Spotting the Megatrends

Statue of Roman Emperor Constantine

The Catholic Megatrend

I just finished my fall term course, History of Christianity I.  The scope of the course was the history of Christianity from the time of Jesus to the Middle Ages.  Over this period of time, Christianity grew from a little offshoot from Judaism to become the religion of the West.  One of the major turning points in the history of Christianity was the conversion of the Roman Emperor Constantine.

Just years before Constantine came onto the scene, the Emperor Diocletian in the year 303 A.D. began a period of persecution of the Christians, leading to the deaths of many martyrs.  Only 10 years later, Emperor Constantine reversed this persecution and issued the famous Edict of Milan, tolerating the Christian religion.  Before the end of his life, Christianity was on its way to become the official religion of the Empire.

What does this all have to do with investing?  This is what is referred to as the megatrend.  It is a major trend that brings about profound change in the way the world operates.  An onlooker in the third century in the Roman Empire would have noticed that something was up.  There were these groups of people who had outlandish claims of eating their lord's body and drinking his blood.  Aside from this, they were generally law-abiding citizens who were very charitable.  Their churches would actually provide for the sick and the travelers.  What was certain was that more and more people were joining them.  Everyone knew the world was changing, but some doubted if this would continue.

The pagans who continued to practice their pagan worship were in for a surprise.  In a short span of roughly 50 years, the pagan cult went from being the official Roman religion to becoming nearly wiped out.  It is easy to deny the trend, but the consequences could be grave.  This is the same way with investing.  Once every few decades, a breakthrough in technology or human thinking would change the way the world operates.  If you invest in the right companies at the right time, you're in for a ride of your life!

Some Megatrends of the Past

Let's look at some megatrends that have occurred in the last century.  If you were around at that time and placed a bet on it, you'd be uber-rich by now.  Just from the top of my head, I can think of 2 megatrends.  In the first half of the century was the automobile megatrend.  Needless to say, automobiles are now ubiquitous. However, it was not so in the early part of the 20th century.  By investing in the best-of-breed companies early on (GM, Ford, Toyota, Honda [disclaimer: GM was best of breed decades ago, not 2008 for obvious reasons]), you would have reaped excellent returns.

Another more recent megatrend is that of the personal computer.  Who is the richest man on Earth right now?  None other than Microsoft founder Bill Gates!  Split adjusted, Microsoft (Ticker: MSFT) IPOed at roughly $0.10.  Even after 10 years of lackluster performance, the stock sits at $35, which is 350 times the initial stock price!  If you had put $10K into MSFT in 1986, you would be sitting on $3.5 million by now.  In fact, in 2000, you would have had $4.6 million!  46000% return in a mere 14 years is not bad at all!  That's approximately 55% return annually!

To ignore the megatrend is to ignore super returns!  The good thing about megatrends is that they are easy to spot!

Megatrends of the Future
So, let's look for megatrends of the future!  How do we exactly do that?  Well, it's actually quite simple in my opinion.  It is looking for something that is inevitable and most of the time, it's actually quite obvious.  I'm sure that 30 years ago, everyone knew that computers would eventually replace the typewrite.  It was just a matter of time.  So, ask yourself, what is inevitable?

Jim Cramer has been saying this for some time and this megatrend has just started materializing.  He calls it the "Mobile Internet Tsunami".  It's all about smartphones.  In my previous post on Google, I had already talked about their Android smartphone OS.  5 years from now, all of our cellphones will be smartphones, enabling us to talk on the phone, text message, surf the web, do work, watch TV, listen to music all on the same device.  This megatrend is easier to spot because it has already started to occur.  The Apple iPhone was the first device to bring awareness to the general public.  It is only a matter of time when the iPhone like devices become commonplace.  Cramer suggests investing in Apple (ticker: AAPL), RIM (ticker: RIMM), Google (ticker: GOOG), Qualcomm (ticker: QCOM), etc.

Another upcoming megatrend would be the renewable energy megatrend.  I also talked a little about this in another post.  Global warming awareness is reaching the point of critical mass as the talks in Copenhagen just ended.  I know there's a lot of debate regarding whether global warming is caused by human activity, but that is NOT the real focus.  Regardless of the truth or lack thereof in the global warming hypothesis, governments are turning towards renewable energy.  Perhaps it's not even for saving the Earth.  Maybe Americans don't want to rely on the Middle East, Venezuela or even Canada to hold the key to what powers their country.  Whichever way we see it, it is inevitable that the world will shift to renewable energy.  Is it going to be solar energy?  Wind energy?  Geothermal energy?  Who knows?!  I'd bet it's going to be a combination of all of these, plus more.  The point is that there is going to be a major shift in how energy works in this world, and you can use that to your advantage.

Another favourite trend of mine is robotics (obviously not because I did my master's in robotics and I work for an automation company!).  This is another megatrend, but I think we're at least 10-20 years from the beginnings of that, perhaps even more.  This change, also, will be inevitable.  One day, we will all have a robot in each of our homes and we will no longer need to do chores like washing dishes, vacuuming, etc.  Heck, we don't even need to vacuum now, with the Roomba robots roaming around!  This megatrend I'm talking about is the proliferation of robots and automation in everyday life.  Hints of that have already begun in a company called Intuitive Surgical (Ticker: ISRG).  Surgeons can now perform surgery remotely by use of robotics using their technology.  This is only a start.  In another 10 or 20 years, watch for this trend to materialize!

I will admit: I don't know everything!  :)  There are probably some other megatrends that I have missed entirely, but not to worry, these trends are fairly obvious.  I'm sure you'll be able to spot them when they arise.  Until then, buy a smartphone and start googling for companies developing renewable energy and robotics!

At a Crossroads with Google

I love Google (Ticker: GOOG)!  Come on, who doesn't?  Their search engine finds everything, their maps are the best in industry, Youtube is synonymous with "online videos", I use their Chrome browser exclusively (except when some sites employ bad programming and don't adhere to standard HTML code), I own an HTC Magic smartphone that is powered by Google's Android OS, even the ads on their search results are good...they're about the only ones I click on because they actually help me find what I'm looking for, and most obviously, I use blogger (you're on a blogspot site right now...enough said).  Lastly, their stock has risen more than 100% in less than a year, which makes me a happy guy because about 50% of my portfolio is made up of Google.

Future Prospects
I have very little doubt that Google will be the first $1 trillion company (by market capitalization).  It's not going to be Microsoft, Exxon Mobil, Walmart or any of the Dow Jones Industrial Average component stocks.  Out of all of the mega-cap stocks, Google has the most momentum.  Analysts have raised their price targets to $650 and beyond, and considering the stock was at $263 less than a year ago, it's not bad at all.

Here are a few things that are going well with Google:

1. Youtube is becoming profitable.  When Google bought Youtube a couple of years ago, it was a cash sinkhole.  Bandwidth and storage costs a lot of money and Youtube had no way of monetizing all that traffic that it was getting.  Two years later, Google is claiming that Youtube is on the verge of being profitable.  If Google was able to rake in huge amounts of cash with Youtube being a sinkhole, imagine what it means when Youtube becomes profitable.  Just to put things in context, Google ranks #1 as the most used search engine.  Yahoo and Microsoft take 2nd and 3rd place, but if you actually break out Youtube's search results from Google's search engine results, it is actually the real second place holder, sitting above Yahoo and Microsoft.  So, you can imagine how much money it can generate for Google.
   
   
2. Android is making a quiet, but sure invasion into the smartphone market.  Until the Motorola Droid debuted on Verizon's network, most Americans had no idea what Android is.  Now, it's the new buzz...the new iPhone killer, etc.  I don't think the Droid or Android itself will kill the iPhone, but it will be a worthy challenger.  I own an Android powered phone and I love it, but I'm a little on the geeky side, so that's expected.
   
