Government Moving Ahead on PRPPs - Financial Industry is "Salivating"

The Financial Post's Jonathan Chevreau article on the plans of the federal government to proceed with Pooled Registered Pension Plans (PRPP) contains the all-too-telling mention that "Naturally, Bay Street is salivating at the prospect. This is a giant potential opportunity for the nation’s banks, mutual fund companies, insurance firms and a growing number of manufacturers of exchange-traded funds." One is "naturally" led to wonder who will benefit most from PRPPs, ordinary Canadians trying to build a pension, or the financial industry. I cannot tell for sure but I own shares in the financial industry.

Also no doubt salivating are the financial planners and advisors Mr Chevreau also mentions, since the added complexity of another retirement savings layer with the PRPP will require more figuring out.

Book Review: Investing and the Irrational Mind by Robert Koppel

In this book Robert Koppel relates how he has discovered that the precepts and practises that he knew from practical experience lead to market trading success are underpinned, explained and validated by the findings of behavioural finance research.

Not so much a ground-breaker providing new insight or knowledge, it is readable summary and description of many behavioural finance concepts and how they have been applied successfully by traders. But it falls short in explaining exactly how to change one's own behaviour. There is a difference between saying that intuition is a quality of successful traders, which he does, and setting out an action program to get there, which is not done. One wonders if he thinks that may be impossible using only a book since as he also notes, "... none of what success requires is easy. There are no shortcuts, simple answers, or turnkey solutions."

It has been known for a long time what kinds of behaviours and psychological qualities lead to success. Koppel cites an 1880 list - self-reliance, judgment, courage, prudence and pliability. Koppel also relates how certain highly successful traders through extreme determination and unstinting enormous effort managed to change themselves and imbue themselves with the required qualities. That's learning the hard way, self-taught through much trial and error. Is that really the only way? Surely not, in this age of deliberate formal education that turns out vast numbers of people who are better at many things than would have been the case if left to their own devices. There is a little bit of such content in the section on psychological resilience but the book misses the opportunity to take the next step by providing the training-type advice to operationalize improved investor behaviour. For instance, Koppel cites research which concluded that optimism can be learned, an encouraging bit of news. Ok, tell me how to do that. My family and close friends would really like me to know! It is not just a case of "just do it".

Koppel is not particularly to blame in this. So far, no book I have come across goes beyond describing the problems uncovered by behavioural finance to putting in writing a comprehensive practical training program. As a model for what I think can and should be assembled, there is the classic on how to be a good consultant, Flawless Consulting by Peter Block. It is very specific and tells you exactly what to do step by step.

The book reads easily. It contains some amusing quotes e.g. "I have stuff, therefore I am", a fitting epitaph for the consumer society. Another, said to be Wall Street lore, vividly describes the investing risk-return trade-off "You can't eat like a bird and shit like an elephant". It also contains a good reading list and copious references.

Most likely, the greatest appeal of this book will be to the active investor, especially the short-term trader and market timer. Passive index investors will find the admonitions about finding a trading system that gives a person an investing edge somewhat beside the point. One could say that one of the great benefits of passive investing is that it helps bypass much of the harmful stimulation that leads to bad decisions and portfolio loss. Someone who owns a broad market index fund can simply do a Rip Van Winkle - file, forget and ignore for a decade or two, perhaps awakening every few years to rebalance amongst asset classes.

In short, this is a good though not great book. My rating 3.5 out of 5 stars.

Thanks to the publisher McGraw-Hill for providing me with a gratis review copy.

Protecting the Investor Protector - Threat to Ombudsman for Banking Services and Investments

Yesterday I added my voice to the chorus (Ken Kivenko of Kenmar, Fair Canada, Rob Carrick of the Globe and Mail, Ellen Roseman of the Toronto Star) objecting to the attempt by a number of financial industry players RBC, TD, Manulife, Investors Group and Macquarie Group to bypass the OBSI as arbitrator in resolving these firms' disputes with individual investors.

Here is what I wrote:
" Flaherty.J@parl.gc.ca,
publicaffairs@obsi.ca,
csa-acvm-secretariat@acvm-csa.ca,
publicaffairs@iiroc.ca,
mfda@mfda.ca,
hwetston@osc.gov.on.ca

Dear Mr Flaherty et al,
This is to state my voice of support in the strongest terms for the continued mandatory involvement of the OBSI as a means of redress for ordinary investors.

Do not allow the banks and investment dealers to opt out of OBSI. The odds are already heavily stacked in favour of the industry in permitting abuses to take place and then to avoid responsibility and compensation for wrongs. Both as an investor with financial scars and as a personal finance / investment blogger looking closely at the many complexities of financial products, it is critical that ordinary individuals be able to count on fair treatment by the financial industry. The OBSI is an important mechanism to keep the industry in line. Recent efforts by various industry players to opt out of OBSI confirm that its decisions sometimes hurt them and that it is doing a worthwhile job.

Regards,
Jean Lespérance
CanadianFinancialDIY"

As a completely self-directed investor I hope never to be obliged to use the OBSI but I want it to be there, even in a stronger form than it is now. I directly or indirectly (and so does everyone else who buys ETFs like iShares' S&P TSX 60 Index) own shares in RBC's parent and in all the public financial industry players who make more profit, at least in the short term, from avoiding their moral obligations to compensate accidental or deliberate screw-ups of client portfolios. But friends and family who use brokerage advisors need the protection of OBSI. I also think it's good business in the long term for the firms themselves to have a strong counterbalance keeping them in check.

