Smith Manouevre Portfolio August 2009 – Where is the Correction?
Hey guys, for those of you just joining us, below is my portfolio that is leveraged with money borrowed from my home equity line of credit (HELOC). As the money borrowed is used to invest, the interest charged is tax deductible. I write an update every couple months or so to show new positions added along with any market gains/losses. For more details, check out my modified smith manoeuvre strategy.
I’m very surprised that the rally has lasted this long into the summer as it hasn’t let up since the market lows in March. I’m still patiently waiting for a correction so that I can buy more equities but I’m not sure if stocks will ever get as cheap as they did a few months ago. In hindsight, perhaps I should have bought more during that time, but hindsight is always 20/20.
Transactions wise, my portfolio has seen very little action due to the appreciating market. Right now, I don’t see any attractive valuations besides perhaps a few of the utilities. I did manage to sell of my last bit of Teck Comminco, but looking at the continuing rally, I should have held on for a bit longer. To look at the positive though, I’m lucky to have held onto half my position during the rally as I was tempted to sell all my shares @ $4 when they announced their dividend cut.
Speaking of dividend cuts, Manulife has announced that they have cut their dividend in half due to capitalization issues with their variable annuities products. This is actually very disappointing news as Manulife has been a strong dividend stock for some time now. I wonder if any other of the insurers are considering a cut in their distribution? In the mean time, I will be holding onto my shares as I still believe that MFC is a strong long term company.
The Portfolio as of August 2009:
| Stock | Symbol | Shares | Avg Buy Price | Total | Div/Share | Yield |
| Royal Bank | RY.T | 75 | $47.62 | $3,571.25 | $2 | 4.20% |
| CIBC | CM.T | 45 | $67.14 | $3,021.25 | $3.48 | 5.18% |
| Power Financial | PWF.T | 105 | $35.14 | $3,689.65 | $1.40 | 3.98% |
| Scotia Bank | BNS.T | 105 | $41.91 | $4,400.52 | $1.96 | 4.68% |
| Manulife Financial | MFC.T | 125 | $33.12 | $4,139.48 | $0.52 | 1.57% |
| Fortis Properties | FTS.T | 150 | $25.63 | $3,843.98 | $1.04 | 4.06% |
| TransCanada Corp | TRP.T | 100 | $33.50 | $3,349.74 | $1.52 | 4.52% |
| FTSE RAFI US 1500 Small-Mid ETF | PRFZ.US | 20 | $51.50 | $1,029.99 | $0.42 | 0.82% |
| AGF Management Limited | AGF.B.T | 50 | $22.71 | $1,135.49 | $1.00 | 4.40% |
| Bank of Montreal | BMO.T | 25 | $44.17 | $1,104.24 | $2.80 | 6.34% |
| Husky Energy | HSE.T | 85 | $35.90 | $3,051.28 | $1.20 | 3.34% |
| Teck Cominco | TCK.B.T | 100 | $15.35 | $1,258.99 | $0.00 | 0.00% |
| TD Bank | TD.T | 50 | $48.24 | $2,412.23 | $2.44 | 5.06% |
| Enbridge | ENB.T | 40 | $37.36 | $1494.39 | $1.48 | 3.96% |
| TransAlta | TA.T | 50 | $21.47 | $1073.49 | $1.16 | 5.40% |
| First Capital Realty | FCR.T | 100 | $15.75 | $1,574.99 | $1.28 | 8.13% |
| Canadian Utilities | CU.T | 50 | $36.40 | $1,819.99 | $1.41 | 3.87% |
More Stats
- Total Cost Base of Equities (inc. fees): $40,711.96
- Market Value of Equities (Aug 7, 2009): $40,092.50
- Total Dividends / Year: $1,700.50
- Portfolio Dividend Yield: 4.18%
Sector Allocation (based on market value)
- Financials: 57.71%
- Utilities: 16.95%
- Energy: 18.68%
- Resources: 0.00%
- Real Estate: 4.41%
- Other: 2.25%
Leveraged Investing Disclaimer: There have been a lot of readers who have mentioned that they are interested in a leveraged portfolio. Over the long term it may be lucrative. However, over the short term, equities are volatile and can put the portfolio deep in the red. My portfolio is a prime example of what can happen. If you can’t stomach losing 20-30% in the portfolio in any given year, then your risk tolerance isn’t suited for leveraged investing.
