Sunday, 21 December 2008

If I'm So Smart, Why Am I Not Rich?

Today I came across an amusing little tool for bloggers called the Blog Readability Test. It supposedly tests the level of education required to read a blog. Being ever skeptical, I plugged in a few other blog addresses to see if everyone gets a high rating (as you can too if you click on the logo at the bottom right side column below) and found one Canadian blog that comes out at the junior high level.

I am a bit chuffed but at the same time disappointed to discover that this blog rates at the "genius" level. Everyone, me included, likes to be called smart but I think I may defeating my own objective to explain simply and clearly what I discover on my exploration of personal finances and investing. The best teachers and writers make the complicated seem simple by the skill of presentation. Obviously I have a long ways to go. It is notable that professional journalist blogs of Jonathan Chevreau of the Wealthy Boomer and Larry MacDonald of Canadian Business both rate at the college undergrad reading level.

The other thing it reminded me is that being smart is no assurance of getting rich, even if you try to apply all your intelligence. (A lot of very smart people in the financial industry have been rapidly becoming un-rich in the last year or so)

The converse is true as well, I believe you don't need to be smart to become rich investing. One such way to do it without smarts is luck, of course, but the small number of lottery winners probably approximates how many lucky investors there are.

Over-thinking and over-analyzing can be bad. The TV quiz show Who Wants To Be a Millionaire once featured university prof contestants who didn't do any better than the average person on the show, most of whom I daresay do not have the same level of education. One memorable literature prof talked himself right out of the correct answer which he knew by introducing low probability doubts and counter arguments. The world doesn't give perfect and complete information and opportunities don't often stay around for long. The most successful investors seem to have the right combination of decisiveness and courage combined with judgment that focuses on the variables relevant to a situation. Those qualities are not a function of education or book-learning intelligence, though they are thereby enhanced.

Another key quality that I believe helps anyone, smart or dumb, attain wealth is effort and attention. Author Malcolm Gladwell in his new book Outliers apparently says 10,000 hours is the amount of effort required to reach genius level in a field. However, with investing merely being expert is not enough as the game is never over and those who rest on their laurels may find them disappearing.

Wednesday, 17 December 2008

Book Review: And The Money Kept Rolling in (And Out) by Paul Blustein

A brilliant book in every way - as exciting as a movie thriller, as intricate as a detective story with multiple intertwined plot lines, as gut-wrenching and sad as a human tragedy that could have been avoided, as fair and detailed as a commission of enquiry into a man-made disaster - this book about Argentina's financial and economic collapse in 2001-2002 is a must-read for anyone interested in the current financial and economic crisis. Though written in 2005 before the crisis started, Blustein takes a few pages to talk about relevance to the USA and states outright: "It could happen here. Americans who give Argentina's story fair consideration and conclude otherwise are deluding themselves." ... or maybe, it's already happening here?

The technical reasons for Argentina's accumulation of a crushing debt load on which it eventually defaulted with dire consequences are fairly straightforward. In his words, "They spent more than they should have, taxed less than they should have and borrowed more than they should have..." while living within the dollar-peso convertibility currency system that required much stricter fiscal discipline.

The individual and collective (both organizational and societal) human reasons that created and exacerbated the technical reasons are the really fascinating elements and this is where Blustein excels at digging them out and presenting them in a gripping story. Self-interest, groupthink, willful blindness, self-deceit, avariciousness, stupidity, panic reactions, vanity, political expediency, official misinformation and spinning, ideology, gamesmanship, it is all there in various people and organizations. The author doesn't pull punches in his criticisms but there aren't many who escape blameless. The IMF, Wall Street investment banks, the US government, the Argentine government, even to some degree the Argentine people, share the burden of responsibility.

The book is not an "anti-" diatribe, whether it be anti-globalization, anti-IMF, anti-privatization, anti-Americanism, anti-capital, anti-bailout or even anti-debt (though it clearly shows that too much debt is a recipe for disaster). He says, "Policies such as open trade, privatization, and deregulation were not responsible for the events that brought Argentina to such a pitiful state."

