Archive for the 'Gurus' Category

The Real 10 Commandments of Investing

Published
by
Dave
9 months, 2 weeks ago
in Asset Allocation, Bonds/Fixed Income, Costs, ETFs, Gurus, Indexes, Investing, Mutual Funds and Stocks
. 4 Comments

Rob Carrick recently “gathered 10 of our favourite bits of investing advice, on topics ranging from stock-market risk to which mutual funds to buy” and called it the 10 Commandments. A commandment is “a command or order,” so something like “thou shalt not use the word commandment incorrectly” is a commandment. “Commandment” #10 is “Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and almost invariably, abandon it at precisely the wrong time.” C’mon that’s not even a commandment! So what is the order here, that we should not jump ship on a good strategy that goes bad? or should we not use strategies? or should we abandon them at precisely the right time instead of the wrong time? The longer explanation does not leave things any more clearer, offering such advice as “ignore the slumps or use them as a buy-low opportunity,” or ” judge whether your fund manager has what Dreman calls a good strategy.” For what’s it’s worth, the only words of advice in there I thought were useful were Buffett’s (use low-cost indexes) and Malkiel’s (less fees are better).

A while ago a guy named Alan Haft (he wrote a book called “You can never be too rich”) made up his own 10 Commandments of Investing and it’s been in my drafts folder ever since I saw it. I think he sums up the most important things that people should do with regards to investing, they are well written, and they make sense. Here they are:

  1. Stick with the indexes
  2. Watch those fees
  3. Create a bond ladder
  4. Diversify
  5. Watch your money
  6. Don’t rush in
  7. Don’t take the risk if you don’t need the return
  8. Get out if something isn’t working
  9. Understand tax consequences
  10. Keep it simple

Here are some highlights:

1. Stick with the indexes
Leave the individual stock picking to gamblers and speculators. Very few people really understand how to successfully pick individual stocks, and if they do, the news that drives markets today is totally unpredictable, making individual stock picking a highly risky venture. Reams and reams of statistics prove index investing almost always outperforms the financial advisors, money managers, and stockbrokers. Stick with the indicies and you’ll likely wind up far ahead of the game. Care to speculate a bit on some individual stocks? Do it with a small portion of your money, but certainly not the bulk of it.

2. Watch those fees
Wall Street loves investors that don’t watch their fees. For those investing in funds, check out www.personalfund.com. You might be shocked to find out the total cost your funds are charging you to own them year after year. Especially over the long haul, fees can destroy your returns. Minimize fees as much as possible by investing in low-fee, highly diversified investments such as one of my personal favorites, Exchange-traded funds such as those offered by www.ishares.com

7. Don’t take the risk if you don’t need the return
Many people would do perfectly fine getting 7-10% returns on their money, yet their portfolios are invested in things that strive for well beyond that. Especially if you’re a retiree, if you doubled or tripled your money overnight, would you go out and buy a fancy new sports car? A mansion on the hill? Few of us would. And for that reason, always ebb towards the safer side of investing as much as you possibly can

Check out the original article for the rest!

Popularity: 91% [?]

Malkiel, Bogle Argue Against Non-Market Capitalization Weighted ETFs

Published
by
Dave
1 year, 4 months ago
in Books, Costs, ETFs, Gurus, Indexes, Investing and Mutual Funds
. 2 Comments

I found this little nugget from June 2006 from a link I saw (not a very interesting read) on Canadian Capitalist’s blog. It’s an article called “Turn on a Paradigm?” (very interesting read) and it was written by Burton Malkiel (author of a Random Walk Down Wall Street) and John C. Bogle (Founder of The Vanguard Group). It attacks the idea that fundamental-weighted indexes can beat the market capitalization weighted indexes. Or, at least, challenges the idea that the former can beat the latter with the same risk. (I thought that’s what they were getting at near the end when they mentioned that fundamental-weighted indexes often hold more small caps which have performed well lately, albeit at higher risk. Although they seem to argue more along the lines that due to the reversion to the mean principle, those equities that recently did well since 2000 will not be doing necessarily so well in the future.)

It’s a great little introduction to the concepts in A Random Walk Down Wall Street (a book that I am reading right now). In case some of you are not interested enough to read it (the article, not the book), I will quote my favourite two paragraphs for you here:

First let us put to rest the canard that the remarkable success of traditional market weighted indexing rests on the notion that markets must be efficient. Even if our stock markets were inefficient, capitalization-weighted indexing would still be — must be — an optimal investment strategy. All the stocks in the market must be held by someone. Thus, investors as a whole must earn the market return when that return is measured by a capitalization-weighted total stock market index. We can not live in Garrison Keillor’s
Lake Wobegon, where all the children are above average. For every investor who outperforms the market, there must be another investor who underperforms. Beating the
market, in principle, must be a zero-sum game.

