Warren Buffett looses $500 million on IBM’s Bad Quarterly Results


Warren Buffett’s Berkshire Hathaway is having a bad year so far. He has been crown the most successful investor of the 20th century. However, I have often read that Buffett evaluates stocks as if he is buying the whole business. I am somewhat puzzled by his rather large position in IBM.

Berkshire Hathaway owns 79.57 million shares of IBM as of June 30, 2015 according to the most recently available filings, making it one of his largest investments. He is also IBM’s largest shareholder, with almost 20 million more shares than the next-biggest investor.

Purchase History

  • First quarter 2011 – average price of $159.00
  •  Second & third quarter – $167.00 & $173.00
  •  Fourth quarter 2011 to third quarter 2012 – $185.00 to $197.00

IBM’s stock price is down because its revenue has been stuck in a prolonged decline. In fact, IBM’s revenue has fallen for the past 14 quarters in a row. That is an infamous track record that makes IBM a scary proposition as an investment. The company has suffered from an inability to expand quickly enough into higher-growth areas like big data, security & the cloud and it has been dragged down by less-profitable hardware businesses like semiconductor manufacturing.

IBM shares are down 22% in the past three years but IBM’s earnings per share grew 8% from 2012-2014. That’s largely the result of IBM’s aggressive share buyback program. IBM has spent 50 Billion Dollars buying back shares. If you want more information on share buy backs: Are Share Buybacks Good or Bad for Investors?

Berkshire’s fourth largest holding, American Express (AXP), has plunged 17% this year. Procter & Gamble (PG) is down 18%. The Tide maker is Berkshire’s seventh biggest investment. Finally, there’s Wal-Mart (WMT), the stock has plummeted more than 30% this year. It’s the worst performing stock in the Dow. It doesn’t look like things will improve anytime soon following last week’s Wal-Mart’s shocking sales and profit warning for next year.

The chart below is Berkshire’s class B shares (BRK.B) year to date price compared to the S&P 500


You can’t dispute the fact that Mr. Buffett has an impressive history of beating stock market returns over the long-term. Illustrated by the 10 year price chart below:


Warren Buffett  quote: “Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years.”

Chasing performance is a common mistake that I have made in the past. Buying into a particular strategy, asset class or fund because it has done extremely well could also mean this great performance may be nearing its end. Before buying Warren Buffett’s Berkshire Hathaway, you should know what you are buying. Although Berkshire Hathaway owns 50 different stocks, they are all American companies and 61% of the fund is invested into four stocks.

  1. Wells Fargo – 24.16%
  2. Coca Cola –  14.34%
  3. IBM – 11.82%
  4. American Express – 10.76%

Now Mr. Buffett is 85 years so going forward his successor will be more responsible for future performance. Would you buy shares of Warren Buffett’s Berkshire Hathaway or some of the same stocks that he likes?

Remember, past performance is no guarantee of future returns!



Back to the Future: Investing in 1985 Verses 2015



In the movie Back to the Future II, Marty McFly jumps into a DeLorean time machine and goes 30 years into the future. If the movie was reality, the teenage Marty would be shocked at the price of things in the United States. He left a time when the price of gas was only $1.09 a gallon, the cost of a postage stamp was 22 cents and $2.75 for a movie ticket.

Other interesting financial facts in 1985

  • Dow Jones Industrial Average closed at 1546
  • Yearly inflation rate 3.55%
  • Fed’s interest rate 10.75%
  • Average price of new house $89,330
  • Average income per year $22,100
  • Average monthly rent $375
  • Average price of new car $9,005

Marty would suffer from sticker shock when he sees today’s prices especially the average cost of $31,200 for a year of college.

When it comes to investing, Marty would have been pleased to know that his future children would have access to the internet. More information with just a few clicks of the mouse or touches on screens of mobile devices. Plus on line tools to construct a well – balanced, diversified portfolio or to determine the optimal saving rate to ensure a secure retirement. He would be shocked to find that robots were available to manage his money and the existence of low cost mutual funds.

Marty’s teenage brain would be over-whelmed with the vast number of investments products available today. He  probably wouldn’t feel confident enough to do it himself and would seek an advisor or pick a target date mutual fund.

Marty would have been happy to learn that there were more tax-advantage opportunities today. He might have known about the existence of IRAs but 401(K) plans were still in its infancy. Roth IRA’s were introduced in 1997 and Roth 401 (k)’s in 2006 which enable after-tax contributions, tax-deferred growth and tax free withdrawals. (TSFA was introduced in 2008 in Canada)

In addition, if Marty wanted to save for college for members of his family, he could open a 529 account, which is now the standard tax-advantaged option for education savings. (RESP was introduced in 1998 in Canada)

Although, I was not a teenager in 1985, I am happy with the major changes in the world of investing. By the way, Marty was played by Canadian born actor, Michal J Fox!




