting an offer in on a 3 bedroom condo in that area it would probably be for about $140K. At which point, of course, he looked shocked and offended and said “if there was a unit selling for that in the building *I’D* buy it!”.

The joke is, there WAS a unit selling for such a deep discount and it was his neighbour’s! of course, he didn’t put an offer in (I did and bought it).

People often seem to fall in love with one form of valuation and decide that its gospel. If your neighbour got a certain price for their property, by golly that’s what you should get too! Or if an appraiser says your property is worth $X, then $X is the MINIMUM you should accept (even if your property has been sitting on the market for 8 months with no offers).

The way I evaluate a property is much like the violent acres post, I take the rent and work backwards, deducting expenses until I figure out how much cash is available for a mortgage, work out how much mortgage that could afford in the current environment, and hope to get the property for less than that. I understand however, that just because my valuation technique says a 3 bedroom condo in that area is worth $140K, people may or may not accept it.

Ultimately something is only worth what someone else will pay for it (and what someone will sell if for). Given, that people overpay (or sell too cheaply) all the time, even this isn’t even an perfect valuation technique.

People getting locked into the view that there is only one approach to valuation (and they’re angry at anyone who doesn’t use it) makes me scratch my head.


Stock Market Volatility

As anyone following the markets has seen, they’ve been jumping around the last while, mostly moving downwards. The stocks I bought are down ~$1,600 (~4%) from when I bought. My father has his sympathetic face on when I talked to him about this, but I’m happy and wish they’d dropped further.

With real estate or stocks, the only time the price really matters is when you’re buying or you’re selling. If you’re buying, low prices are good. If you’re selling, they’re bad. With real estate I buy for the income stream of rent. With stocks I’ve been buying for the income stream of dividends. When I start bulking up my RRSP, one strategy I’m looking at is index funds, which I’ll buy in order to sell after I’m 65.

In “Four Pillars” Bernstein (or it *might* be random walk – the problem with reading a bunch of personal finance books right after another is that they blur together) repeats a few times that a market crash is great for a young person and bad for an old person. A booming market is the reverse.

Ben Stein wrote an interesting article about how massive an over-reaction to the sub-prime problems the current downturn is and how he feels this is a massive buying opportunity (after reading the article I was wishing I had more cash to put into the market – I really need to get working again 😉 ).

Since the stock market is a “secondary market” (people buying and selling ownership of companies, with the money and ownership involved not really affecting the companies in any significant way), the income stream (dividends) aren’t affected by the stock price. With a lower price, the dividend yield increases, and the income stream becomes more affordable. A massive crash would be the same thing on a larger scale. Bring it on!


Buying Stocks In A Down Market

I was asked last year what I had been buying during the stock market meltdown. I had been saving the bulk of my margin for just such a buying opportunity, so I definitely went shopping.

I previously posted my stock position as of the end of July. Since then, on margin, I’ve put another $15K into the market (two $5K buys of BMO and $5K of NA). I regretted purchasing RUS almost immediately after the purchase (somehow I didn’t realize it was a cyclical), so even though its down a lot I haven’t extended my position in it). It was up $200 after I bought it and realized it didn’t meet my criteria, so maybe I should have sold… Hindsight is 20/20. I feel like I over-bought Rothmans, and in some ways I worry that it might be riskier than banks (they haven’t banned banking in public places yet). At one point my portfolio was 1/2 ROC (and I basically said at that point “enough”).

Stock Shares Dividends / month
ROC 705 $70.50
BMO 294 $66.64
RUS 159 $23.85
NA 168 $33.60
Margin $28K -$164.45

On a monthly basis, this gives me a “cashflow” of -$5.42 (so my passive income has become passive debt 😉 ) $32.64 (stupid addition!). I was tempted to pick up another $5K of NA, and actually put in an order for it at $53.38 (2 hours after it had been that price), but its just been moving up since then so I missed out.

My hope is that the dividends will pay the interest charges mostly, and if one or two of the dividends gets raised, pretty quickly it’ll start paying down the debt. If there was a massive drop (to the point where my margin debt reached 70% of the value of my securities – if my stocks dropped 18% from their current value) I would have to pay a margin call (add money to the account to prevent them selling off my securities), which I’d be willing & able to do (I have $10K cash right now, and a $20K LOC). The other risk is if none of the dividends are raised, or if RUS cuts its dividend, eventually I’ll have to transfer money into the account to pay off what would become the mounting debt. I am aware of this risk and accept it. The other risk is if interest rates shoot up, E*Trade’s margin debt interest rate is based on prime, so it would increase as well. I would just start paying it down more aggressively in this situation.