   In any case, the Android Market works similarly to the App Store on the iPhone.  Google keeps a portion (albeit smaller portion than Apple's) of the revenue when someone purchases an app.  Android is expected to grab about 20% of the smartphone market in a couple of years.  However, Google's real money maker is not in the app revenues themselves.  With a Google powered OS, users will most likely use the Google search engine and, in turn, click on Google ads.  Additionally, with the recent purchase of the mobile ad company, AdMob, Google is even better positioned to monetize from smartphone users.
   
   
3. Chrome - Chrome is another little heard of product from Google.  Originally, it was a browser Google released a little over a year ago.  Google's mission was to deliver a browser that was fast, especially when running code like Javascript.  This is because Google is banking on cloud computing to slowly replace programs that reside on harddrives on PCs.  The faster a browser can be, the better performance cloud computing will have.
   
   Continuing along with the same philosophy, Google has announced Chrome OS recently, an operating system that would run netbooks.  Google really has vision in this department.  People are scoffing at Chrome OS, saying that it would never replace a real PC run by Windows.  And they are right...to a certain degree.  Computers with Chrome OS would never be designed to do serious number crunching or gaming because the processors on them will be relatively weak, but a major shift in personal computing will eventually render powerful PCs as archaic.  Whether one likes it or not, cloud computing is the future of computing.  If you don't believe it, when was the last time you sent something to your webmail account (whether it be gmail or yahoo mail or hotmail)?  Probably very recently...and why did you do it?  It was because you wanted to access that file while you were away from your computer at home or work.  That is the driver behind cloud computing.  People want to be mobile and want to access their information any and everywhere they will be.
   
   How will Google monetize from Chrome?  I have no good answer.  Perhaps Google Apps (the applications Google currently offers on the cloud) will work better on Chrome, and by adopting Chrome, people adopt Google Apps, which is eventually going to be a money generator, whether via ads, subscription fees, or something else.  Regardless, I am confident that Google will grab a large piece of the cloud computing pie.

So What's the Problem?

Sadly, we can't have the cake and eat it too.  There is one problem with Google.  It's management leans quite heavily to the left.  It has repeatedly voiced its support for same sex marriage (http://www.lifesitenews.com/ldn/2009/oct/09102912.html), which as you know, is contrary to the Catholic (or shall I say thousands of years of human society's) definition of marriage.

Google is known for their motto, "Do no evil," but I do not believe they really know what "evil" is.  To them, evil is equivalent to doing harm to others, such as stealing, murder, etc.  By opposing anti-same sex marriage legislation, they believe that they are encouraging love and toleration.  Because Catholics oppose homosexuality does not necessarily mean that we discriminate against homosexuals.  The age-old definition of marriage is between a man and a woman, and I believe that by changing the definition itself, we are undermining the basis of human society.  It is not that much different from changing the definition of the word "table" to mean "chair".  It just seems silly, because a table may look like a chair with 4 legs, but ultimately, it is not a chair.

I will not go into why same sex relationships are morally incorrect according to Catholic beliefs (you can read about that here http://www.catholic.com/library/Homosexuality.asp and here http://www.catholic.com/library/gay_marriage.asp), but the fact that Google supports same sex marriages is problematic for us Catholics.

Torn

I have to confess that I still hold Google stock and I'm trying to be totally honest to you, my readers and myself.  I love the company and what they do, but I have a concern for their social/political views.  Buying and using a product of Google is likely not that problematic (e.g. imaging you know a store owner who is homosexual, would you not buy from him just because he is homosexual?  That would almost be intolerant), but owning shares of it mean that one approves of the actions of the company and is supporting it.

I am torn...please pray for me.

Augustine vs. the Pelagians

One thing that I love about this blog is that it is my blog!  I can pretty much post anything I want.  So, this is exactly what I want to do today.  It has nothing to do with investing!

As you may have noticed, I've been a little quiet for some weeks now.  It was mainly because I was slaving away at my assignment for my introductory course in the history of the early Church.  So, anyway, here it is in all its glory (update: it's proof-read - this is the version I will submit to my professor)!  It's a paper on Augustine's writing against the Pelagians.  If you have heard of neither, don't worry, wikipedia or newadvent.org will solve your problem.  In short, it's about St. Augustine's understanding of predestination and free will.  Enjoy!

Why Catholic Investors Should Use Fundamental Analysis - Part II of II

It's Not a Game of Chance!

This is the second half of my intro to Fundamental Analysis. When you buy a stock, you do not need to hope and pray once that buy order has been filled. It is NOT like when you play roulette and the ball has been spun. This is because you know you have bought a stock that will likely go up! I will talk about a few tools that will help you identify whether a company is undervalued or not.

Price-to-Sales Ratio

Ken Fisher pioneered the use of the Price-to-Sales ratio (P/S ratio) in the 1980s. One of the disadvantages about using the P/E (profit-to-earnings) ratio is that it doesn't really work if the company is not making any profit! Sometimes, you may find a company with very good prospects but is not currently making any money. How do you judge if this company is worth buying? The price-to-sales (P/S ratio) can help you.

The concept behind this ratio is simple. A company has a certain amount of sales or revenue and also costs associated with running the company, etc. For a good company, a portion of that sales will become profits. For really good companies, that percentage can be as high as 50% or 60%. What that means is for every dollar that its customers pay, 50% of that money is pure profit.

This helps us very much. Let's say a company has sales of $10 per share. The price of the stock is $15. It's not making any profit currently, but what if it starts cutting costs and starts making money at 50% margin? That means that it has $5 earnings per share ($10 sales × 50%). The P/E ratio becomes 3 ($15 divided by $5). And we know that for a healthy company, a P/E ratio of 3 is a dream come true for us investors! So, we definitely want to by this company!

So, what was the P/S ratio for that company we just talked about? It was $15 / $10, or 1.5. Of course, an operating margin of 50% is not easy to achieve. You will need to do some research on the particular industry you're looking at. If the profit margins for most of the companies in that industry is 20-30%, you may want to use 20% for your analysis.

Some people recommend that a P/S ratio of 1.0.  I would definitely not go blindly and start buying any stocks that have a P/S ratio of less than 1.0.  The company may be in huge debt and could go bankrupt at any moment!  So, please do your homework!

Price-to-Book Ratio

A ratio that has been used for many, many years is the price-to-book ratio. It is a very well known ratio in value investing circles. The theory is very simple as well. A company owns many assets such as buildings, machinery, computers, product, etc. If it were to be liquidated, all of these assets can be sold for a value. This is the "book value". Sometimes, a stock may be traded at value that is lower than the book value. It's almost like someone coming up to you to sell you a $1 bill for $0.50! It's a little irrational, but it does happen!

So, a P/B ratio of less than 1 will start to get us excited. A caveat is that the book value may be inflated. It is a matter of accounting and goes beyond my knowledge. My advice is the same as always: be prudent and dig a little deeper. What seems too good to be true may be just that!

Get Out of Debt!

A company may have great P/E and P/S numbers, but it may also have a huge amount of debt. You have to wary of these companies. As we all know, with debt also comes interests. Debt is not necessarily bad in itself. Most companies borrow money so it is able to expand or to carry inventory, etc. However, if debt is too high, then you may want to avoid buying the stock of that particular company. You want the debt to be small enough that the company can pay back the debt in a few years. Simply compare the amount of debt to the earnings or free cash flow of the company. That will give you an idea of whether a good deal is really that good!

It's All So Complicated

You know what? You are right! Fundamental analysis is not easy and is still very much an art than a science. Most books will tell you exactly what I have told you...a whole bunch of ratios and no real way to evaluate if the business is fundamentally sound. Also, they will not give you a real quantitative way of determining under what price we should buy a company.

