Invest Skeptically

According to Wikipedia, “in Greek mythology, the Sirens were sea nymphs who lured sailors to disaster with their enchanting singing.” Now they just hang out naked on cups of Venti nonfat half-caff soy lattes.

Starbucks presented their 2008 Q1 earnings tonight. Revenue was up 17.5% to $2,767.6 million and earnings were up 1.5% to $208.1 million. After share buybacks, EPS was up 7.7% to $0.28.

There are many views on what Starbucks is or isn’t (one contributor to the Seeking Alpha blog thinks it’s a restaurant/real estate play) and what the stock, SBUX, should be worth. The discussion board on Google Finance contains many lively debates about this company and the stock.

You can probably guess my own opinion from the title of this blog but I thought I’d focus today on the words that Chairman and CEO Howard Schultz wrote in a Letter to Partners released today in the “press room” section of the Starbucks website.

This fiscal year, we will also open an additional 75 net new stores in international markets, increasing the international store opening target to approximately 975 stores. In 2009 that will rise to over 1,000 stores internationally, and mark the first time that our International store openings will outpace those in the U.S.

Everyone talks about the international opportunity but they are still a long way from getting there. Non-U.S. store sales are still only about 25% of U.S. sales and their operating margins last quarter were 10% versus 14.6% for the U.S. stores. However, even after dropping 44% over the last year, SBUX still trades at around a 22 P/E ratio. Justified?

In the coming months, you will see a renewed level of commitment to providing superior training for our retail partners. We will invest in tools and provide them with the resources they need to exceed customer expectations.

Just who are these tools that they’re investing in? The they in that sentence seems to refer to their retail partners. A Freudian slip or sentence malfunction perhaps?

We will utilize our 35-plus years of ethically sourcing, buying and roasting the finest coffee in the world to reaffirm our coffee authority.

My impression has been–through reading opinions on the web and interviews in Taylor Clark’s book–that coffee snobs have rejected Starbucks as a destination for quality coffee. There’s nothing surprising here. It’s hard to ensure a fresh and consistent product when you have so many stores to distribute to in so many places.

On another note, we have received a lot of attention in the last week about the $1 brewed coffee 8 ounce short test [...] I’d like to reiterate that Starbucks is built on premium coffee and a premium experience. We intend to maintain our leadership position at the high end, while broadening our appeal. And similar to other leading global consumer brands, we believe there are opportunities to create segmentation, provide an entry point for new customers, and generate trial in a way that will also maintain the value of our core brand proposition.

If I were an an investor in SBUX, this is what would really scare me. When Starbucks had the attention of the world and seemed capable of opening stores forever (and filling them with lineups no less) they were doing it without advertising and without discounting. Now I see print ads fairly regularly and this $1, free refill, coffee is basically a discounting program.

If Starbucks is selling a “premium experience”, I don’t see how they can broaden their appeal “similar to other leading global consumer brands”. You can segment and sell different kinds of shampoo but there’s only one kind of Porsche–the expensive kind. Thus, if the “Starbucks Experience” is just a consumer product, like shampoo, then what’s the upside for the stock at these levels?

Jonathan Chevreau writes about Dennis Gartman’s presentation at the Toronto Financial Forum on his blog. He reports how the “veteran trader and newsletter publisher” urged investors to “buy what’s already going up, and to sell investments that are going down”.

“[Gartman] also suggested that even top traders like himself will be wrong 60 to 80% of the time or more. That’s why it’s important to sell quickly when it’s apparent a trade is not working out; and to pyramid profits and buy more when a pick works out and the market validates your idea.”

When I read these comments, I wonder just who the audience is at “Canada’s one-stop resource for investment education and financial guidance.” Are they mostly active traders who are trying to trade their way to riches? I just happened to be looking at Chevreau’s blog today but a quick flip through the newspapers or business TV programs will yield many more market commentators advising some sort of action or reaction.

They all remind me of the Warren Buffett quote: “Wall Street makes its money on activity. You make money on inactivity.”

