Send us a Text Message.
Welcome to Safe Dividend Investing’s Podcast # 153 on February 1st of 2024.
Today, I will be answering two interesting investment question.
QUESTION (1)
If a company can hide its debt in calculating book value, why wouldn't free cash flow growth and total debt growth give a better picture of a company's health?
QUESTION (1)
Why do investors in funds avoid reading the fund's prospectus?
(A transcript of this podcast is available.)
SIX INVESTMENT BOOKS BY IAN DUNCAN MACDONALD, ARE AVAILABLE FROM AMAZON.COM KINDLE BOOKS)
(1) CANADIAN HIGH DIVIDEND INVESTING -
In this 325-page book, learn how to select, purchase and build a portfolio of 20 Canadian strong dividend stocks. Summary records of 215 stocks are sorted in multiple ways, and each stock's unique page provides detailed scoring data and 24 years of price and dividend trend data.
(2) NEW YORK STOCK EXCHANGE'S 106 BEST HIGH DIVIDEND STOCKS -
In this 334-page book, there is a 2-page report for each company scoring 11 data elements. It also lists 23 years of historical share price and dividend payouts so that investors can judge the stock's reliability. Released December 2022.
(3) AMERICA HIGH DIVIDEND HAND BOOK
&
(4) CANADIAN HIGH DIVIDEND HANDBOOK
in these two books, pages of charts are sorted four ways by stock score, share price, dividend yield percent and alphabetically. A page for each stock provides eleven facts which created each stock's total score. Both books list all common stocks that were paying dividend yield percentages of 3.5% or more on the New York Exchanges and the Toronto Stock Exchange.
(5) SAFER BETTER DIVIDEND INVESTING:
All 628 stocks paying dividends of 6% or more on the NYSE and the NASDAQ are scored and sorted by score, price, dividend % and alpha. Plus 199 high dividend Canadian stocks. The answers to 128 questions asked by investors are provided. This instructional reference book will make building a better investment portfolio faster and easier.
(6) INCOME AND WEALTH FROM SELF-DIRECTED INVESTING
In this, his first investment book, in easy to understand language, Ian MacDonald reveals the serious concerns you should have about entrusting your money to investment advisors. Step-by-step, he shows you how you can realize an annual 6% income while your portfolio continues to grow year-after-year. 654 stocks paying dividend yields over 3.5% or more on the Toronto Stock Exchange are scored and listed.
FOR MORE INFORMATION ON THESE 6 BOOKS, HIS 3 NOVELS, PAINTINGS, PHOTOGRAPHS AND DIGITAL ART VISIT www.informus.ca and also www.artgalarian.com
Ian Duncan MacDonald
Author, Artist, Commercial Risk Consultant,
President of Informus Inc
2 Vista Humber Drive
Toronto, Ontario
Canada, M9P 3R7
Toronto Telephone - 416-245-4994
New York Telephone - 929-800-2397
imacd@informus.ca
Ian Duncan MacDonald
Author, Artist, Commercial Risk Consultant,
President of Informus Inc
2 Vista Humber Drive
Toronto, Ontario
Canada, M9P 3R7
Toronto Telephone - 416-245-4994
New York Telephone - 929-800-2397
imacd@informus.ca
Safe Dividend Investing
Podcast # 153
1st of February 2024
Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 153 on February 1st of 2024.
My name is Ian Duncan MacDonald. In today’s podcast which is coming to you from the sunny, warm island of St Kitts in the Caribbean, I will be answering two questions.
Every day I hear from readers of my books and listeners to my podcasts. They keep me current with what is now of concern to investors. Questions should be addressed to ianduncanmacdonald@hotmail.com.
QUESTION 1
If a company can hide its debt in calculating book value, wouldn’t free cash flow growth and total debit growth give a better picture of a company's health?
Getting an accurate picture of a company’s health can be complicated.
Companies pay auditors. Large public companies expect, rightly or wrongly, that the auditor will present the Company’s financial results in the best possible light. The auditors recognize that they might not get next year's lucrative audit if they do not do their best to make the company look good. This would include calculating the company’s book value. The auditor is faced with the ethical challenges of maintaining a delicate balance between distorting results in favor of a company and providing an accurate audit for investors in the company.
