Canadian Financial DIY

Self-Regulation by Financial Advisors on Wrong Track

2009-11-27T16:53:00.002Z

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.

Stocks and the Long Term - Some Solid Research to Consider

2009-11-24T11:32:00.008Z

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 IndependentInvestor.info 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.

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

2009-11-23T11:04:00.006Z

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.

Worthwhile Rule Changes to Ontario Locked-in Retirement Accounts

2009-11-19T08:55:00.003Z

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.

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

2009-11-13T16:09:00.004Z

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 http://www.yesyoucantimethemarket.com/index.html. 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.

Foreign Diversification Cognitive Dissonance

2009-11-10T15:33:00.004Z

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

2009-11-10T14:55:00.003Z

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.

Parallels between Love and Investment

2009-11-07T18:36:00.003Z

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!

Time for Portfolio Vaccine against Swine Flu?

2009-11-03T12:14:00.006Z

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.

Contracts For Difference for Canadian Retail Investors: Beware!

2009-10-29T12:02:00.003Z

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.

TFSA Account Adoption Creeping Steadily Up

2009-10-27T17:04:00.003Z

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 Fun: How Much do Pro Golfers Make?

2009-10-23T10:10:00.002Z

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.

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

2009-10-22T07:22:00.005Z

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.

TFSA Ban on Asset Swaps with RRSPs

2009-10-21T08:01:00.004Z

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:

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.
Blogger Michael James on Money's post TFSA Abuse shows another scheme that seems to fit the bill.
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.

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

2009-10-19T13:44:00.005Z

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.

Quotes:

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

Canada's Place in World University Rankings

2009-10-09T10:11:00.000Z

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.

Thoughts for the Active Management Mutual Fund Industry

2009-10-08T12:35:00.003Z

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

2009-10-08T08:10:00.004Z

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.

Scam and Investor Fraud Alert Sources

2009-10-07T10:19:00.000Z

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.

Ontario Securities Commission Investor Warning List
Alberta Securities Commission Investor Watch page
Canadian Securities Administrators Disciplined Persons search tool and Cease Trade Orders database covering all provinces
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
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
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
Fraud.org has North American content

UN Praises Canada

2009-10-06T10:33:00.003Z

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.

Surprising Facts about Scams

2009-10-02T21:32:00.004Z

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.

Book Review: Benjamin Graham on Investing, ed. by Rodney Klein, commentary by David Darst

2009-10-01T09:26:00.003Z

Job ad ... Value Investor: must be highly skilled in dissecting financial statements, especially reading between the lines and uncovering what management may be deliberately or unwittingly concealing; must have great patience and diligence in calculating and estimating data; must be able to separate wheat data from chaff data; must combine internal financial data with external market psychology and national or global economic forces; must have the courage and confidence in one's conclusions to go against the flow of popular and/or professional market opinion or prices; must have the judgement to know when to hold 'em or fold 'em.

Those are some of the thoughts coming to my mind while reading this collection of original writings by the seminal value investor Benjamin Graham. We can see how the master thinks and assembles data into a cohesive analysis. The big question for the individual investor - could I do the same?

Graham speaks for himself in the book through the articles. I wish the editor Klein and commentator Darst had done more to enhance their teaching value by drilling into Graham's analysis, as for example, Jason Zweig does in the Graham classic The Intelligent Investor. For instance, in this day of information overload, it easy to get swamped by irrelevant or misleading details. Could Klein/Darst not have reconstructed the moment in time to say what Graham left aside, or even better to say what he missed? I was asking myself, "so no one is perfect, how good were Graham's analyses in retrospect?" After all, one feature of good investing is to learn from one's mistakes.

Further to that line of thought, I made a small effort to delve into one article, that comparing American Agricultural Chemical (AGR) and Virginia-Carolina Chemical (VC). In the book, Graham says VC is the better buy. Was he right? There's not much to be found through Google for those companies, neither of which exists today (more on that in a minute). From what I did find, Graham was correct, sort of. As of Graham's writing around September 1918, AGR's common share price was $100 and VC's $53. A scant four years later at the end of 1922, their prices were: AGR $32, down 68% and VC $25, down 53%. The Dow Jones Index had moved up from the low 80s to the mid 90s. VC was thus better than AGR in a relative sense but neither was good in an absolute sense. What was Graham's mistake? This, I believe: "... the particular strength of both companies lies in the benefits they will experience from the return of peace. (p.70) ... They have more to hope and less to fear from the future than perhaps any other industry (p.73) ..." In fact, the US suffered a severe postwar recession during 1920 and 1921, not a peace bonus. As fine as was Graham's backward looking analysis, he got the forecasting bit wrong it seems. I did not trace AGR's and VC's history to know whether Graham's conclusion would have made money at any point - that's what Klein and Darst should have done, instead of waxing lyrical about the Aeneid. (It's a bit over the top to say that Graham's writings, well crafted as they are, rank on the same level.)

