Current Portfolio-13 Year Track Record


Sacola                   182%

TSX                           76%

DJIA                          97%

S&P 500                   107%

Past trades total 29 wins and 3 losses with an average gain of 34%. The average holding period was 2.3 years.


Stock Markets - May 2013

          Six years ago, almost to the day, the Dow Jones Industrial Average (DJIA) traded at 18.3 times earnings and the S&P 500 index at 16.7.  Today, the DJIA is at 16.75 times earnings while the S&P is at 18.55, probably it’s all time high.  During 2007 the DJIA set 27 new daily record highs.  This year there has seen over 20 already.  The S&P set 5 new daily highs in 2007.  So far in 2013, the count is at 12.

          If history is to repeat itself, then we are either at the top, or within a few weeks of it.  Our reasoning is that corporate earnings are not growing as fast as the stock markets, nor will they for the rest of 2013 and 2014, and the markets are in expensive territory.  Furthermore, a good chunk of the growth in profits is paper, realized by share repurchases, rather than organic revenue growth. 

          When a company repurchases its shares it is spreading the profit over fewer shares, resulting in higher earnings per share (EPS).  For example; company A earns a profit of $100, and there are 10 shares outstanding.  As a result, the earnings per share is $10.  The company then decides to use some of its profit, or borrow funds, to purchase 2 shares.  Assuming the company made the same amount of profit, the earnings per share would be $12.50, or 25% higher.  Share prices usually increase as a result of the increased EPS.


          The Baltic Dry Index is off 14% from its 2012 high.  The index has been flat for most of 2013, a signal the world trade is doing very little.  In April 2010 the Index was trading around 3096.  For almost all of this year the index has been under 900, with it recently trading at 841.  This is a bad sign as it confirms what we have been reporting for months; there are surpluses of just about everything we produce. 

          The CRB Index has been flat for the past year which accurately foreshadows the world economy.  This is probably the best gauge for the world economy and how it is performing.  The CRB indicates the world economy is going nowhere for the rest of this year.

          Stock market gains this year are based on the attraction of some high yielding shares, low interest rates, as well as the hope that the American, European, Japanese and the Canadian governments will get their acts together and finally tackle what is destroying their countries’ economies. 

          Real estate is too expensive even with zero interest rates.  Plus, around the world there remains a surplus in all forms of real-estate.  Mutual funds are always a disaster for the investor.  Have you ever met someone who got rich holding mutual funds?  Hedge funds are too expensive.   Hedge and mutual funds are designed solely to transfer one’s wealth into the manager’s coffers.  With money market funds, one is lucky to break even after taxes.  After-tax wage gains are slightly positive, but probably less than 1%.

          Sadly the stock markets are the only game in town.  This alone is a negative because it is luring the inexperienced and the desperate hoping to make a little extra.  History proves these people make poor choices and end up losing because they buy horrible companies, and they panic sell, adding further downward pressure to sell offs.

          Dividends have saved us, but only because we bought at the right time and held the shares for years.  If we had not, we would be lucky to get a 4% yield today.  Most good quality companies yield 3% or lower.  Our recommendations are returning over 10% annually based on our purchase prices, one of the highest returns in the world for investing.  Some subscribers have told us they made over 10% last year.  My father’s Tax Free Savings Account, holding only this newsletter’s recommendations is up 92% in just over 4 years.

          Poland announced their gas fields, believed to be the largest in Europe, will not be developed for some time due to cost and competition from Cyprus’ reserves.  Between the two countries they will be fighting for market share, along with Russia, the biggest supplier.  Russia is trying to take over the Cyprus field, so they control Europe’s needs for years to come.  

          However, today Russia is worried.  They have decades of reserves already (probably over 200 years worth), but the gas would end up staying in the ground for decades if Poland and Cyprus both develop their fields.  We suspect Russia has bribed Poland not to develop their field for a few decades, because Russia and their mafia are in desperate need of cash flow.  Russia’s elite have robbed their country for years and continually need a fresh source of money, which shale gas provides in sales to Europeans. 

          If gas prices hit $1.50, which we believe will happen, it will be a financial disaster for Russia.  As a result, they will do everything in their power to keep the price from falling further.  Unfortunately for the corrupt nation, they will be unsuccessful at this because of the growing glut of reserves across the globe.  Continue to avoid the Natural Gas market.

          There are no buying opportunities available today.  In my father’s 48 year career, he has never sat on the sidelines for so long and held so much cash.   We do not believe in buying at the peak of the market, which we feel is where we are at today.  Stock markets are in expensive territory.  By the numbers, all stock markets are vulnerable to a sizeable correction.  Today we must wait for the stock market to come to us, which they will.  It might be a week from now or 6 months away, but it is coming.  The coming sell-off will be quick and substantial.   In the meantime we will be collecting all those lovely dividends each month and know we have X amount locked in safe money market vehicles.