There's no need to fret! Take a look at one of my older posts: Rule #1 - The Book That Energized Me. It talks about a book that gives a very, very simple and quantitative way of determining whether a company is undervalued or not. I will likely write another post that is more in depth to discuss the actual calculations that the author, Phil Town, teaches. Stay tuned!

Why Catholic Investors Should Use Fundamental Analysis - Part I of II

Fresco at the Vatican, by Michelangelo, depicting the personifications of Fortitude, Prudence, and Temperance

The Virtues

In Catholic teaching, there are 2 major categories of virtues: human virtues and theological virtues. Theological virtues (i.e. faith, hope, and charity) are the basis of all other virtues and they relate to God. The human virtues, virtues that help us do good, are divided into 4 Cardinal Virtues: prudence, justice, fortitude, and temperance. Today, we will look specifically at the virtue of prudence.

Prudence, as defined by the Catechism of the Catholic Church (CCC 1806), "is the virtue that disposes practical reason to discern our true good in every circumstance and to choose the right means of achieving it...it guides the other virtues by setting rule and measure." Simply speaking, prudence helps us choose good and how to attain it with care. It is a virtue that proves to be invaluable to every investor.

Reckless Investing

When not using prudence in investing, it becomes what I call, "reckless investing". I have done some of that myself. It was the year 2000...I was 22 years old and had a beautiful image of the world (I still do, but in a different way). I have heard about people buying and holding stocks and making a small fortune over time.

I was hired as an engineering intern at Celestica, Inc. (Ticker: CLS). The dot-com days were coming to an end, but I had no idea. It seemed like everyone was doing very well in their stocks, because as we all knew, the internet will revolutionize the way we do everything! And the high-tech companies that were involved with manufacturing the infrastructure were bound to benefit. So, I bought into this thinking and invested my savings into the likes of Celestica, Nortel (ticket:NT...but they're in bankruptcy protection now, so you won't find much), AMD (ticker: AMD) and Nvidia (ticker: NVDA).

At that time, I had no idea what fundamental analysis was. Heck, I didn't even know what technical analysis was. I simply just bought stocks that had names attached to "tech". The most that I did was look at the stock's chart and extrapolated into the future to see how much money I would make. What happened after that, you are all fully aware. I made a couple of thousand of dollars at first, but soon saw much of my investment vaporize into thin air. This is the perfect example of "reckless investing".

Why was it reckless? Let me illustrate with an analogy. One sunny Sunday afternoon, you walk into a flea market. You want to buy something, but you don't know what. Soon, you see a crowd gathering around a booth, swarming to buy a gadget you have never seen before. You have no idea what the gadget does, but it does look kind of fancy with some spinning fins and a long cord. Most of the people around you don't know what it was either, but they all know it was a good buy since everyone else was buying it. So, you whip out a fresh $20 bill and hand it to the seller. As you walk home with the gadget, you admire at how shiny it is. Once you get home, you show it to your wife. She takes a look and says, "Hey, that's the USB fan they were selling on TV for $3.99 including shipping!"

That story sounds a little unbelievable, but that is exactly what investors were doing in the late 90s and early 2000s. They bought into companies, which they had not a clue what they were about, but most of all, they had no idea what they were worth. This is a result of lack of prudence on the part of investors. To be prudent is to know what a stock is worth and buy at a price below that.

Fundamental Analysis

Fundamental Analysis attempts to find the value of each stock. It's like buying bread at the supermarket. Even if everyone was buying a loaf of bread at $200 per loaf, you wouldn't pay $200 (unless there was a widespread famine), because you know a loaf of bread is only worth $3. Therefore, fundamental analysis seeks to find the intrinsic value of a stock.

Before we begin, let's look at a misconception of how stocks work. Stocks are traded in a stock exchange (e.g. New York Stock Exchange), where you, me, Warren Buffet, or the bum down the street may have access to (as long as we each have an account with a broker). The price of a stock at any given moment is simply the last price at which it was bought/sold. There is absolutely NO fixed relationship between a company's assets, earnings, or future prospects with how much a share of its stock is sold for. It is entirely determined by the price people are willing to buy/sell the stock for. However, having said that, people who buy/sell stocks are somewhat rational (at least most of the time), and will look at the company's well-being to determine what price is right.

There are instances where euphoria or depression hits the entire stock market. You can find evidence of the former in the late 90s where companies were bid up to prices hundreds of times above their earnings. The latter occurs in more recent memory in March of 2009, when the S&P 500 hit 666 points, more than 55% off its peak. The stocks were either traded at prices way above or way below what they were worth. So, our quest is to find out what the stocks are worth, buy at prices way lower than their worth, and sell at prices way higher.

Some Basics

Instead of looking at public companies, let's look at a small business to simplify things. Say your brother-in-law comes to you one day and proposes a business deal. He wants you to chip in to buy a local coffee shop. "Hmm," you think to yourself, "How do I know I'm not buying a sinking ship?" You then ask him to show you some numbers.

The current owner is asking for $500K for the coffee shop. For the past 5 years, business has grown from making profits of $40K/year to $75K/year. You have to admit, as well, that their coffee is pretty darn good. Ok, you say to yourself, if we invest $500K to buy this coffee shop, how long is the payback period? Assuming the profits continue to hover around $75K/year, it would take you a bit more than 6 years to recoup your initial investment. After that, it's all free money! You decide that it's a good deal and go ahead with your brother-in-law's proposition.

What we just looked at is the Price-to-Earnings ratio or P/E ratio as it is more commonly known. We essentially divide the price of a company by the profits it makes in the last year. How does that work for a stock? It's pretty much the same. When you research into a stock, you will readily find the earnings per share (EPS) published. That number is calculated simply by dividing the money the company makes in the last 12 months by the number of outstanding shares. You can then calculate the P/E ratio by simply dividing the share price by the EPS.

So you now know what the P/E ratio is, but how do you use it? It's simple. If the P/E ratio of a company is 1, it means in one year, the company made the same amount of money as it is currently valued. It is an excellent deal for a stable company, because you know the money will keep rolling in and you will have recouped your money in one year. There's very little risk in this investment.

If you find a company with a P/E ratio of 100, it would take 100 years for you to recoup your initial investment if earnings were to be kept consistent. That would not be a good deal!

The S&P 500 have averaged a P/E of between 12-18 in the past 50 years. For a company with steady earnings, you can expect the P/E to be around 10. For a growth company, the P/E can be 15 - 40. Many companies in the dot-com days had P/Es of greater than 100! As you can see, its not an exaggeration when I call my investing, reckless investing!

To Be Continued...

The P/E ratio only paints a small part of a bigger picture. If you find a company with a P/E of less than 5, it doesn't necessarily mean you have found a gem. The company may be in decline and its competition is about to wipe it out. Conversely, if you find a company with a P/E of greater than 100, it does not necessarily mean that it is overvalued. It may have been losing money in previous quarters, but the business is turning around. Earnings barely broke even, and therefore, the P/E ratio is inflated. Or, maybe the company is in growth mode and its earnings are on a straight trajectory to the moon. We need to look at many other factors to determine the value of a company.

In the second part of this post, I will go into more depth the different tools an investor can use to estimate a company's value.

It's Going to Be a Good Q3 Earnings Season

This post is strictly a display of the engineer coming out of me. As a mechanical engineer, I'm fairly familiar with how statistics are used to estimate something. It's called statistical sampling. I'm sure you've heard of it before, but you may not have realized. It comes up every few years in a democratic state...how? Well, it's all in the polls. When an election comes up, polls are taken and each candidate or party is assigned a percentage of the votes predicted. For example, you will hear that the polls predict Candidate A will win the election, with the poll being right 19 times out of 20.