PS Why doesn't the Ontario Securities Commission post any email addresses to receive comments - see the Contact Us page? I had to guess at Chairman Howard Wetston's. Looks a lot like hiding behind a wall. If Minister Flaherty can do it, surely the OSC can too. The next step is to actually respond. I hate to think this is a case of "Speak to the hand".

SRI and ESG Issues for Corporations: What the Press Talks About

Presuming, a) that public opinion obliges corporations to respond and, b) that newspapers reflect and shape that opinion, the Trends in Sustainability website's online analysis tool tells us what is important these days. It does that by counting buzzwords and phrases in such newspapers as the Globe and Mail, the National Post, the Vancouver Sun, the Toronto Star and the Toronto Sun (but not any elsewhere in the country) day by day going back to 1990. It also contains the results for 110 other newspapers around the world. Take a look at the graph below I pulled up from the tool.

Human rights and Climate change are the hot topics, much dominating such issues as child labour, air pollution, poverty and biodiversity. Another take on this is through their other metric, which they call concepts, in which Sustainability is the tops in newsprint in Canada and around the world (including the USA), ahead of business ethics, governance and citizenship. It is also interesting to note that Canada leads the world average in such concern, or at least in writing about it! (though I must also note that Australia is even more interested in Climate Change and Sustainability than Canada) In any case, this more or less sets the corporate agenda in what to address, whether it is with mere words or with action.

WaterFurnace Renewable Energy Inc 1Q2011 Conference Call

My investment pick (original analysis post here) of the environmental litter, WaterFurnace (WFI) finally issued (delayed by conversion to the IFRS accounting standard) its first quarter report covering the three months up to March 31, 2011 and held the conference call on the results.

Things, in a word, look rosy. President Huntington and Treasurer Andriano provided reasonable explanations and assurances that some quarterly report negatives are one-offs (like the extra taxes that really reduced profits), erring on the cautious side (the rise in warranty reserves despite better reliability of newer products) or taking advantage of an opportunity (the rise in inventories to get 2% price savings on input materials vs only 1.5% return on cash). The company also successfully (sales dollars are up) implemented a price increase to restore margins in the face of rising input costs.

More important for the long term is that despite the continued hapless state of the US residential market, WFI is making sales gains and solid profits. There was lots of talk of expansion in China through a joint venture, sales opportunity in new market segments from the Hyper Engineering acquisition, where they are hiring, and a renewal of sales increases in Canada after the promise of the Conservative government to renew the EcoEnergy retrofit subsidy program.

After the call, WFI's price went up in the broadly declining market yesterday, up to $21.50 (which is still way down from the $26 or so of last September when I bought some stock). Maybe speculators (or investors?) have taken a cue from the closing seconds of the call when Huntington said he was looking forward to a solid second quarter. Looking forward? The end of the second quarter is in two weeks!

I still have confidence in the long term worth of this company and still have my shares.

Investing Morally: ESG and SRI Ain't Easy or Simple

"The BP disaster fits very well here. The company was ranked best-in-class by many socially responsible funds and indices such as FTSE4Good and the Dow Jones Sustainability Index. The disaster really highlights some of what the ESG industry is actually rewarding right now, which is the transparency and reporting found in glossy reports." Thomas George, Co-manager of the TD Sustainability Fund, quoted in Benefits and Pension Monitor, September 2010

"... bcIMC tried for a decade, if not more, to make changes at a macro level. We recently reduced our investment exposure to the Japanese market because we found there just did not seem to be an appetite or a willingness to bring fair and reasonable practices into its public equity market. ... That decision about Japan was very much a difficult one to make, but it was largely based on governance concerns." Susan Enefer, Manager of Shareholder Engagement, BC Investment Management Corporation in the same magazine issue

Not even the pros who specialize in SRI (Socially Responsible Investing) and ESG (Environmental, Social and Governance) find it easy it seems. The bottom line from the magazine roundtable's article is that making PRI and ESG a core part of the investment process is: a) in its infancy, but the way of the future, b) a worthwhile risk-reduction effort, c) successful only by digging below the surface stats.

As it happens, my SRI stock pick, Waterfurnace International (WFI), gets a middling rating on governance from the Clarkson Center for Business Ethics and Board Effectiveness of the U of Toronto Rotman School. WFI got only a 77 score out of a 100 in the small and medium company 2010 report. Its main deficiencies have to do with lack of a regular and formal process to assess the Board and its members, as well as too little Board member independence. There are always compromises. ...

Postal "Service" Canada - UK: Canada 1, UK 0

It is always a frustrating and anxious time when sending international letters or parcels since even when a premium is paid for accelerated or tracked delivery, the system doesn't work on an end to end basis and it typically fails to meet the poor consumer's expectations or even indicated times on postal service websites. The attitude of each country's post office is that it did what it promised and the other one is at fault.

Today, I received a letter from Canada here in the UK. A registered letter, which is meant to be tracked and signed for on delivery. The standard is 4 to 7 business days. Oops, neither happened this time. Mailed on May 31st, it arrived June 11, which is at least 8 business days, or 9 if one considers that in the UK mail gets delivered Saturdays too. Worst, the registered letter was simply put through our front door mail slot. Though we were home at the time, we heard the letter being put through and the doorbell was not rung. Canada Posts tracking system says the item left Canada June 1st and arrived in the UK June 3 (did they fly via South America, or what?). After that, it disappeared for 8 days in the UK postal system till it arrived here. All that for a big premium on postage. I've had the same experience going the other direction, from the UK to Canada, with similar results of significantly slower delivery than promised. The item leaves the originating country quickly and then goes into some sort of slow delivery mode.

The Canadian postal strike just reinforces a negative impression.