Thursday, 31 December 2009

C-FAX Radio Interview & Happy New Year

"It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt." Abraham Lincoln quotation on BrainyQuote. Anyone who wants to find out for sure about me merely has to listen to a 15 min. interview I did today with Murray Langdon of C-FAX 1070 radio station in Victoria. It will air at 11:10am Victoria time today and be broadcast on the Internet here.

By the time it airs, I will be away to a good old Scottish Hogmanay soirée and be taking a "cup 'o kindness" à la Rabbie (NOT Robbie) Burns, so Happy New Year to all.

Thursday, 24 December 2009

Merry Christmas and Remember to Share Your Wealth: here's how

Christmas is a time of giving, not just to friends and family, but also to strangers who can use our help. Helping strangers can be direct one to one or through the many fine charities out there.

As with most things today, there is a way to give online. In Canada, a charity portal has emerged - Itself a charity, it funnels funds to charities, electronically, when the charity has registered with CanadaHelps, or manually by cheque in the mail when it isn't. CanadaHelps takes its list of charities from those registered with the Canada Revenue Agency so at least one can be assured that the charity is real and eligible to produce a tax receipt, which CanadaHelps does instantaneously for all charities.

That doesn't mean every charity is equally worthy. That depends on one's preferences and, in my view, on the efficiency and effectiveness with which it carries out its stated goal. Some supposed charities chew up all their donations in overhead and administration. You still need to check them out before giving.

Which brings me to CanadaHelps itself. As a charity, is it worthwhile, effective and efficient or does it subtract rather than add value in helping the ultimate intended beneficiaries? CanadaHelps contacted me the other day touting their website and hoping I would do this post. I asked for and promptly received their audited financial statements. A positive sign, though I wish they would just post them on the website as well for everyone to see. The total expenses of CanadaHelps amounted to 4.8% of donations in the year ended June 2009, up from 4.2% in 2008. It seems mainly due to professional consulting fees rising faster than donations. Tha financial statements do not explain why that happened. One would hope that the online model would allow scale economies and donations to rise faster than costs.

The 3% fee that CanadaHelps charges compares reasonably with alternatives that a charity might have, like PayPal, which charges 2.9% + $0.30 per transaction to receive money. Most of the 3% (about 2.1% per the financial statement) gets absorbed directly by bank fees to make payments. VigetAdvance talks of other charity websites which charge 4.5-4.75% to accept donations. Of course, there is the old letter ($0.54 stamp + envelope) and personal cheque method.

Given that CanadaHelps also allows one to donate shares and thereby avoid paying capital gains on those donated shares, it looks like a good service, convenient for both individuals and charities alike. Whichever of Canada's 160,000 or so charities you choose, have a Merry Christmas all.

Tuesday, 22 December 2009

CPPIB Makes a Good Buy in Scotland

It's nice to know that the next time I go shopping at what is the nicest mall in Scotland, I will be helping out my own future CPP pension, after the announcement today of CPPIB's purchase with a British partner of Silverburn mall on the edges of Glasgow. I wonder if I can get a discount based on my 0.000006% (1 out 17 million CPP contributors) ownership share. The investment looks like a good buy to me. Silverburn has the neatest indoor parking, using an innovative guide that I wish other malls would emulate. On the ceiling above each parking space, there is a red (occupied) or green (empty) automatic detector. It is easy to spot empty spaces a good distance away and makes finding a space a skoosh, as they say in Scotland. All Silverburn needs now is a Roots store, which I daresay would do very well as all the Scots I know love their stuff, and a Tim Hortons.

Monday, 21 December 2009

Zarlink - the next high tech train wreck? Hopefully not!

MoneySense's The Top 22 Pensions in Danger in October rated 181 Canadian public companies on their pension underfunding and their likelihood of going under based on Z-Score (a reasonably reliable accounting ratio-based bankruptcy predictor - see Wikipedia article). High tech company Zarlink came out second worst on the Z-score at a really horrible -3.69 (positive numbers above 1.8 are safe according to the MoneySense rating, though the original z-score safe level is 2.6 or over) and 6th from bottom at 74% underfunding.

So is Zarlink set to become the next pension train wreck, following on the leadership, if one can call it that, of Nortel? Digging through Zarlink's financial statements suggests, thank goodness, no, it will not. It has set aside in restricted cash covering about 89% of the unfunded pension liability. Interestingly, this is not for Canadian employees but ones in Sweden. The Swedish obligation was funded with krona, not dollars, so though exchange rate shifts have driven up the liability in dollars (used by Zarlink in its accounting) the real obligation in krona hasn't changed much. Another unfunded pension liability, this one in Germany, has been dealt with by a contract with an insurance company to cover the liability. So the employees/pensioners over in Europe don't need to worry as much about their pensions. One caveat is how restricted the 'restricted' cash is. In the event of bankruptcy, is it really kept away from other creditors?

On the bankruptcy-avoidance side, Zarlink seems to have made some progress according to its second quarter financial statement by reducing operating expenses, accumulating rather than burning cash and eeking out small profits but there is no dramatic turn-around evident. It's still in a precarious position. Though I don't own any shares, as an Ottawa company I wish them success.

Thursday, 10 December 2009

ETF Combinations for Tax Loss Selling while Maintaining Asset Classes

This is the time of year when most people think of doing tax loss selling in taxable accounts. Larry Macdonald in Using ETFs for Tax Harvesting: Hidden Alpha? on Seeking Alpha has reminded us that ETFs are a handy vehicle for doing that and last year I posted my suggestions for doing it properly. (In case you are wondering why tax loss selling is worthwhile, something that is rarely demonstrated, check out Tax Loss Selling Explained: What, Why and How on HowToInvestOnline).

For the passive index investor like me, the objective is to stay invested. In order to do that and not run afoul of CRA's superficial loss rule of not buying back the "identical" property within 30 days before or after a tax loss sale, one key test with respect to ETFs is to buy back an ETF that tracks a different index. 30 days later you can buy back the original ETF if that's what you want to hold for the long run. Each trade costs commission of course, so figure out whether the round trip is worth it as a percentage of the holding.

Here is a starter list of some of the main asset classes where multiple ETFs track a different index but are in the same asset class. The functional test of whether it is in the same asset class is correlation - the same up and down performance - which can be quickly eyeballed using Google Finance and graphing the ETFs in question (see my example chart of US total market ETFs below). To save time and space, I've just identified the ETFs by their stock symbol.

Canadian Equity
  • XIU - S&P TSX 60
  • XIC - S&P TSX Composite
  • ZCN - DJ Canada Titans 60
  • CRQ - FTSE RAFI Canada; fundamental indexing will cause returns to differ significantly from the above market cap weighted ETFs
US Equity - since the large caps represent about 3/4 of the US market, one might consider swapping total market for large cap or vice versa, especially if it just for the short term
1) Total Market
  • IWV - Russell 3000
  • VTI - MSCI US Broad Market
  • TMW - SPDR DJ Wilshire 5000
  • IYY - DJ US Total Market

