- In around 1996, I bought AIC Advantage Fund (a financial sector fund) based on its stellar past performance. The fund did well for a little while more, then tanked. By 2000 I because frustrated with its poor performance and sold, when really I should have bought more.
- After the AIC fiasco, I transferred my cash from the sale of my AIC Advantage Fund to TD Bank. I wanted to start an RRSP and I was also determined to learn from my mistake with AIC Advantage Fund and diversify. I ended up over diversifying. By 2005 I had several large cap Canadian TD mutual funds, replicating the performance of an index fund but with the 2% MER. Things were not much different when it came to my US, International, and fixed income holdings.
- I bought shares in a small company I worked for called EXI Wireless in around 2000. I bought shares when they were about $1 each. The stock ended up falling slowly over the next few years to around $0.50, and then ended up rising again. A few years later the stock was over $1.34. That’s not a bad return. Anyways I had sold when it was down around $0.65, so I lost on the deal. I bought the stock for no good reason and I sold it for no good reason.
- Bought TD Science & Technology Fund during the tech bubble. Sold it post-bubble.
- In 1999, my grandma, her husband, some of her friends, and I started an investment club. The club was doomed from the start. We had big aspirations of buying the next Nortel or the next Cisco, or Lucent, etc… You get the picture. Between 1999 and 2002 we bought (in approximately chronological order): 360 Networks, Nortel, Lucent, Nokia, Patheon, more Nortel, Harrah’s, more Nortel, Global Crossing. All of our stocks lost money except for Harrah’s which we sold after making 20 or 30% on our investment in only 6 months. 360 Networks and Global Crossing both filed for bankruptcy if I remember correctly and their stock became worthless.
- Stupid purchases: zoom and wide-angle camera lenses which I never use ($100), Garmin GPS running watch which I barely used and eventually broke when I accidentally went swimming with it in my pocket ($120), several books on programming which I have never opened. These were all impulsive purchases made on credit by the way.
- Brought traveller’s cheques to Mexico in $20 USD denominations, not realized that I would have to sign each one individually (huge pain in the ass when you have to sign 20 of them to get $400 cash), that it can be challenging to find a place to cash them, and that finding an ATM in Mexico (even in Tulum) isn’t that hard. I also got screwed on the exchange twice. Once to go from CAD to USD and again to go from USD to MXN.
- Ate out for lunch almost every day since 1997.
- Got rid of my 1986 Toyota Tercel before moving away to grad school for 2 years for far less than it was worth. Should have kept in the the parents driveway.
- Thought it was actually possible to beat the house in blackjack with just the right technique!
Check out these two headlines, published 1 day apart!
India is hunting for oil around the world, but . . . the oil sands in northern Alberta are not likely among its targets, a consultant specializing in state-owned energy companies says.
India has jumped into the intense competition for Canadian oil sands assets with plans to invest $1-billion (U.S.) in the next 12 months, a top Indian energy official said yesterday.
You have be careful who you believe, especially when it comes to things you read in the paper and see on TV.
I predict that within the next 10 years we will see a wave of new index ETFs and index/passive mutual funds. Almost all indexes currently available (and the ETFs and mutual funds that track them) are market-cap weighted. The technique that is usually used is that the stocks in some set (all Canadian stocks for instance) are sorted by their market capitalization (and other factors as well, but market cap is the dominating one). The index is then made up of the first n stocks in that list, where n is however many stocks should be in the index. These indexes may suit the media or other people interested in tracking “the market,”, but there are many disadvantages to using this form of indexing as an investment, and investing my money in market-cap weighted indexes is a very non-intuitive way to to invest. I have talked about some of the disadvantages of market-cap based indexes here: past articles. Non-market cap weighted indexes have a huge advantage over their market-weighted counterparts. I have discussed this in past articles using examples in the Canadian market and the US market.
Why did FTSE launch non – market cap weighted indices?
We wanted to offer the market an alternative to wealth weighted indices and created non-market cap weighted indices to offer our clients a greater choice in market measurement.
It’s interesting that they the indexing community is still hooked on just offering their “clients a greater choice in market measurement,” not a greater choice of “investment.” In the future I can envision more semi-passive/passive indexes being created not for the purpose of “market measurement” or “tracking,” but solely for the ETF market. Or, we will see passive ETFs being created (without an “underlying index”) which will use passive indexing techniques (lower MERs) rather than active management (with higher MERs, which have proven to be a losing prospect in the past). They continue,
What is the difference between market cap weighted indices and non-market cap weighted indices?
