Archive for June, 2011

The tricks that hindsight plays on us

June 29, 2011

17 comments

In a recent post on MoneyVille.ca titled “I let an $11,500 stock profit get away“, The Star’s Peggy Mackenzie relates the story of how she invested $550 in what is today Gennum Corporation. Her initial investment has grown to $6,300 over close to three decades — a respectable rate of return — and that’s even before accounting for the modest dividend (the company has paid a quarterly dividend since 1994).

But Ms. Mackenzie isn’t happy with her returns. She regrets that she didn’t sell the stock in 1999 resulting in a “paper loss from the peak of nearly $11,500”. And she isn’t alone. One hears variations of it all the time. Recently, a friend complained that he has “lost” 10 percent since April and he should have sold because he knew that the troubles in Greece are bad news for the markets. And I’ve caught myself boasting about how much I’ve lost by not cashing in employee stock options in the late 1990s.

Investors should stop beating themselves up so much and realize that hindsight is playing tricks on their minds and what appears obvious today was only one of many potential outcomes in the past. For example, Ms. Mackenzie might have potentially sold Gennum far earlier than when it hit its peak and missed out on most of the gains she is currently sitting on. Or Gennum might have gone the way of Pets.com leaving Ms. Mackenzie with a much more regret. We only have one past but the future could unfold in any number of ways.

Are there other behavioural biases can you spot in Ms. Mackenzie’s post?

Are Covered Calls Less Risky than Passive Strategies?

June 27, 2011

19 comments

In The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad and the Ugly, author Larry Swedroe questions claims that covered calls are less risky (when risk is measured by the standard deviation of returns) than long-only portfolios. He points out that in a covered call strategy, the distribution of returns is not “normal” and that standard measures such as the Sharpe ratio are not very useful in measuring risk.

Classifying covered calls a “flawed” alternative investment, Mr. Swedroe notes that the strategy has two undesirable traits: (1) The returns exhibit negative skewness (Skewness is a measure of the asymmetry of a distribution) and (2) The strategy eliminates the potential for a highly positive return while having no impact on the potential for an extremely negative return (Kurtosis risk).

Mr. Swedroe concludes:

While covered-call strategies appear to promise “a free lunch” of increased returns with less risk, investors who care about more than the volatility of returns will not find this an efficient strategy.

This and That: OSC Proposals, Larry Swedroe in Ottawa and more…

June 23, 2011

12 comments

We all make assumptions when it comes to planning for retirement. A recent column in the Wall Street Journal explains why caution is warranted when making assumptions in retirement planning.

Rob Carrick weighs in on a Ontario Securities Commission proposal that will force investment dealers and advisers to show the actual dollar cost of fees and commissions and a meaningful summary of a client’s rate of return. Good advisers should be doing this already.

Preet Banerjee explains what a dividend capture is and explains why it is a tough way to earn excess returns.

My Own Advisor shares his notes from a talk delivered by Larry Swedroe in Ottawa this week.

Larry MacDonald notes that pension funds, which bring vast resources to bear on active management, has failed to deliver alpha.

Michael James says that Larry Swedroe makes a convincing case for passive investing.

Money Smarts Blog thinks that while the OSC proposals are a great idea, it won’t make much of a difference for most investors.

Canadian Personal Finance Blog offers some good tips (and some not so good tips) on saving money on gas.

If you are going on vacation to the US or overseas this summer, you may want to heed Ellen Roseman’s warning that smart phone users are being hit with hefty data roaming fees.

HowToInvestOnline investigates whether S&P 500 currency-hedged ETFs work well and compares two ETFs available on the TSX.

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