Source: Google Finance

2) Large Cap
  • VV - MSCI US Prime Market 750
  • IVV - S&P 500
  • SPY - S&P 500
  • IWB - Russell 1000
  • ZUE - DJ US Large Cap, hedged to Canadian dollars - so returns will differ from above non-hedged ETFs; traded on TSX
US Bond Total Market
  • AGG - Lehman US Aggregate Bond
  • BND - Lehman US Aggregate Bond
  • GBF - Lehman Brothers U.S. Government/Credit (holds both govt & corp bonds)
Emerging Market Equity
1) Traded on US exchanges
  • VWO - MSCI Emerging Markets
  • EEM - MSCI Emerging Markets
  • PXH - FTSE RAFI Emerging Markets
  • ADRE - BONY 50 ADR
  • GMM - S&P Emerging BMI
2) Traded in Canada on TSX
  • ZEM - holds VWO plus other funds, enough to make a substantial difference
  • CWO - holds VWO but is 100% hedged
  • XEM - holds only VWO but is non-hedged; whether currency exposure difference with CWO counts enough for CRA I cannot tell (and they will, in their inimitable fashion, not tell, if you ask them) but the returns sure will differ
US Real Estate
  • RWR - DJ Wilshire REIT
  • ICF - Cohen and Steers Realty Majors
  • IYR - DJ US Real Estate
Global Equity
1) Traded in US
  • VEU - FTSE All-World ex-US
  • ACWX - MSCI All Country World ex-US
  • GWL - S&P/Citigroup BMI World ex-US
... Developed Country (i.e. ex Emerging Markets)
  • ADRD - BONY Developed Markets 100 ADR (large cap)
  • IOO - S&P Global 100 (large cap)
  • EEN - Robeco Developed International Equity
2) Traded in Canada
  • XIN - holds EFA only but hedged to Canadian dollar, so returns will differ from above two ETFs
  • CIE - FTSE RAFI Developed ex-US 1000; fundamental index - returns will differ from market cap funds
  • ZDM - DJ Developed Markets ex-North America ; hedged to Canadian dollar so returns will differ
For other (sub)asset classes not covered above, like commodities, small cap and value ETFs, a good place to look for ETFs and the index of each is It groups ETFs by categories which roughly correspond to asset classes and the index is shown in the summary for each ETF - e.g. see IOO.

There are some asset classes where I could not find any reasonable ETF combo alternatives - notably Canadian real estate and Canadian bonds. If anyone has any suggestions, please comment.

Wednesday, 9 December 2009

A Good Idea - Liberals Propose Option for Individuals to Invest More in CPP

The Liberal party has proposed something that makes sense to me - an option for individuals to invest extra savings for their pension with the CPP. I could hardly disagree since I said more or less the same thing last year at the end of my review of the investing lessons of the CPPIB. Not only does the CPPIB seem to have been doing a fine job, it pursues worthwhile strategies no individual investor could hope to do on his/her own.

Tuesday, 8 December 2009

IFA Calculator Demonstrates the Diversified Portfolio Superiority

Those who want to check the advantage of a diversified international portfolio may want to try out the superb IFA Index calculator over at Though addressed to US investors using US dollar data, the principles and the nature of the results for Canadians would be largely the same.

The folks at IFA have incorporated several unique and valuable features:
  • inflation (US data) button to see real returns
  • dividends included to get total returns not just the index value increase
  • long history back to 1928 extending right up to October 2009
  • time period selectable of any duration - find the best or worst case scenario that has happened in the past
  • regular (annual) deposits in dollars or percentage can be added, or
  • regular (annual) withdrawals in dollars or percentage too, making this especially useful for a retiree (if you use this option be sure to turn off the "adjust for inflation" in the returns section at step 4; otherwise you would be double counting inflation)
  • realistic portfolios with a wide range of asset classes and weights for any from the ultra-cautious 85% fixed income to the ultra-aggressive totally equity portfolio allocation or,
  • individual asset classes (21 altogether) like REITs, emerging markets, US and international small cap and value, with reconstructed historical data (these are synthetic and thus not fully realistic but IFA appears to have tried very hard to line them up properly)
  • annual rebalancing of every portfolio
  • tax calculation option for funds in a taxable account (US tax rates)
  • portfolio returns adjusted for the maximum annual fees of 0.9% that IFA charges its clients
It all adds up to being able to model the past in a very realistic manner unlike so many other calculators I have come across. This calculator is not world class, it is the best anywhere on the Net.

Portfolio Advantages:
One of the comparator asset classes is the S&P500 index (in step 1, scroll down the Indexfolio list to the bottom to get it). I used the worst ever 20 year rolling period of 1962 to 1981 (yup, it even beats 1929 to 1948 if you look at the handy 20-year chart from AllFinancialMatters blog on S&P500 Rolling Period Total Real Returns; call this the "financial death by inflation" period of modern history). The comparison of a conservative middle of the road portfolio - IFA's Index 45 - to the S&P500 shows the following:

1) Simple buy at the beginning and hold throughout
  • S&P500 - total return 15.56% or 0.73% per year compounded with standard deviation 14.72%
  • 45 portfolio - total return 68.34%, or 2.64% p.a. and 9.12% std dev
  • the portfolio got much higher return at much lower risk
2) Buy $1000 at start and invest $10 real per month ($120 annually) (i.e. rising with inflation)
  • S&P500 - total return 261.71% / 6.64% annualized and 14.57% std dev
  • 45 portfolio - total return 426.93% / 8.66% annualized and 8.88% std dev
  • the advantage of the portfolio is even greater than buy and hold
3) Retiree starts with $120,000 and withdraws $400 real per month (i.e. $4,800 per year = 4% of initial capital, which is the rule of thumb sustainable withdrawal rate)
  • S&P500 - same % return and std dev as for additions (it's just the mirror image); whew! the rule works as after the worst ever period, the S&P500 only investor has weathered the storm and the portfolio survived with a balance of $144,000 in December 1981and better times ahead, though he/she doesn't know it ... by 1991 the balance is up to $299,000
  • 45 portfolio - returns are higher here too and the end balance is $263,000; just for fun, I played with numbers to see how much could be taken out to end up with the same as the S&P500 - and the figure is around $6,300 per year, a whopping 37.5% more money for the retiree to spend! That is a 5.25% withdrawal rate. The money would have run out in April 1997, so a person could have spent 35 happy years in retirement.
IFA does tout that its funds and portfolios outperform on both risk and return what a DIY investor might be able to achieve using index ETFs or mutual funds like those of Vanguard so the actual numbers and potential withdrawal rates might not apply to an individual DIY investor. Nevertheless, the calculator provides a powerful argument for the value of holding a diversified portfolio.

Many thanks to IFA advisor Brad Von Grote who pointed out the calculator and spent a considerable time on the phone chatting with me. In case anyone wonders, IFA hasn't paid me to praise their calculator and I am not a client of theirs though I think a person could do far worse than sign up with them. I only wish they would create something similar for their Canadian audience.

Monday, 7 December 2009

Ordinary People Still Getting Squashed by Crippled Mortgage Market in Canada and UK

Today's Globe and Mail article Never missed a mortgage payment and still facing foreclosure about the nasty fallout on innocent responsible homeowners reminds me of a situation just as bad, if not worse, in the UK. A family member who has had a mortgage with lender Nationwide for the past two years is being refused a new mortgage for an attempted trade-up to a larger property. Like the unfortunate Ms. Matthews in Canada, this person has never missed or been late on payment, nor missed any payments on loans of any sort.

Worse than the Canadian situation, the person has an impeccable credit rating and a highly secure job. The reason given for the refusal of a new bigger mortgage - the person has used on a few occasions the planned overdraft facility on a bank account, an overdraft which was promptly paid back. It's ironic and laughable that a convenience which the banks happily provide and promote (for all the fees they garner) has been used as the excuse for the refusal.

I don't know for sure but I suspect that Nationwide in reality probably doesn't have the money to lend in the global aftermath of funding scarcity described in the Globe article. Even before the crash Nationwide had begun severely restricting mortgage availability according to the March 2008 Times article Nationwide shuts door on mortgage hunters.

The immediate consequence is one less house in Scotland that will be sold. We've gone from credit gluttony to credit starvation.