The stocks within market cap weighted indices are selected according to market capitalisation (price x number of shares x free float) whereas stock in non-market cap weighted indices are selected according to a factors dependent upon fundamental data such as: book price, cash flow, revenue, sales, income and dividends.
Here they are talking about their selection criteria, which is in a way separate from the weighting-criteria. Using this selection criteria they mention is ok, however, I hope that they use equal-weightings or constant-weightings rather than weighting based on these criteria. Unforunately it is not possible to obtain the constituent stocks of these indexes at FTSE’s website.
In the US there is only one index, the S&P500 Equal-Weight Index, that I know of, and fortunately there is an ETF that tracks it, the Rydex S&P Equal Weight ETF. This funds takes it’s selection from the S&P500, however, meaning that there is a bias towards large-market cap stocks. The disadvantage of this is that some speculative stocks with unduly high market capitalizations (based on an overvalued stock) could make it into the index. What I would like to see is a family of indexes, all with equal weights for all their constituent stocks, but with different selection criteria for each index. We see this today, with Dow Jones’ style-based indexes, which are focused on value stocks, growth stocks, etc… however, these indexes are still market-cap weighted, unfortunately.
I can see non-market cap weighted indexes becoming more popular in the future, if only because of their better past performance. We all know people’s insatiable thirst for better performance, and it is clear that non-market cap indexes have given better performance in the past as I showed here and here. When the market has it’s next significantly large drop/crash, average investors will invariably sell positions in market-cap weighted ETFs and index funds and when the market comes around again, will look for other places to put their money, chasing performance. I think passive non-market cap based indexing will be the next big thing.
Incidentally, the Efficient Market theory is the prime motivator behind indexing, which has been a losing propostion over the past few years (but I think thats more a function of market cap weighting than inefficient markets). [emphasis mine]
Maybe I’m talking out of my ass, but I am just not satisfied with using market-cap weighted indexes, nor am I satisfied with putting my money in the hands of a fund managers, whose ability to beat indexes consistently is questionable. Passive non market-cap weighted indexes lie somewhere in the middle and I really like the idea.
- At a recent conference, there was a talk entitled, “New Directions In Indexing.” Here’s the blurb: “Non-Market Cap Weighted Indexes for Portfolio Diversification and Enhanced Returns Carmen Campollo, SVP, Relationship Management, FTSE AMERICAS.” Looks like FTSE really is leading the way.
- The Dow Jones-AIG Commodity Index is non market cap weighted and is rebalanced annually. According to “Kevin,” on the Morningstar forums, “because commodities are so highly volatile (and not that highly correlated) the rebalancing bonus can be large–and you don’t even have to do the rebalancing work. Keep in mind that you only get the rebalancing bonus in a non market cap weighted index—more equal weighted as the AIG index is. In a market cap weighted index there is no rebalancing going on within the index.”
I just saw a hilarious skit on Saturday Night Live last weekend. Here’s the transcript:
Don’t Buy Stuff You Cannot Afford
[ open on couple trying to balance their checkbook ]
Wife: (sighs) I just can’t get these numbers to add up.
Husband: Like we’re never going to get out of this hole.
Wife: Credit card debt, does it ever end?
CP: [walks in] Maybe I can help.
Husband: We sure could use it.
Wife: We’ve tried debt consolidation companies.
Husband: We’ve even taken out loans to help make payments.
CP: Well, you’re not the only ones. Did you know that millions of Americans live with debt they cannot control? That’s why I developed this unique new program for managing your debt. It’s called [presents book] “Don’t Buy Stuff You Cannot Afford.”
Wife: Let me see that… [grabs book, reads] “If you don’t have any money, you should not buy anything.” Hmm, sounds interesting
Husband: Sounds confusing.
Wife: I don’t know honey, this makes a lot of sense. There’s a whole section here on how to buy expensive things using money you save.
Husband: Give me that… [grabs book, looks at it] And where would you get this saved money?
CP: I tell you where and how in Chapter 3.
