Investing

Fundamentals II
 1. Stocks vs. Bonds
2. Do Dividends Matter?
TODAY’ 3. Asset Classes
S 4. Value vs. Growth
GOALS 5. Market History
6. Gold
 A stock is a share in the
ownership of a company.
What Stock represents a claim on
the company's assets and
is a earnings. As you acquire
more stock, your ownership
Stock stake in the company
? becomes greater.
Whether you say shares,
equity, or stock, it all means
the same thing.
 Holding a company's stock means
that you are one of the many
owners (shareholders) of a
What company and, as such, you have a
is a claim (albeit usually very small) to
everything the company owns. Yes,
Stock this means that technically you
own a tiny sliver of every piece of
? furniture, every trademark, and
every contract of the company. As
an owner, you are entitled to your
share of the company's earnings as
well as any voting rights attached
 A “public company” is a company
whose stock is sold on a public
market like the Toronto Stock
What Exchange or the New York Stock
is a Exchange. You can own stock in
“private” companies too, but they
Stock are a lot more difficult to buy and
sell.
?

5
 A given company will have a particular
number of shares outstanding on any
given day. They can increase this
number by selling new shares or
What decrease this number by buying them
back from the public on the stock
is a exchange.
Stock 15,020,000,000
shares outstanding
?
3,220,000,000
shares outstanding
 The price of a share of
What stock will go up and down
everyday. The price is
is a influenced by “supply and
Stock demand”.
? If more people want to
buy the stock, the price
goes up.

7
If more people are trying
to sell the price goes
 Making $$$ With
Stocks
As an investor you purchase stocks
with a goal to make money in two
different ways:
1. Hope the price will go up over
time so you can sell it for a
profit in the future (i.e. realize a
8 “capital gain”).
2. Possibly receive a “dividend”.
Company Value &
Stock Price
• If a company’s income grows,
the company is more valuable
so the stock price goes up!

• If a company’s income shrinks,

the company is less valuable so
the stock price goes down!
Company Value &
Stock Price
A company’s value is “supposed” to represent
the present value of all future cash flows/income
the company will generate.

I say “supposed” to because it is REALLY

difficult for anybody to figure this out on a daily
basis.

Just think of all the assumptions that need to be

made to estimate how much cash flow/income a
company is going to generate for years and
years and years!
 What Impacts Cash
• The Economy –Flows?
Growing? Shrinking?
• Competition
• New Products/Failed Products
• Government Regulation
• Taxes
• Labour Demands
• Inflation
• Interest Rates
• Supply Chain Issues (see COVID)
• Societal Trends (Environment, Health, Etc.)
• Global Conflict
• Advertising Blunders
• And ALL of this is different in every county…
Company Value &
Stock Price
• This is why the stock price of a
company is constantly
changing.

• As new information becomes

available it is factored into the
“market’s” estimations of a
company’s future cash flows!
Company Value &
Stock Price

• So….you as an investor are

hoping that companies are
finding ways to continually
increase their cash flow/net
income over time so the value
of the company keeps going up!
 Company
Value &
Stock Price
Once you have “determined” (i.e. guessed) at the value
of the company, you divide that by the number of shares
outstanding.

Estimated Company Value = Share Price

# Shares Outstanding

16
 “Fun Fact”
We Can Do the Calculation in
Reverse et
Mark tion
p it a liza ”)
Ca t C ap
rk e
( “Ma s
mean pany’s
m
“ A C o lu e ”
Va
 Let’s
Look at
an https://www.morn
ingstar.ca/ca/repo
Exampl rt/stocks/quote.as
px?t=0P0000689
e 9
 What is a
▫ ADividend?
“dividend” is a distribution of a
portion of the company’s profits.
▫ A dividend is usually received in
the form of cash, but can be given is
the form of extra stock.
▫ Companies have no obligation to
pay a dividend.

