It has been a rather fruitful first half of the year for the Noble Anarchist, considering how little I’ve actually been working. To the point where I figured I should probably document exactly how I did it and get it out there for others to learn from and possibly do the same for themselves one day!
My interest in investing (no pun intended) all started back in around 2003 when I worked at Electronic Arts; I was given these crazy things called Stock Options that I had to learn about and how to deal with, later to be matched with an employee Stock Purchase Plan that I was told I was a fool if I didn’t enroll in. Once I had grasped all the basic concepts and built up a tiny nest egg during the tail end of EA’s glory days, I would eventually try my hand at day trading stocks on the side, an experiment I wouldn’t necessarily recommend to the reader… When I was hired at EA, the stock price was around $40, only to split shortly after I was hired and then eventually hit the $70 mark (effectively over tripling my initial options!)…. only to be down around the $20 mark at the time of writing of this blog… so reader be ware!! (note that I cashed them out up around the $50 mark, so I did ok in the end)
Move ahead to about four years ago when I, like many other financially uneducated, middle-classed Westerners rushed to my bank five days before the annual RRSP cutoff at the end of February, armed with $5000 to slap into whatever the teller tells me. We go over the basic few options the bank has to offer stupid customers like myself that don’t really know any better; I end up springing for the longer-term three year RRSP, since the returns start at 1.5% on the first year (less), 2% on the 2nd (more!), and a whopping 3.5% on that 3rd year (even more!!).
Now, I at least recognized those weren’t the greatest returns, but like the mentality that most people have, combined with what stocks are known to do in the short term at times, it was at least guaranteed, and I was thankful I wasn’t losing money like so many other people seem to do (and I did while attempting to day trade). But one thing I did know that so many people don’t is, when you take the 2 – 2.5% inflation adjustment into account, all that “3-year Escalator” as they call it does is, gives me the same amount of money back after 3 years but with an inflationary adjustment built into it. I actually don’t make a penny on that money! There had to be a better way, and with the knowledge that I had from the EA stock days, I had to figure it out.
Fast forward to December 2011, a friend’s coworker that works in the finance department of a local university suggests I just start managing it all myself, and tells me a really good place to look for help is a Canadian magazine called Money Sense. It just so happened to be the time of year when the magazine comes out with its annual “Top 200 Canadian Stock” issue (plus top 500 US Stocks). So I grabbed a copy and started reading.
In this annual edition, the magazine grades every stock from ‘A’ to ‘D’ in two categories: Growth, and Value. In the December 2011 edition, there are 8 stocks that have an ‘A’ in both categories, and they claim that “these All-Star stock picks generated average annual returns of 15.2% over the previous 8 years, enough to triple your money.” …a heck of a lot better than my barely-keeping-up-with-inflation investment I had recently made.
That first year I invested $9,000, and ended up with $10,000 by the end of the year. Not quite 15% as they claim, but again, a lot better than the RRSP ever did.
Get to the Point, Noble Anarchist!
Move forward to December 2012, and after the previous year’s success I make the decision that I’m going all in. After all, the more you invest, the more you make, right?? (of course I realize the contrary is also true!). As it turns out, I was fortunate enough to time my balls-to-the-wall experiment with one of those macro-economic stimulus plans by the US Federal Reserve that most people including myself can barely grasp.
So in December of last year I purchased $100,000 worth of stocks through my margin account (basically, I have $50,000 in my stock account, but because it’s a margin account, the bank will loan up to around 100% of what you have in there… obviously at a price). After only two months of hanging onto my new little worker bees, I was up to $8000 profit. Jackpot!
Since then it has been a roller coaster of a friendship hitting as high as $15,000 profit and very recently as low as $4800 after murmurs that the stimulus program might be coming to an end in the near future. Thank god stock traders can be convinced of anything because after those rumors had been recently nixed in the media, my honey pot shot right back up to near-record highs in only the two weeks to follow. Phew… time to get out!
Here is a summary of what I bought and where it ended up at when I sold it:
- Canadian Stocks
- IDG (Indigo Books) -$10 (0.19%)
- NAL (Newalta Corp) -$220 (4.18%)
- POW (Power Corp) +$1138 (20.32%)
- WPK (Winpak) +$1572 (26.31%)
- US Stocks
- HFC (Hollyfrontier Corp) -$1029 (7.32%)
- RS (Reliance Steel) +$1591 (22.39%)
- TSO (Tesoro Corp) +$1925 (31.13%)
- WDC (Western Digital) +$6800 (100.53%)
My margin account borrowing costs me $225 per month on that much money (which is 4.5% per year). So if I borrow money to buy stock and the stocks go up 10% on the year, I’m making 5.5% on that borrowed money. Average that with non-borrowed money, I’m making 7.75% overall, overall on a portfolio (god I hate that word) that goes up 10%. So in the end this year, I’m up $12,000 on $50,000, which is just around a 25% profit once all the marginal smoke has cleared (as in, my assets didn’t actually go up 25%, I invested twice as much money as I actually own, and paid the bank a bunch of interest for borrowing the money). Oh, and don’t forget to add a few percent for the dividend money these stocks also pay which I’m not accounting for here. (actually in fact, those dividends are not at all insignificant – I received enough to cover the cost of borrowing the $50,000, and then some)
Obviously I did really, really well buying some of that juicy Western Digital, and you might be thinking, “Well, you made so much money because you fluked out on that one stock…”. While it is true that I did get lucky there, statistically speaking you put yourself in a spot to get lucky with a stock or two by diversifying what you purchase when you do these things. More to come on that later!
If you are thinking about actually trying to do something similar to what I did here, but borrowing money to invest scares you too much, I would still recommend opening a margin account because as you gain confidence with it all, it’s nice to have the option. Note that it works exactly like an overdraft – if you don’t use it, it doesn’t cost you. My account is through Scotia iTrade which used to be eTrade; I originally went with them because they were the only one I could find that allowed you to do trades electronically and on your own – I’m sure there are a number of other institutions that allow that these days, and possibly ones that don’t charge you a whopping $28 for each transaction.
Now all that said, I do believe I got quite lucky this year (25% profit in 7 months is certainly not something one should ever expect – after all it is said that even Warren Buffet only averages a 20% profit per year), and after seeing what happened recently when the media reported the stimulus program would start to “taper” as they’re putting it (I can remember these sorts of wild swings being the start of the whole 2008 crash), I’m thinking it is time to sit at the sideline for a bit and watch as some serious adjusting is likely to happen in the very near future. At the moment I’m looking into possibly getting into the precious metals, and as well there’s a website now called “Lending Club” that I’ve heard really good things about.
But once the stock market settles down again, I will be sure to have myself in a position where I can start the next cycle of the Noble Anarchist’s Stock Purchase Plan, only likely at a hugely discounted rate next time!