Financial Service Charges Calculator

I just found this, Financial Service Charges Calculator, provided by the Government of Canada! It’s provided by the Office of Consumer Affairs. It looks like PC Financial is the cheapest by far for my needs. Using a grossly exaggerated estimate of my monthly financial transactions (I exaggerated it a lot because I expect to use Interac more now that I don’t use credit cards), I got the following results:

PC Financial – $1.50
BMO – $25
CIBC – $14.45
HSBC – $25
Scotiabank – $29
TD Canada Trust – $14.45

This assumed only 1 withdrawal from another bank’s INTERAC bank machine. This assumption may be incorrect for some of these banks which don’t have as many ABM’s available to use. Most of the plans above are unlimited plans. PC Financial is clearly the cheapest. I’ve also neglected the fact that cheques from PC Financial are free, and also, CIBC and PC Financial appear to have one of the largest ABM network’s in Canada according to this article (BMO is not listed) which means that I will need to use the other banks’ machine’s less often. I just did a search for CIBC/PC Financial ABMs in Vancouver and it sure turned up a lot.

John B. Sanfilippo & Son, Inc.

The Canadian Capitalist had a link to this an article at by Irwin A. Michael called “The Nutty Investor”. The article starts of,

Most investors want stocks that are exciting, glamorous, novel. I tend to find that the best buys lie in the opposite direction, among the overlooked and ignored sectors of the market – which is why I am now happily investing in nuts.

This article was timely for me, as I just noticed John B. Sanfilippo being discussing on Mr. Michael’s “Value Favourites” page at his site a few weeks ago. It is his newest addition to the value favourites page (which is why I read it) and he talks about it here. There, he really fleshes out the reasoning why ABC Funds bought JBSS (they own 5% of JBSS):

. . . Today, with its shares trading at $13.75, JBSS appears to be a bargain. The stock is trading at a 27% discount to its book value of $18.42 and at approximately eight times next year’s estimated earnings of $1.65 per share. Book value is likely understated given that JBSS owns quite a bit of real estate, most of which was purchased in the 1980s and early 1990s. The company is planning to consolidate its operations by building a new larger central facility. Given the expected short payback of the project, the cost savings could be materially accretive to earnings in a couple of years. As far as tree costs are concerned, management expects prices to fall as newly planted crops are harvested in the coming years. Finally, given the company’s low stock price, the costs and time required complying with Sarbanes Oxley, and the favourable prospects for the company, the Sanfilippo family could take the company private. If it did, we feel it would be worth considerably more than what the stock is trading for in the market.

Like Graham, Irwin tries to find stocks that are trading for significantly less than their book value, or what a private owner of the business would be willing to pay. The Sarbanes Oxley Act is something you will hear about often these days. You can read more about it here.

My Kind of Fund Manager

ABC Funds’ newest feature article, “Our ABC Response to Client Concerns” reveals Irwin A. Michael’s dedication to his funds and his profession. Basically he was getting questions from clients, asking him if perhaps he was not putting more effort into his newest fund, NAD-V, and less attention to his older funds. One client asked him,

Recently, however, with the launch of the NAD-V, I’m beginning to get the feeling that you are focusing on the NAD-V and as a result the other three funds that I own aren’t going to have the same results as one has come to expect. I hope I’m wrong but would like to know from you – are you getting distracted from managing the performance of the other three funds so you can ensure the NAD-V does well? Just wondering…

Here is part of Mr. Michael’s reply,

My initial response to this question was one of surprise. Quite frankly, it never occurred to me that I might slight one fund over the other three ABC Funds. I regard myself as a professional, but more importantly, I have too much to lose – my reputation, my own invested money as the largest single individual client of ABC Funds, my Chartered Financial Analyst designation (CFA), an industry code of ethics and the fact that I have dedicated over 32 years to my profession and almost 18 years building the ABC Funds.

