LTI Investment Newsletter Written by Alain Roy CEO LTI Long Term Investing January 11, 2013 www.ltinvesting.

com

January Investment Newsletter

2012 RELATIVE PERFORMANCE Lumber was the best asset class in 2012 with a yearly increase of

In this issue:
51.8%. 2012 Relative Performance My Results and My Portfolio going into 2013 Dividend Growth Rate - The Overlooked Superstar McDonalds 2013 Watch List An All Star Portfolio Economic Outlook Central Bank intervention and monetary easing and the markets absolutely loved every minute of the loose easing policies. The NASDAQ, S&P 500 and Dow Jones were up 16.7%, In 2012 we saw unprecedented 13.25% and 7% respectively.

LTI Book of the Month

If you compound your money at 9 percent a year, you are better off than investors whose results jump up and down, who have some great years and horrible losses in others. The losses will kill you. They ruin your compounding rate, and compounding is the magic of investing.

Jim Rogers
Legendary Investor

MY RESULTS AND MY PORTFOLIO GOING INTO 2013 2013 was a fairly quiet year for me in terms of buying and selling. transactions this year and the results: Walmart Sold 1/3rd of holdings in 2012 for a 36.4% one year return I bought Walmart shares in August 2011 at $49.50 and the stock price increased to as high as $75 in 2012. I put a Stop Limit at $67.50 on 1/3rd which was triggered in 2012 for an annualized return of 36.4%. I plan to keep the other 2/3rds for the long term. Here is a summary of

SANTANDER PREFERRED SHARES Bought in June 2012; 26% Return as of Dec 31, 2012 This was my first purchase in 2012. In June I bought preferred shares of Santander Bank at $25.09 which continues to pay a 10.2% annual dividend yield in quarterly dividend payments. I plan to hold this one until my Stop Limit at $24.00 gets triggered.

XCB.TO Corporate Bond EFT Bought in August, 5.3% Return as of Dec 31, 2012 The sale of my Walmart holdings added to the Cash weighting of my Portfolio and I was happy to move roughly 50% of my total cash into xcb.to when it neared its 200 day moving average in September 2012. because: 1. It pays you monthly dividends equal to roughly 4% annualized 2. Typically, when stock markets decrease, bond funds with high quality holdings (AA, A, etc.) will go up in value therefore its also a decent hedge against a declining equity market 3. If and when stocks go down, xcb.to will likely remain the same or go up in value, at which point I can then buy equities at lower prices helping to create the margin of safety (discount) that I desire when I buy stocks. Xcb.to is a great place to store cash while you wait for a buying opportunity

There were other buying opportunities that I did not capitalize on, due to adhering to strictly to the LTI Investing Rules: http://ltinvesting.com/investing-rules/. In June of this year there were a few stocks that I should have bought even though not all of my rules were met, however, this is always easy to say in hindsight. I am very happy with my results and with the position of my portfolio going into 2013. In 2012 the total return of my invested portfolio was 14.5%. The total return of my portfolio, including my Cash positions, was 11.4%. I am perfectly fine being patient and waiting for a good

buying opportunity in equities in order to achieve a margin of safety and even greater returns.

MY PORTFOLIO GOING INTO 2013 Interestingly enough, not even five

trading days have passed in 2013 (at the time of this writing) and I have already moved another 40% of my cash into xcb.to Corporate Bond ETF. With the surge in stock prices and long bond term yields after the announcement of the Fiscal Cliff deal in the US, xcb.to dropped quickly below the 200 day and 50 day moving average as shown here. I took this opportunity to move more of my cash position into this bond ETF as an interim location to store my cash. The intraday price actually dropped to $21.30 which is not shown in the graph below. With these most recent changes here is how my Portfolio is set up going into 2013.

DIVIDEND GROWTH RATE THE OVERLOOKED SUPERSTAR How often do read you about dividend growth rate in business news or hear the business networks talk about the dividend growth rate of various holdings? Almost never, yet the impact that a good solid dividend growth can have on your long term portfolio is amazing, hence why I used the compounding quote from Jim Rogers on the cover of this months investment newsletter. Lets jump right into some examples to show you how powerful Dividend Growth can be. Royal Bank is the #1 Bank, traded on all North American exchanges, that I would invest in. I will use Royal Bank as an investment example. Investment Assumptions You invest $50,000 into RY

(also RY.to) in 2012 at $50 Royal Bank dividend growth rate continues to grow at 13%. Since

1997 their dividend growth rate has been 13% on average. Results from Investing $50,000 in Royal Bank stock at a stock price of $50

10 years from now the dividend yield on this holding would be 15.4%. 20 years it would be 28.5%. This means by the time I am 51 (I am currently 31); I could have a dividend income stream of $26,215 from this single holding of $50,000.

Then when I am 60, 30 years from now, it would be paying me $88,989 per year

When I invest my moneythis is what I invest inthe future returns that I can reasonably expect.

As shown below, RBC is not even the highest on my watch list when it comes to Dividend Growth Rate.

Companies like Walmart and McDonalds have even higher Dividend Growth Rates over time. Results if you bought $50,000 of McDonalds stock at $75 Over the past 20 years, through 4 recessions, McDonalds has maintained, on average, a dividend growth rate of 18.7%.

