Old Scars

Too Little; Too Late
Most people I talk to about their investment portfolios seem to have at least one thing in common.  They have an investment they purchased some time ago which is just sitting there, not contributing to their returns.  Usually, it isn't hurting them any longer, either.  That is because it sank in value, big time, a long time ago.  Now, there it sits - a reminder of that big loss, and too small and unimportant to do anything about - not even sell it.  Why bother to sell it?  Perhaps, one day, it might actually appreciate in value.

Hoarding
We can hope all we want, but it makes for a poor investment strategy.  Sure, the damage has, largely, been done, but why not put that money into something useful?  The reason is simple.  We raise money by selling the investments that are in the black, and we hold onto the ones which are in the red.  Perhaps it provides a little insight into hoarders who can't bring themselves to throw anything out after suffering a catastrophic loss in their lives.

Back To Even
We all have the same tendencies.  When we aggregate these tendencies into market-wide behaviours, trends begin to emerge.  Technical Analysts refer to certain points on the chart as "resistance", and "support".  These points exist on the charts for the very reasons I have just described.  If a large number of people bought the same investment at a level where it started to lose value, that point will later become a point of resistance, since human nature is to sell as soon as we get our money back.  Normally, we don't care how much higher it could go - we were wrong once, so better to take the money and not get greedy, thank you very much.

Depends On Your Viewpoint
When an investment drops to a level where a large number of people previously watched it reverse, they might even be inclined to buy more, this time around.  It is like the investment is now on sale.  These become areas on the chart where support for the price is established.  Once violated, support levels can turn into resistance, and resistance levels into support.

When To Buy
Technical Analysis is not just a bunch of lines on a chart.  There are good reasons to explain why things happen the way they do.  These are only two very basic examples.  Personally, I don't rely on Technical Analysis to determine what to buy - I use historical data and earnings forecasts to do that.  I use Technical Analysis to tell me when to buy once I have determined it to be on sale.  This doesn't work so well when buying commodities, but there are other ratios we can use to see, historically, if they are cheaper than normal.

Moving On
Long story short - I  ask myself, "If I didn't already own this loser, and knowing what I know today, would I still buy it?"  If the answer is no, then it is fairly obvious it has outstayed its welcome.  Time to move on and look for a better use of whatever is left.  Otherwise, it brings to mind the definition of insanity which refers to doing the same thing over and over, again, each time expecting a different result.

Any such losers in your portfolio?  Nortel, anyone?

Brokers vs. Fiduciaries

It's About The Money
If you haven't seen this video, you need to watch it.  It is more than a clever story.  It is also the fundamental basis of why I do what I do.  Most financial advisors are not telling you how they are being compensated.  The goal of corporations is to make money, and the goal of employees, then, should be to help the company make money.  Generally, the more money they make for the company, the better they are compensated.  How much their customers make in the process is, mostly, irrelevant.  I know because I have worked for these organizations.

Product
Also, we don't normally shop at Toyota for a Ford product.  Sales people (including financial advisors) are going to sell you their products, not those from elsewhere.  A friend recently asked me to look at his portfolio, and, not surprisingly, it was jammed with mutual funds owned by the advisor's company.  We don't go to a car dealer to buy a washing machine, either.  It is up to us to know what we need to buy, and not let the sales people spend our money for us.  Even personal investors who already know of the undisclosed conflicts of interest between most financial advisors, the talking heads on TV, and their own financial health shrug their shoulders and say, "What else am I supposed to do?"

Education
The first thing we all need to do is to become better educated.  Get a second opinion.  Ask why the differences exist between the first and the second set of options.  Eliminate unnecessary expenses.  Why pay an extra two percent for a mutual fund when an Exchange Traded Fund (ETF) will accomplish the same result!  Anybody with access to Google can determine the difference between a mutual fund and an ETF!  Not only can we avoid ending up with a lemon by doing a little research online, we can even find better prices.  Anyone who is trying to tell us anything different is trying to sell us their own agenda.

Whose Money Is It, Anyway?
So, then what?  We either make the people managing our money accountable, or we do it for ourselves.  Anyone who can fill in a form can open their own online brokerage account.  Start small, and don't take large losses.  Not interested?  Then direct your own broker.  Listen to what they have to say, but don't let them talk you out of anything - especially selling anything that is losing your money.

Specialists
We don't do surgery on ourselves, but then we don't just write a blank cheque and tell the surgeon to fix whatever he thinks might be a problem.  We use specialists to handle specific problems (that's why they are known as specialists).  If "make me wealthy" is your only goal, then most of us should fire the people we have given our money to anyway, since they are the only one's pocketing the cash.  It pains me greatly to see other people taken advantage of, but there is also the father in me which knows that some people will never learn until it happens to them.  Don't let it be you.

For a lot of people, it is getting late.  Do you know where your money is?

Checking The Score

How Much Is Too Much?
We can never have too much money!  When I hear the likes of what is being reported about Goldman Sachs these days, I can't help but think they, like so many, have taken a turn down the wrong path.  Too many people think that money is the answer, that money is, in the end, the real prize.  Like drug addicts, the more they get, the more they "need".  I have actually heard stories about people who said they would retire after making a million dollars, or two.  Having actually done so, and more, they were then unable to retire because even ten million dollars was no longer enough!

Keeping Score
I get what they are thinking.  It isn't actually about the money, its about keeping score.  Many goals can be subjective in nature, but money is meant to be counted - that's what the numbers printed on the bills are for.  I have a higher score than anyone who has less money than me.  Because my score is higher, I am better than anyone with a lower score.