20
Do You Want To Invest in Companies That
Pay Dividends?
• When a company pays a dividend, the “wealth” of the
company has decreased by the amount of cash it has
distributed.
• Imagine a company takes $5,000,000 out of its bank account
and distributes it to the shareholders, the business must now
be worth $5,000,000 less.
• And now that the business is worth less, price of each share
must go down accordingly!
 One Share of
One Share of Stock Worth $19
Stock Worth
+
$20
$1 in Your Pocket
22
Some investors don’t want Some investors REALLY
dividends as they prefer that like dividends because they
the company keeps the cash to want the cash so that they
grow the business. can choose what to do with
it. The investor might think
the business doesn’t have
any viable growth
opportunities.
 If you have invested in a GREAT
company, wouldn’t you want THEM to
keep the money and make the business
“Should” even better? If they do that it would
make the stock price go up!
you want
New companies, or companies with lots
a of growth potential likely won’t pay
dividends as they need to keep their
company cash.
to pay Older/established companies with less
growth potential likely will pay
dividends dividends, as will companies that want
24 to rebalance their capital structure.
?
 Let’s look at an example:

“Should” https://www.morningstar.com/stoc
ks/xnys/brk.a/chart
you want
a Now ask yourself, would the value
of Berkshire Hathaway’s stock be
company “HIGHER” if they had continued
paid out millions of dollars in cash
to pay dividends?
dividends If you think “YES”…..ask yourself
25 “HOW” that is possible?
?
Which Companies Pay Dividends
Often?

26
 Which Companies Don’t Often Pay
Dividends?

27
 1. They DON’T have a better
internal use for the cash
Companies themselves. i.e. they have no
quality growth opportunities.
Therefore
Pay 2. To change their capital
structure and thus lower their
Dividends WACC by distributing retained
Because earnings and raising cash with
debt (when prudent to do so).

3. That’s it. Those are the

28 reasons.
 Many companies DO pay
dividends, and on an overall basis
“Should” they make up a significant portion
of an investor’s “total return”.
you want
a “Total return” is a combination of
the dividends you receive and the
company increase in the price of the stock.

to pay At the end of the day, we are

interested in maximizing total
dividends return.
29
?
 “Should”
you Let’s look at a little
comparison….
purposefull
y invest in
dividend
paying
32
stocks?
 You buy 1 share of TD Bank Stock on
January 16, 1995 for $5.10

On February 6, 1995, TD paid you a

dividend of $0.06.

This works out to a dividend yield of

1.18%. (0.06/5.10)

This equals approximately 4.72% for

a year (1.18% x 4 as dividends are
paid quarterly).
33
 On October 5, 2023, TD paid you
a dividend of $0.96.
What is your dividend yield on
October 5th?
A lot of “dividend gurus” will tell
you that your yield is based on the
price you originally paid for the
stock, or:
$0.96/$5.10 = 18.82%
(or 75% per year)
34
 But, on October 5th that 1 share of
TD bank stock was worth $79.39.

That means that the TRUE

dividend yield on October 5, 2023
was:

$0.96/$79.39 = 1.21%
(or 4.84% per year…which is
almost identical to the yield when
35 you bought it)
 This MUST be true because if you
sold your share, collected $79.39,
then took the cash and bought back
your share the very next minute at
the same price, you would now
agree you’ve “invested”
$79.39….right?
So now you would HAVE to agree
that your dividend yield is:
$0.96/$79.39 = 1.21%
https://www.morningstar.ca/ca/report/stocks/quote.aspx?t=0P00006899
36
 So please don’t fall for the myth
that your return is growing based
on the original price you paid.

It simply isn’t the right way to

look at your investment.

Watch this video if you want to

explore the myths of dividend
investing in more detail:

https://www.youtube.com/watch?v
37 =z5imrtGdehc
 You should be able to set up your
brokerage account to automatically
reinvest dividends back into the
Should you SAME investment the dividend
“DRIP”? came from.