For those who wonder why our governments are currently so anxiously propping up banks and trying to get credit flowing again, "... The nation's banking system was ceasing to perform its vital role as a provider of credit and dispenser of payments, the result being an accelerated contraction in all sorts of economic activity" and "... the shortage of funds spread through the economy like a debilitating virus". The latter is especially in play at the moment. For example, part of the reason for the 45% drop in GM's sales is lack of credit to buyers wanting to buy vehicles even if they are perfectly qualified good credit risks. And look where GM is today. A company with problems suddenly is a company in crisis with insurmountable problems. Same goes for home buyers, if trying to get a mortgage isn't possible, few can buy, prices decline etc.

The helicoptor departure scene in the prologue, where an IMF banker flies out of the country having informed the President of Argentina that the IMF will no longer provide support, abandoning Argentina to inevitable default and collapse, makes a striking image worthy of a movie. Hollywood, where are you?

My rating: Five out of five stars.

Tuesday, 16 December 2008

An Exceptional (note Canadian understatement) Year in the Stock Market

Economist Greg Mankiw posted a histogram chart of the S&P 500's returns this year compared to every year since 1825 that dramatically conveys how unusual it has been so far. The only year as bad as 2008 is 1931, the depths of the great depression. Of course, the year isn't over yet but how much stock market recovery can we hope for as the downward slide of the economy continues apace?

Sunday, 14 December 2008

Origins of the Financial/Economic Crisis - One Chart!

A nice compact flow chart explaining the current mess the world finds itself in can be accessed at Jeff Frankel's Weblog in the post Origins of the Economic Crisis - In One Chart!

Friday, 12 December 2008

Real Return Bonds Correlation and Current Prices

Reader Jordan posed a very good question in the comments of the previous post: " Does a real return bond have the same level of negative correlation to the stock market like short term bonds?" The answer in the research appears to be an emphatic No, they aren't like short term bonds in correlation to equities. The answer is even better!

Real return bonds are uncorrelated to both equities and other bonds. They are different enough to function as a separate asset class, which is exactly what the investor who uses asset allocation to manage his/her portfolio seeks.

ByloSelhi has an excellent page on RRBs; his links include a number of papers that have looked into this very topic. Bylo provides snippets of key conclusions to skim. For instance, the 2004 Kothari & Shanken paper says, "... We found that the real (inflation-adjusted) returns on indexed bonds are less volatile than the returns on otherwise similar conventional bonds. Moreover, the correlation with stock returns is much lower for the indexed bonds. An examination of asset allocation among stocks, indexed bonds, conventional Treasuries, and a riskless asset suggests that substantial weight should be given to indexed bonds in an efficient portfolio."

Here's an eyeball version of non-correlation in this chart from Google Finance showing the iShares real return fund XRB plotted against the TSX, the iShares short-term bond fund XSB and the whole market bond fund XBB. It's only short-term (3 years or so) but one can see the lines don't follow each other closely.
The recent decline in price reflects the recent increase in yield to around the 2.5% level - see CanadianFixedIncome.ca's current rates in the Real Return tab at the bottom of the page.

Buying an RRB with the intention of holding to maturity means that such price swings become irrelevant - the yield you get is that at which you bought - come hell (inflation) or high water (deflation).

With the yield difference between the regular Canada bond of 2025 maturity and the Canada 2026 RRB being only 3.79% - 2.64% = 1.2%, or the implied rate of inflation during that time, the RRB looks to be a good buy to me right now.

Wednesday, 10 December 2008

Fees and Deals on TFSAs at Banks and Discount Brokerages

The TFSA starts January 1st, 2009 and it's time to pick one. But as usual, though the tax rules are the same for all the way each bank and broker implements and charges fees can vary. Rob Carrick warned about fees and provided some numbers in this Globe article. CanadianCapitalist summarized the range of options for TFSAs in this post.

