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How to build a better portfolio
University of Toronto Faculty Association
Seminar / Workshop
November 23, 2012
Norm Rothery, PhD, CFA
www.stingyinvestor.com
Slide 1 of 25 © Norm Rothery 2012
Overview
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Before starting out
Picking the right path
Balance
Dividends
Value
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An extended guide
Slide 2 of 25 © Norm Rothery 2012
Before starting out
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Spend less than you earn
“Annual income 20 pounds, annual expenditure 19 pounds 19 and 6,
result happiness. Annual income 20 pounds, annual expenditure 20
pounds ought and 6, result misery.” - Charles Dickens
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Be debt free
“I've seen more people fail because of liquor and leverage - leverage
being borrowed money.” - Warren Buffett
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Have a rainy day fund
(T-Bills ~1%, GICs ~2%, Savings ~1.4% : 1yr)
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Plan for large ticket items
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Insurance
Slide 3 of 25 © Norm Rothery 2012
Investment Road Map
Portfolio Size
Expertise
Start with Balance
Any
Any
Dividend Investing
$50,000+
Moderate
Value Investing
$50,000+
Above Average
Slide 4 of 25 © Norm Rothery 2012
The Balanced Way
Buy a balanced portfolio of stocks and bonds
Advantages
Easy to implement
The ride is smoother
Likely to outperform
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Things to be wary of
High-fee funds
Taxes
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Slide 5 of 25 © Norm Rothery 2012
Fee Drag
Growth per $1 invested
$50
1970
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
$40
$30
$20
$10
1980
1990
2000
Date (Jan 1 1970 - Nov 19 2012)
Slide 6 of 25 © Norm Rothery 2012
2010
$0
Taxing Gains
Growth per $1 invested
$50
1970
0.0%
2.0%
2.5%
23% Tax
$40
$30
$20
$10
1980
1990
2000
Date (Jan 1 1970 - Nov 19 2012)
Slide 7 of 25 © Norm Rothery 2012
2010
$0
Terrible Timing
Fund Category
US Equity
International Equity
All Funds
10 Year Average Annual Returns
Fund
Investors
Difference
1.59%
0.22%
-1.37%
3.15%
2.64%
-0.51%
3.18%
1.68%
-1.50%
Balanced Funds
2.74%
3.36%
0.62%
(Source: Morningstar.com, 12/31/2009)
Slide 8 of 25 © Norm Rothery 2012
Yikes!
Growth per $1 invested
$100.0
1970
TSX
Timing
Fees
Taxes
Inflation
$10.0
$1.0
1980
1990
2000
2010
$0.1
Date (1% Bad Timing, 2.5% Fund Fees, 23% Capital Gains Tax)
Slide 9 of 25 © Norm Rothery 2012
Minimizing Regret
Performance Each Year (%)
'02 '03 '04 '05 '06
Mawer
7.4 6.0 6.1 5.3 2.9
Bond
-0.9 19.3 15.7 20.6 13.9
Equity
New Cda 23.5 26.1 29.5 18.0 15.3
-16.6 2.3 4.3 -3.3 14.7
U.S.
-11.3 9.7 13.1 13.7 32.0
Int'l
Balanced
'07
'08
'09
'10
'11
3.1
5.9
4.1
6.2
8.9
11.5 -29.7 29.5 13.7
1.9
16.6 -38.4 51.2 23.9
1.1
-8.1 -14.3
4.4
0.1 11.0 10.7 10.3 13.9
Slide 10 of 25 © Norm Rothery 2012
2.4
-2.4 -32.2 24.9
2.9 -16.1 16.4
5.8
8.4 -7.5
9.8
2.9
Balanced Funds
Low-cost easy-to-hold portfolios
Fund Name
Fee
Mawer Canadian Balanced
Mawer Canadian TE Balanced
PH&N Balanced D
Steadyhand Founders
TD Balanced Index
Bonds/Stocks Style
0.96%
0.98%
0.91%
0.69%-1.34%
40%/60%
40%/60%
40%/60%
40%/60%
Active
Active
Active
Active
0.89%
50%/50%
Index
Slide 11 of 25 © Norm Rothery 2012
Dividend Investing
Grow your income via dividends
Advantages
Steady income
Likely return boost
Potential tax advantage
Withdrawal discipline
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Things to watch for
Very high yield stocks
Foreign dividend taxes
High-fee funds
Dividend cuts
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Slide 12 of 25 © Norm Rothery 2012
Canadian Dividend Advantage
Growth per $1 invested
$160
$120
High Yield
Market
Low Yield
No Yield
$80
$40
$0
1977
1981
1985
1989
1993
1997