While audits become much more reliable since the Enron bankruptcy and scandal in 2001(the largest bankruptcy up to that time) this delicate relationship still exists. Enron resulted in the US Congress passing the Public Company Accounting Reform and Investor Protection Act of 2002 (now known as the Sarbanes-Oxley Act (Sarbanes-Oxley) and in the establishment of the Public Company Accounting Oversight Board. Audits of American public companies are now subject to government oversight. Companies are now prohibited from having the close relationships that had existed between Enron and their auditor Arthur Andersen. Similar laws were passed in other countries.
Arthur Andersen was charged with obstruction in the Enron investigation. This was a blow to its reputation. They never recovered from it. About 28,000 of their employees lost their jobs. They stopped auditing public companies.
21,000 employees at Enron also lost their jobs with the bankruptcy. 21 Enron executives went to jail for concealing fraudulent transactions.
It is a tale of greed. Enron had been a Texas energy broker trading electricity and other commodities. It would enter into one contract with an energy seller and a different contract with an energy buyer. Profits were made on the secretive differences between the selling price and the buying price.
To further grow profits third party partnerships were formed that allowed Enron managers to move losses and debt off the Enron books. This fraud resulted in greatly inflated profits. The stock soared in the stock market on the reporting of profits. Enron executives made millions cashing in their stock option bonuses. Profits were put ahead of ethics.
Arthur Anderson was benefitting from Enron business practices. They realized annual income of $26 million coming from consulting services in addition to the $26 million realized from their auditing work. The two companies were so intertwined that Arthur Anderson had permanent audit space at the Enron headquarters. They were regarded as Enron employees.
Based on this history of what can happen when millions of dollars are in play means despite the safeguards put in place after Enron you still must recognize that financial figures are still open to interpretation. I do not see that free cash flow growth and total debit growth as any better at measuring financial health than a comparison between a company’s audited book value and its current share price.
Unlike gathering cash flow and debt growth, the book value and share price data are quick and easy to find. Just comparing those two figures is more of a financial analysis than the typical investor considers. Most investors look at no financial information before they purchase a stock. They usually buy because of media hype and unverified tips.
The objective of my books and podcasts is to get investors to not only look at financial information but to calculate a stock risk score. If you make it too difficult to analyze a stock the typical investor would be bothered in doing it. The sub score for the price-to-book value is only one sub-score out of 11 other sub-scores that are used to calculate the total composite score.
To thoroughly analyze the degree of financial risk involved in a company would require days of effort. It would not only involve reviewing the company’s accounting records but interviewing the company’s executives, their bankers, their suppliers and their customers. Even with all that effort there would still be no guarantee that your picture of the company risk was accurate. It would only be a historical image that can change within hours and still be open to interpretation.
I think in the 11 facts that are gathered in my stock scoring system provides a reasonable picture of the risk in a stock.
A stock with zero risk does not exist. All you are doing in scoring is trying to reasonably sort the stocks from the most to the least desirable.
QUESTION 2
WHY SHOULD INVESTORS IN FUNDS AND ALWAYS READ THE FUNDS PROSPECTUS?
A mutual fund or an ETF is a vehicle for making banks, investment advisors and fund management companies rich. They all want a cut of that money you will invest in their fund. There are thousands of mutual funds and ETFs to choose from. It is a competitive industry.
At best, you will never have more than a vague idea of how much of your money they are siphoning from the fund to put in their pockets. Whether you will make a profit from investing in any fund depends on circumstances and timing that are beyond their and your control.
Since investors take losses in their fund portfolios very seriously. They are prone to sue those who they feel are responsible for their loss. Therefore, to take your money without looking like thieves the funds hire lawyers who are paid to ensure that every fund purchaser has been warned about the transfer of money from your pocket to the fund’s pocket. The lawyers carefully reveal the uncertainty of a financial return in such a way that you will ignore this warning.
There financial return for the fund management and company and its sales team is assured. After all, it isn’t their money that is at risk. It is your money. They will take their percentage every year from the fund you purchased whether it has made of lost money.
