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The economics of borrowing to invest make sense right now, but it's not for everyone – Financial Post

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Over the past six weeks, our clients have come to us with a wide array of emotions and questions. They’ve ranged from great concern to unabashed enthusiasm, and everything in between. On the upbeat calls, one question initially caught me off guard — “What do you think of me borrowing money and investing in bank stocks?”

I was surprised because usually this strategy comes up when markets have been good, and lenders are begging us to borrow money. Obviously, our current circumstance is quite different. Markets are down and have been hyper-volatile, partially due to the use of debt. Margin calls have caused forced selling which in turn has exaggerated price declines.

Look in the mirror

Nonetheless, I’m delighted by this contrarian thinking. After all, money is cheap and stocks are down, so the economics of borrowing to invest make sense. In the case of banks, the Big Five now have an average yield of over six per cent.

Even so, I don’t spend much time discussing the math when responding to these queries. My focus is on the behavioural challenges that go along with markets and leverage. Market gyrations like we had last month are difficult to navigate at the best of times, let alone when your market value has dipped below the loan value.

Investing with borrowed money can lead to disastrous results if you flinch when markets are down. Since this happens every two to three years, leverage is only for experienced investors who have successfully survived a bear market before.

Due diligence

It’s encouraging that the borrowing question is coming up at a time of upheaval and decisions are being based on the prospect of better future returns as opposed to great past returns. But the timing doesn’t make it a slam dunk. You still need to methodically go through a series of steps to determine if you’re ready to run your own hedge fund.

First, maximize the return from your existing portfolio. This means dialling up your equity content, which will increase the return potential and importantly, serve as a trial run for your leveraged strategy. If you can’t stomach the volatility that goes with an all-equity portfolio, then borrowing to invest is not for you.

Assume modest returns and higher interest rates. Make sure the strategy works even if stocks are slow to recover and the prime rate goes up. When debt is involved, you need a cushion.

Assess the stability of the loan, not just the investments. Remember, your interests aren’t aligned with those of the bank. You’re trying to buy low and sell high, but when stocks are down, your banker is more likely to be pressuring you to sell, not buy. Banks will do whatever it takes to get their money back, whether it suits your timing or not.

In for the long haul

Make a five-year commitment. This strategy must fit in with an overall financial plan that takes into account your future cash needs (i.e. renovations; college tuition; travel) and RRSP/TFSA contributions. You can’t count on the debt capacity you’re using to invest being available for other purposes for the next few years at least.

Diversify. It’s psychologically and aesthetically pleasing when dividends cover the interest payments, but this should be a secondary consideration. Diversification is job one, which means not limiting yourself to high-dividend stocks in a few industries (i.e. banks, REITs and telcos) that operate in one economic region (Canada).

Buckle in. We did some modelling a few years ago that compared an unlevered, all-stock portfolio to a balanced portfolio that was bought using borrowed funds. We went through a myriad of scenarios and kept coming up with the same conclusion. The returns and volatility of the two strategies were similar. A conservative portfolio that’s levered behaves much like a pure stock portfolio. In other words, you’re going to feel every little market wiggle, even if you’re invested in the bluest of blue-chip stocks.

Long-term investors should be taking advantage of lower stock prices, but using debt to do it is an aggressive strategy. It’s only suitable for investors who plan carefully, are already fully invested, and who know how they’ll react when the math isn’t working.

Tom Bradley is chair and chief investment officer at Steadyhand Investment Funds, a company that offers individual investors low-fee investment funds and clear-cut advice. He can be reached at tbradley@steadyhand.com

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This Top TSX Gold Stock Is a Great Long-Term Investment – The Motley Fool Canada

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There is no question this economic environment is ideal for gold prices and, therefore, TSX gold stocks. However, some gold stocks are so strong, investors can buy the stocks knowing they are great long-term investments.

Gold is something investors should always have at least a small portion of their portfolio exposed to. And in times of uncertainty, when a safe-haven asset is demanded, that’s when investors should be increasing their exposure to gold.

Today’s environment is precisely that. The uncertainty in both financial markets and economies makes a safe-haven asset like gold one of the most attractive assets to be increasing exposure to.