(Dividend This is an easy way for you to

make sure you are already putting
Reinvestment your cash to work.
Plan) Or, if you’d rather you can let the
cash pile up and invest in a
different investment.
38
 Note: when you automatically
Should you reinvest dividends back into
the same company you are in
“DRIP”? the same overall position on
the day you buy more shares.
(Dividend You don’t have more wealth.
Reinvestment
Plan) Remember this when you read
articles/blogs/books/etc. that
will try to tell you that
39 dividend investing is “best”.
 A bond is a debt investment in
which an investor loans money to
an entity (typically corporate or
What governmental) which borrows the
funds for a defined period of time
is a at a variable or fixed interest rate.
Bonds are used by companies,
Bond? municipalities, states (provinces)
and sovereign governments to
raise money and finance a variety
of projects and activities. Owners
of bonds are debtholders, or
42
creditors, of the issuer.
(http://www.investopedia.com/terms/b/bond.asp?layout=orig)
 The “key” with bond
investing is that the person
What that holds the bond doesn’t
is a participate in the profits of a
company. If a company
Bond? becomes more profitable,
the bond holder doesn’t
make any more money! All
they get is their promised
interest payment.
43
 In August of 2020,
Apple issued $5.5
Billion of bonds with
interest rates ranging
from 0.60% to 2.61%
(per year).
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/hg-
bonds-apple-launches-5-5b-offering-at-low-yields-59920540

Sounds about as good

as a high interest
savings account right?
44

Does that return excite

 +270%
in 40 months
+270% gain in 40
months…or at
most 8.7% interest
 In 2019:

“…the company's wearables

division, which includes AirPods
and Apple Watch, accounts for
more revenue than 300 of all
Fortune 500 companies.”

47 https://fortune.com/2019/08/06/apple-airpods-business/
 Be a lender and make a
small amount of interest?
(bonds)
OR
Be an owner and
participate in the profits
and growth of the
48 company? (stocks)
 Most people think bonds are
“safe” and “low risk”.
Interes It is true that bond prices
t Rates move up and down less than
stocks.
and But bonds prices do fluctuate
Bond when market interest rates
change.
Prices And oh boy….have they
49
changed!
 It IS true that bond prices
fluctuate less than stocks…
Interes but they still fluctuate.
t Rates Bond prices fluctuate for the
same reason stocks do –
and supply and demand.
Bond Demand changes because
interest rates in the market
Prices change.
50
Interes
t Rates
and
Bond
Prices
51
Interes
t Rates
and
Bond
Prices
52
  Let say you buy a bond today
Interest from Bell Canada for $1,000.
Rates Bell Canada promises to pay
you 5% interest per year for 10
and years and then you get your
$1,000 back.
Bond
Prices –  You will get $50 of interest per
year.
an
exampl  That is your “reward” for
53 investing in the bond.
e
  Now assume that the interest
Interest rate investors want on a bond
Rates like yours (similar risk, maturity
date, etc.) goes up to 6%.
and
 Your bond only pays 5%
Bond interest.
Prices –
 Now imagine you need to sell
an you bond because you can’t
exampl wait 10 years to get your
money back.
54
e
  Will someone want to pay you
$1,000 for a bond that pays 5%
interest when they could buy a
different bond (of similar
Ask features) that pays 6%?
Yourself  Of course not!!!!

 You will have to sell your bond

for LESS than $1,000 to entice
somebody to buy your bond.
55
Interes
t Rates
and
Bond
Prices
56
 Since the early ‘80s
interest rates have been
trending down which has
generally been causing
bond prices to go up.
So, for 2.5 decades
investing in bonds had
been a decent investment
because bond investors
were earning a good
62 amount of interest and
bond prices were going up!
 My opinion is that until
someone is 5 years away
Should from retirement they should
YOU think very carefully about
WHY they want bonds in there
Have portfolio.
Bonds Bonds WILL smooth out the
in Your “roller coaster”….but it will
also decrease the overall total
Portfoli return of your portfolio as
63 o well.
Is a smoother rollercoaster
64
Investing in Bonds is Like
This
Investing in Stocks is Like
This
 Let’s Look at Real World Example