But only before the deduction of investment management costs. In practice, investors as a group will fail to earn the market return after these costs, and as a group, they will fall far short of the low-expense index funds. For the typical actively managed equity mutual fund, annual operating expense ratios are well over 100 basis points (one percentage point). Add in the hidden costs of portfolio turnover and sales loads, where applicable, and effective annual costs are undoubtedly considerably higher, perhaps as much as 200 to 250 basis points. In total, simply because the average actively managed fund must underperform the capitalization-weighted market as a whole by the amount of financial intermediation costs that are deducted from the gross return achieved, active investing must be, and is, a loser’s game.

Wow! I can’t wait to get into the meat of Malkiel’s book. I’ll give them the last word — “Intelligent investors should approach with extreme caution any claim that a ‘new paradigm’ is here to stay.”

Popularity: 34% [?]

Steadyhand Opens for Business

Published
by
Dave
1 year, 5 months ago
in ETFs, Gurus and Mutual Funds
. 2 Comments

Mutual fund company Steadyhand recently opened up their Vancouver office. It’s founder is Tom Bradley, formerly of Phillips, Hagar, & North, better known recently for his blog that he started in June 2006. I read his blog once in a while and in general I like what he has to say. I can’t see myself buying any of their funds though. There is zero past performance so you have to take their word for it that they know what they are doing. Their website says “We have a straightforward lineup of no-load, high-conviction funds that we offer directly to investors. Our fees are low, our portfolios are concentrated and our managers focus on making you money, rather than tracking an index.” Again, my faith in mutual fund managers’ ability to beat indexes (after MERs are taken into account) is almost non-existant. According to Jason Zweig in Investing Intelligently 4th Revised Edition page 248, only 37 of 248 U.S. Stock funds outperformed the Vanguard 500 Index Fund from December 1982 to December 2002. I could go on with more references. The fact that Steadyhand’s MERs are fairly low should make their job of beating their competition (indexes) a bit easier. All of SteadyHand’s funds have MERs of 1.7% or less. That might be a lot less than the average mutual fund, but it’s still a lot higher than the 0.5% I can get for iShares MCSI Index ETF (XIN). One thing they have done that I like is that they offer a small discount in the MER, the longer you hold the mutual fund.

So if you’re thinking about giving your money to Steadyhand, first listen to what Tom Bradley has to say about passive index ETFs: “Exchange-traded funds (ETFs) are a great product. They provide exposure to the equity market for a reasonable price. If you buy the iShares XICs, you can be assured of getting the return of the S&P/TSX 60 for only 0.17%. That’s a good deal.” He emphasized it again later: “As I pointed out a couple of weeks ago, I still think the low-cost, broad market ETFs are excellent products, in particular, the iShares XICs, which track the S&P/TSX 60 Index and have an MER of 17 basis points.” (Some of you might have noticed that he was referring to XIC when he should have been referring to XIU).

Popularity: 15% [?]

Interview with Michael Irwin and Ross Healy

Published
by
Dave
1 year, 7 months ago
in Irwin Michael and Ross Healy
. 1 Comment

Investorial had a transcript of this interview a while ago. Here’s the the video: “Irwin Michael and Ross Healy on ROB TV.”

Popularity: 23% [?]

Bill Miller on Commodities and Market Physics

Published
by
Dave
1 year, 11 months ago
in Bill Miller, Economics and Stocks
. 2 Comments

Here’s a really old article, flagged it a long time ago, and just got to it now: “Bill Miller on Commodities.” How true is that? To make some money by buying things at the right place and the right time (if that is your fancy) you have to be buying things that are in the dumps, things that no one has made money on in a really long time, things that are cheap. It is funny how most humans never figure this out. Part of the reason why this happens is that bull markets can be so prolonged. The other reason I think is that when the big crashes hit, no one has any spare cash around to invest in the cheap stuff because, well, it was all invested, and now you’ve lost it.

One final reason could be that humans seem to have Newton’s 1st law of motion hard-wired into their brains. The law says that an object will not change velocity until a force acts upon it. Humans have a slightly corrupted version of this law programmed in their brains, however. A version that ignores the “until a force acts upon it” part. People forget so easily that there are forces that can cause markets to “change velocity” from upwards to downwards, instead thinking that the velocity will stay upwards (as if the world was frictionless). Inflation, rising interest rates, commodity shortages, natural disasters, a huge shift from the historical mean, war, stupidity, corruption, routine market correction, etc… In fact, in another analogy with physics, you could probably say that the magnitude of the restoring force involved is proportional to how far away from the mean the market has travelled, just like a spring (see Hooke’s Law). In other words, the bigger they are the harder they fall.