Since I can deduct the interest charges (as investment expenses) and the dividends are tax preferred, I’m expecting the tax savings will more then make up for the $4 / month.

While there are some risks, and my passive income has gone down a bit, I think this is a rationale attempt to take advantage of what I hope was an irrational dip in the market. If all of these companies went bankrupt, I could afford the $163 / month payments (and you’d read me grumbling about it for some time 😉 ).

I realize also that I am very focused on banks (long term I’d love to add in some solid dividends from companies in an unrelated sectors such as Loblaws and an Energy stock and a partially unrelated insurance and investment company). Furthermore I realize I may be over-focusing on high-yielding dividend stocks rather then stocks with high dividend GROWTH. Right now I like the money in the bank and being able to have a foundation I can count on rather then buying for (less certain) future gains. As long as the dividends keep up with inflation (3% annual growth, which would be considered VERY meager), I’m content.

So there I am :-). It doesn’t really matter, but the current value of my securities is $48.8K (down $750 from what I paid for them) and I’ve received $72.60 in dividends so far (from ROC). I’m expecting my next dividend to come at the end of the month from BMO.


Money Smarts Changes

Mike recently hinted at some upcoming changes and got frequent commenters intrigued. In the past, it’s often take us a couple of stabs to clearly convey changes to the blog, so this is my half of the description of what’s happening.  Mike should be providing more details tomorrow.

Mike recently called me up, reminded me that when I sold him my half of the blog we’d agreed that either one of us could opt-out of the paying me $20 / post agreement we’d made, and that he wanted to bring it to an end. My reaction was actually to laugh, because I’d been planning for a while to tell him I was ready to wrap it up as well, so we were completely on the same page (the official credit for the “dump” goes to Mike, but it was a very mutual decision! 😉 ).

My understanding of Mike’s perspective, which I’m sure will be explained further in future posts and be put into effect in September, is that he’s interested in making the blog more practical, with posts that explain precisely how to do things. I certainly have a “navel gazing” element to my take of personal finance, musing about what it all means more often than detailing alternative asset allocations.

My current plans are somewhat up in the air. Part of me wants to go back to blogging on my own, with a more experimental approach (incorporate pod-casts, shorter daily posts, longer essays, instructional videos and the like). Part of me is drawn to moving to a totally different area and starting to blog on something other than personal finance. Part of me is also drawn to using my “blog writing” time to move forward on one of my book ideas. The current twice a week, close-to-1000 word blog posting has gotten somewhat stale for me, and if I’m going to keep learning I think I need to move to something new.

At a conference recently I talked to a woman who said that she feels every grad student needs something outside their studies to “feed their soul”. She said she cooks gourmet dinners for a dinner party every Sunday night and that feeds her soul (and her friends’ stomaches!). In “Better“, Atul Gawande talks about something similar when he discusses how writing makes him a better surgeon (and he recommends to every surgeon that they have another activity that they’re passionate about outside the hospital). Blogging has served that role for me for the last couple years of my PhD program, so it’s time to find a new outlet for this part of my life.

At every step of the way, Mike and I have been of almost the exact same mind about most issues (joining forces, how to run the blog, advertising policies, investing philosophies, acceptable and unacceptable behaviour on the part of commenters, and when to go our separate ways). From my end, I really couldn’t have asked for a better partnership (if I can find a woman like Mike I better marry her immediately! 😉 ).

Thanks to the Quest for Financial Security / Quest for Four Pillars / Four Pillars / Money Smarts Blog readers and commenters and the Canadian (and International) Personal Finance bloggers for the last three years, it’s been a blast! I’ve LOVED the comments and trackbacks (responses on other blogs to my posts)!!!


How to Get More Comments on Blog Posts

One of the best things about blogging is the comments readers leave. Far more than other publishing mediums, blogs allow the writers to get closer to having a dialogue with their readers.

On a number of occasions I’ve talked to people about comments, why readers comment and how to get them to do so more. I’m unwilling to follow a number of the approaches myself, but here they are for other bloggers to consider.

