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?

Nature Or Nuture?

More Than Our Genes
Apparently we not only get to blame our poor looks on our parents, a Swedish study, mentioned in this video, says we can also blame our poor investing habits on them, as well - at least in part.  I agree with Mr Zweig, however, when he says we can learn to be more than our genes.  I think it goes back to an older post I did, where I talked about the difference between personality traits, and character traits.  Every personality, I believe, is capable of developing character traits such as patience, kindness, and self control.

A Simple and Reliable Approach
Mr. Zweig also suggests we can learn to manage our emotions over the course of many years.  I would suggest following a reliable, and simple investing strategy that actually works, as a superior approach - it doesn't have to take as long to learn.  A reliable method removes much of the emotion.  It is the emotion that gets most of us into trouble.  Also, the simpler it is, the quicker and easier it is to master.  Of course, there's always the old Buy and Hold approach, where we, basically, do nothing.  I suppose that is the best approach for some people.

Any opinions?  Is nature to blame, or can we outsmart even our genes?

Freakonomics and the Stock Market

To Pay or Not To Pay
Paying for bagels (or not) can help us understand the extent of white collar crime.  That is what Steven Levitt tells us in his book Freakonomics.  I'll let you read the book for the details, but I will say he arrives at this conclusion from an honour-pay bagel business which has existed in the U.S. over a number of years.  Personally, I find the idea intriguing, but also encouraging.

Same Old Same Old
Despite the ever-accelerating pace of change in modern society, changes in how people tend to behave come very slowly - like, barely, if at all.  Maslow's hierarchy of needs is as valid now as it was when he published it, and has applied throughout history.  There have been, and always will be those who cheat other people - within certain historical norms.  We just keep inventing new ways of doing it.

By The Numbers
That said, let's talk about Levitt's analysis.  On the basis of the bagel business he wrote about, we can put some numbers to the way in which people are inclined to behave.  First, the data suggests that smaller businesses are more trustworthy than larger ones.  The reason given is because people are better known in smaller groups - it's harder to cheat because it is harder to cover one's tracks - there are only so many people to blame.  Second, the experience of the business owner (Paul Feldman) was that executives, as a whole, were less honest than other groups.  In Paul's opinion, the executives felt more of a sense of entitlement, and therefore less need to pay for their bagels.  Who knew?!?

Well Meaning, and Meaning Well
The biggest take-away, in my opinion is that, overall, the payment rate of Feldman's thousands of customers was between 80 and 90 percent.  The reason I find this encouraging is what it should tell us about the stock market, and particularly about stock market advisors.  We have all heard about Bernie Madoff, and illicit bank behaviour and questionable lending schemes, but this data would suggest most people can be trusted to do the right thing.  Still, we need to be aware of the fact that one or two people out of every ten we give our money to might be cheating us.  That is the reason we need to keep informed and monitor those acting on our behalf.  The good news is 80 to 90 percent of people saying they want to help, actually mean it, and will try to (not to be confused with those who have, or don't have the ability to).

Decent Is As Decent Does
True, the perpetrators of the recent financial fiasco have not properly been held to account.  True, thanks to the overwhelming and unregulated power of derivatives in the financial system, we are all a whole bunch poorer.  True, it will take years to adjust to the current reality.  Still, in our society, today, the intent of the vast majority of regular folks, is to do right by others and to lead a decent and honest life.  Knowing this certainly influences my outlook on our ability, working together, to transcend the current uncertainties.

What do you think?  Are most people honest?  Do you trust them (with your money)?

Momentum Investing

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Causes
Richard Morin explains momentum investing in this video.  Such momentum can be explained by the tendency of investors to hold onto losers (hoping to return to profitability) and to readily sell winners (and take profits).   Momentum can also be created by investors' over reaction to events affecting the stock market and by herding tendencies, particularly those of fund managers not wanting to risk missing the next big move.

Performance
Of course, the old efficient market theory espoused by most economists says a stock can never be mispriced, yet strategies like this exist to take advantage of just such occurrences.  In this case, he is claiming an annual average performance which is five percent better than the returns of the TSX index.  That is a significant performance improvement!

Momentum, Eh?
Mr. Morin says that price momentum works particularly well in the Canadian market.  I would assume it is because of the cyclical nature of resource companies, but don't know of any research that would back up my statement.  If anyone knows the reason, I would appreciate it if they could provide the information in a comment to this post.

Liquidity
When asked about costs, he stated the use of highly liquid stocks (lots of shares traded) is important in keeping costs low.  Larger companies, especially those included in indexes and funds make good candidates.

So much for not being able to time the market!