Wife: Ok, so what if I want something but I don’t have any money CP: You don’t buy it.
Husband: Well let’s say I don’t have enough money to buy something. Should I buy it anyways?
Husband: Now I’m really confused!
CP: It’s a little confusing at first.
Wife: Well what if you have the money, can you buy something?
Wife: Now take the money away. Same story?
CP: Nope. You shouldn’t buy stuff when you don’t have the money.
Husband: I think I got it. I buy something I want, and then hope that I can pay for it right?
CP: No. You make sure you have money, then you buy it.
Husband: Oh, THEN you buy it. But shouldn’t you buy it before you have the money?
Wife: Why not?
CP: It’s in the book. It’s only one page long. The advice is priceless and the book is free.
Wife: Well, I like the sound of that.
Husband: Yeah, we can put it on our credit card.
CP: [shakes head]
Announcer: So get out of debt now, write for your free copy of “Don’t Buy Stuff You Cannot Afford.” If you buy now you’ll also receive, “Seriously, If You Don’t Have the Money, Don’t Buy It!” Along with a 12-month subscription to “Stop Buying Stuff Magazine.” So order today!
Excellent satire of life with easy money. We used to be like the couple in the skit, (well not as clueless), charging things to credit cards and figuring out how to pay for it later (usually with a hefty chunk of our paycheques). Now we pay for everything with money we have saved and not only do we have more disposable cash than ever before but it feels great!
Apparently the US gets more oil from Canada than any other country, according to a report that Random Roger just saw on CNN. The full results are here: “Where The US Gets Its Oil.” This is no doubt only going to increase as US tries to wean itself off foreign oil and the Alberta oil sands increase production, according to theNational Post:
According to data obtained by the Reuters news agency, the U.S. Energy Information Administration estimates America’s oil imports from Canada will almost double by 2025, from 1.6 million barrels a day to 2.7 million barrels a day. The vast majority of that increased production will come from Alberta’s oil sands, which are expected to produce as much as three million barrels a day by 2020 . . . In October, Utah Senator Orrin Hatch said Canada was poised to surpass Saudi Arabia as “the world’s oil giant” in the 21st century.
I just read three articles from The Big Picture about market inefficiency that I found interesting:
- “The kinda-eventually-sorta-mostly-almost Efficient Market Theory” talks about how the father of efficient market hypothesis (EMH), Eugene Fama, has now admitted that “poorly informed investors could theoretically lead the market astray; Stock prices, he noted, could become “somewhat irrational.” This has shift in thinking “has big implications for real-life problems, ranging from the privatization of Social Security to the regulation of financial markets to the way corporate boards are run” according to a quoted Wall Street Journal article.
- “The Hardly Efficient Market” discusses the case of Apple’s (AAPL) stock in the past year. “That’s a perfect example of bad theory costing you money.”
- “The Astonishingly Inefficient Market” looks at Enron as a perfect example of how inefficient the market is. “Where, pray tell, is the efficiency there? The information that Enron was giant fraud was out, and yet the stock took over a year to collapse. Efficient? P’shaw . . . “
I waited patiently until WordPress 2.0.1 was released as I heard there were quite a few bugs in WordPress 2.0. Anyways, the install was a bit tricky, mainly because I had some modifications to the default Kubrick theme which I had to port over and a bunch of plugins I had to upgrade and test as well. It looks like everything is finally working now and looks-wise the site looks almost identical to before. The administration interface is a bit nicer although nothing to write home about. The only reason I upgraded was so that I can upgrade to the next major release, and so on. The WordPress 2.0 upgrade guide was useful as well as the WordPress 2.0 Plugin Compatibility Guide. The only plugin I am sorely missing is the spelling checker I was using, which apparently doesn’t work well with 2.0. Also I just found a hosting company, and I am thinking of hosting the site at MHER.org long term. Other than one person mentioning it in a post in a forum, I don’t much about it but we’ll see.
Warren Buffett’s annual reports are famous. But there are many other value investors whose reports are must-reads. One of those is Martin Whitman:
Savvy value investors shouldn’t stop with Warren Buffett’s letter. Another renowned value investor’s reports are also well worth reading.
Martin Whitman provides his interesting take on value investing every three months in the Third Avenue Value Fund’s (TAVF) quarterly report. Whitman founded the U.S.-based Third Avenue Value Fund and is the author of Value Investing: A Balanced Approach (ISBN: 0471398101), which is one of the more insightful books on value investing.
