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The Greater Society Perpetual Bond

October 19, 2012

The Canadian market is down this year and, for the first time since 2008, might stay down. Many investors are, no doubt, wondering how they’re going to pay for their retirement or their children’s education or their vacation (as the case may be) and many-a-fiduciary, board member or sponsor is wondering how they’re going to explain why the pension plan can’t pay what it promised to pay or why the university, hospital or charity can’t do what it planned to do.

It’s all about money (not vision) and this year the investment professionals have had little to offer us but low interest bonds, “concern” for the Eurobond and anecdotal evidence on investment returns in “election years” and the year after that. “Hope”, we presume absent the recurring investment scandals that bedevil Wall Street and Bay Street. (Please see our recent Posts on Churn, Churn, Churn, October and September 2012 or The Winnipeg Free Press, October 17, 2012 and, as a possible antidote for complacency about investment and investment returns, A Portrait of Scranton, http://thewalrus.ca/scranton/, November 2012.)

But is it that the “markets” are somehow “bad” or is it that just they are bad at investing, like surgeons who can’t or won’t cut? A good question with a ready answer because almost everybody is doing the same thing which (they ought to know) is “optimal” only for a zero or constant return and any other return is just an accident in a zero market. (For more on this important fact, please see our Posts, Volatility for the Delta Challenged or Run, Rabbit! Run, June 2012.)

Exhibit 1: The S&P TSX Composite Index (2008-2012)

The S&P TSX Composite Index is an abstraction and doesn’t have anything to do with business productivity, success or failure, any more than a thermometer might cause the temperature.

(Please Click on the Chart to make it larger if required.)

Its numbers are calculated from the ambient stock prices and the total market capitalization of the largest listed companies. And, obviously, if we don’t have any money to invest, we can’t buy them and the prices will go down (unless “foreign” investors are snapping them up at low prices). That would also be the case if investment managers have somehow decided that our money is “safer” in low-yielding bonds or more productive in “emerging markets” or “alternative investments” in foreign countries or “flights to safety” as happened in 2008. Hopefully, they’ll “beat the index” this year (zero) and prove once again that they know what they’re doing no matter what we say. After all, we did give them our money, didn’t we, and they have it now, don’t they. And they can pretty much do whatever they want with it (except spend it) because they’re licensed. (Please see our Post on The Secret Life of a Portfolio Manager, July 2012.)

In any case, we know what we’re doing. The Greater Society Perpetual Bond™® (please see our earlier Post, The Greater Society Perpetual Bond, July 2012, and the Postscript below) has produced a staggering +19% return so far this year in these tepid markets, plus earned dividends yet to be collected, and we know exactly how that was done and can expect to do it again and again regardless of the “market”.

We started the portfolio in the usual way, buying only (B)’s in late December and early January of this year (please see Exhibits 2, 3 and 4 below). We also avoided oil & gas, mining and most other resources (with the exception of the “woods” Canfor and West Fraser which are renewable and still good for building houses) not because we had some “foreboding vision” of the future but because we wanted to focus on the people-oriented and employment-creating manufacturing and service industries of our society – which is where we’re going when the oil, gas, sludge, and rocks in the ground run out, so to speak, and we need to have alternatives in readiness. (However, for more on the oil & gas industry, please see our Post, The Canadian Oil Patch, October 2012 and Alberta & Company, September 2012).

There are only sixty-five companies in this sector with market capitalizations in excess of $1 billion and the total market capitalization is currently about $472 billion, which is not a lot of money in world terms but it’a all that we have that might help us here. By the end of January, we had fifty-eight of them in our portfolio, buying as usual blocks of 1,000 shares in each without regard for the relative prices, and currently hold all sixty-five. In the course of the year, we only made twenty-one transactions of which eighteen were “buys” and three were “sells” sometimes more than once for the same company. Please see Exhibit 3 and 4 below.