A Brief Lesson on Statistics

It all sounds a little unintelligible...how is it done? Well, as you might have guessed, the polls don't actually go to every single house in the riding and ask every eligible voter who he/she is going to vote for. The poll goes around and takes a random sampling of voters, say 1000 of them. Out of the 1000 voters, their opinions will give a picture of how the election will turn out to be. Assuming a normal distribution (bell curve), the poll will use what are called confidence intervals. In our case, it would be 95% confidence intervals, hence 19 times out of 20. Basically, the poll gives say Candidate A 45% of the vote. The 95% confidence interval can be42% -47%. Because it was only a sample of 1000 voters, the actual vote could vary between 42% - 47%. And we are 95% confident that this interval captures the right percentage.

So What?

So, why am I bringing this up? How does this apply to Q3 earnings season? Remember, you heard it here first. I'm using statistical sampling to predict how the entire Q3 earnings season will turn out. Using Yahoo Finance (http://biz.yahoo.com/z/extreme.html), I'm able to see which companies have beat, met, or missed earnings.

From Oct 5 - Oct 14, 37 companies beat earnings and 10 missed. The proportion is 78.7% beat earnings. This is a small sample of the companies that have reported, but we can estimate what the 95% confidence intervals are for the entire season. The confidence intervals can be calculated with the following equation:

For those who want to learn what the heck this is, you can visit wikipedia at http://en.wikipedia.org/wiki/Binomial_proportion_confidence_interval. Anyway, the intervals turn out to be from 67.0% - 90.4%. What this means is that we can be 95% confident that by the time Q3 earnings is done and over with, 67-90% of the companies will have beat their earnings estimates. So, up to 9 out of 10 companies could beat earnings this season! This is HUGE! Even if the final outcome is on the low side, two thirds of the companies will have beat earnings. This translates to an awesome earnings season to me! With this estimate, I'm quite willing to keep my money in the market!

We can continue to monitor and improve our estimates as new data comes out. By 12:30 pm on Oct 15, 93 companies have beat and 20 have missed. The proportion is now 82.3%, which is right inside our initial prediction. With the larger sample size, our new updated intervals are 75.3% - 89.3%. So, we're definitely on a good track to a good earnings season.

But...

There are some caveats. The market is ever changing and so are earnings estimates. Market analysts are free to change their estimates as they continue to observe the earnings that are coming out. So, their estimates may drift up or down depending on how other companies are doing, which means this method is not totally accurate!

As well, our sampling may not be randomized enough...So, be careful when using this method. Having said that, I am still predicting a good earnings season, which would logically result in a good market!

Catholic Retirement: Wisdom of the Proverbs

"Wealth quickly gotten dwindles away, but amassed little by little, it grows." - Proverbs 13:11

Wisdom of the Proverbs

The wisdom of the Scriptures is really amazing. It is full of timeless truths, and this verse from the Proverbs about wealth is no different. You can imagine two people with very different circumstances. The first won a million dollars in a lottery and the other, over his entire working career, amassed a savings of a million dollars. What kind of mentality would the former have when he cashes that million dollar cheque? Maybe, "I'm going to treat myself to a nice vacation, buy a sports car, spread a bit of the wealth to my close friends, etc." There is absolutely nothing wrong with any of the above, but the frame of mind is to spend, and to spend quickly. At the end of the first year, he may have spent a good 20-30% of his fortune. On the other hand, the latter understands the hard work it took to save up that one million dollars. He is not going to spend a good chunk of it in one setting.

The Proverbs is not commenting on the morality of the speed of obtaining wealth, but it is simply stating a fact. When money is obtained in a short timespan, chances of it being spent quickly is higher. On the other hand, if it is saved over a long period of time, it will grow. It speaks more about human nature than anything. Saving requires discipline and once obtained, it stays with you for the rest of your life.

Catholic Retirement...Well, Really, It's Just Smart Retirement!

So, how do we apply this proverb to our investments? What is the way of Catholic retirement? In my spare time, I have built a spreadsheet that plans out my retirement. It is like one of those retirement calculators that you can find on bank websites, except better! :) Please download it if you'd like. You'll need to enable macros in Excel for this to work, but don't worry, no viruses here! Let's go through it line by line.

First, what do the colours mean? Yellow denotes an entry box. If the cell is not yellow, you don't need to touch it. Some of the colours I put in there just highlights certain things.

1. Right at the top, we have our biggest enemy: inflation! One of the main reasons why we cannot afford not to invest is because if our money is stagnant, the value of it actually decreases over time. Everyone can recall how something used to be so much cheaper when they were kids! The historical inflation rate in North America for the past few decades is somewhere between 2 to 3%. I've put in a default 2.5%.

2. The second entry box is the growth rate of our investment. This is the average growth you are expecting to see in your investment per year. For reference, a CD (certificate of deposit [or GIC - guaranteed investment certificate in Canada]) usually returns about 2-3%, because it typically matches inflation quite closely. Therefore, CDs usually give an illusion of increasing the value of your money, when in fact, it is remaining constant, at best (due to the canceling effects of inflation). Depending on which years you take an average, the S&P 500 index will return anywhere between 8-12%. I don't believe that is good enough. My goal is to get 20-30% returns consistently year-after-year. You will soon see how much difference a few percent make!

3. The third entry box is how much money you intend to add to your retirement investment each year while you are still working. 10-20% of your before-tax income would be a good start.

4. The fourth entry box is how much money you already have in your investment.

5. The fifth entry box is your estate value (in today's dollars), or how much money you want to leave your family/friends/charity of choice.

6. The sixth entry box is your current age.

7. The seventh entry box is your final age, or how long you're expecting to live. To be safe, I have put 85 so we ensure the chances of you running out of money is low.

8. The eighth entry box is the fun part. It's how many more years you want to work before you retire...Go ahead, have some fun...put in 5 and see what your investment needs to do for you to achieve that goal...freedom 35...not impossible to achieve!

9. Now we have our first non-entry box. The "age of retirement" box just shows how old you will be at your retirement.

10. The next box is the "years of retirement". It shows how long your retirement will last.

11. Here, this box shows how much your investment is worth at retirement. Whatever numbers you have chosen, it does look pretty big, doesn't it? That is the power of compounding, my friend. Your money will work harder and better than you will ever work for yourself! And that is the reason why you're reading this blog!

12. The 12th box shows your estate value in the "future" dollars. The value of the money is the same, but the magnitude of the number is larger due to inflation.

13. After retirement, some people choose to move their investments into safer vehicles (e.g. bonds). I do not necessarily agree with that strategy, but it is understandable. So, how much do you expect your investment to return (after inflation)? For simplicity sake, if you expect it to be 10%, just minus the inflation rate from 10%. So, if you are using 2.5% as your inflation, enter 7.5%.

14. If your retirement investment is in some tax-deferred plan (such as 401(k) or IRA [RRSP in Canada]), you will get taxed as you withdraw money. If it's not in a tax-deferred plan, you probably still have to pay taxes on capital gains. Enter in the tax rate at which you expect to be taxed.

15. This box shows you how much money you will withdraw from your retirement funds during the first year of your retirement.

16. This box shows how much actually gets into your hands after Uncle Sam takes his cut.

17. Finally, this is the inflation adjusted amount, or in other words, what the value is in today's dollars. If you intend to be spending $40000 per year in your retirement, you would want this number to be $40000.

Now that you have entered in all your info, click on that "Optimize for Retirement" button at the bottom. You will need to have macros enabled for this button to work. Otherwise, it'll just do nothing. What this button does is it find out how much money you can withdraw per month based on the data you have provided.

I will confess now: this spreadsheet is not entirely flawless. Many things change over the course of your lifetime, including inflation rates, tax rates, etc., etc. This sheet only provides you a constant value for these things. If you want to be on the safe side, enter a larger number for inflation and taxes. Having said that, this sheet will probably suffice in showing what actions you need to take in order to achieve your retirement goal.