“AGG” - “VTI” –
iShares Vanguard
Core U.S. Total U.S.
Aggregate Stock
Bond ETF Market
ETF
https://www.m
orningstar.co
m/etfs/arcx/ag https://www.m
g/performance orningstar.co
m/etfs/arcx/vti
67 /performance
 Let’s Look at Real World Example

“AGG” - “VTI” –
iShares Vanguard
Core U.S. Total U.S.
Aggregate Stock
Bond ETF https://calculators. Market
atb.com/atb/jsp/Ear
lyInvesting/EarlyIn ETF
2.31% vesting1_run.jsp

13.15
68 %
 Should
YOU Have
Bonds in 1. The long-term rate of return
Your on bonds is less than the
Portfolio? stock market.
2. Since you will NOT get off
the rollercoaster….why do
you need them before
retirement?
69
 Should • There is ONE “possible”
YOU Have justification for buying
Bonds in bonds that you may come
Your across.
Portfolio? • Let me show you it and
then we can discuss.
• The problem with this
idea is that we can’t know
if it will work well over the
70
long term. Only time will
tell.
71
 What is an Asset Class?

“An asset class is a grouping of investments

that exhibit similar characteristics and are
subject to the same laws and regulations.
Asset classes are made up of instruments
which often behave similarly to one another
in the marketplace.”
https://www.investopedia.com/terms/a/assetclasses.asp
Main Asset Classes
  Cash is technically an asset
class, but we all know that
Cash & when you hold cash it is
Cash slowly losing value over
time due to inflation.
Equivalent
s  So outside of your
(GICs, emergency and sinking
funds (and having enough
Term cash on hand to cover your
Deposits, monthly bills), I don’t think
74
Savings) it makes sense to hold more
cash.
  Many people believe you
should keep a significant
amount of cash on hand to
buy into the stock market
when it goes down
“Buying significantly (like in 2020).
the Dips”
 I DO think you should “buy
the dip”….but not by
keeping a lot of cash on
hand.
75
 Let’s see why.
 “Buy the Dip”

Keep cash ready to buy

when the market has a
significant drop.
 You may have
waited until here to
invest…
If you stared saving
cash here to buy
the next big dip…

Which means you

missed this…
 You may have
If you stared saving waited until here to
cash here to buy invest…
the next big dip…

Which means you

missed this…
This opportunity
may have worked
IF you managed to
buy at the bottom.
This opportunity
may have worked
IF you managed to
buy at the bottom.
But come
on….what are
the odds YOU
know where
the “bottom”
is?
  The most difficult thing to
do is knowing WHEN to
“buy” as the market is
falling.
“Buying  It is a little scary to put your
the Dips” money into a market when
it is falling fast.
 And if you wait for it to start
going back up you may
81
miss a lot of the dip.
Start here…
when would
you buy?
 JUST
KEEP
BUYING!
  Commodities refer to
agricultural and resource
Commoditie products like oil, natural
s gas, wheat, orange juice,
etc.
 Commodities are VERY
volatile (see oil prices!) and
don’t have a very good long
term track record for
earning returns.
84  I don’t think they are a
good “long term
 https://finance.yahoo.com/quote/P
DBC/performance?p=PDBC

https://finance.yahoo.com/quote/G
SG/performance?p=GSG

https://finance.yahoo.com/quote/D
BC/performance?p=DBC
85
  You can also invest in all kinds
of real estate other than your
house and/or rental properties.
Real Estate
 There are ways you can invest
in industrial real estate,
apartment buildings, storage
units, warehouses, nursing
homes, etc.
 Be careful not to invest “too”
heavily in this asset class as you
probably already have a
86 significant portion of your net
worth tied up in your house
  When it comes to bonds you
can invest in many different
types.
Bonds
 You can read more about
them in your textbook, or
you do your own research.
 I’m not going to spend any
class time on them as I
REALLY don’t want to
encourage young people to
87
include them in your
portfolio!
  Corporate vs.
Government
Types of
 Short vs. Medium vs.
Bonds
Long Term
 Fixed Rate vs. Floating
Rate
 High Yield vs. Low Risk
 Convertible vs.
88
Conventional
  Now when it comes to
“stocks” there are
Stocks different classes that we
do need to learn more
about.
 Don’t feel overwhelmed
by this. It is easy enough
to learn.
 I like to think of stocks in
89
3 major classifications.
 How to Geograph
Think y
About
Investin
Growth
g in Size
vs. Value
Stocks
90
 North America International Emerging
Markets
▫ Canada ▫ Japan
Geograph ▫ United States ▫ United ▫ Taiwan
y Kingdom ▫ Thailand
▫ France ▫ South Africa