Rebooting Year-end Tax Planning Tips


When I was a financial advisor, I use to contact my clients with some year-end tax saving ideas. As a writer of a financial blog, I decided to remind readers that now is a good time to review your tax situation. Holiday season is just around the corner, you are going to be busy visiting with family & friends and Christmas shopping.

You will be glad during tax filing season that you planned ahead! You could reduce your tax bill or generate a bigger tax refund. I updated a similar post that I wrote last November and added some new tax saving tips.

Tip 1 – Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Do you need new eyeglasses or hearing aids then buy them now. Planning a winter vacation that requires medical shots, get them ahead of time.

Tip 2 – Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and the full amount is tax-deductible creating a bigger tax deduction.

Tip 3 – Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax-deductible retirement account could generate a bigger tax saving. (Plus stock market returns have been known to be higher from November to April) If you are retired and your income is lower than last year, consider withdrawing a little extra from your retirement account and put it into a tax-free account.

Tip 4 – Have you sold any investments in 2015 that will generate a taxable capital gain?  Do some tax loss selling of investments that are underwater to offset the capital gains. In Canada, a capital gain loss can be carried back three taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5 – Postpone selling your investment winners in non-registered accounts until January to avoid paying tax in April. If you have losses, consider selling some winners and buy them back again to increase your cost base.

Tip 6 – Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket. For example, in Canada you can contribute to your spouses’ retirement fund and claim the deduction.

Tip 7 – Top up education savings plans for your children or grandchildren to ensure your plan gets any eligible government grants. (Canadian grants stop the year in which the child turns 18)

Tip 8 – Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 9 – Check to see if there are any changes to tax laws that could affect your tax return for 2015 & 2016. There could be some new tax deductions or some deductions that could be eliminated. (In Canada, the Family Tax Cut allows families with children to split their incomes for a tax credit maxing out at $2,000.00)

Tip 10 – Small business owners should go over their account receivables and make a list of potential bad debts. Consider writing off any bad debts that are more than 120 days overdue before tax season ends.

According to the Fraser Institute, tax freedom day in Canada was June 10 this year. The average Canadian family with two or more people will pay 43.7% of their annual income in taxes. The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

Do you have any year-end tax planning tips?





GM Warrants Have a Best Before Date


A blogger friend of mine “Bear with the Bull” emailed me yesterday with a question regarding General Motors warrants. He thought that it would also be a good general topic for a blog post. I thought that there may be other investors who are in the same boat and could use some additional information. Here is a portion of his email.

“Well my mother in law was asking about warrants.  It seems they had an investment in GM before GM filed for bankruptcy, my guess is they did nothing with it, and now she says GM is sending them warrants regarding their investments in GM.  Not sure if this make sense as a result of the bankruptcy filing or not but it might.  Also I do not know if what they had before was strictly stock or not.”

“I know warrants are basically options issued by the company instead of the exchanges  and it seems that these warrants expire next year.  She was asking what all this meant and if she should do anything about them”?

Apparently GM issued two warrants as part of the bankruptcy settlement. Not sure if my friend’s mother in law has the A or B warrant or both but they do have different values and expiry dates.

Key Factors Regarding Warrants

  1. Warrants like call options have an exercise price which allows the owner to exchange one warrant for one share of stock. GM warrant “A” has an exercise price of $10.00 and “B” at $18.33 which are bargains because the current price of GM stock is around $33.50! In simple terms you can purchase a $33.50 stock for $10.00 or $18.33 based on which warrant you own.
  2. Warrants also have expiry dates which forces holders to convert their warrants into stock. Warrant A, expiring July 10, 2016 and Warrant Bexpiring July 10, 2019. Most full service and discount brokerage firms will automatically convert the warrant into shares if the price of the underlying stock is above the exercise price on the expiry day. However, if the stock price is below the exercise price then the warrant will expire worthless!
  3. Warrants can be exercised at any time, you don’t have to wait until the expiry day. Plus they are listed on stock exchanges and trade just like stocks but they are not eligible to receive any dividends. You do have the option to sell your warrant in the open market at any time. (Ticker symbols; GM.WS.A & GM.WS.B)
  4. Both warrants and options trade based on the price movements of the underlying stock plus a time premium. Typically, a longer expiry date will be awarded with a higher time premium. The time premium value also moves based on what investors’ expectations are for the future value of the stock.

Unfortunately, my friend’s mother in law missed a golden opportunity to sell the warrants for a larger profit, back in mid-March of this year. The time premium for both warrants were much higher than today. See the chart below:


The blue line represents the price movement of GM warrant “B” which has a longer expiry date compared to the brown line representing warrant “A” and the black line is the price of GM stock.