Being the type of guy who always wants to compare options and find the best deal I have taken Rob's work a little further and done some browsing and phoning to make up a little spreadsheet that shows what I have found. Given the sorry state of information flow within large financial institutions to both customer service reps (a blogger does not have access to the insiders with the exact knowledge or authority so one gets the "real customer experience" in trying to dig up information) and websites, some of this info may not be correct.

The Best Deal in my opinion is .... Outlook Financial's 5% 5-year cashable GIC. When I phoned earlier today the rep assured me that one can lock in the rate today even though the money can only go into the account as of the legal start day of January 2nd. The astute will observe that Outlook has an ad on my website so you can be sceptical about my motives for recommending them but I invite you to try finding a higher GIC rate. Go to Canoe.ca Money Rates for GICs do the sort from high to low and Outlook's is the highest in Canada bar none. The only slight downside is that the guarantee for payment of principal and interest comes not from CDIC but from the Credit Union Deposit Guarantee Corporation of Manitoba. If the CDIC safety net is a requirement for you, then National Bank's 4.1% 19 month GIC looks attractive, as does Bank of Montreal's 4.3% 3-year promotional offer.

The bottom line for the discount brokers is that there is little to distinguish them with respect to TFSA alone. My own broker BMOIL is the only real outlier with a fee of $25 per withdrawal. The big drawback for all the brokers is the presence of hefty $125-135 fees for transferring an account to another institution. Among the things to consider:
Some brokers are not even offering TFSA accounts, like QTrade rated #1 in the Globe ranking or E*Trade (that's why they aren't on my spreadsheet). CIBC Investor Edge's offering is coming "March-April" 2009 while ScotiaMcLeod Direct will only have application forms ready (and confirmation of fees) on Dec.22nd.


Whatever you do, go open a TFSA as soon as possible, especially before the unholy alliance of Libs/NDP/Bloq gets into power and starts reversing the "errors" of the Conservatives. Who knows how long the TFSA might last.

Credential Direct's Great Guide to Using The TFSA

The best explanation I have yet come across for how to use the new TFSA is Credential Direct's brochure. In 12 big print pages, complete with yellow smiley faces, it clearly and simply explains when to put money into a TFSA or an RRSP/RRIF, and at what ages and stages of life - start of career to home buying to education to after retirement - to use each.

Tuesday, 9 December 2008

Five Personal Finance and Investing Books for Christmas

Wondering what to buy for Christmas for someone who is, or should be, interested in personal finances and investing? Here are some choices I've enjoyed reading and highly recommend.

  1. No Hype: the Straight Goods on Investing Your Money by Gail Bebee - the place to start if all you know is GICs or mutual funds; explains all types of investments and accounts with a practical, readable style
  2. The New Investment Frontier III by Howard J. Atkinson with Donna Green - the ins and outs of the increasingly popular exchange traded funds for Canadians
  3. All About Asset Allocation by Richard A. Ferri - how asset classes like stocks, bonds and real estate can be put together to produce more stable and higher return investment portfolios
  4. Insurance Logic by Moshe Milevsky - leads one through the issues to decide how, why and when to use insurance effectively, whether it is to protect property, life, health, automobiles, travel, or to minimize taxes
  5. What Kind of Investor Are You? by Richard Deaves - helps you decide whether to stick with an advisor or strike out as a DIY investor and if the latter, how to do it successfully, by looking at principles and pitfalls in psychology, diversification and risk tolerance, market returns along with products like mutual funds and index funds

Friday, 5 December 2008

Finance 101 Course Online & Free by Robert Schiller of Yale University

Wow! A top-notch university lecture series on fundamental topics of modern finance by Robert Schiller, professor at Yale University and amongst other things, author of the best-selling book Irrational Exuberance and co-creator of the Case-Schiller Housing index in the USA. The course description is this:
"The course strives to offer understanding of the theory of finance and its relation to the history, strengths and imperfections of such institutions as banking, insurance, securities, futures, and other derivatives markets, and the future of these institutions over the next century." There are several guest lectures by famous people connected with investing: David Swensen, Carl Icahn, Stephen Schwarzman and Andrew Redleaf.