- divide ▫ Germany ▫ Brazil

▫ Australia ▫ South Korea
your The big U.S. ▫ Switzerland ▫ China
portfolio companies
▫ Spain ▫ India
into these (S&P 500)
give you a ▫ Italy ▫ Malaysia
three lot of ▫ Hong Kong ▫ Poland
geographi indirect
International ▫ Netherlands ▫ Russia
c locations exposure ▫ Etc. ▫ Mexico
91
 An emerging market economy (EME)
is defined as an economy with low to
middle per capita income that is
expected to grow rapidly. Such countries
constitute approximately 85% of the
global population, and represent about
92
45% of the world's economies.
93
 “Size” of
Company
Classifie
d
by
“Market
Cap”
94
 “Size”
Classified
by
“Market Cap”

y
el
- divide your

at
xim
portfolio

ro
p
into these

Ap
three (four)
95 sizes
 Growth
vs.
Value
A growth stock is A value stock is
any share in a a stock with a price that
- divide company that is appears low relative to
anticipated to the company's financial
your grow at a rate performance, as measured
portfolio significantly
above the
by such fundamentals as
the company's revenue,
into average growth dividends, yield, earnings
for the market. and profit margins.
96 both
 Growth
vs.
Value
You will pay the You will (hopefully) pay
full “fair” price for below the “fair” price for
- divide this stock and this stock and hope to
your hope to profit by
the future
profit when the stock
price recovers to its “fair
portfolio growth in the value”.
stock’s price.
into
97 both
 RULES of THUMB
(Historically)
1. Over a long period of time
small company stocks have
outperformed (grown faster)
than large company stocks.
“Small is better than large”
2. Over a long period of time
value stocks have
outperformed (achieved a
10 higher return) than growth
0
stocks.
 The Rules are Changing?
1. Fama’s research became so
famous, and turned out to
be so correct, that a large
portion of the market started
buying “small” and “value”.
2. Once that started
happening the “premium”
an investor could get has
been shrinking.
10
1
10
8
11
1
11
2
11
3
 Is the 3 Factor Model
Dead?
• It is too soon to say if the
expected premium on both
value and growth are
shrinking? Disappearing? Or
staying in place.

• It may seem hard to believe

but 10 - 15 years just isn’t
11
4 long enough to know.
 Is the 3 Factor Model
Dead?
• I suggest in your portfolio you
have some of:
• U.S./Canada/Int’l/Emerging
Markets
• Small, Mid and Large Cap
• Value & Growth
11
5 • *You’ll see why in a few slides
https://www.morningstar.com/stocks/us-stocks-have-ou
tperformed-world-history-shows-that-success-can-be-fl
eeting
https://www.morningstar.com/stocks/us-stocks-have-ou
tperformed-world-history-shows-that-success-can-be-fl
eeting
Canadian Index Annualized Returns U.S. Total Index Annualized Returns

Last 20 years +7.8% Last 20 years +10.18%

Last 10 years +7.5% Last 10 years +12.24%

https://www.taxtips.ca/stocksandbonds/investmentreturns.ht
m
https://www.portfoliovisualizer.com/backtest-asset-clas
11 s-allocation#analysisResults

