Wednesday, 17 October 2012

My baby takes the morning train

After the slump of 2008 I was fed up with my mutual funds. They were supposed to be a tax sheltered way to grow my savings. They were supposed to be indexed to the stock market. They were supposed to provide for my in my old age. But the answers were "No" "No" and "No". Not only were my fund managers squandering my capital every year – they were charging me from 1.75 to 3 percent of my assets to waste my money.

Then I noticed the fund compositions were so far off base as to be nearly fraudulent. I bought a global precious metals fund. "Global precious metals" meant all Canadian Mining funds. I bought a Global Commodities Fund. "Global Commodities" meant all Canadian Oil, Gas and Mining Companies

By 2011 it was clear that I would have invested more wisely if I'd stuck all my money in the g-string of an exotic dancer named Bambie. Bambie outperformed the stock market. Bambie gave me short-term growth. Over and over again. And Bambie was aging me so quickly that I was never going to outlive my RRSP.

Plus with Bambie I had no problems with timing the market. With Bambie, it was always the right time to get in. And she always told me when it was time to get out!

So in late 2010 I began to formulate a plan. I had accumulated enough in my retirement account that I was going to open a self-directed RRSP. Farewell MERs! Hello per-trade commissions. Farewell Index funds that don't perform the Index. Hello, Bre-X.

In other words this Fox was going to let the herd of Canadian investing sheep follow their advisers over the cliff. This Fox was about to become a wolf. In the coming months I will explain market fundamentals as I understand them. Several principles will come to the fore. I can explain to you how you develop an investing style that lets you pick stocks that you already know how to make money on. It's very probable you can take your own money, and make money with it, than the average mutual fund manager. Let me give you a simple example...

I'm into Canadian Pacific Railways.
First of all – I like trains. I travel by train. I live near the major GO transit line into Toronto. My office looks out onto the Canadian Pacific mainline that travels from Atlantic to Pacific in this great country.

I read about trains every few days. Mostly hobbyist stuff. Old pictures of steam engines, or the electric railway systems of the 1930s. Well guess what? The railway business model hasn't changed since 1840. In other words, my hobbyist interest has given me a fundamental understand of the practical base of the economic model of railroading.

Let's look at those fundamentals:
  • A class of ship called "salties" send coal and iron ore to Asia to be made into consumer goods
  • Container ships send the finished goods back to North America
  • The containers are offloaded onto specialty railcars
  • The containers are taken off the railcars and put onto truck trailers at inter-model yards
  • The trucks drive the trailers to the discount retailers such as Walmart
How can this market be disrupted?
  • Rising fuel costs have increased the cost of sending coal and steel and finished goods by ship so much that ships now practice slow steaming. It now takes a ship twice as long for each leg of the journey
  • What this means is that new pressures will force Chinese companies to re-offshore (also called "onshoring") their factories back to North America.
  • This is bad for shipping but it means good manufacturing jobs coming back. And it means everything still travels by train.

Looking at the matter from a completely different perspective, the barrier to entry is almost impossible to override. Currently there are seven "Class 1" carriers - Canadian Pacific and Canadian National, CSX Transportation, Norfolk Southern Corporation, Union Pacific, BNSF Railway, and Kansas City Southern.
The CP railway enterprise owns 14,000 miles of usable track. If you want to compete with CP you have to buy 14,000 miles of land, and lay 14,000 miles of track.

Then comes the sweetest plum of all. Canadian Pacific has been under-performing for a quarter-century. Activist shareholders have succeeded in forcing the CP Board to appoint ex-CN Chair E. Hunter Harrison as the new chair of Canadian Pacific.

And this concludes our lesson. This makes CP a "story stock". They used to be in the toilet. Now they hired the greatest mind in railroading. That makes for a good story.

I look forward to sharing with you the story of how this stock play unfolds.

Canadian Pacific Railways
Ticker – CP

Wall Street is bullish on Railway Stocks

Disclaimer: This is not investment advice. This is the story of how I pick my stocks. I cannot recommend these stocks for you. My invitation is that you use this story as an inspiration to develop your own portfolio that meets your risk profile, the type of stocks you can understand, and that are recommended by professional writers and market analysts. I am an amateur investor. I enjoy the hobby, and invite you to enjoy it too.

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