The 26 lessons include downloadable videos or audios of the lectures given in the Spring of 2008, with transcripts in html, pdfs of slides used. Caution - the video files are large - I downloaded a medium-quality video of one lecture on behavioural finance and it was 197Mb. It runs 65 minutes. If you are really up for it, afterwards test your knowledge with the exams and then check against the answers. Based on that one module, the material is explained in very accessible language.

I don't think they give you a degree from Yale for it but it doesn't cost anything either.

Useful Tax Reading for Canadians Abroad - When a Non-Resident Can Benefit from Filing

Came across Electing to File a Canadian Tax Return as a Non-Resident of Canada for Tax Purposes by Wayne Bewick of Trowbridge Professional Corporation in the Fall 2008 issue of Canadians Resident Abroad. Non-resident spouses with RRSPS and retirees may be able to get appreciable tax savings.

Wednesday, 3 December 2008

Book Review: More Than You Know by Michael J. Mauboussin

This book is like a series of investing idea hors d'oeuvres - many tasty morsels but not a satisfying or balanced meal, more for the pleasure than for practical investing sustenance. The book consists of thirty-eight un-connected chapters of 5 to 7 pages. Each presents a separate idea relevant to investing based on a parallel from another area of human knowledge, the unconventional places of the book's sub-title "Finding Financial Wisdom in Unconventional Places".

The problem is that the practical application of the idea is left hanging. For instance chapter 12 discusses rationality and emotion and shows that, contrary to what many may believe, emotion is actually beneficial and necessary to successful decision making. That's interesting but then comes the lame conclusion - "Yet successful investing requires a clear sense of probabilities and payoffs. Investors who are aware of affects are likely to make better decisions over time." So now I've read the book and am aware, does that mean I'm going to do a better job investing? I doubt it. I hoped for more since the author is not just a professor at Columbia Business School by the chief investment strategist at Legg Mason Capital Management.

To some degree, this book suffers from the "look how clever I am" syndrome, uncovering all these principles in arcane and non-obvious places. Perhaps this is not surprising since the author writes on page 2: "The experts who knew a little about a lot - the diverse thinkers - did better than the experts who knew one big thing." He is deliberately making himself more diverse. Still, it reminds me of a very smart friend who once was told by his very sensible wife, "oh, piss-off, N____, stop being such a smart-ass".

For those who are willing to take being teased, there is considerable delight and invitation to further thought and investigation (like any good prof all sources are cited and there is lots of further homework, er, reading).

Quotes:
  • "... because there's such a focus on outcome vs process, most institutional investors have time horizons that are substantially shorter than what an investment strategy requires to pay off." (p.57)
  • "... the talking heads on television satisfy a human need for an expert, without providing the value of an expert." (p.70)
  • "markets can still be rational when investors are individually irrational." (p.95)
  • "I find that thoughtful discussions about a firm's or and industry's medium- to long-term competitive outlook are extremely rare." (p.115) and maybe this is related to the first quote above?
  • and a quote of a quote - "better-known forecasters - those more likely to be fêted by the media - were less calibrated than their lower-profile colleagues." (Phil Tetlock's study of media contact and poor predictions discussed on page 45) ... I believe some bloggers better than the mainstream media

After reading this book, one tends to feel that one knows less than before - that there is a whole lot more to know. It's not easy or comforting but maybe that's a good thing.

My rating: 8 out of 10.

Tuesday, 2 December 2008

Comparison of Canadian Growth Portfolio ETFs from Claymore and iShares: XGR vs CBN, Which is Better?