I’m curious, what has done really badly in the past few years anyways? What has performed the worst? I did a quick check of index funds using globefund.com’s fund filter and sorted them by worst performers over the past 3 years. It looks like tech stocks/nasdaq, bonds, and US equities (due to US dollar decline) have been the worst performers in increasing order of better performance. We also can’t forget about cash which also hasn’t performed too well (in never does, but it doesn’t do that badly either, just losing a few percent every year due to inflation). :-) What has performed the best over the past 3 years? Well just about everything, energy stocks, gold, Canadian equities, REITs, international equities, European equities, in decreasing order of performance. Anyways, don’t read too much into that, it’s just me playing around. I have a hunch though, that those investments that have performed well over the past 3 years are probably less likely to perform as well going forward.

Aside: Newton himself famously lost 20,000 pounds (in 1720, worth 1.9 million pounds in today’s dollars) on the South Seas bubble.

Popularity: 26% [?]

How to Think Like Warren Buffett

Published
by
Dave
2 years ago
in Warren Buffett
. 0 Comments

Here’s an interesting read, the first in a 29-part series on how to think like Warren Buffett

Popularity: 18% [?]

Has Miller’s fund outgrown his touch?

Published
by
Dave
2 years, 3 months ago
in Bill Miller and Mutual Funds
. 1 Comment

Has Miller’s fund outgrown his touch? discusses whether or not Bill Miller can continue to beat the S&P 500 for much longer. Bill Miller is investment manager for Legg Mason Value Trust. I recently purchased shares in CI Value Trust (Value Trust’s Canadian dollar equivalent) and currently it makes up my entire US portfolio.

. . . don’t be surprised if the fund hits head winds. It barely beat the S&P 500 last year, nosing it by less than a percentage point. And Value Trust trailed the S&P 500 for the first quarter, falling slightly while the index gained 4 percent.

Miller himself notes that the 15-year beating-the-S&P record is just “a fortunate accident of the calendar,”:

he added, noting that there would be no 15-year streak if the investment year ended in any month but December; in some years, Value Trust trailed the index in the 12 months ending in January, February and so forth.

The author Jay Hancok argues (briefly) that it would benefit current investors if the fund was closed up to new investors:

Is it time to close Legg Mason’s flagship mutual fund, Value Trust, to new investors? A good argument can be made that the answer, at least for current investors, is yes.

But Legg Mason has no plans of closing it up just yet:

Its money-management team “believes the fund can comfortably manage substantially greater assets than those presently under management,” says Miller in his statement to me. Value Trust’s low turnover will help.

Miller himself pointed out that:

many successful “managed” (non-index) funds are bigger. Fidelity Investments’ Contrafund had $65 billion in assets last month when it announced that it would bar new investors, to focus on working for existing shareholders.

The author argues that “the more S&P 500 stock that Value Trust absorbs, the harder it’s going to be for Value Trust to outperform the S&P 500.” This is less of a problem for Bill Miller, however, who “makes big, bold bets on relatively few stocks. At the end of last year - the most recent information available - just 10 stocks made up 45 percent of Value Trust’s holdings.”

Popularity: 18% [?]

Stocks Buffett Would Stay Away From

Published
by
Dave
2 years, 5 months ago
in Stocks and Warren Buffett
. 1 Comment

This article, “Dreadful Stocks to Avoid,” explains a few good rules of thumb for conservative stock picking (also applies to mutual funds since they can own stock too!).

Stocks to avoid:

  • Businesses that bet the farm - “In some industries, companies periodically have to make critically important decisions. If the company makes the wrong choice, it will be dealt a crippling blow.” As an example, “. . . Boeing is betting the farm against the superjumbo, opting instead to develop the 787, a smaller, long-range jet that it expects to better address the market’s needs. But if Boeing’s analysis is incorrect and the market moves toward the superjumbos, it will lose customers.”
  • Businesses dependent on research - “. . . there is a downside to research. Often, innovative companies are required to do research simply to maintain their competitive position. And if the research dries up, the company suffers.” Although it was not for lack of innovation or good ideas coming from research, this rule would have prevented the majority of Canadians from buying Nortel and preventing a lot of pain.
  • Debt-burdened companies - “In general, Buffett avoids companies with a lot of debt. This makes sense. During the best of times, large amounts of debt mean that cash that could be put toward growing the business or rewarding shareholders is instead servicing the debt.” This seems like a no-brainer.
  • Companies with questionable management - “Some clues to look for here include excessively optimistic press releases, overly generous compensation or options grants, or the constant use of external circumstances to excuse operational shortcomings.”
  • Companies that require continued capital investment - “Over the long term, shareholders make spectacular returns by buying businesses that are able to achieve extraordinary returns on capital. This leads to excess capital that the company can use to repurchase shares, pay a dividend to shareholders, or reinvest in further growth.”