Friday, 4 December 2009

Expats - Where is Best to Live? Canada or Russia or Singapore? reported on a survey done by HSBC which discovered that Canada offers the expat the best lifestyle. Towards the bottom of the news item, there is mention of a second HSBC survey called Expat Economics 2009, which ranks countries for the best financial rewards for expats. Russia comes out on top there, quite a surprise, but is almost at the bottom of the list for lifestyle.

Which presents the obvious question, which offers the best overall combination?

HSBC Lifestyle Table

HSBC Economics Table

The country with the highest combined ranking is Singapore! It is number 4 in Lifestyle and 6 in Economics. Hong Kong is not too far behind.

Of course, which is best depends on what you are looking for. It seems a lot of retirees, who are not in the wealth accumulation phase of life, like Canada.

The UK ranks poorly in both tables. Expats have a hard time saving as living costs, especially housing, are too high. One wonders why so many people want to come to the UK.

The report says that the credit crunch and its aftermath have caused expats to, surprise(?), spend less and save more. More interesting is the finding that high income $200k+ earners put a much higher proportion of their savings and investments into shares, bonds, property, funds versus the heavy focus on bank savings by those earning less than $60k. One might say that at the time the survey was conducted - February to April 2009 - the big earners seemed to be taking advantage of buying opportunities. And how does one get to be rich / a high income earner - is it possibly by taking advantage of opportunities when they present themselves?

The other interesting indicator is that, as HSBC says, "wealth is moving east". Russian and Asia are the places to make big money as an expat. Europe and North America are falling behind.

One must note of course that HSBC admits that the survey was not scientifically conducted and may be inaccurate.

Thursday, 3 December 2009

Putting Financial Education on the Right Track's superb review (dare I say definitive critique) of the failings of current investor education programs leaves one quite depressed. It seems the result of investor education is that the average person is worse off!

Education doesn't work? At all, ever? The notion that education does not work is rather contrary to a foundation of the modern world. Saying it does not work today should not mean it cannot work.

One basic problem appears to be that current investor education programs, in the interest of being "fair" and "balanced" and presenting all alternatives, ends up suggesting that active investing, whether directly through stock picking and market timing, or through buying high-cost funds, gives the investor as good an outcome as buying and holding passive, whole-of-market, low-fee, index funds. The facts unfortunately deny such a position.

The fact is that government and regulatory organizations, who probably know the truth, are the ones in charge of investor ed. How can they be expected to say that a massive part of a huge industry is doing it wrong? It doesn't look like they are the right people to be leading the effort.

One of the interesting links from InvestorInfo is to the Financial Education Institute of Canada, a private company that provides seminars to employees. The Institute gets paid by employers. It emphasizes its product neutrality and gets the correct answer (index ETFs). We need more of that. Employers are a good path for providing better education to individuals.

There's another fix that employers are in a great position to implement. The most important investment money for individuals is their retirement savings, which flows through defined benefit or defined contribution pension plans at their employer. Two of the big faults of individual investors - 1) picking the actively-managed, high-cost funds and, 2) not saving enough - can be vastly improved through changing the default options in plans. Instead of some active fund, when a new employee enters a plan, make the default the index ETF. Defaults have been found in the USA to have a huge influence on participants' plan choices (e.g. download The Future of Lifecycle Saving and Investing conference proceedings and search for the word "default").

For the "not saving" bit, add another option: provide a little checkbox to have some or all of a pay increase go automatically to increased deductions for pension. Apparently our faulty brains find it a lot easier to commit future money than present money to savings. Money we never see we don't miss. Such defaults address one of the big gaps in making investor education useful in practice, namely that success is not just about knowing facts (like the differential performance of active vs index funds). It is also crucially about countering and avoiding bad reactions and decisions to which we are all subject, as behavioural finance research has embarassingly revealed.

Tuesday, 1 December 2009

Book Review: Investing the Templeton Way by Lauren Templeton and Scott Phillips

Reading a book about the investing methods of enormously successful legendary investor Sir John Templeton makes one simultaneously inspired and depressed. Inspired, because the exploits of any exceptional practitioner show that it is possible to succeed through skill, even in a field as notoriously difficult as the quite efficient investing markets. Depressed, because one realizes that such success requires a combination of hard unrelenting work and judgement in being able to separate essential from non-essential, noise from signal in the information over-load era where it is easy to get over-whelmed and confused.

This ability of Templeton to identify the correct piece of information struck me most in the account of his success in exploiting the tech bubble. Unlike many others who saw the tech bubble and tried to profit by short-selling, only to be squeezed out at big losses when, in that lovely phrase of Keynes, the market stayed irrational and kept going up longer than an investor could stay solvent, Templeton figured out the trigger that would finally cause the bubble to burst. At least as instructive is that he was 88 at the time - one of the book's lessons is that Templeton never stopped looking for bargains. I wonder if he lay on his deathbed in July 2008, thinking something like "shucks, there's a whole lot of easy money to be made very soon."

Investors looking for a detailed step-by-step investing manual filled with rules and checklists will be disappointed. This book is a high-level guide, more about the bargain mindset, the willingness to be different, to be ridiculed, to stick with a stock for years if necessary till its value is recognized, to be curious and questioning, digging through and beneath financial ratios.

However, it does include some of his rules of thumb:
  • look for countries with debt/GDP ratio of under 25% to avoid the risk that a country will have inflation and currency problems that will cause net investment losses
  • a rising/high level of takeovers in the market is an indicator of value - when competitors are taking each other out, they obviously feel they are getting a bargain
  • a high/rising level of IPOs suggest over-valuation as insiders decide to stick the public with the company at maximum price
  • sell a stock when there is an alternative available to buy that is 50% better price relative to intrinsic value
The book is filled with Templeton success stories. Yet is often said that one learns most from mistakes. I would have liked to see some discussion of his blunders and what was learned, or perhaps a longer review of one case, with its mis-leading data to be ignored and why it merited being ignored. Though it is certainly worthwhile and instructive as it is, the book ends up insufficiently analytical for my taste.

The text reads well and quickly. The smattering of charts and tables support the points being made without being overwhelming. It is a bit strange to find a few pages of Templeton family photos at the back, that probably being the doing of co-author Lauren Templeton, who is a niece (warning, there is a lot of reference to "Uncle John" in the text) and the owner of an investment firm. ... One wonders if niece Lauren is on the way to becoming ultra-successful and rich by Investing the Templeton Way.

Best quote: "... the most successful investors are defined by their actions in a bear market, not a bull market." i.e. they are buying by the truckload when everyone is terrified and the market is plummeting.

My rating: 3.5 out of 5

Many thanks to the publisher McGraw Hill for providing me with a review copy

Monday, 30 November 2009

Inflation in Canada Over-estimated by CPI

Those prone to suspect that the government low-balls inflation estimates can rest a bit easier. What a nice surprise to come across Measurement Bias in the Canadian Consumer Price Index, written in 2005 by Bank of Canada economist James Rossiter. It examines the various biases that affect published CPI numbers and concludes that CPI has over-stated the actual cost of living increase in recent years by about 0.6% per year. In other words, instead of the approx. 2% annual inflation CPI says we have been seeing, the real number is closer to 1.4%. That helps those on fixed budgets.