TSX gold stocks today

The economic environment around the world has been dire since the coronavirus pandemic hit. With no vaccine and little knowledge of the deadly disease, governments had to act quickly to protect their countries, enacting measures that have decimated economies.

Then, to deal with the economic consequences, massive fiscal and monetary stimulus has taken place around the world.

While this stimulus was needed and warranted, it doesn’t take away from the fact that central banks are printing money and governments are issuing new debt at unprecedented levels.

All of these conditions are creating the perfect storm for gold prices to rise. Some analysts even think that gold could skyrocket to $3,000.

Gold prices have been gaining momentum going back to December of 2018. In those 17 months since, prices have increased roughly 40%, an extremely rapid pace for gold.

And when you consider that the environment today is even more favourable than it was in 2018 and 2019, increasing exposure to gold investments is a no-brainer.

Top TSX gold stock to buy

Any time the price of gold is rising significantly, gold stocks will see a major positive effect. Since December 2018, the iShares S&P/TSX Global Gold Index ETF is up roughly 100% and more than double the pace of gold.

One stock that makes up 20% of the fund is the massive gold producer Barrick Gold (TSX:ABX)(NYSE:GOLD).

Barrick, a $60 billion company, is one of the world’s largest gold producers and an investor favourite in the gold industry.

The company is one of the best in the business, and, with its massive global diversification, it’s a stock you can hold for the long term.

In the first quarter, Barrick produced incredible results. The average realized gold price was $1,589 — a 22% increase from the same quarter in 2019.

That increase in gold price drove a 30% increase in revenue and a roughly 50% increase in operating and net income.

And when you consider that the average realized price in the quarter is nearly 10% below where gold is today, it’s clear this company is going to have a strong period of performance over the near term.

One of the reasons Barrick is so attractive today is the focus management has had on cutting costs and increasing shareholder value.

In the first quarter, the company produced nearly 1.25 million ounces and had all in sales costs of just $950 an ounce.

So, it’s no wonder why Barrick, the top TSX gold stock, is so profitable in the current environment and will continue to increase its profitability as gold prices rise.

Bottom line

Barrick’s solid operations and high-quality management team makes it one of the top gold stocks on the TSX.

It even pays a dividend that yields more than 1%. While this isn’t going to make or break your investment, it demonstrates management’s willingness to return capital to shareholders.

If you are underweight gold or need some resiliency in your portfolio, I would seriously consider adding a position in Barrick Gold today.

As we approach a new month, check out some of the other top stocks to buy besides Barrick.

The 10 Best Stocks to Buy This Month

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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

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A case study in how not to invest in bank stocks – The Globe and Mail

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I have two investments I just don’t understand: BK and BK.PR.A. They were purchased by a financial adviser I have since parted ways with. I know they invest in bank stocks, but I can’t understand why BK in particular is doing so badly. I feel that these shares are a special type of investment that is more complicated than most.

More complicated than most? That’s an understatement. Your adviser shouldn’t have recommended a product you don’t understand. What’s more, as you’ll see, the adviser’s recommendation to buy BK and BK.PR.A together makes no sense from a financial standpoint – except for the fat commission he or she likely pocketed in the process.

BK and BK.PR.A are two different classes of shares issued by Canadian Banc Corp., an investment vehicle known as a “split share” corporation. Canadian Banc Corp. holds a portfolio of the six biggest Canadian bank stocks, and while BK and BK.PR.A both provide exposure to those underlying stocks, they do so in different ways and with dramatically different results.

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BK.PR.A, the preferred shares, are relatively stable. They don’t participate in the ups and downs of the underlying banks, but they pay a fairly secure dividend that is funded by the dividends from those shares. The preferreds also get first claim on the capital of the underlying portfolio up to the preferred’s issue price of $10 a share.

Adding yet another layer of protection, although BK.PR.A’s dividend is variable because it is tied to the prime lending rate, BK.PR.A’s yield is never allowed to drop below 5 per cent, as calculated on the $10 issue price. (BK.PR.A has been trading slightly higher than $10 recently, so the yield based on the market price is currently a bit below 5 per cent.) Reflecting its conservative characteristics, BK.PR.A has produced steady returns over the years, and is a suitable choice for an income-seeking investor.