Actually, not only is Michael Irwin the largest client of ABC Funds, but this page says he has invested “his own funds (taxable, holding company and full RRSP) as well as his wife’s, children’s and his late father’s estate in the ABC Funds.” Further down in the article he says exactly how much of his and his family’s portfolio is investedin ABC Funds:

As a final point, given that my family and I are the largest individual unit holders of ABC Funds with over 80% of our invested capital in the three open-ended funds it is in my best interest to see that they all succeed. The fact is that these four funds are a large part of my deep passion for my work and I would never compromise my principles. I remain motivated and excited about ABC Funds and the prospects for “deep-value investing”. This will not change. [emphasis mine]

I wonder how many fund managers out there (and their families) have such a huge stake in their funds? (and are as passionate as Mr. Michael makes himself out to be)?

New iUnits: Dividend Index and Real Return Index

Four new ETFs were announced by Barclays Canada a couple of weeks ago.

XMA and XTR provide sector exposure: Providing investors with exposure to the Canadian materials sector, XMA will replicate, to the extent possible, the performance of the S&P/TSX Capped Materials Index. XTR is designed to provide investors with exposure to the Canadian income trusts sector by replicating, to the extent possible, the performance of the S&P/TSX Income Trust Index. XMA and XTR will join Barclays Canada’s other sector iUnits funds, including energy (TSX:XEG), financials (TSX:XFN), gold (TSX:XGD), technology (TSX:XIT) and REITS (TSX:XRE) to provide investors with the ability to target investments in some of the largest and most popular Canadian equity sectors / segments.

XDV provides yield opportunities: Designed to provide investors with exposure to higher yielding, dividend paying Canadian stocks, XDV will replicate, to the extent possible, the performance of the Dow Jones Canada Select Dividend Index. XDV will focus on investing in stocks with higher yields, proven dividend growth and dividend sustainability and higher liquidity.

XRB provides inflation protection: To provide fixed income investors with an inflation-protected investment, XRB is designed to replicate, to the extent possible, the performance of the Scotia Capital Real Return Bond Index.

I am personally going to be staying away from the income trust fund (I don’t know enough about the quality of the trusts in the S&P/TSX Income Trust Index).

I Googled for “Dow Jones Canada Select Dividend Index” and apparently it was just launched on December 5, 2005. Here’s the description:

The Dow Jones Canada Select Dividend Index’s 30 components are selected from the Dow Jones Canada Total Market Index, which represents 95% of the country’s float-adjusted market capitalization. To be included in the index–which is calculated in both Canadian and U.S. dollars–stocks must have a nonnegative, historical, five-year dividend-per-share growth rate; a payout ratio of less than 80% for all companies; and daily average dollar volume of $1 million for three months prior to the annual review. Stocks that meet these criteria are then ranked in descending order by indicated annual dividend yield, and the top 30 components are selected for the index. The index is weighted by indicated annual dividend, and the weight of any
one component is capped at 10%.

S&P 500 equal-weighted index

Found an old article from 2004 about the S&P Equal Weighted Index, “Buy the S&P 500 with better returns,” which can be bought under the Rydex S&P Equal Weight EFT (RSP). The S&P Equal Weight index holds all the stocks in the S&P 500 index equally (0.2% each). Rebalancing works like this:

If the share price of one of the companies in the index climbs sharply, the Rydex fund pares it down to a 0.2% weighting when the portfolio is rebalanced every quarter. If a stock tumbles, more is added. Thus the fund is continuously funneling profits from stronger to weaker issues; in effect, selling high and buying low.

I wouldn’t even really call this value investing. This is just common sense. If you created a portfolio yourself of 60 stocks, like the S&P TSX 60 index, would you weight them according to their market capitalization? Probably not. If one of the stocks in your portfolio went up by 50% and another went down by 50%, would you sell the one that went up and buy more of the one that went down? Yes, you probably should, if your transaction costs aren’t too high. If you want to think of it as value investing, that’s fine. I guess compared to the run-of-the-mill S&P500 it is certainly more value-oriented:

“This is a poor man’s value tilt,” says Robert Deere, head of domestic equities for Dimensional Fund Advisors, the foremost operator of customized index funds for institutions.

DFA heavily favors small and downtrodden stocks, citing academic research that shows they outperform big-cap growth stocks over long periods. Since this fund does that implicitly, “I would expect it to give you a higher return — no doubt about it,” he says.