Of course, CPI is an average and no individual actually buys exactly the basket of goods in CPI, so some caution is in order. The sources of bias cited in the paper can perhaps help one in making an adjustment:
  • commodity substitution bias occurs, for example, when a real consumer notices a jump in the price of beef and starts buying pork instead (Michael James noticed a "swine flu special" on pork) but CPI continues to track beef the amount of beef consumed exactly as before. If you think pork and beef are not really equivalent, that such substitution is in effect a loss of real value, then subtract 0.15% from the 0.6% number above.
  • outlet substitution happens when you buy the same designer jeans at lower price at the outlet store instead of the high-priced retail store with the loud music. CPI takes a while to catch up to this shift retail patterns. Think part of the pleasure of the jeans is the music? Take away another 0.1%.
  • quality change bias might best be characterized by considering quality of the average car of 25 years ago compared to today. I for one prefer today's cars. If you really enjoyed the breakdowns and rust of bygone days, you can say inflation is not really lower by another 0.15% compared to CPI.
  • new goods, new services and new brands bias happens when the increased in standard of living resulting from the introduction of such new products and greater choices is not reflected in CPI. If you think such things as microwaves and cell phones have not enhanced your life, then take away 0.2%
The paper mentions on page 22 that estimates in other countries show a similar but slightly higher over-estimation - the USA around 0.8% and the UK 0.35 to 0.8%.

Overall, I am most skeptical about the first bias, commodity substitution, since when I am forced by price to buy downward, it isn't the same value, though I can imagine other substitutions where I would not care. The other biases do ring true enough, so I'm happy to accept that CPI really does over-state inflation.

Friday, 27 November 2009

Self-Regulation by Financial Advisors on Wrong Track

Fellow blogger and former financial advisor Preet Banerjee at WhereDoesAllMyMoneyGo has brought to my attention that financial advisors are threatened by more government regulation as a result of recent scandals and rip-offs by advisors. It is being suggested they self-regulate. Certainly preventing fraud by advisors is a primary concern because the client loses everything when that happens.

Whether it's government regulation or self-regulation, criminal fraud is not the only problem advisors have. The other big, somewhat hidden issue is what might be called abuse of fiduciary duty. Though seemingly not illegal, too many so-called advisors are nothing more than sales people in disguise, who fail in their moral obligation to do best by their clients by investing them in high-MER mutual funds on the basis of trailer fees and who provide little of value in the way of investing or financial advice. Advisors can be extremely beneficial for the investing public, but if the relationship is to be based on trust as the article says, then they need to work in the client's best interest first and not secondarily after their own fee income goals are met.

Tuesday, 24 November 2009

Stocks and the Long Term - Some Solid Research to Consider

It is a cliché that one should only invest in stocks if one has a long term horizon but often this advice is dispensed with a definition of long term using a number pulled out of the air or even without any number at all! Is long term five years, 10, 15, 20, 25, 30?

Thanks to the fine website (you will need to register to see content but it's all free and unbiased info) for uncovering some credible answers. As one should expect, there isn't a single number but a sliding scale of declining risk with extension of years invested. How Long is a Long-Term Investment? The 1 in 9 Rule summarizes the paper by economist Pu Shen of the Kansas City Fed, available at How Long is a Long-Term Investment.

Some of Shen's Discoveries
  • showing risk on the basis of a one-time investment at the start (the typical "if you had invested $10,000 in Fund X in 1970, it would be worth $ZZZZZ today") understates the chances of losing money; the more realistic scenario, where an investor puts in money gradually over time, which he calls repeated investments, took at least 24 years before a positive real return on stock investments was always achieved. Stocks = the Center for Research in Security Prices Index, an index for the entire U.S. stock market from 1926 to 2002. The one-time method always showed positive returns after only 19 years, a difference of 5 years. The reason is the net effect of two opposite forces - time diversification (which reduces risk) and shorter effective holding periods (which hurts). Check out Shen's chart 2 below

  • stocks never under-performed bonds (US Government 20 year bonds) after at least 26 years holding period (repeated investment method used), not exactly a mere blink of an eye.
  • though the risk of stocks declined progressively with longer holding periods, the odd time they did have poor results, and even after 20 years the worst stock vs bond under-performance was still quite a hefty difference - check out Shen's chart 5 below. Sobering data, I'd say.

  • quote: "Worse than investing in stocks right before a market crash is liquidating stocks shortly after the crash." (He says this in the context of people needing to retire then but of course a retired person does not typically spend all his/her money, or cash everything out, the day of retirement.) The worst possible 20 year holding period for stocks was ending in 1974 but from then on, there was a bumpy but ever-upward recovery. Moral of the story: hang on, don't panic, don't sell everything, try to sell as little stocks as possible after a crash - viz 2008 crash and 2009 recovery to date.
  • even after 25 years holding period bond investors only beat inflation 34% of the time!! Now that's what I call risky. Stocks always beat inflation over 25 years and beat bonds 99.8% of the time. Stocks for the long-term indeed.
She shows that it is very misleading and harmful to define the long term for stock investment as five or even ten years, such as this article does. One should also keep in mind that Shen's paper did not factor in the annual fund expense fees and tracking error that an actual investor would face. This would lower returns and extend necessary holding periods.

Monday, 23 November 2009

The TTC - What Is It with Government and Cost Control?

The Toronto Transit Commission is about to raise rates 10% and this Toronto Star article describes how about-to-be-poorer citizens have been accumulating tokens to lessen the impact of the fare increase. The implication is that these people are somehow blameworthy for doing so.

Nowhere does there seem to be a discussion of the justifiability of the rate rise. Why does the TTC history of rate increases going back decades illustrate a long-standing case of inability to keep fares in line with inflation? Look at this graph

taken from a link at TTC, the Costly Way, an interesting account of the TTC experience from a Toronto resident. Using the year 2000 as the base, the TTC's cash fare increase to the 2010 rate has been 4.1% compounded, while the Bank of Canada inflation calculator says CPI has gone up 1.95%. That's more than double the rate of inflation! Since the TTC is a public body, profit gouging cannot be blamed, it must be out-of-control costs, perhaps (?) due to an embedded bureaucracy at a monopoly service. If there's anyone blameworthy, looks like one must also include the TTC and the succession of City Councils that have overseen this chronic mess.

Thursday, 19 November 2009

Worthwhile Rule Changes to Ontario Locked-in Retirement Accounts

In what I would call an incremental but still very beneficial improvement, the Financial Services Commission of Ontario announced a few months ago in O.Reg. 209/09 that holders of LRIFs or old and new LIFs will be able, as of January 1, 2010, to unlock up to 50% of the account on a one-time basis. The unlocking can be a straight taxable withdrawal or a tax-free transfer into an RRSP or a RRIF.

O.Reg.209/09 also changes the maximum withdrawal calculation to either the old formula (under which the percentage allowed changes every year and is published in December by the FSCO - e.g. 2009 tables here in Schedule 1.1), or the account's investment return for the previous year, which ever is greater. In good market years with strong returns, that could increase the amount that can be withdrawn or transferred tax-free into a RRSP or RRIF. The annual maximum withdrawal/transfer is separate and additional to the one-time transfer.

These measures add flexibility and control for the investor since more can be withdrawn as needed or put into RRSP/RRIF accounts that are still tax-deferred but which have no limits on withdrawals. It also allows people like me with a number of separate locked-in accounts to consolidate by moving the Ontario plan assets into another existing account.

When one has multiple accounts, portfolio rebalancing gets awkward and complicated. I anticipate being able to reduce my Ontario LIRA, which I will soon convert into a LIF, to the point (in 2008 that point was officially $18,520 according to FSCO's Form 5, which is used to apply for the transfer) where I can ask for the remainder to be transferred into my RRIF under another rule which allows a 100% withdrawal/transfer for those over 55. The small amount rule applies only to the total of Ontario-regulated locked-in accounts so those who also have accounts regulated by other provinces or the federal government (hooray, that's me) are more likely to benefit.

FSCO's L200-302 details all the rules as of May 2008 regarding Ontario locked-in plans, including provisions for early withdrawal due to shortened life expectancy, becoming non-resident of Canada and financial hardship.