I don’t envy my friend at “Bear with the Bull”, giving financial advice to family is really tricky. Regrettably, I don’t own any shares in GM and have no helpful suggestions on what to do with these warrants. The good news is that GM stock is currently trading above the exercise prices of both these warrants. The bad news is the time premium has been reduced.

Keep in mind, earnings release date for General Motors is Oct. 21 and investor’s future expectations could change based on vehicle sales in China. Could be positive or negative for the  price of the stock and the warrants. I hope that this blog post sheds some light on warrants in general.



Sometimes Being Frugal May Not Be Worth It?

Friends of mine invited us to join them on a four-day bus tour to New York City. I wasn’t very keen on accepting their offer; travelling ten hours by bus from Toronto to a hotel in New Jersey and back again wasn’t very appealing. After a little arm twisting from my wife, I decided to take the plunge to go on my first ever long distance bus tour.

Some Positive Points of Touring by Bus

  • Lots of stops to stretch our legs, get some food and use restrooms
  • We watched an interesting documentary on the Statue of Liberty & Elis Island on the trip down
  • Our route was very scenic  through the rolling hills of Pennsylvania and upper New York
  • Discount coupons for shopping in New York City, plus at an outlet mall on our return trip home
  • Really well-organized, lots of information on things to see, handouts on train & subway lines
  • Tour guide provided some fascinating facts at all the different stops (The Wall Street Bull isn’t on Wall St because of permit problems)


Biggest Negative Was I needed More Time to See the NYC Sights

  • Traveling back & forth from New Jersey to Manhattan wasted 2 hours a day
  • Lots of time waiting for everyone to rejoin the group at the different stops plus getting on and off the bus
  • Spent too much time on sights that I wasn’t interested in and not enough time on other sights
  • 10 hours by bus verses 1.5 hours by plane
  • Great travelling weather but it was cloudy & raining during touring days     : (

There were too many highlights to share in one post so I will only mention two that really moved me. The first was visiting Elis Island because the ship that my mother and I took from Italy stopped there before we boarded a train from New York City to Toronto. Thousands of immigrants made the same journey under much worse conditions.

The second was the One Trade Center Memorial where the names of all the people who died during 9-11 are listed. The two reverse water fountains symbolizes tears. Memorial staff remember victims’ birthdays by placing a single white rose by their names.

Some Travel Tips for NYC

  • Admission tickets to popular sites have to be booked in advance (2 weeks or more)
  • Popular high-profile sites have airport like security checks, give yourself some extra time
  • Manhattan Streets run east-west and Avenues run north-south, impossible to get lost, or so they say
  • Trains & subway lines are relatively safe and easy to use
  • Expect carrying bags & backpacks to be checked even at low profile sites like at St. Patrick’s Cathedral

Now I did save money taking this bus tour but in hindsight, there are so many things to see in New York City.  I think it would have been worth it to spend the extra to fly to New York and stay in a relatively cheap (for Manhattan) hotel. Either way, I highly recommend putting New York City on your bucket list.

Happy Thanksgiving to all my Canadian readers & followers!!!

Does Your Debt Die With You?

death of credit1

My daughter asked me this question while having dinner at her house.  It started with me complaining about how some of my boomer friends were living beyond their means and had mountains of debt. I had to reassure her that we were not in that situation. (It is not uncommon that your family dinner conversations included some financial topics)

I explained that she and her brother had nothing to worry about. Children are not responsible for any debts belonging to their parents.

Generally, the estate pays off debts, as long as there’s enough money in an estate to pay them all off. Any remaining money goes to beneficiaries. There is an order to how debts must be repaid. Funeral expenses, income & estate taxes and secured debts are the top. Unsecured debts, such as credit cards, lines of credit are near the bottom. If the estate does not have enough money to pay back all the debt, creditors are out of luck.

Remember that jewelry, antiques and other valuables must all be added to the total value of the estate. You might be forced to sell some of them in order to pay back creditors. Very important, the executor of the will could be liable if he or she pays money out to the beneficiaries from the estate before all the debts are settled, creditors could make a claim against the executor personally.

Creditors could also go after an individual’s retirement account and proceeds from a life insurance policy if no person is named as beneficiary. Those funds would automatically be included into the total value of the estate. However, in Canada, retirement accounts can to transferred tax-free to the surviving spouse.

Joint ownership or loans that have been co-signed are different. You will be responsible to pay them back. You don’t inherit your parents’ or your children’s debts unless you guaranteed them.

It is very important for young people to check their own credit report periodically to make sure you are not still holding debt for someone who isn’t in your life anymore. Credit cards that you have co-signed years back may still be active and you could be also on the hook for apartment leases even if you moved out.

Estate laws vary depending upon where you live and can be very complex. Get some good legal advice, talk to a tax specialist and pick a knowledgeable executor. You can’t take it with you! However, avoid giving it to the tax man and leave something to your love ones instead.


death of credit