Archive for September, 2009

This and That: Bears turning into Bulls and more…

September 24, 2009

  1. Look who is bullish now! James Grant, a self-confessed “not famously a glass half-full kind of fellow”, writes in the Wall Street Journal that the recovery from the Great Recession will be something of a barn burner.
  2. The Globe and Mail’s Rob Carrick reports that TD Bank joins other major banks in boosting interest rate on its secured lines of credit. It seems to me that Royal Bank is the lone holdout — my line of credit is still at Prime.
  3. In a recent talk organized by PWL Capital, The Drunkard’s Walk author Leonard Mlodinow noted that stock market returns are random or close to it. He reiterates the point in an interview with Jon Chevreau.
  4. PWL Capital’s Cameron Passmore talks about fixed income investing in this radio interview.
  5. The Dividend Guy featured a guest post on the key concept in The Intelligent Investor: margin of safety.
  6. With so many extra-curricular activities available, Million Dollar Journey wonders where to draw the line.
  7. I agree with Four Pillars that Speakout Wireless is the best pre-paid deal around. We have two pre-paid phones and the long expiry periods are perfect for light users.
  8. Michael James reports that phone customers can expect a rebate of between $5 and $20 due to a recent Supreme Court decision.
  9. Vanguard ETFs are set up as a special share class of its mutual funds. Preet Banerjee posted a response on why the Vanguard structure has cost, tax and tracking efficiency. Larry MacDonald also noted Vanguard’s response that the adverse tax consequence of the VIPER structure is “hypothetical”.
  10. The Financial Blogger posted a list of top 20 Canadian dividend stocks.

That’s it for this week. Have a great weekend everyone!

Emotions affects fixed income investors too

September 24, 2009


In a recent discussion with the Globe and Mail, Enough Bull (read my review here) author David Trahair once again made a case for investing exclusively in GICs. Unfortunately, I don’t think it is a persuasive case. First, he compares TSX total returns with GICs over various time periods and despite a premium from stocks ranging from 2% to 6%, he says “GIC returns seem to be competitive”. Michael James showed that even modest premiums when compounded over time result in a huge difference in the ending value.

Mr. Trahair then says that expenses and emotions take a toll on the equity premiums:

The last point is emotions – were you able to hold on when your equities lost almost 50% of their value from June 18, 2008 to March 6, 2009?

It is a fair point — something that, hopefully, won’t come as a surprise to regular readers. But is it valid to assume that fixed income investors are not prey to emotions? Does the low volatility of fixed income help investors to stay invested? Let’s turn to the DALBAR study of investor behaviour for some answers.

The DALBAR study found that investors in both stocks and bonds experienced much lower returns than the comparable indices. Over a 20-year period ending in 2008, stock investors underperformed the index by 6.48%. Bond investors didn’t do much better — they underperformed by 6.66%. Interestingly, stocks performed poorly over the 5- and 10-year period ending in 2008 but stock investors didn’t do much worse. But, bond investors once again underperformed by 6% over the same time period.

As bonds have much lower volatility than stocks, it is likely that bond investors are hurt by greed rather than panic. It is hard not to chase the latest ‘it’ investment when everyone else is piling into it.

Book Review: The New Yorker On the Money

September 22, 2009

[Front Cover of The New Yorker On the Money]

The New Yorker On the Money is a collection of cartoons that appeared in The New Yorker magazine on the subject of money, banking, investments, employment and the economy over a period of more than 80 years. The cartoons are organized by decades: from the roaring 1920s to the not-so-roaring 2000s and Malcolm Gladwell, the non-fiction author whose books are perennial best-sellers has supplied a delightful introduction.

In addition to being absolutely hilarious, the cartoons brilliantly capture the zeitgeist of the era and remind us how often financial history repeats itself. One cartoon from the 1930s depicts men around a table peering at a dollar bill and the caption reads ‘A Board of Directors inspects third-quarter net earnings available for dividends after deductions for fixed charges, income tax, depreciation, and obsolescence.’ The New Yorker could have published that cartoon in the late 1990s with some minor changes and it would have perfectly captured the era when companies routinely deducted a long list of items to produce “pro forma” earnings.

[Excerpt from The New Yorker On the Money]

Excerpted with permission from The New Yorker On The Money Copyright © 2009 by The New Yorker Magazine; Andrews McMeel Publishing.

Here’s one cartoon that is not exactly funny but is an incisive observation of investor behaviour. Two men have jumped off a building and one tells the other: “Remember, I warned you that only a person with a regular income, a cash reserve for emergencies, and adequate insurance coverage, plus a surplus, should buy stocks — and then with the utmost selectivity.”

I received a review copy of this book and it has to be the one I have enjoyed the most by far. If they didn’t send me a copy, I would have purchased one. It is available from and for roughly $20.