Keep cash in money market investments, with no term longer than one year.




          It is time for our annual reminder to not contribute any money to a Registered Retirement Pension Plan (RRSP).  There are so many negatives and only a handful of positives when it comes to them.  These plans are promoted to the public as a tax shelter, when in fact it is a tax deferment plan.  Specifically, the money grows tax free until one retires or reaches the age of 69, at which time the money becomes fully taxable at the individual’s tax rate once the funds are extracted.

          True, there are some positives to the RRSP, however, we believe the negatives outweigh the positives.  Below we have outlined the good and the bad  about RRSP investing:

  • It is important to realize that the need for an RRSP depends on the individual.  Most people lack the discipline to save, so for many, the RRSP is the only method of saving as the individual is unable (I should say, not supposed to) to touch these funds until retirement.  Unfortunately though, this is rare.  A recent article in the Globe and Mail stated that 76% of RRSP’s are collapsed prematurely, resulting in penalties and loss of tax deferment status.
  • For an individual who will be receiving around $32,000 from a pension plan in retirement, depending on the amount of money in the RRSP, the forced income from the RRSP will most likely push the individual into the next tax bracket, forcing him/her to pay higher taxes.   
  • RRSP’s are huge revenue channels for all financial institutions which is evident in the large number of advertisements on the radio, TV and in newspapers.  Specifically, every RRSP plan charges an administration fee. In addition, if one is not using a self-directed RRSP, the financial institution managing the plan will always be investing your money in their financial instruments.  These instruments, mainly mutual funds and ETF’s, then charge numerous fees on top of the ones from the RRSP.  As we have discussed before, these fees come at the expense of profit.
  • The laws surrounding a RRSP are complex at best and often require advice from a tax specialist.  Any breach of the laws and one will be heavily penalized. This is one of the main reasons I will never register my money in a plan. The best investments are always simple.
  • Do you know what the tax rate and structure will be 10-15 years from now?  Based on the largest demographic shift in Canada’s history around the corner, more people will be leaving the work force than entering.  Because of this, it is safe to bet that taxes will be higher 10 years down the road as there may be fewer payroll tax receipts going to the government and more people drawing down government services.  As a result, it is beneficial to pay lower taxes on the money once it is earned today, rather than at a higher rate later down the road.
  • Use a self-administrated RRSP.  A small yearly fee is cheaper than pouring large sums of money into expensive, poor-performing mutual funds.  Depending on one’s age, invest a portion in market funds (T-bills), and the rest in blue-chip companies that have a solid record of increasing dividends each year.

          While we will not recommend RRSP’s, there are some benefits to having one.  Specifically, the proceeds towards an RRSP are a tax benefit.  In addition, if one is fortunate to work for a company that contributes generously to an employee RRSP plan, I would recommend that the individual takes this opportunity, because it is an extra form of pay.  But, keep in mind this is a taxable benefit. Furthermore, companies that offer this will more than likely offer non-registered benefit plans as well.  If you choose to invest in RRSP’s, make sure to do your research and proper planning.  Failure to do so can end up costing you a lot of time, money, and grief. 

           If you have the ability to save on your own without touching the funds, I would not recommend investing inside a RRSP. When you do the math, there is no tax savings. If an investor saves $1m in an RRSP, once the individual collapses the plan he would have no choice but to purchase an annuity which will tie up his/her money. Failure to do so can cost the investor roughly $400,000 in taxes.

          By investing in these plans, all one is doing is creating long-term tax obligations.  Sacola feels that it is better to pay the tax when income, interest or capital gains are earned.  Only when one pays these taxes, does the money become truly tax free.  In addition, for the serious investor it makes no sense to tie-up ones money as you do with an RRSP.  Investing is about taking advantage of opportunities and registered plans limit a large number of them. 



     Warren Buffett once said "the stock market is designed to transfer money from the active to the patient."  This is holds true in today’s market on so many levels.  One of our rules to investing is to let the market come to you rather that you chase the market.  This takes patience, but, it will eventually prove to be more profitable over the long run.

     Today’s market takes time to create buying opportunities.  In the meantime, we are constantly rewarded with cash dividends and a nice tax credit (if one qualifies) while we wait for bargains.  It is these dividends that end up creating a large chunk of ones overall returns.  This is evident on page 6 of our publication.

     There are a number of factors to look at before choosing a dividend paying stock.  Dividends are measured by yield, and are calculated by dividing the dividend into the share price.  The yield will tell an investor if the stock is properly valued, or if the dividend is at risk of being cut.