2001
2005
2009
Date (Data Source: Kenneth French, Value Wt, 4.4%/yr)
Slide 13 of 25 © Norm Rothery 2012
U.S. Dividend Advantage
Growth per $1 invested
$250
$200
$150
$100
No Dividend
1 (Lowest Yield)
2 (Low Yield)
3 (Medium Yield)
4 (High Yield)
5 (Highest Yield)
$50
$0
1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Date (Source: Kenneth French, Equal Wt)
Slide 14 of 25 © Norm Rothery 2012
Easy Dividend Portfolios
Exchange Traded Funds
Canada
iShares Canadian Dividend ETF (XDV, 0.55%)
iShares Canadian Aristocrats ETF (CDZ, 0.67%)
US
Vanguard High Dividend Yield ETF (VYM, 0.13%)
Vanguard Dividend Appreciation ETF (VIG, 0.13%)
Slide 15 of 25 © Norm Rothery 2012
Simple Dividend Stock Selection
Dogs of the TSX
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Start with the 60 large stocks in the S&P/TSX60
Buy the 10 top yielding stocks
Rebalance each year
Look to David Stanley, Canadian MoneySaver
1987-2011: 11.97%/yr vs 9.34%/yr index
We publish a weekly list of the Dogs of the TSX in our
free Stingy News Weekly email letter. Sign up at
http://www.stingyinvestor.com/cgi-bin/email.cgi
Slide 16 of 25 © Norm Rothery 2012
Individual Dividend Stock Tips
Positive attributes
Above average yields
Dividend growth
Financial strength
Earnings > Dividends
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Negative factors
Extraordinarily high yields
Derivatives/products
Negative momentum
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Slide 17 of 25 © Norm Rothery 2012
Value Investing
Buy stocks with a margin of safety
Advantages
High return potential
Often less volatile
Simple valuation measures
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Things to watch for
Can be hard to follow
Forced selling
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Slide 18 of 25 © Norm Rothery 2012
Canadian Value vs. Glamour
$140
Growth per $1 invested
$120
$100
Low P/E
Market
High P/E
$80
$60
$40
$20
$0
1977
1981
1985
1989
1993
1997
2001
2005
2009
Date (Data Source: Kenneth French, Value Wt, 3.7%/yr)
Slide 19 of 25 © Norm Rothery 2012
U.S. Value vs Glamour
$1,000.0
Growth per $1 invested
$100.0
$10.0
Low P/B
Market
High P/B
1977 1981 1985 1989 1993 1997 2001 2005 2009
Date (Data Source: Kenneth French, P/B, Eq Wt, 30%)
Slide 20 of 25 © Norm Rothery 2012
$1.0
$0.1
U.S. Value by Decile
20%
P/E (1951-2011)
P/B (1926-2011)
Annual Return
15%
10%
5%
0%
High
9
8
7
6
5
4
3
2
Low
(Data Source: Kenneth French, Equal Wt)
Slide 21 of 25 © Norm Rothery 2012
Value Stock Tips
Positive Attributes
Low ratio stocks / margin of safety
P/E, P/B, P/S, P/CF, P/D
Financial strength
Dividends and dividend growth
Low liquidity / small / neglected stocks
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Warning Signs
Negative momentum
Buggy whips / “value traps”
Vampire squid management
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Slide 22 of 25 © Norm Rothery 2012
U.S. Stock Market Valuation
50
40
Current
CAPE
P/E10
30
20
10
0
1880
1900
1920
1940
1960
1980
2000
Date (Data Source: Robert Shiller)
Slide 23 of 25 © Norm Rothery 2012
U.S. Bond Market
Long-Term Interest Rate (%)
16
Yield
Current
12
8
4
0
1880
1900
1920
1940
1960
1980
2000
Date (Data Source: Robert Shiller)
Slide 24 of 25 © Norm Rothery 2012
Exploring Dividend and Value Investing by Norm Rothery
www.stingyinvestor.com
Stingy Investor Free email newsletters
http://www.stingyinvestor.com/cgi-bin/email.cgi
Slides
http://www.stingyinvestor.com/SI/articles/talk_1112.pdf
Useful Books
A Random Walk Down Wall Street
The Intelligent Investor
Contrarian Investment Strategies
What Works on Wall Street
by Burton G. Malkiel
by Benjamin Graham
by David Dreman
by James P. O’Schaugnessy
Advanced Topics
Security Analysis
Value Investing
by Benjamin Graham
by James Montier
Market History
A Splendid Exchange
The Ascent of Money
by William J. Bernstein
by Niall Ferguson
Slide 25 of 25 © Norm Rothery 2012