I Told You So!

Hilarious video of bearish Peter Schiff on various talk shows in the past few years getting laughed at by his peers:

Somewhere around the middle of the clip there were a few stock recommendations. Ben Stein recommended buying Merrill Lynch when it was trading at $76.01. It’s now trading at $8.34. Someone else said Goldman Sachs is cheap and recommended buying it at $175. It’s now trading at $53.31. Ballsy Peter Schiff countered those recommendations with “Stay away from the financials. They’re toxic. They’re not cheap, they’re expensive. You think they’re at low P/Es? They have no earnings. Their earnings are going to disappear.”

Bogle on Index Fund Investing

Bogle on Index Fund Investing

Just found this great interview with John Bogle, “the father of index investing.” A must-listen for any investor, especially those who own mutual funds and those who have no idea what index investing is all about. If you already use indexes in your portfolio, they is still a lot of great information here, and it will help give you even more confidence that you are on the right track!

The Real 10 Commandments of Investing

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!

Malkiel, Bogle Argue Against Non-Market Capitalization Weighted ETFs

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.”

Steadyhand Opens for Business

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).

Bill Miller on Commodities and Market Physics

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.

Has Miller’s fund outgrown his touch?

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.”

Stocks Buffett Would Stay Away From

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.”