     A stock with a dividend that is at risk of being reduced, or cut all together, will trade a lower price causing the current yield to be abnormally high.  The price, at which the stock will fall to, tends to be the level the market believes the new dividend will deliver a competitive yield.  If the dividend is eliminated, the stock price tends to realize a substantial decline.

     As the chart of $25,000 invested below clearly highlights, the benefit realized by waiting for a higher yield is tremendous.  An investor who waits 4 years for a nice yield (5% in the chart) will make nearly 40% more than the investor who jumps right into the market in order to earn a 2% yield.

     Using the chart again, one who is able to wait for a severe market correction, which tend to occur nearly every 7 years, and gain a 7% yield will nearly double the gains in two-thirds the time compared to settling for the lower yield.

     When researching a company’s dividend, an investor should look at the following:

  1.  Are dividends paid from earnings?
  2.  Does the company have sufficient financial resources to cover liabilities as well as dividends?
  3.  Is there a lengthy history of increasing the dividend?
  4.  Is the company in an industry that offers price stability and low competiton?

     ***** has raised its dividend by 3 cents a share quarterly.  The company started paying dividends in 2006, and since then has raised the payout at least once every year.  Its financials today are rich enough that there could be another increase in 2013.  With over $50b in the bank, it is nearly a guarantee an increase will occur.

     ****** announced that it predicts its profits will grow by roughly 10-to- 12% a year for the next 5 years.  As a result, it will most likely increase the dividend each year accordingly.

     ****** is the major shareholder of *******.  In this relationship, ***** usually realizes part of their dividend increases from the subsidiaries.  This means that ***** will be increasing their payouts.  It has done so for 7 of the past 8 years.  ****** oilfield operations should be in full production within the next 3-6 months, meaning higher profits in the future, leading to more dividend increases.

     We have strongly recommended buying dividend paying shares since the inception of this publication.  More importantly, we tend to concentrate on companies that increase the payout on a routine basis.  There are plenty of these companies around.  Bay Street never recommends these stocks because it equates to only one commission since there is rarely any reason to ever sell them.

     Sometimes it becomes a hard decision to know when to sell.  Before the recent credit crunch and the collapsing real estate market, ******** and ********** had the best dividend growth record in the industry with 15 years of increased payouts.  We did not suggest selling ******** because we believe in the future of Canada.  Plus, the yield is still respectable.

     Both companies, as did others, have raised their payouts in 2012.  Will ***** and ****** be back in a race for the best record?  Let’s hope so.  It is worth noting that ******* has one of the best records in the world for paying a dividend, over 110 years.

     A key point to our system is that, based on our purchase price and after numerous dividend increases, our portfolio yield grows.  For example, ********* yields 12.1%; ******* 11.8%; ********* 6.5%, and so on.  Plus, these shares have made huge capital gains.  The 3 mentioned above have gained 136%, 100%, and 148%, respectively.

     Even companies that do not raise payouts on a regular basis hold up due to reasonable yields.  *******, ********, and ******** fall under this category.

     ****** used to have one of the better TSX dividend growth records.  However, they have stopped increases because, along with most companies in the industry, it is being hurt by the zero interest policy.  These company profits will increase with interest rates.  Once this occurs, the dividend increases will follow.

      Nobody knows the future, but history helps to guide us for tomorrow. It is telling us that we are in for a sustained period of flat growth.  As a result, most stock markets profits will be via dividends.  It has been proven, time and again, dividends must be part of any investment portfolio if it is to grow.


Vancouver Love Affair


          I moved to Vancouver in October. This is the second time I have lived in the city. I have always loved living here. It is ranked amongst the top ten in the world for good reason. However, like all cities, it has its faults. Vancouver’s main one is real-estate. The citizens of Vancouver honestly believe that prices cannot correct. Every excuse in the world is used to justify the price of the asset. Unfortunately, the common sense used in the reasoning is as rare as the household income needed to justify its price.

          According to the Real Estate Board of Greater Vancou-ver's (REBGV), there were 2,853 sales through the Multiple Listing Service in May, a 15.5% decline from a year earlier. May sales were the lowest for the month since 2001 and 21.1% below the 10-year May sales average. At the same time listings increased by 6,927, a 16.8% increase from a year earlier. New listings for May were 15.3% above the 10-year average for the month.