The indemnity information is hidden in the small print in a prospectus or literature you might see on a fund. It is not the first thing you will read in their promotional literature but it is always there. Do not expect those who are about to take your money to force you to take the time to read their warnings or interpret what you are reading. They prefer that you not read it because you might ask some hard questions that can get in the way of closing their sale of the fund to you.
For example, I looked at the small print for what is promoted as being the “best” ETF available. I read:
““Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual fund or ETF's prospectus, which contains detailed investment information, before investing.”
They add the extra step of you having to make the effort to go to and read the prospectus with the expectation that you will not be so bothered. However they can now say you were warned. They really want you to give them your blind faith in what they are selling you. They do not want to handle your objections to their fees, commissions, and expenses. Yet, you are conversing with a salesman ( or should we call him your financial advisor) who should if pressed explain any money that will be withdrawn from your investment. This individual is paid to make sales not encourage questions.
You can also find the avoidance of explaining fully the facts about the fund in a statement like the following:
“The indicated rates of return are historical annual compounded total returns for the period indicated, including changes in unit value and reinvestment distributions, and do not take into account any charges or income taxes payable by any security holder that would have reduced returns.”
By not asking for an explanation of this legalese gobbly-gook you are agreeing to accept whatever return you get from this investment including any charges that the fund company incurs and passes on to you. You will never be aware of how much of your money is being siphoned off.
Hidden in the middle of their literature that may find a statement like the following:
Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated.
All you have heard from your investment advisor is that investing in this fund is the smartest thing you have ever done. Based on its history this fund will certainly continue to increase by several multiples. It will easily provide you with a safe, generous income for the rest of your life when you retire.
You also are unlikely to have a discussion with your advisor about the following, which is as clear as mud:
A return of capital reduces an investor’s adjusted cost base. Capital gains taxes are deferred until units are sold or until the ACB goes below zero. Investors should not confuse this cash flow distribution with a fund’s rate of return or yield. While investors in this fund will be able to defer some personal capital gains, they must still pay tax on capital gains distributions that arise from the sale of individual holdings by fund managers, and on interest and dividend distributions.”
All you can probably comprehend is do not try to figure out where any gains or income you receive from this fund were derived from because you have no control over what the fund manager is doing with your money. While you might not choose to sell a stock and incur additional capital gains tax, you have given the fund manager the freedom to do whatever he wishes with your money. Furthermore, the money you may now be receiving may be just a deduction from some the money you invested.
Diversifying your investments is recognized as a smart investment strategy. Every prospectus contains a promotional trigger that is meant to impress you with the quality and diversity of the stocks in this portfolio. The fund identifies the top 10 holdings in the fund.
To impress you with their diversity, your fund may contain hundreds of stocks. However, you are only going to told about the top ten stock holdings. These are usually well-known blue-chip stocks. These ten may each represent only 3% of the portfolio’s value or together 30%. The remaining hundreds of stocks in your fund could be a meaningless fraction of one percent each.
To protect themselves the fund’s legalese states that these top top ten are “ presented to illustrate examples of the securities that the fund has bought and the diversity of the areas in which the fund may invest, may not be the representative of the fund’s current or future investments, and may change at any time. Depositary receipts, credit default swaps and equity total return swaps are normally combined with the underlying security.’
What this is saying that even identifying the top 10 stocks in the fund is meaningless because you have given them the ability to make any changes they wish to make to the fund at any time. You really do not have any idea what you are investing in right now.
Why do people invest blindly in funds? Are they overwhelmed by the sales spiel? Do they not take investing seriously? Do they really believe that like priests that all financial advisors have a calling to only act in the client’s best interest?
Why do most advisors think they are incapable of learning how easy it is to choose the best, safest stocks for their portfolio? Are they so sure that they will fail at managing their portfolio that they need someone to blame other than themselves?
It takes only a few minutes to show someone how to find and acquire twenty financially strong, long-established companies paying high dividends. Such a portfolio can provide you with a reliable income to live on or income to further invest in growing your portfolio.
Before you invest in any fund, first explore becoming a self-directed investor managing your own portfolio. It can not only save you hundreds of thousands of dollars in fees, commissions and charges over a lifetime but allow you to sleep soundly at night knowing exactly what you are invested in and why you invested in it.
END
