Tuesday 26 November 2013

Jeremy "Stocks for the Long Run" Siegel says US Stocks Not Over-Priced

Professor and author Siegel lays out a reasonable case in this hour long video lecture that his thesis still holds that stocks provide the best returns in the long run compared to bonds or T-Bills. Apparently the 5th edition of his famous book is to be out soon with updated data contained in the lecture. In the lecture he argues that there is a flaw in the earnings calculation by S&P which biases earnings down and thus inflates the current P/E calculation in Robert Shiller's well-known CAPE (Cyclically Adjusted Price Earnings, which uses an average of earnings for the past ten years instead of only the past year). Siegel says the gigantic writedowns by a handful of financial companies in 2009 following the financial crisis created a huge earnings hole that overwhelmed the continuing profits of most of the S&P 500. The earnings hit overall just wasn't as bad as the S&P calculation portrays. That 2009 hole will persist in the CAPE average for another five years. He says that as a result the oft-cited over-valuation of the S&P 500 based on current CAPE around 25 is wrong and CAPE is actually below the long term average. He blames the messing up of CAPE on 1993 and 2001 FASB accounting rule changes forcing earnings recognition of writedowns (see around minute 43 of the video).

Wednesday 13 November 2013

The State of Risk Profiling in Canada - Ouch!

FinaMetrica provides a risk profiling tool to the financial advisory industry worldwide and a version to individual consumers. Here is what they had to say about the state of affairs in Canada in Risk Profiling: Art and Science:
In countries like Canada, the regulator appears to be significantly behind many other countries. The regulatory framework in Canada is complicated with disputes between  the provinces and federal government over jurisdiction and a recent Supreme Court decision recently delayed or derailed attempts at a single regulator. Regulation of mutual funds, stock brokers, banks and insurance firms all fall under different regulatory bodies in Canada further complicating the picture. The investment  regulators in Canada are still substantially focused on product level risk assessments  with little or no framework to look at the client holistically."
Sadly, not very flattering.

Tuesday 12 November 2013

Financial Certifications Glossary from IIROC: a Useful Start though More is Needed

The Investment Industry Regulatory Organization of Canada's online glossary of about 40+ financial titles and designations is a good step forward towards lessening the confusion confronting the average person looking for expert advice. The direct weblinks to all the sponsoring / certifying organizations' websites is itself a big timesaver. The listing of education requirements for each designation gives an impression of how substantial and deep the required knowledge base is for each.

My suggestions for additional info for the glossary:
1) Standard of Care provided to Client - does the holder of a designation undertake to provide advice under a fiduciary duty best-interest standard or a suitability standard or something else? This is a hot topic these days as the Ontario Securities Commission considers whether to impose best-interest standards on people who call themselves financial advisors. The glossary indicates whether each designation has an ethics code but it doesn't, and could and should, say what each code promises on this critical point.

2) Subject Matter Expertise - the one thing I as a consumer want to know is "who do I ask about what?" Suppose I want advice on improving tax efficiency of my investments across types of accounts (RRSP, TFSA etc). The designation titles are suggestive but inadequate. Do I look for a CA, a CGA, a CIM, a CFA, a CFP or any of about a dozen or so other possible designations? Is the Distinguished Financial Advisor Tax Services Specialist going to provide me with sound advice? I'd guess not as the impression from the webpage is that they are competent in filling in T1 and T2 tax forms but that's it. A Chartered  Accountant or maybe a Chartered Investment Manager would be a much better bet, despite the absence of the word tax in the title. The head of IIROC says in a Morningstar video interview that they don't want to judge the various designations but surely they can compile and condense into some sort of searchable system what each designation claims to be able to do. Every solid designation should have and should publish its Body of Knowledge such as the CFA does.

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