Mailbag: Buffett Raising Cash; RRIF conversion; Financial Jargon; and Share Splits

Each month, we select a handful of questions that were asked by clients or soon-to-be clients. We like to post our answers online because others may have that same question as well. Here are a few of the things we were asked about most recently.

Question from Ontario: Warren Buffett has been raising cash by selling Apple. Is he worried about a pending crash in the market?

No, we don’t think so. While Buffett sounded pessimistic at his annual general meeting last spring, remember too that he’s now 94 years old. We think his latest sales in both Bank of America and Apple is driven by succession planning.

By raising cash now, he’s giving his successor a clean slate to allocate money as he chooses when Buffett is no longer around. This prevents his successor from facing criticism that he’s “undoing the legendary Warren Buffett’s investment decisions”.

Interestingly, Buffett’s successor is a fellow named Greg Abel who was born, raised, and educated in Edmonton.

Question from Scarborough: When do I need to convert my RSP to a RRIF?

You can open a RRIF anytime, but no later than the end of the calendar year that you turn 71. You have to start withdrawing money from the RRIF in the year after you open it (age 72).

The amount to withdraw each year is a percentage of the RRIF that is determined by the federal government. The minimum amount increases as you get older. For example, if you are 72 on January 1, the minimum amount is 5.4%. This percentage increases incrementally each year until it maxes out at 20% when you turn 95.

Withdrawals from a RRIF are taxable as income.

We will do all the paperwork to open the RRIF and transfer all the assets from your RSP to your RRIF. No work from you is required other than to sign the document that we will email you via Docusign.

Question from Oakville: Do you vote at shareholder meetings?

No, we don’t exercise our proxy votes. We never invest in a company based on a personality. For that reason, we don’t study the backgrounds of each board member or candidate. Furthermore, each client has their own ethical values and opinions and we would not want to speak on their behalf. Our core competency is to buy and sell securities rather than to delve into corporate governance matters.

Question from Ontario: I don’t know what the columns in the portfolio statement mean. What does “quantity”, “book value”, and “market value” mean?

Quantity is the number of shares you own of the particular security. For example, if we purchased 100 shares of Aecon Group, the quantity would be 100.

Book value is the amount of money paid to buy the security. For example, if we bought 100 shares of Aecon Group and paid $10.60 per share, the book value would be $1,060 (100 shares * $10.60).

Market value is the amount of money the investment is worth right now. For example, if Aecon Group’s most recent stock price were $30, its market value would be $3,000.

Question from Ontario: How come some companies that are bigger than others trade at a lower stock price?

The stock price is only a function of how many shares the company has issued. Some companies issue a lot of shares while other companies issue fewer shares.

For example, a company that trades at $10/share with 1 million shares outstanding is worth the exact same as a company that trades at $100/share with 100 thousand shares outstanding.

$10 * 1,000,000 shares = $10,000,000 market capitalization

$100 * 100,000 shares = $10,000,000 market capitalization

More companies today are splitting their shares, which has the effect of increasing the shares outstanding in order to lower the stock price. This makes a company’s stock more accessible to the average investor. For example, a single share of a company with a $1000/share price is quite expensive for many people. However, the company may do a 2-for-1 split by giving that person an extra share. This, however, will reduce the stock price to $500 since there will be twice as many shares floating around in the market. For the investor, it has no impact on how much their investment is actually worth.

Please reach out to us at info@SchneiderPollock.com.

-written by Jeff Pollock