Archive for May, 2013

This and That: Retirement Gamble, Modest Returns and more…

May 30, 2013

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1. Frontline, a program on PBS, featured a story called The Retirement Gamble (the show itself may not be available to all readers) recently. The program takes a hard-hitting look at the state of retirement savings in America: too many people don’t save enough and those that do save are not investing it wisely or are getting fleeced by the financial industry. A cool graphic available here as a web extra, takes a stab at showing how much retirement fees are really costing you. Don’t let this happen to you.

2. A New York Times article profiled a money management firm that has an unique sales pitch by showing their expected returns after fees, taxes and inflation. Hint: Real returns are going to be rather modest.

3. This column in The Wall Street Journal says that stocks and bonds are pricing in divergent scenarios and one or both markets could turn out to be wrong.

4. Here’s a sobering article that points out that accumulating a $1 million nest egg isn’t as easy as the financial industry makes it out to be from a surprising source: CNBC.

5. Fortune magazine ran a story alleging long-term criminal fraud at Ranbaxy Labs, whose generic medicines appear to be widely prescribed in Canada as well. One wonders, what, if anything, Canadian authorities are doing to keep our medicines safe and efficacious.

6. The Economist magazine ran an update to its story on global real estate with valuation estimates based on rents and income. The Canadian housing market ranks high among the most richly valued markets.

7. The global financial crisis dealt only a glancing blow to Canada compared to many other developed markets. Outgoing Bank of Canada Governor Mark Carney explained why in a recent speech.

8. Rich people are different from you and me. They lose more money in investing quipped Dan Solin, in a talk to clients of PWL Capital this week. Michael James on Money reported on the talk and a local radio station did a short interview with Mr. Solin.

9. Tom Bradley of Steadyhand Funds has put out a report called Five Essential Elements to Being a Better Investor. It contains sensible advice for keeping your emotions in check, a key to becoming a better investor.

10. Now for something completely different: Jon Stewart ran a funny piece on the troubles surrounding Toronto Mayor Rob Ford.

Reasons for Caution in Comparing Real Estate Returns with Stocks

May 22, 2013

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In a recent column in The Financial Post, Garry Marr pointed out that even in hottest bull market in real estate, stocks beat homes as an investment:

By the end of last year real estate prices had climbed about 85% over the previous decade, according to the Teranet/National Composite Bank House Price Index.

Stocks? The TSX/Composite Index has had a total return of about 141% during that period or about 9% annually. Go back 20 years and stocks still return more than 9% annually over the period.

One can sympathize with Mr. Marr’s intention to provide a counterpoint to the constant rah-rahs from the real estate industry (As a matter of fact, many years back, I wrote a very similar post in response to industry claims that real estate beat stocks here). However, Mr. Marr is incorrect in comparing home prices with stocks. Here’s why:

The total return from stocks includes the change in price level of the TSX index from 6,614 in 2003 to 12,433 in 2012. That’s a gain of 88 percent. The rest of the gains came from reinvested dividends (The TSX Composite yields about 3 percent per year). The return from housing was measured solely as the increase in the level of the Teranet – National Bank National Composite House Price Index and does not account for rental income from a property. It is true that owning a home entails expenses such as property taxes and maintenance but even in frothy markets like the present one, housing typically will have a positive yield net of expenses but excluding the cost of financing. Therefore the column presents an incorrect picture by comparing total returns from stocks with just the increase in price level of real estate.

Even if it turns out that stocks beat out real estate over the past decade, it still does not mean anything unless one takes risk into account. After all, if stocks beat bonds in most time periods, investors would hardly express surprise because stocks are riskier than bonds. The TSX Composite annualized returns had a standard deviation (a measure of riskiness of stocks) of 19.53% in the 2003 to 2012 period. The Teranet / National Bank National Housing Price Index, on the other hand, showed a standard deviation of just 2.6% during the same time period (assuming I did the calculations correctly with the information available from housepriceindex.ca). If real estate is less risky than stocks, one would expect real estate to have lower returns as well.

This and That: Excel Errors, Housing Bubbles and more…

May 17, 2013

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Economics may be a dismal science but a recent flap between two renowned Professors and a grad student simply trying to reproduce their results for a school assignment makes for a fascinating story.

Paul Krugman lashed out at the pundits who “turn their backs on the unemployed” based on the flawed findings of Reinhart and Rogoff in The New York Times.

Globe and Mail columnist Rob Carrick highlighted a rent versus buy argument that finds “owning never wins”. As is usually the case with buy v. rent debate, the case study is filled with assumptions like 4 percent maintenance expense on homes.

The United States may just be recovering from the previous housing bubble but sharp recent gains are giving rise to worries that another bubble may be forming in some markets.

While the S&P 500 and Dow Jones Industrial Average are hitting new highs, the US remains stuck in slow economic and employment growth. This New York Times column took a look at disconnect between the stock market and the economy.

Charlie Munger doesn’t get the same attention as Warren Buffett but he probably has better zingers. In an interview with CNBC, Mr. Munger bluntly characterizes high-frequency trading as “legalized front-running” and “basically evil”.

In an interview with CNN Money, legendary money manager Charley Ellis says that investors who see fees not in terms of assets but in terms of expected alpha will find fees “unbelievable”.

This Wall Street Journal video segment says that everyone should have a contingency plan and suggests some ideas. Some tips like the one to have 4 weeks of water around the house sound completely impractical.

Remember how BRICs became investment fads a few years back based on rosy economic forecasts looking ahead more than two decades? The Economist says that with the four emerging market economies slowing markedly, we may already be in a post-BRIC world.

Now for something completely different: Slate ran a story on the best pictures captured by Commander Chris Hadfield aboard the International Space Station. You can find many more pictures on Col. Hadfield’s Facebook page here.