8
 Real Estate Investment
Trusts
It is tricky to find the long
term rate of return for real
estate because we need
know what kind of real estate
we are talking about…and in
what country.
“Generally” speaking the
stats I’ve seen show you
could historically expect to
get between 9% and 11%
12 long term by having a very
1
broad-based real estate
  From one year to the
next some investments
will go up and others
will go down.
 Sometimes WAY up and
WAY down!
 Let’s see what’s
happened over the last
15 years.
https://novelinvestor.com/asset-class-returns/
12
2
12
3
 The reason I think we
should have all of these in
our portfolio:
 U.S./Canada/Int’l/
Emerging Markets
 Small, Mid and Large
Cap
 Value & Growth
12
4
Is so we can gain benefits
from “rebalancing”.
12
5
 Let’s do an example:
Assume that on January 1,
2006 we invest $1,000 in
each of the following:
 REITS, Int’l, Emerging
Markets, U.S. Large
Cap, and U.S. Small
Cap.
 Remember that each
12 has a very different
6 annual performance.
 Scenario #1:
Under Scenario #1 we will
not buy or sell any of the
investments to
“rebalance”.
We will simply let each
asset class grow/shrink
each year until the end of
2020.
12 Let’s see the ending
7 balances.
 Scenario #1 – Without
Rebalancing
Asset Class Starting Total Ending
Balance Return Balance

International $1,000 207% $2,070

Emerging Markets $1,000 274% $2,737

REITs $1,000 282% $2,824

U.S. Small Cap $1,000 360% $3,604

U.S. Large Cap $1,000 411% $4,114

Totals
12 $5,000 307% $15,348
8
 Scenario #2:
Under Scenario #2 we will
sell the asset classes that
went up in value and buy
the ones that went down in
value.
This will rebalance so each
asset class represents 20%
of the total portfolio at the
start of each year.
12
9 Let’s see the ending
 Scenario #1 – With
Rebalancing
Asset Class Starting Total Ending
Balance Return Balance

International $1,000 309% $3,086

Emerging Markets $1,000 338% $3,383

REITs $1,000 270% $2,705

U.S. Small Cap $1,000 342% $3,420

U.S. Large Cap $1,000 337% $3,374

13
Totals $5,000 319% $15,968
0
 Scenario #1 vs.
Scenario #2
Asset Class Without With
Rebalancing Rebalancing Difference
International $2,070 $3,086 $1,016

Emerging Markets $2,737 $3,383 $ 646

REITs $2,824 $2,705 ($ 119)

U.S. Small Cap $3,604 $3,420 ($ 184)

U.S. Large Cap $4,114 $3,374 ($ 740)

13
Totals $15,349 $15,968 $ 619
1
 Rebalancing “Rules”
1.Don’t rebalance more than
once per year.
2.Rebalance with “new
money” rather than selling
if you like when your
account is still small.
3.Remember that “buying
low” is a good
13 thing….even if it can be
2 hard to do.
 Let’s take a historical look at what happens
when we put the different “market caps” and
“growth/value” together.
It will also reinforce the “don’t get off the roller
coaster” idea.
13
3
https://soundinvesting.com/wp-content/
uploads/2022/03/2-4-Fund-Equity-Retur
ns-1928-2021-C.pdf

13
4
https://soundinvesting.com/wp-content/
uploads/2022/03/2-4-Fund-Equity-Retur
ns-1928-2021-C.pdf

13
5
https://soundinvesting.com/wp-content/
uploads/2022/03/2-4-Fund-Equity-Retur
ns-1928-2021-C.pdf
 Expected Returns
A lot of (older people) think I’m
crazy to tell students about
10% returns.
“They” may not have realized
returns that high in their life.
Why? Let’s see….
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 Asset Historic Realized
Weight Class Return Return

60% Stocks 10% 6%

40% Bonds 6.5% 2.6%

Total 8.6%

Fees (2.0%)

13 Realized 6.6%
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 My Personal Approach
In my own portfolio I’ll be “ok” if
I earn a long term rate of only
6%.
I’ll be happy if I get 8%.
I’ll be thrilled if I get 10% or
more!
I’ll show my actual numbers in a
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coming class.
 My Personal Approach

I’ll show you the portfolio I

use in a future class!