When I buy shares in a company like Walmart, with a similar growth rate as McDonalds as shown above, I am really buying into the future cash flows via the dividend payments. This does not even

include any capital appreciation of the stock price. What if you had more money and you invested $200,000 into a company like McDonalds with an average dividend growth rate of 18.7% over time $45,606 into your pocket 10 years from now

Dont overlook dividend growth rate of fundamentally solid companies that have long term demand for their products and services. 2013 WATCH LIST AN ALL-STAR PORTFOLIO I have a total of 136 companies on my watch list that was distilled down from 7700 companies listed on all major North American exchanges. Below I will share with you some of the top companies on my watch list that passed the scrutiny of the LTI Macro Screening and a Financial Statement Fundamental Analysis. Here are some of the top companies on my watch list that have superb

fundamentals and healthy dividend growth rates that would create a truly all-star portfolio: Consumer Durables/Discretionaries 1. Walmart - WMT 2. Proctor and Gamble - PG 3. McDonalds MCD 4. Colgate Palmolive CL 5. Coke Financials 1. Royal Bank RY or RY.to 2. Bank of Nova Scotia BNS or BNS.to Oil and Gas 1. Chevron - CVX 2. Exxon Mobile - XOM 3. Canadian Utilities CU.to

Health Care 1. Novartis 2. Johnson and Johnson 3. Astra Zeneca 4. Becton Dickinson Industrials/Services/Equipment (these companies will feel more pain from recessions) 1. General Dynamics 2. WW Grainger 3. United Technologies Should the stock price of these companies drop near their 52 week low, or lower, this could be a great opportunity to solidify phenomenal future cash flows due to the strong dividend growth rate in addition to providing good stable price appreciation over time. MCDONALDS Here are some of the results from my Financial Statement of Analysis on McDonalds and why McDonalds is such a fundamentally strong company and one to add to your watch list: Lets start with the most obvious: Revenuesare they going up? Yes

Net Income Going up? Yes

Cash Flow from Operations Going up? Yes

Retained Earnings Increasing over time? Yes

Free Cash Flow Stable and/or increasing? Yes

Gross Profit High, consistent or growing? Yes, high and consistent

Net Profit Margin Consistent (the higher the better) and/or growing over time: Yes!

Return on Equity Greater than 12% and consistent? Yes.

Adjusted Debt to Equity Below 0.8: Yes (only the best companies have a ratio below 0.8)

Cash Return on Sales Are they larger than Net Profit Margins? (this is important): Yes!

Cash Ratio Above 1.0? Yes

Dividend per share/Earnings per share Are they paying out more than they make? No (this is good) Note: Too many companies pay out more than what they make.dont invest in companies like this as that is unsustainable over the long term.

Dividend and Dividend Growth Rate over time (monster increases since 2002, through 2 recessions)

To the right is a summary of all the ratios and items I calculate in the financial analysis. The nice thing is that I can compare companies within the same sector to weed out the very best companies from the very okay companies. Its very important to invest in

companies with the attributes as shown above otherwise you are just taking on unnecessary risks with your capital. Buying the very best of

companies (at a discount) with high dividend growth rate and solid demand for their goods and services ensures you are minimizing risks and

maximizing gains which is the balance you want to achieve when it comes to investing your hard-earned money.

Winning Investment Strategy = Fundamentally Solid Company + Stable demand for goods and services + Strong dividend growth rate + Buying at a discount

This strategy may not be ideal for you. Take from it what you think fits with your investment goals and needs.

ECONOMIC OUTLOOK The strategy of most developed nations in dealing with the global economic contraction has been clear; extremely accommodative monetary policy, namely printing more money and printing lots of it, in hopes that increased money supply will spur growth. Central Bank intervention and the level of money printing has truly become an unprecedented experiment that has never been seen before. The graph below from Reuters shows the balance sheets of the major central banks as a percent of GDP. We are seeing a concerted effort by major central banks to quell another recession. The Bank of England has gone from 5% in balance sheet assets as a percent of GDP in 2008 to 26% in 2012. You can see that Bank of Japan (BOJ), Europe Central Bank (ECB) and the US FED have all dramatically increased their balance sheets with assets through printed money that was not there before. Its like a big party hosted by the central banks and the punch bowl is always being filled will printed money and it is overflowing and everyone is laughing partying like crazy. This experiment is like giving a drug addict more heroine and hoping that one day he will get better. You cant cure a debt problem with more debt.

Here is an average of all the major central banks put together. In only four short years the balance sheets of Central Banks increased from an average of 12% to 24%.

Even China is getting in on the action, as shown below.

If and when the central banks withdraw from their loose easing policies (assuming they do) what types of impact will this have on their respective economies? It will be years before we know this outcome. In the meantime I remain highly optimistic in the long term and highly cautious in the short to medium term. LTI BOOK OF THE MONTH If you have not learned a great deal about the amazing Tax Free Savings Account its time to buy this book and take 3-4 hours to read it. TFSAs are the most amazing investing vehicle out there. I cannot say enough good things about them. You must order this book: Tax Free Savings Accounts by Gordon Pape $11.55 on Chapters.ca

Happy New Year to everyone! Have a great 2013.

Alain Roy, P.Eng, MBA Candidate CEO LTI http://www.ltinvesting.com

Disclaimer: The content of this newsletter is intended as general information only. Any action that you take as a result of this information and analysis is your responsibility. I cannot be held liable for any negative outcomes, of any kind, as a result of the information in this newsletter. Please use this information responsibly. Consult your financial advisor before making any investment decisions.