          The REBGVD’s average price for all residential properties in Metro Vancouver ( Vancouver, North Vancouver, Surrey, Burnaby, Delta, Richmond, Fort Langley, and Coquitlam) was $625,100 in May, up 3.3% from May 2011. Specifically, detached home prices jumped 5.1% from a year ago to $967,500, apartments increased 1.7% from a year ago to $379,700 and town-home property prices rose 0.9% in May from a year ago to $470,000. However as pointed out by Garry Marr of the Financial Post, "using actual average prices instead of the index, average detached home prices are down 12.2% from a year ago, town-homes are down 0.2% and condominiums are off 1.1%."

          While I am unable to find any data for commercial property, I am certain that it is in worse shape than residential. My reasoning is all one must do is walk down any street to witness at least one empty store front or a "For Lease" sign on office buildings. This is true no matter what part of the city I visit.

          Values have become so crazy that even our financial institutions can no longer justify them. Our banks have started to jump on the price decline band wagon this spring with various calls for price declines ranging from 10 -20%. We feel this is very bullish on their part. However, the fact that banks (which are in the business of lending money and cannot create fear) are openly projecting price declines, it is safe to say the top of Vancouver’s housing market was in 2011.

          A collapse in real estate prices in Vancouver is going to have a profound impact on the city. According to Statscan, the median household income in the city is $67,500. Yet, people live as if it is double that. The city has industry and commerce, but not enough to justify its cost of living. Therefore, it is very reasonable to conclude that the local economy is very dependent on home equity. Should home prices collapse, home equity will be squeezed and spending will contract. The outlook for the local economy does not look promising.

          Vancouver home values are a gift to those who purchased decades ago. If you are one of these people and have thought of cashing in, now is the time. Prices are correcting and will continue. Invest the principal in low risk assets (see page 6) and the income will more than cover the cost of renting in the lifestyle you are accustomed to. Sure, price will eventually recover and break new highs, but, it will most likely not occur for at least a decade after the trough.


The Decline of Canada's Middle Class

                I was sitting at the dog park eavesdropping to the conversation at the bench next to me.  The couple, clean-cut and most likely in their late 30’s, were discussing the decline of the middle class. Both sported a large Starbucks coffee.   

                Whether the middle class is actually declining is open for debate.  Statistics provide evidence that it is not actually happening, because the majority of Canadians remain within an average income bracket used most often to describe the middle class.  In fact, the average household income in Canada increased 8% between 2005 and 2009.  However, it can be said that it is becoming poorer. 

                Perhaps what those who believe in the declining middle class should concentrate on is the loss of purchasing power realized by the majority.  Incomes have increased with the “rate of inflation” over time.  But, the prices of many things have increased faster.  As a result, the middle class can no longer afford goods in the quantity and size we have grown accustomed to.  Shelter and food being the most often debated.

                There is no doubt that the world has become smaller.  Today, consumers are able to purchase goods from all over the world with relative ease.  As a result, many consumer brands have started dominating the global market.  There are many benefits to this; manufacturing en-masse lowers the per-unit cost and the savings are passed onto the consumer via lower prices.  This is evident in computers, travel, and clothing to name a few.  However, by favoring an international brand that has no manufacturing ties to your community, province or country, one is essentially guilty of contributing to what many believe is a shrinking middle class.     

                One of the easiest ways one can contribute to a wealthier middle class is by being conscious of where one spends money.  Depending on the product, buying local may cost a little more but the profits will more than likely stay within the community.  It is these profits that create a wealthy middle class as the local profits trickle down creating investment and jobs.

                At the beginning of the article I noted the two were drinking Starbucks.  I found it ironic that these two could be concerned about Canada’s middle class while consuming a coffee whose profit is exported to Seattle.  As of the last annual report (October 2011), Starbucks had 17,003 stores.  None of these are considered franchises where the profits remain with the franchisee.  However, 47% are “licensed” to large institutions such as those in grocery stores and Home Depots. These outlets account for only 9% of the company’s total revenue.  The profit realized from these outlets is exported to the host company’s head office. 

                The remaining stores, the numerous ones you see around town, sometime one across the street from another, are all corporate and the revenue from these stores represented 82% of total revenue in 2011. For arguments sake, we will assume the same for profit.       

                Assuming that profits are in line with revenues, the 82% of profits realized by the 9,031 corporate stores averaged a profit per store of $113,100 in its fiscal 2011 year.  This profit would be better utilized within one’s own community; instead it is used by Starbucks to expand in other markets, leaving little-to-no economic benefit to the host community other than a few jobs that can still exist via a mom-and-pop shop or a franchised brand.

                This is transferable to many products and retailers. We as Canadians should educate ourselves to become more conscious consumers and try and support those products created in Canada before any other. We need to walk past the Starbucks to the family owned. Keeping profits as close to home as possible is the easiest way to support a stronger middle class in your community.