Friday, 13 November 2009

Book Review: Yes, You Can Time the Market! by Ben Stein and Phil DeMuth

Market timing is normally not my thing but after reading this book I accept that, Yes, you can time the market with Stein and DeMuth's method. The only thing is the method requires that you have the patience of Job and the lifespan of Methuselah. What investor would be willing to not buy / not invest in the market for 17 years waiting for the buy signal to begin flashing? The book's buy signal test was a red "no-go" for the whole time between 1984 and 2001, a period during which the S&P 500 (used as the US market proxy throughout the book) experienced huge unprecedented gains. Similarly, the twelve years between 1954 and 1966 was another long period for an investor to sit on cash or money market accounts according to Stein and DeMuth . The authors' goal to show conservative investors how to make money in the long run is truly vulnerable to Keynes famous quip that in the long run, we are all dead.

The Yes market timing method works as follows:
  • objective - determine when the US market is over-valued, in which case don't buy, or under-valued, in which case buy
  • assess over-/under-valuation with four real after-inflation metrics: price, price/earnings, dividend yield, earnings yield vs bond yields, price to sales, price to cash flow and Tobin's Q (a measure of fundamental value of companies; each individual metric works but several simultaneously saying Yes works even better
  • the current value of the metric is compared against the trailing 15 year average
  • valuation is applied against the market index only - the S&P 500; it is explicitly not proposed to be used for individual stocks
  • wait ten years or more (the longer you wait, the better, though their testing only goes up to twenty years) to achieve far superior returns than you will get whether investing at random as an average of years or on a continual dollar cost averaging schedule.
  • when signals are saying are saying No, it only means don't buy, it doesn't mean sell; you keep whatever stock investment you have and simply wait till the next buy signal.
This last point has caused other reviewers (e.g. at Amazon) to accuse the book of not really being about market timing. To be a market timing purist you must be jumping in and out and in etc, it seems. Similarly, the book violates another cliche image of market timing, that it is only about short-term timing in days, months or perhaps year to year, but not decades, which is the case here.

For the most part, the analysis and comparisons make a convincing case for the authors' thesis. Using 100 years of market data, rolling periods and looking at results after 5, 10, 15 or 20 years of holding after purchase builds confidence that the data was properly compiled. There is also economic logic supplied as to why the indicators should work.

Where the argument isn't convincing is the comparison of dollar cost averaging vs their market timing using 1977 as a starting point. In 1977 the buy signals were flashing so the market timer got their money into the game a lot sooner than the DCA investor. With a subsequently rising market, the market timer was bound to win.

It is very useful for the book to contain all the year by year tables of past signals, both buy and don't buy, along with subsequent results of the 5-20 year holding periods. That reveals a key fact - the market timing system did not produce great returns every time it said buy (e.g. buying in 1973 produced only a 251% gain 20 years later) , just as buying in many years when the system said it wasn't propititious to buy produced outstanding returns in subsequent years (e.g. buying in 1982 gave off a gain of 582% after only 15 years). The system appears to produce better returns on average.

Chapter 8 titled Using Market Timing contains a lot of very sensible cautious advice for investors, the antithesis of a get rich quick mentality that one might suppose a book on market timing might present - e.g. "Never make a "bold" investment decision; Don't think big; Don't make any sudden moves".

The book was published in 2003 so the data series stop too soon for us to find out what any reader wants to know - what is the situation today, is the market over or under-priced and is it time to buy? Fear not, the authors have continued to update the metrics on the book website As of Oct.30th, 2009, it shows for the S&P 500 - Price - Green! BUY!; P/E Ratio Red! Don't Buy!; Dividend Yield - Green! Buy! (They say also that data for several other indicators is no longer available.) That should mean it's a good time to buy.

Stein and DeMuth posit that their method should work on other markets, though they haven't tested. It might/should given its essence is to identify times when a market is clearly under-priced in historical terms. Of course, the method also rests on the assumption that the future will be like the past, that reversion to past means will occur.

My rating: 3.5 out of 5 stars.

Tuesday, 10 November 2009

Foreign Diversification Cognitive Dissonance

Take a look at this chart and tell me what the heck is going on?

Isn't diversification into foreign equities supposed to reduce portfolio volatility and increase returns through non-correlation and rebalancing? Yet the simple all-Canadian portfolio with 5% T-Bills, 30% All Canadian Bonds and 65% TSX Composite Equities would seem to have done about the same as an international portfolio with the same fixed income but with equity holdings of 25% TSX, 15% S&P 500, 15% MSCI EAFE developed country and 10% Emerging Markets. The cumulative compound return of the two portfolios after 22 years ended up almost identical - the Canadian portfolio at 250% and the International at 256%.

Twenty two years is starting to be a long time waiting for international diversification to help a Canadian investor. Is the data somehow wrong? I used financial advisor and frequent Financial Webring contributor Norbert Schlenker's downloadable time series spreadsheet from his Libra Investment Management website. The data (unique and no doubt compiled with considerable effort) has been adjusted for inflation and converted back into Canadian dollars from unhedged foreign holdings.

This graph goes against the conclusions in such classic books as Roger Gibson's Asset Allocation (my review) to the effect that international diversification helps considerably. Gibson figured things in US dollars instead of the Canadian dollars in this data. Is Canada somehow special and its equity market a mirror of an international portfolio?

Condo Real Estate

Author and speaker Gail Bebee of No Hype-The Straight Goods on Investing Your Money fame yesterday sent out her e-newsletter (just go to her website to sign up) with a link to an excellent guide to condo buying, whether as an investor or an owner-resident, by financial advisor Kurt Rosenstreter. Having once been a condo owner and board member, I can vouch for the sensible advice he gives. If the rental costs don't even cover interest on a mortgage these days, let alone taxes and condo fees, as in one example he cites, then it sure is time to rent rather than own a condo.

Saturday, 7 November 2009

Parallels between Love and Investment

Renaissance man Ben Stein ruminates about the similarities between a successful approach to love and to investing in the delightful Lessons in Love, by Way of Economics on the NY Times website.

One thing he forgot to mention is that being good at one does not automatically make you successful at the other!

Tuesday, 3 November 2009

Time for Portfolio Vaccine against Swine Flu?

Last year it was the banks the precipitated a market crash. This year will it be swine flu?

All of a sudden, swine flu is in the economic news. Today, GlobeInvestor's H1N1 sick days could hamper Canada's fragile recovery notes the potential for swine flu to make the economy sick. At the same time, CBC's headline article A perennial bull turns negative about the pessimistic outlook of market commentator Josef Schacter includes swine flu as a negative point in his outlook.

Perhaps my view is coloured by what I learned during the brief stint I spent in a former job helping to plan for a flu pandemic, but I am a bit worried too for a couple of reasons. First, there is the reality of a pandemic. By definition a pandemic directly makes sick an awful lot of people, up to a third of the population during the peak of an outbreak. Whether its kids or adults falling sick, a lot of people may take time off work to minister help. Whack! Take that, economy and stock market.

As bad as the real effect is, the panic effect could be worse. If stories of food and fuel shortages start appearing in the press, who knows what panicked people might do. Whack again, economy and stock market.

The key to avoiding all this is control of the outbreak. Thankfully, there is a vaccine, whose effectiveness is unknown but it could still work well if enough people are vaccinated according to Swine Flu Vaccine Predictions from the UK National Health Service. Enough people is a huge number - "... only 70% of the population would need to have the vaccine to reduce the impact of the virus to that of a relatively mild seasonal flu epidemic". 70% means about 0.7 x 33 million = 23 million people in Canada need to be vaccinated but the total so far is only 1 million according to the Montreal Gazette. The reference to striking increases in flu activity is alarming. Official statistics on actual infection rates are hard to get. The national Public Health Agency seems to publish only the number of deaths, which thankfully is low, but that doesn't help too much since the main impact of low-mortality rate swine flu is sickness not death. We are left with Google's Flu Trend indicator, which it claims tracks actual cases quite accurately. Below is a screenshot of today November 3, 2009.