Now, Let's Have Some Fun!

So now that you have become familiar with the spreadsheet, let's play around with some numbers to see what our retirement is going to look like.

The Young Father

So, let's take someone similar to myself, in his 30s with a young family and some savings. For our numbers, let's use...

Inflation: 2.5%

Contribution per year: $5000

Present investment value: $20000

Estate value: $0

Final age: 85

Current age: 30

Remaining work years: 30

I've left out the investment growth value so we can play around with that.

Investment growth rate: 3% --- Value at Retirement: $293,559

Investment growth rate: 9% --- Value at Retirement: $1,008,230

Investment growth rate: 15% --- Value at Retirement: $3,824,020

Investment growth rate: 20% --- Value at Retirement: $11,838,816

Whoa! What a difference! I did not select these numbers randomly. 3% is a typical return for a CD (or GIC). 9% is an average return for the S&P 500. 15% is considered a very good long-term return for any fund. 20% is what I believe a smart individual investor can achieve the long-term.

As one can see, the investment value grows exponentially as your growth rate increases. If the young father has a return of 9%, he will have $1 million when he retires. If, on the other hand, his return is 20%, he will have almost $12 million! That's a 12-fold increase in value for a 2-fold increase in growth rate! So, here we have it. Don't settle for less! You want to increase your growth rate as much as possible!

The Early Bird

Now that we have established the importance of growth rate, let's look at our time horizon. For our numbers, let's use...

Inflation: 2.5%

Growth rate: 15%

Contribution per year: $5000

Present investment value: $0

Estate value: $0

Final age: 85

Let's change up the age and number of working years and assume that we work until 60 years old. This represents how early we start our retirement savings.

Current age: 20, Remaining work years: 40 --- Value at Retirement: $10,229,769

Current age: 30, Remaining work years: 30 --- Value at Retirement: $2,499,785

Current age: 40, Remaining work years: 20 --- Value at Retirement: $589,051

Current age: 50, Remaining work years: 10 --- Value at Retirement: $116,746

The Early Bird, starting at age 20, saves up $10 million dollars for his retirement, while the late starter, at age 50, is only able to save $116K. The late starter is going to have a really tough retirement living on government pensions! Again, for compounding to work its magic, it needs time! The difference of 10 years can prove to be life-changing! If you can afford to work a few more years, your retirement can be a lot more enjoyable!

The Super Saver

Let's see how the contribution amount affects the final value your retirement funds.

Inflation: 2.5%

Growth rate: 15%

Present investment value: $0

Estate value: $0

Current age: 30

Final age: 85

Remaining work years: 30

Contribution per year: $1000 --- Value at Retirement: $499,957

Contribution per year: $3000 --- Value at Retirement: $1,499,871

Contribution per year: $5000 --- Value at Retirement: $2,499,785

Contribution per year: $10000 --- Value at Retirement: $4,999,569

There's sometimes a slight misconception amongst investors that the more one contributes to one's retirement funds, the better. That is true, but to a lesser effect than the previous two factors. The value of retirement grows linearly with the contribution amount. $1000/year contribution yields a final value of $500K, while a $10000/year contribution yields a $5 million final value. So, yes, it is true that it is better to contribute more, but its effects are less pronounced than if you spent some more time increasing your returns by 1 or 2%, or if you start your retirement savings a year or two earlier.

Conclusion

The conclusion is threefold:

1. Increase your returns!

2. Start early (or work a little longer)

3. Increase your contribution (but don't put too much emphasis on this).

Since this is a blog about investing, we will focus on conclusion #1 in future posts. It's actually not that difficult...don't get fooled by the myths perpetuated by the investment industry. The individual investor has many advantages over fund managers and yes, even Warren Buffet. We'll explore these a little later on!

Sustainable Investing: Solar Energy

Growing up in the 80s and 90s in Canada, I experienced first hand how environmental consciousness was starting to catch on. We saw our first blue boxes (curb side recycling bins) in the late 80s. The schools were also really focused on education about the ozone layer, acid rain, and global warming. I even did a project on hydrogen as a fuel for cars. Environmental consciousness was really engrained into our minds.

For my current job, I typically travel a few times a year to the US, and I find it really suprisingly that most cafeterias don't have recycling bins or curbside recycling is almost non-existent south of the border. Most of my customers I speak with are embarrassed by this lack of initiative by their governments and it was then that I realized that without some form of legislation, it would be very difficult for any country to adopt a more environmentally conscious mindset. For example, you would think Germany would not be a very good country for solar energy generation. However, if you ever fly over some cities in Germany, you would see rooftops upon rooftops of solar panels. It's because the German government has provided subsidies for solar panel installations.

After watching Al Gore's Inconvenient Truth (I recommend the movie to anyone!), it became apparent to me that there's a real urgency in the matter. We are definitely on the path of destruction if we (the world) continue to use fossil fuels the way we do today. Recall my first post on the concept of stewardship (http://catholicinvestor.blogspot.com/2009/07/can-good-catholic-be-wealthy-part-i-of.html). The Lord has granted us this world in its entirety for our benefit, but we also need to care for it. The earth is not ours, but the Lord's, and we are not the owners, but merely stewards. Therefore, it is our responsibility to sustain the earth.

Sustainable Investing

As an investor, how can I help sustain the earth? I call it sustainable investing. It is simply investing in companies whose products or services promote the sustainability of the planet. Companies providing technology for renewable energy is a perfect example. In particular, I will talk about solar companies in this post.

The biggest growth in the renewable energy sector could arguably be photovoltaics (PV or solar panels). A large number of public solar companies have or are in the process of ramping up their production significantly. For example, First Solar had a revenue of $134 million in 2006. For 2008, that number increased to $1.25 billion, growing almost tenfold! This type of growth rate is not unique to First Solar, but is similar across the board.

As production ramps up, the cost of each solar panel will decrease. We are at a point where solar panels will soon become cost effective even without government subsidies. With Obama's push to pass the environmental bill, the cap-and-trade system will greatly benefit companies like First Solar. What exactly is a cap-and-trade system? To put it in simple terms, the government places a limit (a cap) on the amount of greenhouse gases that can be emitted in the country. Companies and institutions are given a certain number of emission credits. If the company emits less than the credits it has in its possession, it is free to sell them (trade) to other companies that emit more than their credits allow.

The cap-and-trade system is technology neutral. It means the laws of economics will allow for various renewable energy technologies to flourish. The ones that are most successful will eventually replace the ones that are not, purely based on economics, and not whether the government decides to provide subsidies. This system encourages creative development of new technologies.

The Players

There are a plethora of PV manufacturers that are publicly traded in the various American stock exchanges. Some of the notable ones include First Solar (ticker: FSLR), Sunpower (ticker: SPWRA), Evergreen Solar (ticker: ESLR), and Suntech Power (ticker: STP). For a more comprehensive list of solar companies, check out the holdings of a Solar ETF by Claymore (ticker: TAN). This ETF invests in most of the major solar players out there. So, if you are lazy in picking companies, but would like exposure to the industry, this ETF may be your solution. As always with funds, you need to do a lot more homework to make sure all of its holdings do not engage in any questionable practices (see my post on ethical investing).

One of the leaders in the industry is First Solar. It makes solar cells out of cadmium telluride, which is a more cost-effective material than traditional silicon, but is also less efficient. Ever since its IPO in the end of 2006, it has been profitable. It's IPO price was $24 and it has never looked back ever since. Its stock price peaked at around $300 before the great crash of 2008 and is now sitting at around $120. By Rule #1 standards, it is a wonderful company! Its growth is spectacular and the profits rise along with it. In my opinion, the company is very undervalued and I hope to add it to my holdings in the near future.