The article pooh-poohs the Rydex Equal Weighted Index’s MERs, “The ETF’s expense ratio is 0.4%. That’s more than three times that of the Spider, eroding indexing’s greatest advantage.” But that hasn’t hurt its returns. According to the article the equal-weighted index has beaten the market-weighted index by 2% over the past 10 years,

Rydex says that the equal-weighted index has greatly outperformed the market-weighted index over the last 10 years, delivering annualized returns of 14%, compared with 12% for the index.

However, this document on S&P’s website puts the 10-year annualized returns at 12% and 9.3% respectively. I will definitely be buying RSP over SPY and not because I am chasing after good past returns but because the methodology makes sense.

Is the S&P 500 a passive index or an actively managed mutual fund?

I uncovered and interesting article, “The S&P 500 is a mutual fund – and a bad one,” written in 2002. As someone who has considered buying shares of SPY to make up the major part of his US portfolio, this article, claiming that the S&P 500 is a bad mutual fund was a must read. In it, Jon D. Markman says:

“Unlike most index publishers, such as the Nasdaq and Dow Jones, Standard & Poor’s adds and subtracts stocks from its three broad indexes — the largecap 500, the Midcap 400 ($MID.X) and the Smallcap 600 ($SML.X) frequently in accordance with a largely subjective list of criteria that includes market capitalization, liquidity and their representation of industrial sectors.” [emphasis mine]

The S&P 500 is supposed to be representative of “the market” (not the US economy which consists of 306 privately-owned US companies with revenues of at least $1 billion) and one of the ways they do this, is by matching the sector allocation of the entire US stock market (small-caps and all, almost 10,000 stocks as of 2005) to the index. In 2000, according to Mr. Markman, the S&P had a 14% weighting in technology stocks by market capitalization whereas the entire U.S. market had a weighting of 18% in technology stocks by market cap. The people at S&P proceeded to add the tech stocks with the next-largest market caps to its index, removing stocks in industries that had now become “over-weighted” compared to the entire US market sector allocations. Many of these technology-related stocks were at their peaks in 2000, and extremely over-valued. The S&P then held on to these stocks as they plummeted and lost sometimes greater than 80% of their peak values.

In their quest for ultimate sector diversification, they have performed one of the most banal rebalancing operations I have ever seen: buying tech stocks based on high momentum and high valuation. Standard portfolio rebalancing operations would normally involve selling stocks which have recently advanced to such a large degree so as to have overweight positions, compared to their original weightings. The tech stocks which were already in the S&P500 index had advanced significantly and the S&P500 was overweight in these positions compared to a few years ago, and probably should have sold off some shares in the technology sector; however, the broader market (including the large number of high tech companies barely post-IPO and with no earnings) just happened to have advanced even more (to make up 18% of the market vs. 14% for the S&P500), thereby triggering a technology stock buying spree for the S&P500 index managers.

This would be enough to put any holder of SPY in an uproar. Especially if SPY was a mutual fund with a mutual fund manager. Only the SPY (or S&P500 Composite) is in fact NOT a mutual fund, as the title of the above article claims, it is just an index. It was designed to be some representative figure of the value (as currently being traded) of the US stock market. This article, although it is misguided in laying blame on the people at S&P, highlights some key downsides of indexes, especially the ones based on market value, and sector allocation. There are also many other silly things which go into factoring how much of each stock is held, such as liquidity and available float. You get what you pay for I guess. ETFs which follow the major indexes are popular because of their low fees and the ability to beat the returns of a significant number of equity mutual funds. But the indexes are not mutual funds, and they are not supposed to be smart. They follow a passive strategy and stick to it.

There are other indexes out there which do not follow this type of methodology. Two of which I know of are the S&P Equal Weight Index (replicated by the Rydex S&P Equal Weight ETF), and also the Dow Jones Canada TopCap Value Index (replicated by TD Select Canadian Value Index Fund ETF). From Rydex’s website,

Equal weighting also offers increased diversification as compared to its cap-weighted counterpart. The composition of the securities of the S&P 500 Index combined with quarterly rebalancing avoids over concentration in popular (or momentum) sectors, such as the domination of the Information Technology sector that occurred in the S&P 500 in 1999 – 2000.