Popularity: 26% [?]

Too Many Choices (or why I am ready to give up)

Published
by
Dave
2 years, 6 months ago
in Advisors/Brokers, Bill Miller, ETFs and My Portfolio
. 10 Comments

If you have read my last post you will know by now that I am set to start my new portfolio at Clearsight. I have been debating what to choose for my US equity component, and whether or not to go with my advisor’s recommendation of CI Value Trust (satellite fund of Legg Mason Value Trust). I said in my last post that am not interested in investing in Bill Miller’s Value Trust fund but that I said I would rather go with the Rydex S&P 500 Equal Weight Index ETF (RSP) instead. I have now come to the realization that RSP is very similar to the S&P 400 Midcap Index which is also available as an ETF (MDY). It is very highly correlated and comparing the performance of these two ETFs makes this obvious. There is also a small advantage to getting MDY over RSP in that “the higher volume on MDY is an advantage for that fund, as is the typically tighter bid/ask spread” but this is probably splitting hairs. Comparing either of these two funds to Bill Miller’s Value Trust is probably not a fair comparison, just as comparing S&P 500 (huge-cap) to S&P 500 Equal Weight (semi-large to large-cap) is not exactly a fair comparison as they are in different classes and will of course perform differently. I found yet another index choice today, the S&P 500 Value Index (IVE). It has beaten the S&P 500 index but it has not been able to catch Bill Miller’s Value Trust. Sounds like a great alternative to the S&P 500 index though as it screens out some stocks which aren’t a good value.

At this point I began to get frustrated with the number of choices out there. RSP, SPY, MDY, IVE, and that is only a few of the ETFs available. Then there are the actively managed mutual funds, LMVTX being only one of many, and of course there are the index mutual funds of which there are probably one for every index just like the ETFs I mentioned above. Sometimes I feel like I know exactly what I want, other times I can not makes heads or tails of it with all the choices and knowing there are even more choices out there that I have not examined is daunting. It is frustrating for some someone like me, skilled in the maths and sciences and now software, that there is not some exact deterministic way of determining the ideal choice.

When I left TD, one of the main reasons was because I did not have a proper selection process for what I would buy for my RRSPs. Usually I would scan the performance (usually the longest term possible, 10-years or since inception if available) and choose funds that looked like they had done well in the past. This was flawed because crappy funds can have a few stellar years and good funds can have a few bad years. Or sometimes I would look for funds that did well in the past, but might have just come off a bad year (hoping to catch the fund on the up-swing). This method was also flawed. The second reason I left TD was that I did not want to be a DIYer anymore. I felt like an amateur/hack trying to do a professional’s job, and I was not succeeding. Not only that but I did not have enough time to spend on this. You may think that writing and researching articles for this blog takes time, and yes is does (and I have learned a lot about investing by writing this blog), but it cannot compare to the amount of time financial advisors and their superiors have spent day in and day out trying to answer these same questions. It is after all their full-time job. My financial advisor says that he does not pick stocks. He leaves that to the professionals, such as Ross Healy or Bill Miller. He does not have time to research stocks for his clients. By the same token, I should leave the management of my portfolio to my advisor because I do not have time to do it myself.

This does not mean that I should leave everything up to my advisor. Much like my advisor will monitor the actions of Ross Healy and Bill Miller I should also vet all actions my advisor recommends for my portfolio. Right now I think I am ready to give up and let him decide what is best. I would like to have a say in the asset allocation and I really want to have 25% bonds and the rest balanced between Canadian, US, and International. But as for what is inside those categories I really do not have the time to examine his choices of holdings for me in microscopic detail. It has already taken far too much of my time. The portfolio that my advisor is recommending is already much better than my old TD portfolio for many reasons, and if going with an advisor helps keep my hands off my portfolio and helps me keep this allocation over the long term, then it will surely achieve much better performance in the long run than I was getting with TD as a DIYer.

No time to read over this rant, it’s too long. Grammar mistakes be damned!

Popularity: 19% [?]

Must-Read Annual Reports

Published
by
Dave
2 years, 7 months ago
in Gurus, Mutual Funds and Warren Buffett
. 0 Comments

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.

Popularity: 14% [?]

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