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moneysense.ca, 4/01/07
This and That
Current issue:
- Larry MacDonald of Investment Ideas blog highlights a study, which found that for many model portfolios deferring rebalancing for as long as four years provided the best returns. You can find the original article here.
- Canadian Banks & Insurance posted a handy table of the 2006 returns of some of the big names in the financial sector. CIBC had the best annual price gain of 28% and Sun Life Financial the worst at 5.5%. Bank of Montreal (TSX: BMO) currently has the best yield 3.78%, while Manulife Financial has the worst at 2.03%.
- Melanie writes on Canadian Mortgage Trends that consumers getting a new mortgage should also pay attention to the “extras” that might save them money rather than just the lowest interest rate.
- If one of your New Year resolutions is paying less tax, you may want to check out some of the tax-saving strategies suggested by tax-expert Tim Cestnick in The Globe and Mail.
- We hold Home Depot (NYSE: HD) in our portfolio and I cannot say I am a fan of ousted CEO Bob Nardelli who managed to alienate employees, shareholders and Wall Street, but I do hope he wasn’t let go because the stock is languishing. A CEO’s job should be growing sales, growing earnings, earning a decent return on capital and not managing the share price as Contrarian Edge points out in his excellent post.
moneysense.ca, 4/01/07
Wow, a lot of great posts lately!
Can anyone explain what Larry MacDonald is talking about when he says,
“Selling an asset just because its price went up and buying another just because its price went down seems suboptimal to me. Maybe the decision to rebalance should also be guided by value concepts: sell the rising price asset if the value ratios indicate overvaluation and buy the falling price asset if the ratios signal undervaluation. But then this begins to look like value investing, not rebalancing?”
Why is he so confused? Isn’t rebalancing just one way to do value investing, one of the many, many techniques/ideas? Or it could be said that rebalancing is something that one should always do, no matter what philosophy you follow to select the investments. If an asset class in your portfolio appreciated so much, such that asset allocation was shifted by say 15% but your analysis still told you it was “undervalued” would you still rebalance or hang on?
He “suboptimal” talk is typical…people always thinking they can “do better” than everyone else or do better than buying indexes and rebalancing annually, for example.
CC: I agree with Dave: the quality of your writings improved tremendously for the last year. I think you should start part-time journalist carrier as a financial blogs analyst.
Financial Services and Real Estate (mostly REITs) have historically been my two favourite “sectors” for my stock picking. The biggest names in both of those sectors are usually the “benchmarks” against which I measure my stock picks. Lately I have considered the large caps in those sectors to be quite overpriced and I have been mostly investing in the small cap companies in these sectors. These days, I’m even starting to run out of good picks in the small and mid-caps in these sectors. As a result, I’m starting to feel like there’s nowhere to go but down from here.
Hey Dave. I’ll try to clear up the confusion. Rebalancing sells the stock that has risen in price and buys the stock that has fallen in price. But what if earnings per share for the rising stock grew faster than the price gain? The price-to earnings ratio falls. And what if earnings per share for the falling stock fell more than the price decline? The price-to-earnings ratio rises. Does that seem like value investing?
Rebalancing makes sense in restoring the original portfolio allocations, and hence risk level in one sense. But this can be trouble during an extended trend, for example the long slide in Japanese equities during the 1980s and 1990s. If one had held off rebalancing, as guided by value criteria like price-earnings ratios etc, they could have avoided rebalancing their portfolio toward zero.
Larry: I agree with your P/E rationale … one additional point: rebalancing could also have saved a lot of people from part of the Nortel and other telecoms losses. I would think that selling part of an asset that has taken too much importance in a portfolio would be very wise. Buying a stock that is going down and for which the P/E ratio is going would be indeed foolish in my opinion. Then again, I don’t have the numbers, but the high P/E of Nortel when the stock was at 120$ might have been enough to say: time to sell.