The S&P Equal Weight Index is just another alternative, and a good one if you want to avoid what happened to the S&500 in 1999-2000. I would not be surprised if the S&P Equal Weight Index was born out what happened in the late 1990s bull market, in the same way that the S&P TSX 60 capped index was created after Nortel became a huge percentage of the TSX 60 index during that same period.

See also: “The Hidden Risks of Index Investing” which I found out about from this article on the Investing Guide blog.

This article was first published on October 31, 2005

Investors May Let Emotions Drive Decisions

I found this excellent article, “Investors May Let Emotions Drive Decisions” on The Mess That Greenspan Made.

Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case,” Tilson wrote in a paper called “Psychology & Behavioral Finance.”

One problem: We’re too emotional. A study published in “Psychological Science” co-authored by professors at Stanford University, Carnegie Mellon University and University of Iowa pitted people with normal brains against people whose limbic systems, the brain’s emotional center, were impaired.

The paper asks whether a neural systems dysfunction that curbs emotion can lead, in some circumstances, to more advantageous decisions. The answer, in terms of investing, was yes.

In the study, people were given $20 in play money and could invest it $1 at at time. Winning or losing was decided by a coin toss, the winners would win $2.50, more than tripling their initial investment. The losers would lose the dollar they invested. The odds were clearly in the investors favour. Yet the people with normal brains became more conservative after losing. The people with impaired limbic systems did not.

“Medical study confirms brain impairment HELPS improve investment returns,” Ajay Singh Kapur, chief global equity strategist at Citigroup, wrote in a summary of the study.

He uses the study as an argument for fighting instinct and getting into the market when investment sentiment is most negative and exiting when investor sentiment is high.

Benjamin Graham talks a lot about NOT thinking too hard when it comes to investing (unless you make it your full-time job like him) and keeping a simple, conservative approach: “It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits.” As well, there is the quote I gave at the bottom of this article.

This is one of the key aspects of the Intelligent Investor, “harnessing your emotions.” In the commentary for the Introduction, Jason Zweig writes:

What exactly does Graham mean by an “intelligent” investor? Back in the first edition of this book, Graham defines the term–and he makes it clear that this kind of intelligence has nothing to do with IQ or SAT scores. It simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself.”

Screwed on Bank Charges

We just got our first bank statement since attempting to stop using our credit cards completely. My plan to reduce our total spending by not using a credit card may have back-fired slightly, as there was a whopping $17 in extra charges charged to our bank account, in addition to the $11 we are already charged for our monthly plan “Everyday Banking Plan.” We were pushed over our transaction limit because we are such heavy Interac/Debit users, and we have many automatic deposits and withdrawals coming in and out of our account every month. To combat the problem, we will carry around more hard cash in our wallets in December and I hope this will help us stay under the transaction limit.

I am seriously considering using our BMO bank account for all our bill payments and direct-deposits, and using a separate ING Direct account (they allow you to create 4) for Interac charges, since as far as I know there is no limit to the number of Interac transactions you can make with ING Direct accounts, just as there is no limits or charges associated with transferring money from an ING Direct account and a big-bank account (except charges incurred from the big-bank). It will be nice when ING Direct one day provides bill payment and direct deposit service.

2 tips from Graham

The has an excellent little summary of two of the key concepts from the Intelligent Investor: 1) Buying stocks makes you an owner and 2) Always buy with a margin of safety.

The author expands on 1), saying that as an owner of a stock you have a right to get answers from management about their performance and to demand better. Doing this kind of thing is not out of the reach of people like Buffett or Bill Ackman who own significant portions in common stocks. But I think it is important to think about buying stocks as ownership in a company and not just a randomly fluctuating ticker symbol. It’s helpful to ask, as Graham often does, if this business were a private business, would you buy it at the current market price? 2) Always buy with a margin of safety, is extremely important. The article says,

Graham details just how to buy with a margin of safety, which he calls the “central concept” of investing. Put simply, the “margin of safety” is the difference between the intrinsic value and the price at which a stock trades. For example, a security worth $50 per share but trading at $25 per share enjoys a massive 100% margin of safety. Buying in that situation heavily stacks the odds in favour of the investor.