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cf, that would depend on the dividend payout ratio (dividend rate relative to earnings), the yield, and the overall value of the stock. The stock would need to have a compelling case to purchase it again, I like to stick with stocks that have a history of paying an uninterupted dividend.
FT,
Teck has announced that, once they retire their $2.5B in debt, they will reinstitute the dividend. In fact, the CEO would like to pay back the suspended dividends. One thing he noted is that mutual funds that are geared towards dividend payers obviously had to sell Teck when they suspended the dividend.
If I remember correctly, you got out of Teck after making about 20% on the stock. Could you see yourself getting into Teck if it reinstitutes its dividend (thus help diversifying your SM portfolio) even if it is in the $40’s?
Hi Bill,
It all comes down to the level of risk you are comfortable with and the level of confidence you have in your investments. Investing in individual companies is already more risky than broader portfolios.
Lotteries are not investing. With investing, the odds are in your favour in the long run. With the lottery, the odds are sharply against you.
Ed
I don’t believe in leveraged investing.
I rely on the companies that I invest in to do my leveraging for me.
Buying a lottery ticket is high risk investing as well!
Hi FT,
Why is everyone focused on a small correction in a major recovery?
If you recall our article in March “Irrational Pessimism”, we expect that 2009 will be seen in the distant future as the best buying opportunity during our lifetime. There has been a huge runup since then, but this is only about 1/3 of the decline, so there is still lots of room to run.
We still need a gain of more than 50% to get back to the peak.If you look back to 1950, the longest the S&P500 has taken from the bottom to reach a new all-time high is 4 years. If you look at the mid-term, instead of the short term, the chance of well above average returns is very high.
Our fund managers are still telling us they are finding more, cheaper companies now than any time since 1974. This is not really true in Canada, but in the US and globally, value investors are still very excited about all the opportunities.
The talk of a correction has been all over the news. It is essentially obvious, since the markets don’t go straight up. However, nobody knows when it will happen. What makes you think we won’t get a 10% correction after the next 20% rise?
Focusing on the short term if usually not effective. We would suggest to make sure you are invested for the next 100% uptick, instead of trying to miss the next 10% downtick.
Ed
Hi Matt,
As Cannon pointed out, the very high P/E of 143 is not meaningful, since they are based on extremely depressed earnings. Based on forward earnings, the S&P500 is reasonably value at about 15, and based on normalized earnings, it is actually quite cheap.
Also, your comment: “There has not been an end of any recession in history where P/E ratios of major indices did not reach single digits.” is not accurate. In fact, almost 100% of recessions did NOT end with P/Es in single digits.
Single digit P/Es in stock market history have resulted only from extremely high inflation (because high interest rates are correlated to the inverse E/P) or from major depressions.
Ed
Sorry I thought of another question…what about the taxes on your investments? Are you netting the taxes from the portfolio or paying them out of pocket? Would a strategy such as using universal life-insurance in a corporation work here? Help you manage taxes, reduce risk, etc, etc.
First off I admit to being from the US so I might not understand the Canadian way of doing things but bear with me. I love the way you are doing leveraged investing but I’m wonder what made you choose to risk this money in the market? Have you looked at any other investments the might give you solid returns without the swings or risk of loss?
Mark/Matt/Tom,
You’re all welcome. There is a US site with a slightly different spelling if you are interested in US equities.
http://www.dividendinvestor.com
Tom – yes, I’ve used Excel’s feature to get fresh data from the site and manage to create my own reports.
Thanks for the link cannon….
Matt, I couldn’t agree more with your pt. 5 in # 17.
Trying to be patient….just saving cash for some buying in the future :)