Yikes!, an almost vertical upward trend, except for Quebec, which is different as ever and totally blank for some unexplained reason. I've been watching it for the last month as the country turned bright red, not an indicator that the Liberals have finally won an election, but the sign that things have gone as bad as the scale goes.

For an investor, what happens in the USA matters greatly and the Google trend there is pretty high too. The World Health Organisation provides weekly updates on its H1N1 portal for all parts of the world and swine flu seems to be advancing everywhere to differing levels of intensity though the data's usefulness is suspect since many countries have stopped reporting individual cases. The Pan American Health Organisation publishes a very cool inter-active, but useless (due to stale data), map of swine flu.

A portfolio equivalent of vaccine in this case is to use put options on market ETFs such as XIU in Canada and VTI in the USA to shield against a market downturn. That protection can be secured by buying a 90 day put. A flu pandemic might last a few months, it doesn't last forever and since the death rate is low (barring an unpredictable mutation that changes it) for this swine flu, the bad effects also won't last forever either. Is it still worth buying put options?

Given the relatively high likelihood of a temporary flu-induced market sneeze, it is very tempting to play the speculator and really go "whole-swine" into puts. On the other hand, since I expect to be invested in the market for many years hence, the dip will not harm me in the long term.

What to do, what to do ... just accept the discomfort since the chances are low for a fatal infection to my portfolio, or try to make some money predicting the short-term future.

Thursday, 29 October 2009

Contracts For Difference for Canadian Retail Investors: Beware!

Last Sunday, GlobeInvestor posted the news that henceforth Canadian retail investors in Ontario and Quebec would be allowed to open accounts to trade in Contracts For Difference (CFDs). As Wikipedia describes, CFDs have long existed in the UK, Australia and elsewhere but not in the USA.

In a CFD, the investor bets against a market making broker, in Canada's case CMC Markets, either that a stock or other security will go up, by going long, or that it will go down, by going short (see CMC's examples for how it works). The amount the stock moves away from the price at the time of taking the position/contract to the sale is the difference and that determines the investor's loss or profit. The key unique characteristic of CFDs is the huge amount of leverage they entail, which creates an enormous bang for your investment buck - good or bad. CFDs are essentially a way to get rich or go broke at warp speed. Due to the magnification effect of leveraging, unlike regular stock purchases, you can lose far more than your initial investment.

Since CFDs do not have an expiry date, unlike options which do expire, it might be thought that a retail investor with a long term perspective might for example, simply buy the TSX index long and hold on till the market eventually rises, making sure to keep plenty of cash around to meet the almost inevitable calls for extra cash to maintain margin requirements. However, there's a catch - long positions are subject to a daily interest charge as long as they are open. It is as if one has borrowed the whole amount (see section 2.1 of CMC's rates and fees). The interest rate on the notionally borrowed money is currently low - about 2.8% annualized by my calculation (just a bit less than discount broker BMOIL's 3.5% interest rate on margin debt and a bit more than the TSX 60's current dividend yield of 2.7% ... raising the question, unanswered on CMC's website, whether the Canadian version of CFDs pays out the dividend to the long investor as is the case for CFDs in the UK for instance) - but it still lowers returns and creates a disincentive to anything but short-term speculative day trading with CFDs.

The supposed hedging value of CFDs is minimal. If one takes an offsetting short CFD to balance against a long stock position one already holds, then one simply freezes the total value (excepting the inevitable costs) of the two holdings since a rise or fall in the CFD simply mirrors in the opposite direction the stock holding's movement. Most people think of hedging as downside protection, not both downside and upside. An investor is better off with a straight put option or a stop loss order.

About the only party sure to benefit from CFDs is the market maker CMC Markets, from collecting the bid-ask spread on buys and sells, the interest on open positions, trading commissions and other charges. It is ironic that CMC's website links to this Financial Post story which says that the founder and CEO of CMC Peter Cruddas is London's richest man (interesting isn't it that he is at the top of the Times 2009 online richest list just ahead of a some online gambling site owners). That's where you money will go folks unless you are one of the lucky few who play and win the CFD lottery.

Tuesday, 27 October 2009

TFSA Account Adoption Creeping Steadily Up

RBC has just released a survey that shows the number of Canadians opening TFSA accounts is climbing steadily and is now at a quarter of eligible (18+) Canadians. Back in April Jonathan Chevreau had reported in his Wealthy Boomer blog that 20% had opened accounts to that point. The good news is that most people - over 70% - are mostly aware of the TFSA. Hopefully, the slow to act will soon join the list ... hint to some members of my family!

It was a wonderful coincidence that the January 1st start-up date more or less marked the bottom of the equity slump so those who were quick to jump in have seen a very healthy return so far - my initial $5000 evenly split between XIU and XMD has risen 33% or so since my account opened in February, a great tax-free return.

Maybe more Canadians should be a little more adventurous than the cash savings and the GICs that dominate TFSA account holdings according to RBC. Interest rates are so low that there isn't much point to tax-free savings if there isn't any income generated. RBC's headline to its press release - Why aren't Canadians taking advantage of tax free savings accounts? - is true in more ways than one.

Friday, 23 October 2009

Friday Fun: How Much do Pro Golfers Make?

Ever notice how the sports reporting on the winners of golf tournaments says little or nothing about how much money pro golfers make? In these hard economic times it isn't wise to rub it in how much these guys and gals make.

Canadian Business / MoneySense in Golf Earnings 2009 has dug up the data and done a bit of calculation to make us envious. Isn't it a hoot to know that Tiger earned $4191 for each stroke he played?!! It really puts in perspective the three hacks it took me to get out of a sand trap in a recent round. I calculate my $$$ per round not in revenue but in cost - green fee and lost balls.

Worse, as much as these guys make on the course, it is the off-course endorsements and related business (like course design) that their competitive success makes possible which really brings in the dough. It is astounding that Woods in his career could make $1 billion from golfing.

Thursday, 22 October 2009

Government Ban on RRSP - TFSA Swaps Revisited: One Red Herring and the Real Problem

Sometimes I'm a bit thick and it takes a while for the real reality to distinguish itself from the illusory reality.

The Illusory Reality: Yesterday I noted the scenario mentioned by two other bloggers - see here and here - for supposedly moving funds tax-free from an RRSP to a TFSA. The illusion is that the investor moved funds but what has actually happened is that the investor made a profit on an investment in the TFSA account and made a loss in the RRSP account. To see this, it is only necessary to remember that the exact equivalent result could be achieved by simply buying and selling on the market instead of doing a swap. In fact, a swap is just that - instead of the investor buying or selling on the open market, his accounts buy and sell to each other.

Another tack is to think of it in the investor's shoes - after the stock price rises in the TFSA, you are $XXX better off in total wealth. Would you really want the stock to decline after your RRSP buys it so that the TFSA can buy it back? After the round trip of swaps and the stock decline, the investor has less money in total than after the TFSA made a profit. The TFSA is the same but the RRSP is worse off. In any case, there is no guarantee that the stock will happily fluctuate up and down within the range needed to come out ahead on a net basis. That's why day trading is a highly risky proposition.

This non-problem is a manifestation of the sunk cost fallacy. At each step of the process, the investor is faced with a clean slate and a new decision about how to invest. The past, however recent, is irrelevant. I certainly hope the Department of Finance policy is not meant to stop this kind of investor operation because the government would then be taxing the profits of normal risky stock purchases and sales.