The only solar company in which I have a long position right now is Evergreen Solar. It differentiates itself from others with its String Ribbon technology, where it uses up to 50% less silicon than do traditional technologies. In contrast to First Solar, it has seldom been profitable since its IPO in 2001. However, that may be a plus. Hear me out. According to Yahoo Finance, Evergreen's book value (value of the company) is $2.81 per share. Its share price is at around $1.70 at time of writing. What does this mean? If you are familiar with some of the ratios that are thrown around, you will have heard of the Price-to-Book ratio, which is widely used by value investors. The book value of a certain company indicates how much the company is worth according to its "books" (e.g. its buildings, equipment, cash, and other tangible assets). Therefore, if the company were to be liquidated, the book value is about the amount of money that the company would be worth.

Investors have been so depressed about Evergreen that the share price is now lower than its book value per share. The P/B ratio is 0.61. Let's take a look at some of the other solar companies' P/B ratios. First solar: 4.44, Sunpower: 1.90, Suntech: 1.55, Trina Solar: 1.49, Canadian Solar: 1.50, LDK Solar: 1.80, and the list goes on. To a value investor, this P/B ratio of 0.61 is definitely a call for attention.

Evergreen has a good product, but are in growing pains right now. It is trying to ramp up production, build factories, and make a profit all at the same time. It is definitely not easy. However, they have a big backlog of orders and a secured supply of silicon. The only things they need to do are to control costs and turn a profit. One catch is that they have $317 million of debt and only $86 million of cash, while still burning cash every quarter. It is definitely not a stock I would recommend to everyone, but if you understand the risks involved, there is little downside to this stock at a share price of $1.70.

Conclusion

So, should you invest in the solar industry? In terms of sustainable investing, it is definitely at or near the top of the list. According to renewableenergyworld.com, only 0.3% of the power generated in May 2009 in the US was from solar sources. I can see that number easily grow by 10-30 times. This is a great opportunity for investors. I believe we are on the cusp of a major shift in power generation, and here is an opportunity to take part in it. Imagine 30-50 years later, as you talk to your grandchildren or great-grandchildren about the early 2000s, they will look at you in awe when you tell them that we used to produce power by burning coal and oil. They will also look at you in great respect as you tell them that you were one of the first investors to embrace sustainable investing, to help the world become the faithful stewards that God had wanted us to be in the beginning!

Rule #1 - The Book That Energized Me

It was the winter of 2007 and my portfolio had gone nowhere for much of the year (actually, it went down a little bit). At that time, I had recently rediscovered investing in stocks. I got married the summer of the previous year and had amassed a great amount of debt. I thought that it would be a good idea to accelerate the growth of my investment portfolio by investing in stocks. So, I opened a self-directed RRSP account (similar to the 401(k) plans in the US) and slowly moved my existing mutual funds into stocks. At first, I bought "safe" stocks like Manulife (ticker: MFC) and United Health (ticker:UNH). These traded sideways for a little bit; so, I sold them. Then, I bought the "Technical Analysis for Dummies" book and thought it could improve my investing strategy by using a more quantitative approach (technical analysis is really more like black magic). I also started reading up on options after my co-worker, Steve, had told me how he had made a killing in the options market. I began buying call options and put options at first. Then, I got into fancy stuff like strangles and straddles. It's ok if you have no clue what I'm talking about, because I hardly touch these investment vehicles anymore. While I did make some huge returns (e.g. I once made >100% in one day buying a Lululemon option), I also saw some of my investments vaporize (e.g. some out-of-money options that I bought expired worthless). In short, I was going nowhere fast and spinning my wheels like a madman!

Then, one evening when I got home, I saw an audio book on the kitchen table. "Rule #1 by Phil Town", it read. "What's this?" I thought to myself. My wife, Renee, came over and said she saw this on the rack at the library and thought I might be interested in listening to it. "Sure," I said, but in my mind, I thought that I didn't need to listen to this audio book; I had all the knowledge that I needed, recalling how good I was when I made the Lululemon trade, but also forgetting how I also excelled at losing money at the same time.

Since I have a long commute to work everyday (about one and a half hour total), I decided to pop the CD in to keep myself entertained. The audio book was actually read by the author, Phil Town, himself. That gave me a good first impression. Then, he had my after chapter 1. He actually didn't talk much about his method of investing. First, he told his life story of how he turned from a broke Vietnam vet hippie to a successful investor. He then went on to debunk some of the myths that all seem logical, but are simply not true. Some of which include: it is difficult, if not impossible to beat the market, and the best way to invest is to diversify and to buy and hold. But most of all, he gave me a glimpse of hope. What he was saying was that we don't need to submit to mediocrity. He claims that with his method, it is possible to make 15% returns every year. However, I think he's just playing it safe...in fact, I think it is probably possible to make 20-30% consistently year-over-year. He himself is the best example. Although not verified, he claimed to have turned $1000 into $1 million in 5 years.

I'm not going to summarize the entire book in this post, but he basically teaches 2 things in the book. The first is how to identify good companies. He does so in a very quantitative way, by looking at data readily available on MSN money. In fact, I have built a spreadsheet to do that. It literally takes about 5 minutes to analyze a company. If you want a copy of the spreadsheet, contact me. However, read the book first. The second thing he teaches is when to sell a stock, which many will agree is probably the hardest thing. If a stock goes up, you hold onto it, thinking it will continue to go up, until you realize your gains have been erased. Or your stock goes down, and you hold on and hold on, hoping that it would come back up some day.

After reading the book, I felt like a new man. The world seemed like a better place. Why is that? This is a little out of context, but it was due to one of the 3 theological virtues: hope! I was so disappointed at my performance in the stock market that I was ready to return to mutual funds, but now, I have found a quantitative method which will help me build up my wealth.

I have to confess that I did not go unscathed in the 2008 bear market. My portfolio did drop about 40% at one point. Having said that, it did perform better than the overall market, which dropped more than 60% at its bottom. One of the reasons was that I did not follow Phil's advice in selling...I held on. I am on my way to recouping my losses, but what is most important is that I haven't lost hope.

I would recommend this book to any beginner investor, or even a seasoned investor. It is an easy read and you will not regret spending the $17 at Amazon. I've put a link on the right side of this blog. And as Phil says, "Now go play!"

Update (2010-05-14)
I have now made available my Rule #1 spreadsheet.

My Mistake!

Everyone makes mistakes once in a while...I'm no exception. Before I started this blog, about 3 months ago, I decided to buy a leveraged index ETF (exchange traded fund). It was the Daily Large Cap Bull 3X Fund from Direxion, ticker BGU. Now, let me remind all of you who are beginner investors: be very wary when buying leveraged funds, because leveraged funds are meant to increase volatility, or risk, as defined by the investment industry (I disagree with this definition, but that will be the topic of another post).

Anyway, what was my motivation for buying this fund? Let me give you some background: I re-started my investing career some time in 2007. I had previously invested from 2000 - 2003 and you guessed it, I lost my shirt! So, after taking a fairly extended break (I was rediscovering the Lord, courting my then girlfriend, and preparing for my wedding), I decided that I should start investing again. This time, however, I'm actually going to learn about investing before doing it. So, I read a few books on technical analysis and then fundamental analysis. Thinking I was ready to take on the world, I put a majority of my retire funds into stocks. That was before the market meltdown in 2008. So, fast forward a year or so to June of 2009. The S&P 500 had shed about 60% from its peak just a few months prior, but the market seemed to have bottomed. I studied the Dow Jones Industrial Average and S&P 500 Index over and over again to see if I can discover any characteristics of bear markets. This was what I found:

1. Almost all bear markets last less than 2 years (from previous peak to trough).
2. If you had invested in an index fund when the market first dropped to the midpoint ([peak+trough]/2), you would be back to where you were in less than 2 years.