BK, the class A shares, are a different story. Essentially, the class A shares (also known as capital shares) are entitled to all of the value in Canadian Banc Corp.’s bank stock portfolio after the preferreds’ dividend and fixed capital requirements are satisfied. This means the class A shares are effectively a leveraged bet on the underlying stocks. If bank stocks rise, the class A shares will rise even more. If bank stocks fall, the class A shares will suffer an even bigger loss.

The sell-off triggered by the novel coronavirus pandemic is a great illustration. From Feb. 21 through May 28, BK shares plunged about 37 per cent. That’s far worse than the drop of about 22 per cent for the BMO Equal Weight Banks Index ETF (ZEB), a fund that holds the same six banks – but with no leverage, and lower costs.

BK also pays a dividend, but it’s anything but stable. The dividend is reset monthly to yield 10 per cent based on BK’s average market price over a designated three-day period, which means the dollar amount of the dividend will rise in good times, and fall in bad times.

When markets get really ugly, however, BK’s dividend can disappear altogether. Even though none of the underlying banks has cut its dividend, BK suspended its payout in March after the net asset value per unit of Canadian Banc Corp. fell below the threshold of $15 that triggers a cessation of dividends on the class A shares. BK has since reinstated its dividend, but the monthly amount is about 40 per cent lower than it was a year ago.

You may be wondering how BK can pay a 10-per-cent dividend when the preferred shares are already yielding 5 per cent. According to the prospectus, “to supplement the dividends received on the portfolio and to reduce risk, the company will from time to time write covered call options in respect of some or all of the common shares in the portfolio.”

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But many split share corporations also resort to selling stocks in the underlying portfolio to generate cash required to pay dividends on their class A shares, said James Hymas, president of Hymas Investment Management. “It is my belief that, if people understood class A split shares, they wouldn’t buy them.”

With the rebound in bank stocks this week, BK has recovered some of its hefty losses. But its total return, including dividends, for the five years through May 27 was still negative 1.2 per cent on annualized basis, according to Bloomberg. Over the same period, ZEB posted a positive annualized total return of 4.6 per cent. Clearly, an investor who wanted exposure to bank stocks would have been better off buying a low-cost bank ETF instead of a leveraged product such as BK.

What’s more, your adviser should have known that, although BK and BK.PR.A have different characteristics on their own, they are complementary pieces of the same underlying portfolio. When you put them together you’re essentially buying a portfolio of bank stocks – just in two different wrappers that add unnecessary layers of complexity and fees. Canadian Banc Corp.’s management expense ratio of 1.35 per cent is more than double ZEB’s MER of 0.62 per cent.

“Your reader was given really stupid advice by the adviser, because when you own the class A shares and preferred shares in equal proportions, all you own is a fund with a lot of bells and whistles that owns bank stocks,” Mr. Hymas said. “You can do that a whole lot easier by buying an ETF that owns bank stocks. And it’s much cheaper.”

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

Special to The Globe and Mail

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The best investment every digital brand can make during the COVID-19 pandemic – TechCrunch

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Intuitively, stores that sell online should be making a killing during the COVID-19 pandemic. After all, everyone is stuck at home — and understandably more willing to shop online instead of at a traditional retailer to avoid putting themselves and others at medical risk. But the truth is, most smaller online stores have seen better days.

The primary challenge is that smaller shops often don’t have the logistics networks that companies like Amazon do. Consequently, they’re seeing substantially delayed delivery timelines, especially if they ship internationally. Customers obviously aren’t thrilled about that reality. And in many cases, they’re requesting refunds at a staggering rate.

I saw this play out firsthand in April. At that point, my stores were down 20% or in some cases even 30% in revenue. Needless to say, my team was freaking out. But there’s one thing we did that helped us increase our revenue over 200% since the pandemic, decrease refund requests and even strengthen our existing customer relationships.

We implemented a 24-hour live chat in all of our stores. Here’s why it worked for us and why every digital brand should be doing it too.

Avoid the common ‘unreachability’ frustration

When I started my first online store in 2006, challenges that bogged my team down often meant that my team’s first priority became resolving those challenges so that we could serve our customers faster. But admittedly, when these challenges came up, it became more difficult to balance communicating with our customers and resolving the issues that prevented us from fulfilling their orders quickly.

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