Trading stocks can be a fun and rewarding hobby. But for most individual investors (who have day jobs, families, and don’t spend all day staring at a Bloomberg screen) I believe that a boring buy-and-hold approach to investing is more appropriate. This idea might seem blatantly obvious but it’s easy to forget with all the voices on internet blogs, newspapers, and TV encouraging us to trade something.

I had a coworker once who said that portfolio management is mostly about managing your emotions; and I think he was right. From my personal experience, I’ve found that it’s easy to get caught up in the excitement and the temptation towards activity. When fear (or euphoria) is high and all the talking heads are saying, DO something, it takes a lot of discipline to go back to a rational place and remember all the planning that went into creating my portfolio: investment objectives, time horizon, asset allocation strategy, and buying quality companies (good earnings, cashflows, identifiable growth plans, etc.) at reasonable valuations.

I guess I’m writing this blog today because the recent market volatility is starting to play with my emotions, making the cacophony of opinions resonate all the more, and because I need a reminder that I’m an investor and not a trader.

When reason is not enough to sit and watch dispassionately as my stocks go up and down 5% a day, I’ll use this bit of psychological trickery I found at the Motley Fool: How do you reduce the volatility of a stock? Don’t check the price.

I found this tax rate calculator on the Morningstar.ca website.  I like the fact that it shows you your “Average Tax Rate”.

ING Direct Canada has launched its Streetwise Fund:

ING DIRECT is once again challenging the high fees Canadians pay for investing and bringing diversification at a low cost to the masses with the launch of a new index-based mutual fund called the Streetwise Fund. The Streetwise Fund is a diversified balanced fund which incorporates several indexes in its investment strategy.

The selling feature is that retail investors can get low cost–the MER is 1%–diversification even if they have relatively small portfolios. This last point is relevant because many online brokerages still charge $29 per trade for small accounts (although the trend seems to be $9.95 pricing).

But is the Streetwise Fund’s 1% MER really low cost? The answer is no. Can you replicate it yourself for less using Index ETFs? The answer is yes.

Here’s an example assuming a portfolio of less than $6,000 (trying to keep equal weighting between the four indices):

This portfolio offers the same exposures as the Streetwise Fund: S&P/TSX 60, DEX Universe Bond Index, S&P 500, and MSCI EAFE.

The weighted average MER of these ETFs is about 0.18%. Even if you were charged $29 per trade, trading fees would be equivalent to about 0.41% over 5 years (4 trades x ($29 / $5711) / 5 yrs)* for a total cost of 0.59% per year–or 0.41% lower than the Streetwise Fund!

Other blogger coverage of the Streetwise Fund:

• ING Index Funds? HUH? [squawkfox]
• ING Direct’s Low-Cost Mutual Funds [Canadian Capitalist]

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*Or equivalent to 0.50% if you annuitize it over 5 years assuming a 7% discount rate.

Last week’s post was about searching for US SEC filings on US companies. Today’s post provides the equivalent Canadian information. Public filings for Canadian companies can be found using the search database tool on the SEDAR website. The website is not as user-friendly as the EDGAR site because the filings aren’t coded by form number. For example, information that may be found in an SEC 8-K filing might show up on the SEDAR website as “News Release”, “Material Change Report”, or “Other”. “Other” seems to catch many different filings as I’ve found quarterly reports hidden in them. At any rate, following last week’s format, here are some of the common filings using what I believe to be the common document type descriptions.

• Audited (Annual) Financial Statements: Annual report.
• Interim Financial Statements: Quarterly report.
• News Release.
• Material Change Report
• (Management) Information Circular: The annual proxy circular. Use this to find out information on officers and directors, their shareholdings, and shareholders that hold more than 10% of the company’s stock. Note that the line here is 10% and not 5% as in the US.
• Insiders and >10% shareholders must file their transactions within 10 days. Note that this is different than the US SEC Form 4 for insiders that has to be electronically filed within 2 business days. The Canadian insider filings can viewed at the SEDI website under “Access public filings”.