The Real Reality: The real problem is revealed in the discussion on the Financial Webring TFSA thread. It is the fact that the tax rules allow an investor to choose which price within a security's trading range on the day of the swap to have applied to calculate the value of the swap. The difference between the high and low price is what generates the tax-naughty riskless profit for the investor who has eliminated the market risk through judicious use of options. A more volatile stock, or a volatile day to perform the swap, is better because it produces a higher high-low spread and that increases the risk-free profit. Options also use less capital than straight stock, which boosts the returns.

That being the case, the Government would seem to be engaging in throwing out the swap "baby" with the dirty hi-lo price "bathwater". Instead of banning swaps (which doesn't make sense anyway since direct stock trades can effect the same outcome) or changing the rule that any price during the trading day when the swap takes place may be used to value the transfer amount, either declare that two-way swaps of the same security will automatically be valued at the same price within the same day, or perhaps within 30 days in a manner akin to the superficial loss rule. There's even a catchy name to give it - the superficial swap rule.

Wednesday, 21 October 2009

TFSA Ban on Asset Swaps with RRSPs

Updated later in the day - see red text.
The proposed new rules to eliminate potential abuses of TFSA accounts announced the other day by Finance Minister Flaherty includes one strange rule (see the Department of Finance's Backgrounder section on Asset Transfer Transactions) that bans swaps between TFSAs and registered accounts like RRSPs, LIRAs, RRIFs.

I must admit I was puzzled since I had not previously seen anyone proposing a way to avoid taxes by doing a swap.

There seem to be several explanations of what the rule prevents:

  1. A visit to the Financial Webring where all the usual suspects gather and gleefully point out such tax "work-arounds" uncovered in a TFSA thread a post by Marty123 on Oct.20th detailing a highly sophisticated strategy using massive over-contributions and options.
  2. Blogger Michael James on Money's post TFSA Abuse shows another scheme that seems to fit the bill.
  3. The Canadian Tax Resource blog gives a similar example to Michael's.
Perhaps it is the space limitations of traditional media but the clear online examples put to shame the ambiguous description in the Globe and Mail article on the subject.

My direct question to the Department of Finance for an example has yet to be answered (stay tuned for what they eventually tell me). Here is what they said: "The idea would appear to be that overall, advantage is rarely gained but the scheme is such that a large number of small swaps, particularly involving volatile stock, could enable capital gain to exceed tax liability, using financial software and hedging strategies."

In this first year of the TFSA when the contribution limit is only $5k, it is likely Michael's strategy would hardly be worth it considering each swap is charged a fee by the broker ($45 flat fee per security swapped at my discount broker) and it would eat up much of the tax savings. However, down the road when accumulated TFSA room gathers bulk, the benefit becomes more attractive.

Yet to be confirmed also is the import of the tax penalty. The Department of Finance phrase is: "TFSA amounts reasonably attributable to asset transfer transactions will be taxable at 100%." I would think that what it means is that you would be taxed on whatever "excess" you had managed to transfer - the $1000 in Michael's example - at your normal marginal tax rate i.e. just as if you had withdrawn the $1000 directly from the RRSP, and not at a 100% tax rate, which would amount to confiscation by the government of the excess shifted, an action that even for the government is a tad harsh. " Update: I was wrong, ouch! quote from an official spokesman of the Department of Finance - "No it’s not the marginal rate, it’s a levy of the full amount of the *gains*. It won't matter much anyways since the brokers will all block any sort of swaps with TFSAs and registered accounts.

I wonder if the government will now ban swaps between locked-in registered accounts and non-locked-in registered accounts since the same technique Michael describes could be used to move value and unlock locked retirement money.

Monday, 19 October 2009

Book Review: The Secret Language of Money by David Krueger with John David Mann

I like this book. Reading it made me reflect, it explained puzzling human behaviour about money and investing with a neat combination of physical and psychological science and good stories, it gave me practical, implementable advice to, as its subtitle says, "make smarter financial decisions and live a richer life".

The book provides a welcome new approach to improving our own investing and financial success. Unlike the general run of investing books written by economists, mathematicians, engineers, author Krueger formerly practised as a psychiatrist and is now an executive coach. Instead of the facile and useless "just say no" kind of thought that seems to follow from the huge catalogues of irrational investor behaviour (e.g. see Behavioural Finance), Krueger offers ingenious solutions to defeating to defeating our own bad tendencies. One I laughed at is his suggestion to counter impulse spending on a credit card by freezing it a block of ice.

Money is such an essential part of our lives (quoted in the book is the statement of Albert Camus: "It is a kind of spiritual snobbery that makes people think they can be happy without money.") that even one practical thought that a reader actually does something about will make its price more than worth it. And the book does cover a lot: basic attitudes, emotions about money and its alignment with life values and goals, aka our money story, debt, reckless spending, scams, bubbles. Find out why everyone, no matter what their income, thinks that about twice their current income is what it would take to make them happy (oops, caught me too!) and then what to do to make the numbers match up better so you can stop having money be a source of anxiety and become merely the means to an end that it should be.

  • re out of control spenders: "The spender's true goal, whether it is affection, intimacy, prestige, esteem, comfort, or connection, is something that money cannot buy."
  • "A balanced healthy approach to spending means using your money in those ways that best serve your values and your goals in life."
  • "Cons work because they tell us what we want to hear."
  • "... the graying of America has created a bull market on fraud" because the part of the brain that is most useful to detect the irrationality of scams, the pre-frontal cortex, tends to wane with advancing age
  • "Success has less to do with skills and intelligence than with a mindset." ... phew!, I was worried there! I'm not making fun of this statement. The story on page 55, which I presume is true, about the two anthropologists who have totally different outcomes in an experiment because of a difference in mindset struck me as powerful illustration of what I have observed so often - people who succeed but should not have based on "rational" factors and others who fail when by all rights they should have succeeded.
  • "Focus your energy on where you are headed rather than where you've been."
  • "Why do we keep walking the same path over and over, as if "trying harder" will make the critical difference - when we know very well where it is almost to lead?"
My main quibble is that some of the suggested cures to investing-related mistakes seem weak, too general or not very relevant.

Maybe another edition in future will beef up that part but in the meantime this is an excellent book in my opinion. 4.5 out of 5 stars.

Thanks to McGraw-Hill for providing me with a free copy to review. Check the book's own website to get a flavour of the book with some substantial content.

Other bloggers have reviewed this book too: Thicken My Wallet, Michael James on Money here and here and Million Dollar Journey

Friday, 9 October 2009

Canada's Place in World University Rankings

How do Canada's universities rate when compared with the best in the world. Pretty darn good, I'd have to conclude after looking through the just-published latest Times Higher Education - QS World University Rankings 2009. The ranking are based primarily on ratings of 9300 academics around the world, along with, in order of declining importance, research productivity, student-faculty ratios, employer reviews and proportions of international faculty and students.

  • Canada took 11 of the top 200 spots, better than many other countries with much larger populations, like Germany with only 10, France with 4
  • Canada had 12 in the top 200 last year - apparently Asian universities are moving into the top rankings displacing mainly US universities (and what longer term effects will the recession aftermath do to further erode that result?) - competition is hotting up and Canada has no cause for complacency as all but McGill and U of T moved lower in the rankings. See also the 2008 vs 2009 table
  • the USA (54 of the top 200) and the UK (29) dominate the world higher education business, with all of the top ten between them and 18 of the top 20
  • in terms of "punching above its weight" in terms of population, Canada is 3rd in the world, at a ratio of about 0.33 (11 universities for a population of 33.8 million) behind the leader UK (ratio 0.47) and Australia (ratio 0.41); the USA is way behind at a measely ratio of 0.18; if one subdivides the UK as Scots are fond of doing(!), wee Scotland with only five million people has the highest ratio of all with 4 universities in the list - ratio = 0.8! ... too bad it doesn't have a very good football team, so everyone could be happy...
  • McGill is the best university in Canada and number 18 in the world, followed by:
U of Toronto (29th),
UBC (40th),
U of Alberta (59th),
U of Montréal (107th),
U of Waterloo (113th),
Queen's (118th),
McMaster (143rd)
Calgary (149th)
Western (151st)
Simon Fraser (196th)
These Times-QS rankings correspond fairly well with those of Maclean's magazine, which also put McGill on top amongst the medical/doctoral schools, though Queen's is second there and Dalhousie, Saskatchewan and Ottawa rate ahead of Western.