Below is a figure of the Dow Jones Industrial Average, showing the 2000-2002 bear market. (I actually prefer the S&P 500 Index, but that's ok...) The peak occurred in January 2000 at 11723 pts., and the trough occurred a little less than 3 years later in October of 2002 at 7286 pts. Yes, this was actually a very long bear market relatively speaking (more than 2 years). The market hit the mid point in March 2001 at 9500 pts. So, according to my finding #2 above, we should be back at 9500 pts. by March 2003. Well, I was wrong...but not by much. By October 2003, 7 months after that, the index was back at 9500 pts. So, my theory wasn't off by too much.

Figure 1: 2000-2002 Bear Market - Dow Jones Industrial Average

If we apply this theory to the bear market of 2007-2009, the midpoint occurred around 1100 pts. in the S&P 500 index (assuming March 2009 was the real trough) in the September 2008. We should see S&P 500 rise back to 1100 pts. before September 2010. We're already at 1026 pts today (August 21, 2009). So, I think my theory will work again this time around.

Whew! That was a long background to the story, and probably will be longer than than the story itself. Anyway, this little theory that I came up with led me to buy BGU. By March of this year, S&P 500 had already hit 680 pts and was on its way back up. I thought that 680 was probably going to be the bottom of the bear market. After all, the index did lose about 60%. How much lower could it go? Even if the index went down to 0 pts (hypothethically speaking, of course), the midpoint would be 790 pts ([1580 pts + 0 pts]/2), and the market had already dropped past that. So, I thought buying when S&P 500 was at 900 pts. would give me a gain of 22% (1100/900) in less than 2 years, except with BGU, it is 3X leveraged. So, the gain could be around 66% (probably less than that because it is 3X daily and not over the long term). Not too shabby!

As I watched the market rise from 900 pts to 1000 pts in a mere 3 months, I was so proud of myself for making this great call! After all, I did lose a good chunk of my portfolio just a year prior. Then I started this blog...and the more I wrote about ethical investing, the more I introspected. There I was, saying how investing in mutual funds could potentially be unethical because these funds could have invested in questionable companies, but I knew for a fact that within the Russell 1000 index, which the BGU was trying to mimic, there were companies like Merck (makes vaccines from aborted human fetus tissue), Philip Morris (makes cigarettes), and probably a whole bunch of companies that tinker with human embryonic stem cells, manufacture/sell artificial contraceptives, promote abortion, etc. etc.

I am kind of shocked at how heedlessly I had acted when I decided to buy BGU. The only thought in my mind at that time was "66% returns...66% returns..." So, yesterday, I decided to sell all of my shares. I did make a decent profit, but at the expense of investing in some companies that had questionable practices. Now I'm wondering if this calls for a visit to the confessional...LOL!

In conclusion, don't follow what I did! The rule of thumb should be not to invest in any funds at all without doing some extensive research. However, since most of us have lives to live, my suggestion is not to invest in funds at all. Pick good companies with good practices and you'll sleep better at night!

Can a Good Catholic Be Wealthy? Part IV of IV - Stocks vs. Mutual Funds

This is the last post of the 4-part series of "Can a Good Catholic Be Wealthy?" I hope by this time, I have convinced you that it is morally acceptable for a Catholic to be wealthy. Although in theory, this is not difficult to accept, there seems to be an unwritten rule against anyone making lots of money in a short span of time without actually working for it. I believe this thinking, at least in part, has stemmed from our understanding of the original curse, "Cursed be the ground because of you! In toil shall you eat its yield all the days of your life...By the sweat of your face shall you get bread to eat" (Gen 3:17, 19).

The perfect example of such a way of earning income is, of course, gambling. No work is involved in gambling (unless you're counting cards in Blackjack!). Any earnings or losses result purely from chance. Especially in fundamentalist circles, gambling is considered a sin. What does the Catholic Church say about gambling? We don't need to look far...the Catechism of the Catholic Church (CCC) paragraph 2413 states:

Games of chance (card games, etc.) or wagers are not in themselves contrary to justice. They become morally unacceptable when they deprive someone of what is necessary to provide for his needs and those of others. The passion for gambling risks becoming an enslavement. Unfair wagers and cheating at games constitute grave matter, unless the damage inflicted is so slight that the one who suffers it cannot reasonably consider it significant.

Therefore, the Church has exonerated gambling! Next time you win a few bucks at the casino, you don't have to lie about it to your friends at church. The caveat is that the likelihood of gambling leading to sin cannot be underestimated. It can lure us into various sins including several of the 7 deadly sins: greed, wrath, envy, lust and even pride.

Using your imagination, you can visualize someone who has fallen or is on the verge of falling into sin because of gambling. He would have brought much of his family's savings to the casino and lost it all, getting involved with loan sharks, lying to his wife, etc. etc. Much of this type of visualization can be transferred to someone in the stock market. It's the year 1999 and our imaginary "investor" friend has witnessed his co-workers make a killing buying stocks like Cisco and Nortel Networks. He soon sells all of his bonds and mutual funds and buys the above mentioned stocks. At first, he sees his investment grow by 20% in a couple of months. Then, towards the end of the year 2000, his stocks begin to sink. Thinking that they would bounce back, he takes a line of credit and "averages down", buying more. A few months later, the stocks continue to drop. This time, he re-mortgages his house and averages down even more. By the time the summer of 2002 comes around, he has lost more than 80% of his original investment and is in a ton of debt. There is very little doubt that investing in stocks has led him to sin. He has put his own well being along with his family's into jeopardy.

This type of "investor" is among many who give true investors a bad rep. They are the ones who create a bad aura around stock investing. Thus, responsible investing, for many people (including Catholics), exclude buying individual stocks because the losses can be so great. Mutual funds have emerged to be the vehicle of choice for many. Because they invest in many stocks, chances of losing 80% of the original investment is very slim. To any responsible person, mutual funds are the way to go. It must be a way to go for Catholics as well, is it not? I will go to argue that it is not for several reasons.

Why Investing in Stocks is Superior to Investing in Mutual Funds in Every Way

1. Ethical Investing - If you own a mutual fund, can you tell me what are its top 10 holdings? No? What about its top 5 holdings? Still no? What about its top holding? Well, then you're in serious trouble, my friend! As this blog will explore more down the road, ethical investing is a big part of Catholic investing! We are morally obligated to invest in companies that do not act contrary to the laws of God. For example, did you know that Merck produces vaccines made in part from aborted fetal tissue? If the mutual fund that you bought owns Merck, you are indirectly putting your money in a company that may be acting contrary to your conscience. If you want to invest ethically in a mutual fund, you should keep up to date with the hundreds of companies that it owns and ensure that each and every company are acting in at least ethically neutral ways. On the other hand, it would be much easier to do research on just a few companies.
2. Mutual funds are not immune to market downturns - as most mutual fund investors just found out the hard way in 2008-2009, mutual funds can drop by as much as 50% in a bear market. If you think by buying mutual funds, you're reducing your risk, you may want to do some rethinking. Mutual funds simply own multiple stocks and if those stocks drop by 50%, there is nothing preventing the fund from dropping by that much as well. Your best bet against this drop is to spend some time doing your homework and buy rock solid stocks (or even liquidate in a bear market).
3. Mutual funds really don't do that great - it's simple math. By investing in many stocks, a mutual will achieve the average of the returns of all of the stocks. Even if the fund manager has a few awesome picks, those great returns will always be dampened by the underperforming stocks. Why would you want to get an average return anyway? If you look at the S&P 500 index, from August 1999 to August 2009, the return was -22%. Say what? Yes, you would have lost 22% if you bought a S&P 500 index fund 10 years ago. That is the reality of the market average. On the other hand, if you had bought and held Apple (Ticker: AAPL) for the same period, you would have made more than 800%. How difficult was that? Not very!