A few days ago I posted about iShares new Portfolio ETF funds, stating my opinion that the XGR iShares Growth Core Builder Fund is reasonably good. There is existing competition for this fund in the one-stop shopping growth fund space in the form another ETF from Claymore, the CBN Balanced Growth CorePortfolio ETF.

I decided to have a look inside, do a comparison, see which is better and whether either is a great product that you and I should rush to buy now.

The Scorecard - my bottom line opinion summarized for those who want it all now

The winner by a narrow margin is XGR with 70 points out of 100, while CBN has 64. Call me a tough marker but that's a passing grade for both, not a fund-of-the-year score. Unlike most schools, in the right-most column, I dare to say exactly for what I would have given a perfect 10 (and I would be interested to hear other opinions too!).

Some Details
CBN's expense ratio is the sum of its own 0.25% plus that of the funds inside, which I calculated as 0.55% using the proportions of the component holdings. It is interesting that Claymore actually uses four funds of its competitor iShares (IGT, XRE, XRB and XCB) to make up 15% of the portfolio fund. The MER statement is the one critical thing I noticed (is there more?) that is NOT up to date in the Prospectus page 65 and for which I penalized CBN. Unlike the web site summary page on CBN, the Prospectus still says the MER is 0.7% for everything including the Claymore subsidiary funds; this is what was changed on Nov.18.

Diversification is broader and better in the XGR contents when one looks at the constituent funds. For instance, XIC is the total TSX 300 fund within XGR while the CBN equivalent content is CRQ which only contains 69 companies (more or less parallel to XIU, which I consider to be a large cap fund, not the broad total market). The same situation exists with XGR's holding of EEM a broad emerging markets ETF while CBN contains CBQ, which is confined to BRIC countries (Brazil, Russia, India, China).

In addition, the equity market funds used by CBN follow the fundamental indexing approach for their weighting, as opposed to market-cap weighting of iShares' funds. Fundamental indexing used various accounting measures to select and overweight companies considered to be better value and it is an investment strategy that I slot (though it doesn't apply the limited price to book definition proven by the research) into a Value asset class and not a whole of market holding that the true passive investor seeks.

The too-large Bid/Ask spread and Premium/Discount to NAV are surely mostly the result of these two ETFs both being quite small (both are less than $10 million in assets) and thinly traded. If the funds got a lot bigger that disadvantage of both would decline but in the meantime it's not good for the investor.

XGR's vague investment policy statement, which as I said in my previous post, implies an active management approach that is likely not the way they will actually manage the fund. Still one must take note of what is written, caveat emptor.

With about half its holdings in fixed income XGR is more like a balanced fund than a growth fund. With 80% equity, CBN is just a little above the usual maximum of 75%- it is in the aggressive growth zone.

Monday, 1 December 2008

TSX Prediction Survey Results Are In - Is The Crowd Wise?

Thank you to those 22 intrepid souls who dared to predict where the bottom of the current stock market slump might end up.

A three-word summary of the survey opinion is "watch out below!". Though we are substantially above the low of 7724 set when I started the survey - at least as of right now the TSX Composite is around 8640 - pessimism, or is it hard-nosed realism, reigns. The median and the average of votes was that the TSX will fall to 6000 before we reach the base of the abyss. That's more than 30% down from now.

This post's title refers to the popular book by James Surowiecki, The Wisdom of Crowds, in which he gives numerous examples where taking the average of estimates from independent, diverse sources can give better predictions than those of experts. Part of the problem with the market these days however is a seeming lack of independence because everyone is tainted by a common negativity. Is our survey "crowd" wise or are we just a mob carried away by our own pessimism to a form of group-think?

We'll find out for sure within the next few years, at which point, if the survey prediction proves correct, I'll write another post claiming credit for how wise the readers of this blog are! ;-)

I'm not about to short the TSX, though. I'll just stick with my asset allocation and wait it out because in five to ten years the market will have recovered. That's my prediction.

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