Thursday, 8 October 2009

Thoughts for the Active Management Mutual Fund Industry

Ottawa Business Journal wrote about the new Investment Partners Fund which has a completely different fee structure from the usual 2% or so annual MER charged by the average Canadian equity mutual fund. The fund managers will only charge a fee if returns exceed 5% in a year. If the fund loses money or makes weak returns, no fee! Over 5% return, they will charge 0.25% for every 1% (or part) return. If the fund was to get a 9% return, which would be quite an achievement, that would be a 1% fee for the year, pretty darn reasonable.

Only thing the article doesn't mention is whether the fund may or will use leveraging (borrow extra money) to try juicing returns, which of course the managers have extra incentive to do. I'd certainly want to see a restriction on borrowing in the fund policy. Otherwise the risk of loss goes way up. Make it a pure stock picking challenge.

Unfortunately the fund is only open to accredited investors, i.e. rich people or professional investors.

But it does offer an idea to our over-charging fund industry.

Financial Times Video Interview Series on Future of Investing

In this October 2nd video interview in the Financial Times, the CEO of BlackRock (world's largest investment managers) Larry Fink says that investing opportunities in the next 5 to 7 years will be more attractive outside the USA. He sees on-going high unemployment, government budgets and slow economic growth constraining investment success.

Another of the FT series on the future of investing interviews Henry Kaufman, described as an elder statesman of Wall Street. He talks about the sources of the credit crunch crisis. It is evident that the causes are still there - huge financial concentration means institutions that are too big to fail, which they know of course, allowing them to take inordinate risks in pursuit of profit, which they have done and will do again, since the appetite for reform is now fading as markets and economies begin to recover. Meanwhile, a big cause of the original crisis - cheap money aka interest rates at zero - is still there. All of which means another crisis is down the road, But what happens if governments are still labouring under the large debts they assumed in bailing out the last crisis?

A priceless moment in this interview occurs when the interviewer asks Kaufman, who has just said he thinks institutions should be allowed to fail as a means of keeping them from taking too many risks, whether he thinks it was correct that Lehman was allowed to fail. Kaufman happens to have been on the Board of Lehman at the time. Delight as we might at Kaufman being hoisted on his own petard, we might ask where was the line between having to make less than ideal decisions while firmly holding one's nose and self-serving favoritism.

Yet another interview with Daniel Putnam of Grail Partners predicts that retail investors will see more and more complicated products, like mixes of active and passive, guaranteed and not guaranteed, personally tailored for each person. Bye, bye mutual funds, hello structured products. I see a great danger that individual investors won't be able to understand them and the providers will take the opportunity to build in very handsome profit margins. Will regulators step up to ensure that investors receive enough understandable information to make intelligent decisions about whether he/she is being offered a fair deal?

There are also interviews with Benoit Mandelbrot of (now growing in fame) Mis-behaving Markets doing an "I told you so" and a series of principal players in the Lehman Brothers collapse doing "it wasnae my fault" for the first year anniversary of the incident that confirmed that some financial institutions really are too big to fail.

Wednesday, 7 October 2009

Scam and Investor Fraud Alert Sources

DIY investors have to be on their toes against scams and frauds, perhaps even more than ordinary advisor-guided investors (though some might want to debate that point). Here are few online sources I've found to help check out current known illegal schemes.

  1. Ontario Securities Commission Investor Warning List
  2. Alberta Securities Commission Investor Watch page
  3. Canadian Securities Administrators Disciplined Persons search tool and Cease Trade Orders database covering all provinces
  4. BC Securities Commission's InvestRight website has a heading Scams in the News on the home page, an Investment Caution List and an Alerts and Watches
  5. PhoneBusters (sponsored by the RCMP, the Ontario Provincial Police and the Canadian government Competition Bureau) posts more of the "breaking news" type warnings including the dastardly Puppy scam
  6. Quatloos "A public educational website covering a wide variety of financial scams & frauds"; blog and discussion forum includes a lot of US and international content
  7. has North American content

Tuesday, 6 October 2009

UN Praises Canada

The latest UN Human Development Report rates Canada as the 4th best country in the world for its overall success in achieving well-being for its citizens. The UN defines well-being as a combination of three things : "living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and gross enrolment in education) and having a decent standard of living (measured by purchasing power parity, PPP, income)". 4th is the same position as in 2004.

I daresay that since the data was compiled in 2007, Canada will have moved up into 3rd at least since number 3 Iceland's woes in the 2008 crash would have put a big dent in its standard of living.

Note that the USA is 13th and the UK 21st in the ranking. It is nice also to notice that the upward trending lines of the total averages suggest that the world is becoming a better place to live!

The chronically grouchy CBC doesn't even mention Canada's outstanding result, choosing instead to play up the negative with its UN Calls for Better Deal for Migrants. In contrast CTV highlights the UN's praise for Canada's immigration policies.

Friday, 2 October 2009

Surprising Facts about Scams

Bet you didn't know this:
"... scam victims often have better than average background knowledge in the area of the scam content."
"... scam victims report that they put more cognitive effort into analysing scam content than non-victims. This contradicts the intuitive suggestion that people fall victim to scams because they invest too little cognitive energy in investigating their content, and thus overlook potential information that might betray the scam"
" ... People who show above average vulnerability to scams do not seem to be in general poor decision-makers, for example they may have successful business or professional careers."
"... some people become 'chronic' or serial scam victims:"
"... victims are often acting against their own better judgement: with some part of their minds they recognise a scam for what it is."
Source: The psychology of scams: Provoking and committing errors of judgement a University of Exeter study sponsored by the UK Office of Fair Trading released in May 2009
If you don't believe the research read the cautionary tale Why we keep falling for scams in the Wall Street Journal, written by Stephen Greenspan a university professor psychologist specialized in (studying about) gullibility. Of all people, he was one of Bernie Madoff's victim investors and uses himself as a case study. His interesting conclusion - spreading assets and savings around is a way to reduce the risk of losing all through unforeseen disasters such as a scam. Works for investments in general too, I'd add.

David Krueger's recent book The Secret Language of Money (which I will soon review) also discusses how scammers ultimately depend on our complicity and emotional responses overwhelming our rational brains. He cites one clever investing scam that I've not seen described before. He calls it the Uncanny Forecaster Scam. To get the trust and confidence of the victim, the scammer posing as a broker calls 100 people and tells half that it will go down and the other half that it will go up. No investment is asked for yet. Then he calls back the half for which the answer was correct and again tells half that group that it or any other stock will go up and the other half that it will go down. Presto! Half will be right again! Then he calls back the targets who are by now impressed with his expert forecasting and suggests they send along $25k or whatever for another suggested investment. Bye bye money.

I like one scam avoidance guideline in the Exeter study: "... if you
think an offer might be a scam, it almost certainly is – your gut instinct is almost invariably right."

One mental antidote to scams might be to adopt what might be called the government bureacracy decision-making rule - avoidance of error at all costs: be so skeptical that nothing is ever approved if there is the slightest chance that it could go wrong.

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