Sunday, March 23, 2008

If You Are Investing Less Than 25% of Your Income Then You Aren’t Serious About Becoming Wealthy

If you are investing less than 25% of your income then you aren’t serious about becoming wealthy. But how do you afford to do this without suffering? The answer is here.

You can do this by eliminating waste and impulse spending from your spending habits. Studies have shown that the average person blows around 25% of their income in these two totally unnecessary areas; waste spend and impulse spending. Let’s see what these two types of unnecessary spending are and how to eliminate them.

First I will define waste spending. There are two main types of waste. Firstly waste is when you spend more money than you need to in order to get the result that you want. Secondly waste is when you buy more than you need in order to get the result that you want.

Here are two examples around food.

An example of Type 1 Waste would be buying a sandwich for lunch for $5 when you could have made the same sandwich at home, and brought it with you, for only 50 cents. You are paying ten times the true value of that sandwich by buying it ready made. You probably also spent more time standing in line to be served than the time you would have required to make the sandwich at home.

An example of Type 2 Waste is when you buy more food than you need and then have to throw it away. Because you couldn’t be bothered taking the time to calculate the amount that you really needed you overspent on your food bill.

The facts are that people are regularly guilty of both type 1 and type 2 waste on a regular basis, and not just with food. They tend to buy without asking for discounts and they over buy in all areas of their life.

Now let’s define impulse spending. Impulse spending is when you buy something that you had no intention of buying until you saw it by chance. It is no coincidence that supermarkets put chocolate bars and magazines next to the checkouts. They are there because the supermarket is well aware of the profit potential for them from impulse spending.

Impulse spending does not enhance your lifestyle. You are simply buying something just because you saw it and quite often you don’t even really want nor need these items. I was amazed to discover that most books purchased are never read. In fact the statistics are that 80% of books purchased are never even started and half of those that are started are never finished, People buy books on impulse, usually because they are attracted to the title and the cover design.

The main areas of impulse spending are sweets and magazines and anything that is “on sale”. People also tend to impulse spend in their areas of interest or hobbies. Young women will impulse spend on clothes, shoes and makeup. Musicians will impulse spend in the music shop, and so on.

If you can eliminate waste spending and impulse spending then, if you are like the typical American, you will free up around 25% of your income that you can put to investing. But how do you cure yourself of these costly habits? You can do this easily by developing two new habits.

New Habit Number 1:

The self-made rich decide in advance where and how they are going to spend their money. The average person spends their money randomly as the urge seizes them. Deciding where you money is going to go, while you are still at home, eliminates impulse spending. Making a conscious decision as to the value you will receive for each dollar spent will help eliminate waste spending.

Develop the habit of deciding, on pay day, where your money is going to go, write this down and then read over it and ask yourself if any of that planned expenditure is in the waste spending category.

When you are going shopping take a list and stick to the list. This will help remove the impulse spending habit. Developing the habit of deciding in advance where your money will go is a great way to ensure that you still maintain your quality of life in the present, but you free up money for investing so that you can become rich and enjoy a much greater quality of life in the future,

New Habit Number 2:

The self made rich have the habit of writing down every cent that they spend, as they spend it, so that they are fully aware of where their money is going. The average person is surprised when their money runs out because they were not fully aware of how much they where spending. As a result, bad money managers find that they have too much month at the end of the money whereas good money managers find that they have too much money at the end of the month.

Develop the habit of recording your expenditure as you spend it. Become fully aware of where your money is going and always ask yourself if this particular transaction is going to truly enhance your life or not. If the answer is no then don’t go through with that transaction.

Developing these two simple habits will free up a surprising amount of money for you to put to investing. So how should you invest that money in order to maximize your profits? Unfortunately this article is long enough already so that secret will have to be revealed on another day.

Monday, March 17, 2008

Bought 2,000 Units of Paramount Energy Trust Today

In spite of the market correction today I picked up 2,000 units of Paramount Energy Trust (PMT.UN-T).

