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.
Sunday, 21 December 2008
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.
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.
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:
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.
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:
- account opening hassle involved for each institution - e.g with BMOIL, even as an existing client, I would need to send them my ID info again (and I read similar comments about TD Waterhouse on the Financial Webring thread on TFSA Offerings), which is no easier than Questrade, where I don't have an account and which said I could simply mail them a blank cheque from my bank to comply with the money laundering regulations.
- trading commissions and fees - see discount broker Trading Commissions at StingyInvestor
- overall reputation - see the Globe and Mail's annual broker ratings
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.
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.
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