Get More Readers

There’s a certain proportion of readers who will comment on blog posts (I’ve heard the estimate of 1% from multiple sources), so the easiest way to get more comments is to get more readers. I’ve written before on some general ideas about this, but most bloggers are probably already doing everything they can to get as many readers as possible.

Write “Accessible” Posts

A friend’s father was talking about how the hardest decisions for an organization are often made the quickest. If a board of directors is considering building a new power plant, there’s probably one person who really understands what this entails and they’ll do what she thinks is best. If they’re deciding whether or not to buy new mops for the custodial staff, everyone has an opinion and the discussion may take a long time.

Similarly, complex posts will get fewer comments. I think Thicken My Wallet writes some of the most detailed and insightful posts in the personal finance blogosphere (I think 98% of his stuff is gold). A ton of his posts get 1 or 2 comments, and some don’t get any.

If a blogger writes nothing but rehashes on the themes of “avoid debt”, “investment X is AMAZING!”, “investment Y SUCKS!”, “latte factors”, or “spend less than you earn”, it will often be a blog that will get tons of commenters (as everyone can put together a comment on many of these topics).

I think Garth Turner at is pretty funny, but basically every one of his posts boils down to “real estate is over priced and the market is going to crash”. Each of his posts gets hundreds of comments.

This is something that I think has limited the comments I get, but I’m just not willing to write posts that keep going over the same territory repeatedly (it seems boring to me).

Write Inflammatory Posts

Casey Serin is the master of this, but bloggers learn when a post hits certain buttons among their readership. Writing a post on the subject is a good way to get passionate members of both sides posting comments. Our posts on real estate agents do this, although Mike and I have only written these posts when we have something to say, not to get people fired up.

A high traffic blog could easily be created around the idea of a daily post criticizing real estate agents. You’d get the agent rebuttals, people agreeing, people leaving anecdotes of bad experiences, and so forth. Each day, just write 400 words and get everyone going again. Other ideas would be daily posts on: why the government needs to give poor people money, why poor people are the cause of all of society’s ills, how you just need to *believe* in success to achieve it, how taxation is evil, how real estate is the easy path to riches, how Forex trading is the easy path to riches, how gold is the easy path to riches, or how some particular stock trading systems is the easy path to riches. Don’t do anything substantive on any of these topics, just keep saying the same vacuous things in different ways each day.

Respond to Comments

When I first dabbled with blogging I thought that it might make sense to not respond to comments at all. My thinking way that I have my say in the posts, so perhaps I should let readers talk it out between themselves in the comments. If your goal is to get more comments, DEFINITELY respond to as many comments as you can. People will be far more likely to leave comments in the future if they get a response. It also leads into discussions in the comments section, which will tend to draw more people in and get more commenting happening.

Encourage Commenters

I think we’ve had some AMAZING people commenting on this blog over the years, but there have been a couple of crazies that stuck around for quite a while. They’re often good at writing inflammatory comments and getting people going, and they leave LOTS of comments, so encouraging them may be a good idea if lots of comments is your goal. I always wanted to maintain a high value of commenting as well as raw number, so I’d ignore them and eventually the nuts would move on (probably related to my last point: if you ignore the good commenters they’ll move on too).

Mention Comments / Commenters in Posts

On occasion I’ve based a post around a good comment or highlight a commenter in a post. This is like the last two ideas on steroids (and is worth doing).

Link to, and Comment on, Other Blogs

It may only lead to a single comment, but most readers have probably seen the comments bloggers leave one another thanking them for links. Linking to other blogs and other blogs’ posts is worthwhile. When I get a good comment from a blogger I haven’t seen before, I’m VERY likely to go and check out their blog (and usually leave at least a couple of comments on interesting posts). Theoretically, bloggers should leave good comments since they got enough interesting ideas to write posts on their own blogs (and can toss a couple interesting ideas into the comment section of other blogs).

Keep Posts Short

My posts are too long, I realize many people just won’t get all the way through a 1,000 word post. Some commenters will leave comments without reading the entire post, but they’re jackasses for the most part. Keeping posts short and digestible will increase the number of people who finish reading it, and therefore may consider leaving a comment.

Ask Your Readers Questions

I suspect some people are willing to comment but just can’t think of anything to write. One technique is to try to encourage discussion with a few questions at the end of a post that you hope people will comment on.

What have you found to be the posts most likely to get you to leave a comment? For bloggers out there, what have you found to be the best ways to get readers to comment?