As for disappearing companies, it is remarkable how few of those mentioned in the book exist today. Capitalism sees companies rise and fall quickly. The mighty of yesterday are gone today. To some degree the foundation of value investing is that the future will be like the past and/or present for a company, e.g. when we buy companies with a record of steady dividend growth, we assume that will continue. For those who don't pretend to know, there's passive index investing.

As a result, this book has no direct investing value relative to today's markets and companies. It is of some pedagogical value for value aficionados, since it is always worthwhile reading the original of any sector's leading mind, like Graham is acknowledged to be.

My rating: 3 out of 5

Watching the UK Get Older - What Effect on Government Finances?

2009-10-01T07:36:00.004Z

Found on the BBC website Maps chart UK's ageing population this brilliant animated map (compare the map to Statistics Canada's yawn-inducing text Population Projections for Canada, Provinces and Territories) that shows the steady ageing process as the years roll on. Starting from 1992 and projected to 2031, the inexorable slow ageing process is visually striking as the map gets more and more of the darker coloured areas indicating the ageing. Whether the measure is median population age or 65 and older, the pattern is the same. Increasing longevity is evident too as the over 85s triple their share of population.

One interesting phenomenon is that there was not much change through the 1990s but suddenly around 2002 the phalanx of those of State Pension Age or older begins to rise from 18.3% of the population to 19.5% by 2010. That's over 730,000 extra people potentially drawing State Pension. It surely doesn't help government finances. Just as a period of negative market returns is a bad time to start drawing on one's retirement portfolio, so it is for a country, except that the UK government has no choice.

McKinsey Says Emerging Equity Markets Will Grow Faster

2009-09-30T08:22:00.004Z

A few weeks ago, I noted research results which concluded that there is no automatic, direct relationship between GDP growth and equity market performance, and I cautioned against jumping too fast into investments in China, India and Russia.

Now along comes global consulting firm McKinsey & Company with its annual Global Capital Markets review (summary here with link to full report, which is free upon registration) with the view that Emerging country Equity Markets will grow considerably faster than major developed markets like the USA, the UK, Eurozone and Japan (Canada is too insignificant to merit much of McKinsey's ink). Notable quote: "... asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand." Equity is one of the asset classes they discuss.

McKinsey cites several reasons for thinking that equity in emerging markets will do better:

high savings rates in those countries mean a lot of money is available to invest and equity is better placed than debt to be the investment vehicle
these countries have great needs for infrastructure construction
financial markets in emerging countries are still quite small compared to GDP and thus have much room for growth
many state-owned enterprises have yet to be privatized

Along with the big constraint of the government and private debt burden in developed economies, McKinsey see higher inflation as a risk. They see little hope of big gains in equities: "These projections give little support to the hope that corporate earnings and valuations will rise again to significantly and sustainably higher levels in mature markets ."

It seems that McKinsey may not be alone in coming to such conclusions. The rebound in Emerging Markets has been much stronger since January 1st, as the iShares' Emerging Markets Index Fund (EEM) has outstripped such developed market ETF indexers such as SPY (S&P500), VGK (Europe) and XIC (Canada) in the Google Finance chart below.

Admittedly, Emerging Markets did fall off much more drastically during the crisis last fall but they have still outdone the developed ETFs from just before the worst moments of the crash, between August 1st last year and today, as this second Google chart shows.

Reasearch Results on Whether Financial Advisors Help or Hinder

2009-09-24T07:21:00.003Z

Sadly, the answer is that financial advisors hinder according to Do financial advisors improve portfolio performance?, a just-released study of German investors at Vox by university professors Andreas Hackethal, Michalis Haliassos and Tullio Jappelli. The reason is the old bugaboo - costs and fees.

Advisors add value but ... "Even if advisors add value to the account, they collect more in fees and commissions than they contribute." Apparently the authors found that richer, older people tend to use advisors more which accounts for a preliminary gross conclusion that "Investors who delegate portfolio management to a financial advisor achieve on average greater returns, lower risk, lower probabilities of losses and of substantial losses, and greater diversification through investments in mutual funds." They note that the financial industry would love to grab that statement for publicity. However, the net truth is completely opposite: "Once we control for different characteristics of investors using financial advisors, we discover that advisors actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own."

Of course, that does not mean that all advisors are bad for your financial health. It does mean choosing carefully, however.

So, DIY investors, take heart. Follow sound investing practices and you too will succeed.