Sunday, March 16, 2008

Top Pick Canroys Based on Discount to Net Asset Value

The March 7, 2008 issue of the CIBC Oil & Gas Royalty Trust weekly report has a Net Asset Value matrix for most of the Canadian Oil & Gas Trusts (Canroys). I like to buy Oil and Gas Trusts based on Net Asset Value (NAV) since all these business's are selling the same product. There are other metrics to consider. However, NAV is a good base to start from.

Based on NAV my Top Picks are as follows;

Advantage Energy (AVN.UN-T $10.85) Trading at a 26% Discount to NAV of $14.75
Paramount Energy (PMT.UN-T $7.86) Trading at a 18% Discount to NAV of $ 9.62
Baytex Energy (BTE.UN-T $21.00) Trading at a 12% Discount to NAV of $23.96

The discounts reported are based on March 7, 2008 closing prices.

Members of our mailing list will be emailed a copy of the CIBC report.

Please perform your own Due Dilligence.

In interest of full disclosure I own units in all three of the above Canroys.

Monday, March 10, 2008

Neglecting Dividend-Paying Companies Hurts Investor Returns

Many people who began investing during the tech craze of the 1990s were taught to ignore dividends. The logic was that company managers who couldn’t adequately reinvest in their own business for growth were probably a bad risk for any investment dollars.

Warren Buffett famously has never paid a dividend at Berkshire Hathaway because he wants to reinvest every dollar of free cash flow himself.

But neglecting dividend-paying companies hurts investor returns.

At the turn of the century, and with the change of tax treatment on dividends, money began pouring back into firms that paid dividends. (A prominent feature of the much-maligned Bush tax cuts included tax-code changes that dropped the rate for dividends from high ordinary income levels – 35% in the top bracket – to a maximum of 15%.)

Bernstein Global Wealth Management prepared the amazing chart below, which demonstrates the power of dividends over the long term.

The Bernstein study concluded, “It should therefore come as no surprise that dividends have been a major component of growth in an investor’s return over time.
Remember, calculations of a stock’s performance in a portfolio are based on total return, i.e., the annual price appreciation (or loss) plus dividends.”

One dollar in 1926 (when market data first became reliable) invested in large-cap U.S. stocks would have grown to nearly $2,300 by 2004. But the Bernstein report shows that if you remove dividends – and the magical effect of compounding those dividends – then that same dollar would be worth a meager $87.66.

A similar study by Standard & Poor’s showed the same results over a different time horizon. The study of total returns (price appreciation plus dividend income) shows that payers of dividends outdistanced non-payers by 1.9% annually from 1980 through 2003.

Saturday, March 8, 2008

Doom and Gloom

After the dismal US jobs report was announced the doom and gloom in the main stream media was deafening.

I learned over the years that what ever the mainstream reports today is the "top" or in this case the "bottom" of an investment cycle then we are near the end of the cycle.

The same dismal US Jobs report five years ago marked the beginning of the US bull market of 2003-2007, rising more than 60% in the next five years. Furthermore, US unemployment remains low by historical standards.

I am still fully invested in income producing assets and if I am right we could have a decent market rise over the the course of the year.

Monday, March 3, 2008

Natural Gas Weighted Income Trusts

Natural Gas Weighted Energy Trusts have been decimated since the "Tax Fairness" policy was announced on October 31, 2006.

Despite the spike in trading activity year-to-date, unit prices still remain depressed for Trilogy Energy Trust (TET.UN-T) and Paramount Energy Trust(PMT.UN-T). February 2008 to-date, Paramount’s unit price is 46% below its pre-Tax Fairness level and 43% below for Trilogy. Peyto Energy Trust (PEY.UN-T) and Progress Energy Trust (PGX.UN-T) have fared better, and currently exhibit average prices only 9% and 12% below their pre-Tax Fairness levels respectively.

Investors seeking the most exposure to increased natural gas prices should consider both Trilogy and Paramount. Trilogy has the highest cash flow sensitivity to natural gas given its unhedged production, while Paramount’s cost structure (both operational and financial) provides leverage but 25% of their production is hedged.

I presently have positions in Paramount and Peyto.