The rule is, of course, quite simple. We only buy or hold (B)’s and we “sell” on (B)- to (N)-transitions. For the meaning of (B) and (N), please see almost any of our earlier Posts and the references to theory and practice therein.

It’s noteworthy that all but four of these companies (Maple Leaf Foods Inc, Bell Aliant Inc, Toromont Industries Ltd and Pembina Pipeline Corporation) have had significant price increases this year (please see the CHG Column in Exhibit 3 and 4) but that fact has nothing to do with whether a company was a (B) or (N) in January or is a (B) or (N) now, and certainly doesn’t explain why the “market” is negative now.

We only buy or hold (B) the stock of a company if the stock price plausibly exceeds the Risk Price (SF). Our “buying” and  “selling” prices are shown as the Stock Price (SP) (please see Exhibit 4) and reflect the “buying” and “selling” disciplines that we enforce. Both the Stock Price (SP) and the Risk Price (SF) are step-functions and the Risk Price (SF) is only re-calculated as new balance sheet data become generally available to investors.

Please see our Post, The Price of Risk, August 2012, for more information on the meaning of the risk price but it can be loosely described as “the least stock price at which a company is “likeable” ” (Goetze 2009) and “likeability” has to do with investor confidence that a stock is likely to retain its value and, hopefully, obtain a positive return above the rate of inflation. And, obviously, neither property has much to do with the market index, although prices may be volatile because of market factors and investor uncertainty, apprehension or needs for cash.

Exhibit 2: The Greater Society Perpetual Bond – Cash Flow Statement

(Please Click on the Chart to make it larger if required.)

Exhibit 3: The Greater Society Perpetual Bond – Portfolio

(Please Click on the Chart and again to make it much larger if required.)

Exhibit 4: The Greater Society Perpetual Bond – Stock Prices

(Please Click on the Chart and again to make it much larger if required.)

One notices that we have set the stop/loss on the portfolio (please see the bottom line of Exhibit 3 or 4). The current portfolio value is $2,287,000 and the stop/loss prices are based on simple market volatility (please see our Post, Popoviciu’s Volatility, September 2012) which, if all of them were executed, would sell us out at $2,112,000 for an 8% loss. An alternative policy for market risk control is to use The Wall Street Put (please see our Post, The Wall Street Put, August 2012, for more details).

Postscript

We seeded The Greater Society Perpetual Bond™® (GSPB) with $2 million in January and will continue to report on its progress every few months. The fund has capital gains of $282,000 plus earned dividends of $58,000 so far this year (please see Exhibits 2, 3 and 4 above) and, of course, the capital of $2 million remains intact and continues working.

Exhibit 1: GSPB Income Statement & Balance Sheet – September 30, 2012

Of the $2 million in capital, we initially invested $1,521,160 in the Portfolio in early January and retained the balance in cash.

The Total Investment Earnings net of the Margin Account (which is optional if leverage is not cheap) are  $339,890 and $151,066 are available for disbursement after the deduction of expenses and the inflation adjustment to the capital from the earnings.

(Please Click on the Chart to make it larger if required.)

The principle of the GSPB is that it is a non-profit organization and charitable foundation under the Canadian tax law and that the Capital is never depleted so that disbursements of the earnings (net of the expenses of obtaining them) continue indefinitely. Donors receive a tax benefit and, within the GSPB, an opportunity to “vote” with their money as to how the disbursements are accumulated and disbursed to their preferred charities (Available For Distribution in Exhibit 1).

The Capital is inflation-adjusted in every period in order to keep its “value” but the Management Fees are calculated as 20% of the earnings on the Capital and there are no charges such as Loads or Fees on the Capital. In other words, The RiskWerk Company is only paid for performance and not just performing.

For more information, please see our Posts on Charitable Giving and The Greater Society Perpetual Bond.

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used.  Related data may be obtained from us (for free) in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”.

Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability.

We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now.

The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”,  ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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