Martin Whitman’s quarterly reports (from 1995 to 2004) can be found on the Third Avenue Fund’s web site. Whitman is a deep value investor and often buys distressed debt at deep discounts. For instance, last quarter he started investing in scandal-plagued Parmalat. Whitman said, “Parmalat, a massive fraud, is an Italian-based worldwide company essentially selling dairy products. The fund established a toehold position based on the view that Parmalat seems reorganizable because it is likely that many of its businesses are well entrenched and profitable.” If you think that such situations can’t have a suitable margin of safety, or result in a profit, then you should take a look at the Third Avenue Value Fund’s track record. According to Morningstar.com, the Third Avenue Value Fund beat the S&P500 by over 2% annually during the last ten years and it did so with below-average risk. Mind you, Whitman would likely have more than a few things to say about Morningstar.com’s definition of risk.
In Canada we also have our own value investing guru who writes excellent reports, Irwin A. Michael, manager of ABC funds. He provides monthly commentary, ABC Perspectives, and several other features available through the ABC Funds client page. Not to mention his excellent Value Investigator site.
I was just looking at a chart today at Yahoo that did not make any sense. The chart compares Fidelity Low-Priced Stock Fund (FLPSX) with Legg Mason Value Trust (LMVTX). The problem is that over this period the former should have beaten the latter by a significant margin. According to this article at Forbes.com which I have referenced twice already, FLPSX had an 18.4% annualized return vs. 16.55% for LMVTX. Either the Yahoo chart is incorrect or the Forbes article is incorrect. Then it dawned on me, Yahoo is obviously just plotting the NAV which doesn’t take into account distributions! I found an article, “A Call for Decent Fund Charting,” that cleared things up for me.
Morningstar is apparently the only site that shows plots of total return on investment (besides mutual fund company websites, which only show performance for their own funds). Compare the data here for LMVTX with the data here for FLPSX. It gives FLPSX’s 10-year annualized return as 16.82% vs. 14.71% for LMVTX. That looks more like it! Over the same period in Yahoo, 1996-2006, we see a completely different picture (the incorrect picture).
On Morningstar it is not possible to compare two different funds on the same plot, so charting is useless in my opinion, except for comparing with the indexes and fund categories. The best solution is to look at figures like “n-Year Annualized Return” (see the Trailing Total returns section on Morningstar’s fund pages) at sites like Morningstar’s or on the mutual fund company’s pages themselves.
My apologies, as I have presented a few plots comparing mutual funds from Yahoo in the past. I guess this technically applies to ETFs and stocks as well, basically anything with distributions. I will try to go back and fix some of the old posts that used plots from Yahoo to compare past performance.
Of course everyone has heard by now that Google’s shares dropped about 9% today. I had heard earlier that their stock had dropped 19% in after-hours trading, but settled back to 12%, then 9% today:
Google shares fell 12 percent in after-hours trade to $379.00, slicing roughly $15.3 billion from a market capitalization that had stood around $126 billion. To put that in perspective, the decline represents the entire market value of Gannett Co. Inc. (NYSE:GCI – News), the largest U.S. newspaper chain.
Wow. Well not everyone is buy buy buy:
“It would be fair to say that the bloom is off the rose,” said Stifel Nicolaus analyst Scott Devitt, who issued a rare “sell” recommendation on Google stock this month. “Google remains a great company. But there is a disconnect between the business and the market capitalization.”
It looks like there are only 2 analysts labelling Google as a sell. It’s 29-8-2 (buy-hold-sell). Actually 29 out of 31, that pretty much IS everyone. Here’s what a friend wrote to me thing morning:
Watch Google crash…they missed fourth quarter earnings estimates by a mile. It’s the first sign of adversity since the IPO. The stock already lost 9.05% at the time of this email. People will probably forget about this in a couple of days when someone on Wall Street announces that “despite poor fourth quarter performance, Google remains ‘a great buy’.” Everyone will then start dumping money in again. The daily press releases from Wall Street seem to be what drive the “Bulls.” Google is a great present day example of the “psychology of investing.”
It’s also a typical example of irrational exuberance and of history repeating itself.