Good or Bad?
These people are so far removed from reality, I don't know what it would take to get them back.  I don't know anyone who actually believes that having money makes us better people.  I suppose, it really isn't being a better person that they have in mind. I'm not condemning the possession of money, but in my mind it doesn't necessarily translate into virtue, either.  We do need to be careful on this point, as we are all familiar with the arguments as to how evil money is, and all the bad it can be used for, and how having real money must mean it was obtained at the expense of others.

Skills or Scores?
My reality is coaching soccer.  As a coach, my job was to instill a desire for mastering the skills.  So it made my job a whole lot harder when parents would pay their children for scoring goals.  For me, it wasn't about the score.  If players learned the skills, then the score would take care of itself.  Have you ever seen the best team lose?  What that should tell us is the score isn't always right, and it should never be our only measure of what a team, or any individual is worth.  Still, I see coaches who will cheat because they want a winning score.  When are the grown-ups in this world going to start acting like they really are, in fact, grown up?

Motivation
If you ask me what we should be striving for, rather than money, it is the the things we have a real passion for.  Not that we should let our passion blind us, either.  Still, I can guarantee there is no stopping a person with a real passion, and there is no shortage of money and compensation for such people. Why? Because they are at their best when they are exercising their passion.  As for having to pay the top one percent incredible amounts of money to attract "the best", I have always said I would prefer to hire the person who is so passionate about what they do  they would do it even if they weren't getting paid.  People then say, "Oh, you can't expect people to work for free!" and I don't - they are completely missing the point.

Our Children
In so many ways I feel very sorry for those people who think that the more money they have, the happier they will be.  I just wish a whole lot of people would grow up, and realize that happiness comes from the inside, and not the outside.  We are teaching a whole generation of children everything we know - all the things that aren't helpful, and things which are outright lies.  What ever happened to wanting a better future for our children?  Does anyone really believe that making them slaves to money, like addicts to drugs, is in any way preparing them for a well-adjusted future?  Should not leaders care?!?

Technical Analysis by Walter Murphy

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There was a point in time when I mistakenly believed market reversals from the peak were caused by selling.  Although it may seem counter-intuitive, such events are actually caused by buyer exhaustion.  It is what Walter Murphy describes in this video as "everyone being in the pool".  Once the maximum number of buyers is reached, there is insufficient new money to keep stocks at lofty levels.  As the chart in the video shows, we are pretty close to such a point in time.

Murphy gives three reasons he thinks markets are overbought.  First, the uptrend is now in its six month.  Second, momentum indicators are "starting to show signs of deterioration."  Third, sentiment is "excessively optimistic."  He says the trend is up, but is also unsustainable.  Longer term he is still bullish, especially for oil and gold to go higher.

That does not mean the markets can't go higher from here.  It does mean the risk of going lower is greater than going much higher in the shorter term.

What are your expectations for the next few months?

Portfolio Diversification

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A Small World After All
I am not a professional, and cannot tell you how to balance your portfolio, but I do want to share a couple of things.  In the video, Dale Jackson refers to geographical diversification.  I seldom buy shares of companies outside of Canada because I want to avoid exchange fees and currency fluctuations.  For companies outside of Canada and the U.S., I would rather hold a basket of companies, rather than individual stocks, so I use Exchange Traded Funds (ETF's).

Cyclical Sector Solutions
The TSX is comprised mostly of Energy, Materials, and Financial companies.  These sectors are largely cyclical in nature (fluctuate according to economic growth).  Still, we find some of the very best companies in the whole world trading on our very own TSX.  For times when economics are not in favour of cyclical companies, I buy inverse ETF's (which make money when markets decline) and/or bond ETF's.

Seasonality
The sector allocations shown in this video are based on the make-up of the S&P500, and not the TSX.  The underlying assumption is that we are always fully invested all of the time, so we need to weight our portfolio similar to the market in order to get market-like performance.  Studies done by people like Brooke Thackray, or the Stock Traders Almanac would suggest there is a certain seasonality to the various sectors.  Different sectors tend to outperform during different times of the year.  I seldom have all of my money invested in the markets at the same time, and I use Technical Analysis to detect which sectors are outperforming (usually based on seasonality).  There is a certain rotation I normally follow, rather than just blindly throwing money at everything in the market.

Trade-Offs
Because I am an active investor,  being overly diversified tends to make more money for my advisor in fees and commissions, while lowering my own overall return.  In my experience, one size does not necessarily fit all.

How do you allocate your portfolio?

February 2012 Portfolio Update

For the iShares TSX60 ETF (XIU), I am showing the gains made by using the 200-day moving average as the buy/sell decision point.  It has been a little over a year, and already the benefits can be seen over a buy and hold approach.  Of course, those gains would be slightly less with commissions factored in.

No new trades in my portfolio (Model in the chart above) since Feb. 08.  I am being too cautious, but want to avoid any sudden drop the European situation might cause.  Also, the qualitative easing by the U.S. Federal Reserve will start to wear off at some point.

Seasonally, we are entering the time of year when the TSX is running on all cylinders as the Material, Financial, and Energy sectors tend to do well.

Two month return for TSX @ February 29, 2012 = 5.76 percent
Two month return for Basic Timing Model using XIU = 5.92 percent
Two month return for Advanced Timing Model (my returns) = -1.13 percent
Money for charity = $0.00


How about you?  Are you cautious in this market, or are you looking forward to good times ahead?