Archive for July, 2009

This and That: Best bets for a bull market and more…

July 23, 2009

  1. With stocks bouncing back from the lows of March 2009, this column in the New York Times says that technology and large blue-chip growth stocks are likely to perform best in the next bull market.
  2. In light of the Earl Jones affair (a Montreal-based advisor alleged to have perpetrated financial fraud), Rob Carrick shows how to run basic background checks on a financial advisor.
  3. Jon Chevreau reiterates that a home should be a person’s castle, not their bank machine.
  4. Thicken My Wallet points out that extrapolating Japan’s long decline to the US ignores some important demographic differences.
  5. Should one buy a starter home and later trade up if necessary or go for a once-and-done home to live forever? Gail shares her thoughts on the issue.
  6. Preet is conducting a mega giveaway with lots of prizes on offer as part of his blog’s second anniversary celebrations.
  7. If you bought a lottery ticket and found that 6 out of 7 winning numbers matched, how much would you have won? The answer, as Michael James found out, is surprising.
  8. I’ve had my share of interviews but I’ve never been asked about my salary history. However, employers do typically ask about salary expectations and I simply say “in line with the market”. Mr. Cheap on how to address this sticky question if it comes up in an interview.
  9. Oh, to be young and cash rich. Million Dollar Journey offers tips for someone in this fortunate situation.
  10. Dividend Growth Investor digs up a cache of partnership letters dating back to the early years of Warren Buffett’s investment career.

Have a great weekend everyone!

Doubts on Equity Risk Premium

July 23, 2009


After investing for ten long years and ending up with less capital than they invested, many are questioning the wisdom of long-term ownership of stocks. While I think bonds have a place in even the most aggressive portfolio, it would be a mistake to extrapolate the recent poor run in stocks far into the future and give up on stocks altogether. This post on Falkenblog (which I found via Larry MacDonald’s Investment Ideas blog) captures the prevailing mood by arguing that the equity premium does not exist by making the following points:

  1. Geometric versus Arithmetic averages: I’m not entirely clear who the target of this criticism is. Almost every book I have uses geometric averages in talking about long-term market returns. Jeremy Siegel, for instance, clearly breaks out both geometric and arithmetic averages and his data indicates that stocks have exceeded bond returns by 3.3% during the 1802-2006 time period.
  2. Survivorship bias: I find it interesting that Falkenblog chose not to cite the Dimson, Marsh and Staunton paper, which found that equity premiums existed in every major market database for the 1900-2005 time period: “The annualized U.S. equity premium relative to bonds was 4.5% compared with 4.1% for the world ex-U.S. Across all 17 countries, the equity premium relative to bonds averaged 4.0%, and for the world index it was also 4.0%”. In other words, equity premiums are not unique to US stock markets.
  3. Taxes: Applying a tax rate on the equity premium is simplistic. A more careful analysis would apply past tax rates on returns from stocks and bonds and arrive at an after-tax risk premium.
  4. Adverse market timing and transaction costs: Many studies have established that the returns obtained by the average investor falls far short of market returns. However, intelligent investors who pay careful attention to expenses and emotions have high odds of outperforming all other asset classes by sticking with stocks over most long holding periods.

While the debate about past risk premiums may be interesting, a more pertinent question for investors is: where do we go from here? Today, 10-year bonds are yielding 3.5%. The dividend yield of the S&P 500 is about 2.5% and the TSX Composite roughly 3%. Stocks seem to be priced to deliver a healthy premium in the future even with very modest returns.

Book Review: 397 Ways to Save Money

July 21, 2009

[Front Cover of 397 Ways To Save Money]

We are already familiar with Kerry Taylor’s work. We know her the creative and talented writer and photographer behind She has now hit the big leagues with her new book, which has already garnered rave reviews and briefly made it to the best seller list.

The book’s title says it all: it features an impressively long collection of tips to save money. Just pick a topic such as “Home Maintenance” and dive straight in for ideas on saving some cash. Kerry shows not only how to save money but also how much savings each tip can potentially generate. It is a timely addition to the genre, especially at a time when North Americans are turning their backs on their spend thrift ways.

The paperback book, published by Harper Collins Canada, is priced frugally at $14.99 but is available even cheaper at online bookstores. An excerpt is available on the Squawkfox website.

Other reviews
Four Pillars said it is “a great reference” and “a really good book”.
Jon Chevreau called it “The Guerrilla Frugality Bible”.
Million Dollar Journey thought the book contained “ideas that anyone can easily use to keep more cash in their pockets”.
Preet reviewed the book favourably and linked to other reviews.
Larry MacDonald chimed in with a 398th way to save money.