Going back to Genesis...in the beginning, God did not intend for us to have to toil to make a living. So, why would it be contrary to His will to invest in stocks to earn good returns, as long as we invest in ethical companies and in responsible ways? In future posts, we shall explore together these various aspects of investing. Of course, we'll learn how to make some good money in the market as well!

Can a Good Catholic Be Wealthy? Part III of IV - The Rich Young Man

I venture to make a hunch that 99.9% of Christians worldwide is familiar with the story of the Rich Young Man in the gospels. You know, the story about the man who goes up to Jesus and asks what he must do to gain eternal life, and then goes home disappointed because he was very rich and didn't want to give up all his belongings? See, wasn't I right? You do know the story! This story used to bother me, not a lot, but enough. And I bet it bothers some of you, too. Let's take a look at the story as Matthew narrates it in 19:16-22.

Now someone approached him and said, "Teacher, what good must I do to gain eternal life?" He answered him, "Why do you ask me about the good? There is only One who is good. If you wish to enter into life, keep the commandments." He asked him, "Which ones?" And Jesus replied, " 'You shall not kill; you shall not commit adultery; you shall not steal; you shall not bear false witness; honor your father and your mother'; and 'you shall love your neighbor as yourself.'"The young man said to him, "All of these I have observed. What do I still lack?" Jesus said to him, "If you wish to be perfect, go, sell what you have and give to (the) poor, and you will have treasure in heaven. Then come, follow me." When the young man heard this statement, he went away sad, for he had many possessions. Then Jesus said to his disciples, "Amen, I say to you, it will be hard for one who is rich to enter the kingdom of heaven. Again I say to you, it is easier for a camel to pass through the eye of a needle than for one who is rich to enter the kingdom of God."

Why does this story bother me? It's quite obvious! Jesus says, "it will be hard for one who is rich to enter the kingdom of heaven." Uh oh! I guess I shouldn't really be rich then. Actually, that wasn't really the scary part. The scariest part was that it appeared that in order to enter into the kingdom of heaven, we need to sell all of our belongings and give them to the poor.

Let's hold our horses a little bit. One thing that I learned in my biblical courses is that in order to perform exegesis on a passage, meticulous analysis of each and every sentence is required. Let's backtrack a little and see what actually happened. First, the young man approaches Jesus and asks him how he could gain eternal life. Jesus replies by telling him to follow the commandments. That's it! There's no mention of giving up all of one's belongings or anything to that effect. If giving up one's belongings were a prerequisite for entrance into the kingdom of heaven, just think about how many people would be left out!

So, what is the real message of this story? Let's continue with the passage. After the first exchange, the young man continues to probe Jesus. His motive is unclear, but he does seem to be genuine. Jesus then tells him that if he wanted to be perfect, then he should give up his belongings and follow Him. It is true that we should all aim to be perfect, but it is also true that not many of us will ever attain that lofty level.

Let's continue this thought along the lines of vocation. St. Paul tells us in 1 Corinthians 7:25-31 that it is better for one to remain single because one is spared of worldly worries. So, becoming a priest or a religious is a more direct route to God. However, we know that not everyone is called to become a priest or a sister. Nor is married life an unholy way of living. In fact, married life is really good (I can attest to that)! It's just that a married person has a lot more to worry about aside from his faith. I, for example, need to worry about my job, the economy, what kind of flowers to get my wife for our anniversary, whether to buy pampers or huggies, etc., etc. The same goes for wealth. Once a person attains a certain amount of wealth, he needs to figure out how to make use of it for the good of his family, friends, and society. One thing that is important to note is that these worries are not necessarily bad. If you have these worldly worries, it shows that you are being a responsible person. However, they do detract us from the ultimate good, that is God. That is why St. Paul tells us that it is better to remain single and also why Matthew recounts this story to us.

Therefore, the message of this gospel story is the same as that of Part I and II of this series: it is alright to be wealthy, but God must ultimately come first. The young man, wishing to be perfect, was not able to leave everything behind, and therefore, chose a more indirect and imperfect route to the kingdom of heaven. But it is possible for him to get there, just like the rest of us sinners, because "for God all things are possible" (Matt 19:26).

Can a Good Catholic Be Wealthy? Part II of IV - Wealthy Saints

There is sometimes a misconception of why the Catholic Church canonizes her saints. Some believe that the Church canonizes saints to honour them for their works of charity, etc. However, that is not at all the real reason. Saints are now enjoying the beatific vision (i.e. seeing God face to face) and do not need nor want our praise. The real reason for the canonization of saints is because the Church wishes to present them as models and intercessors to the faithful.¹ Therefore, it is for OUR welfare that the Church canonizes saints. If we wanted a quick answer to our question of whether a good Catholic can be wealthy, all we need to do is to find out if there were any wealthy people in the Church's history who were canonized as saints.

Let's remove the suspense! There indeed are saints who were wealthy! We will now take a look at a few examples.

St. Louis IX²

St. Louis IX was the king of France from 1226-1270. From one perspective, he was much like other kings. He fought in a couple of the Crusades and led a war against England. However, the reasons for his canonization were of another nature. He was a promoter of peace and preferred resolving conflicts rather than fighting wars. He protected the clergy against oppression from the barons. He spent many hours in prayer, penance and fasting. He also loved the poor and performed many works of charity, including feeding the needy, washing their feet, attending to lepers, and founding hospitals.

Although he remained king and presumably lived in a comfortable palace until his death, his life was dedicated to God and His people. For this reason, he was made a saint by the Church.

St. Katharine Drexel³

St. Katharine Drexel is the second American-born person to be canonized as saint (after St. Elizabeth Seton). She was born into a very rich and prominent family. However, after attending to her stepmother's terminal illness for three years, she experienced a deep conversion and began living a life of voluntary poverty. She became a nun and devoted her life to the betterment of American natives and visible minorities. She founded many schools and mission centres. By the end of her life, she had used $20 million in her work.

St. Thomas More⁴

St. Thomas More was the Lord Chancellor of England during Henry VIII's reign. He lived a life typical for a wealthy chancellor and served the king until Henry's infamous divorce of Catherine of Aragon. St. Thomas was not able to acknowledge the king's divorce nor his claim of supremacy over the Church of England, and resigned from his chancellorship. Three years later, he was tried and was found guilty of treason and was beheaded. Before his death, he told the crowd before him that he was "the King's good servant, but God's first." His wealth meant nothing to him if he were forced to turn his back on God.

Conclusion

The three saints that we've looked at were very rich, probably richer than most of us ever will be. However, there is one common theme amongst the three of them. Their wealth was not the most important thing in their lives; God was. They did not despise their wealth, and even used it for their causes, but when time came for a decision between their wealth and God, they would always choose God first.

So, we should model after these wealthy saints. It is alright to gain wealth, and even quite acceptable to live a comfortable life. However, God always comes first. When our wealth becomes an obstacle between God and ourselves or when it leads us to sin, we must forfeit our wealth and change our way of life. Therefore, we must remain vigilant as our wealth grows with the passage of time. We must remain faithful to the Lord and carry out His will, whether that be helping the poor, attending to the sick, or other works of charity.

Sources

1. Catechism of the Catholic Church, Paragraph 828: http://www.usccb.org/catechism/text/pt1sect2chpt3art9p3.shtml

2. St Louis IX: http://www.newadvent.org/cathen/09368a.htm

3. St. Katharine Drexel: http://www.catholic.org/saints/saint.php?saint_id=193, http://www.americancatholic.org/Features/SaintOfDay/default.asp?id=1311

4. St. Thomas More: http://www.catholic.org/saints/saint.php?saint_id=324, http://www.newadvent.org/cathen/14689c.htm