The margin of safety concept is very important. The term “safety” reminds me that buying low not only improves the odds of a greater return in the future, but ensures greater “safety” against a significant loss, compared to a stock which is trading at a high price. After all, this is the main purpose of investing, as Graham defines it at the beginning of Chapter 1 of the Intelligent Investor, where Graham quotes himself, from the 1934 edition of Security Analysis: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” How can one ensure a margin of safety? Graham hints at this early on, in the Introduction, entitled, What This Book Expects to Accomplish: “we shall suggest as one of our chief requirements here that our readers limit themselves to issues selling not far above their tangible-asset value [book-value, or net-asset value] . . . The ultimate result of such a conservative policy is likely to work out better than exciting adventures into the glamorous and dangerous fields of anticipated growth.”

Clearly, Graham was not about speculation, and he favoured a conservative and boring approach to investing. In the Appendixes, written by Buffet, he tells about a man named Walter Schloss. Walter never went to college but took one course taught by Ben Graham at Columbia and later worked at Graham-Newman. His strategy? Buffett recalls Adam Smith wrote about him in Supermoney,

He has no connection or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that’s about it. . . Money is real to him and stocks are real–and from this flows an attraction to the “margin of safety” principle.

Buffet continues,

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. . . He simply says, if a business is worth a dollar land I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. [italics his]

Looking at Walter Schloss’s returns in the Appendixes show some pretty amazing returns. From 1956 to 1984, WJS Limited Partners had a 16.1% annual compound return and WJS Partnership had a 21.3% annual compound return. That compares to an 8.4% return for the S&P500 over the same period. Pretty impressive returns for what sounds like a very simple approach to investing, on the surface. We cannot forget of course that Walter J. Schloss probably spent his entire day pouring over annual reports for many companies, which is no small chore.

Finally, the author of the Fool article offers a glowing recommendation for the Intelligently Investor:

I’ve read and re-read my copy of The Intelligent Investor. It is lined with yellow highlighter ink. Reading that book was one of the most important steps I took toward developing a lucid investment strategy. And I believe Buffett was right when he called it the “best book on investing ever written.”

I second his comments, and that reading this book was one of the best investments I ever made, after getting a university education. I am just now going through it for the second time, only now I am covering it in yellow highlighter ink as well. I’ve had to take a short break this week as I need to buy a new highlighter already, after just the first two chapters!

Risk Premium for Stocks

This Fortune article, “Investors Are in for a Shock,” talks about some recent comments issued by Alan Greenspan: “Investors, the Fed chairman intoned, normally demand a substantial ‘risk premium’—a high return in exchange for taking a chance that they may lose money. Now, though, investors ‘accept increasingly low compensation for risk.'” The author goes on to explain:

Greenspan’s argument rests on the idea of the risk premium—the extra return (over a supersafe investment like Treasury bills) that investors have traditionally received for putting their money in peril. For stocks, the risk premium equals the expected real (inflation adjusted) return on a broad portfolio of shares, minus the real interest rate. To calculate the risk premium that stock investors are getting today, we turned to Asness. For expected return, Asness uses the earnings yield on the S&P 500—earnings per share divided by price—adjusted for cyclical swings in profits. Asness pegs today’s earnings yield at 4.3%.

To derive the real interest rate, Asness takes today’s ten-year Treasury yield of 4.6% and subtracts the average inflation rate over the past five years, 2.7%, to get a real rate of 1.9%. So today’s risk premium is the 4.3% expected return minus the 1.9% real interest rate, or 2.4%. That’s about half the 5% margin that stocks have delivered for the past 80 years. So investors aren’t getting the usual extra bang for holding equities.

This will lead to two possible outcomes. At best,

people who buy at today’s levels are in for a sustained period of subpar returns, perhaps 4% or 5% annually, after inflation. That’s because the best predictor of future gains is the price you pay. “High prices and low risk premiums today mean low returns tomorrow,” says Cliff Asness, an economist who runs AQR Capital, a $17 billion hedge fund.

and at worst, “the more dire alternative is a steep fall in prices that makes everything from the S&P 500 to homes what they aren’t today—that is, great investments.”