Fight Back - Ellen Roseman

Click Here To See The Video

What To Buy
Ellen Roseman is the author of "Fight Back".  I have not read the book, but wanted to highlight some of the things said in this interview.  Ellen makes the point we need to invest only in the things we understand.  We should not buy products we don't understand especially since financial advisors get paid for selling us product, whether we understand what we are buying, or not.  Know how the advisor is compensated - it determines what they sell and what they don't.  Also, we are told to get references every time we hire a professional - why not for our financial advisor?  Don't stop there, either, search online.  Employers do it all the time now, we should as well for the people we want to hire.

Start Small
There is no other hobby, or part-time job that can make us the amount of income that investing can.  Why more people don't learn how, is beyond me.  Ellen suggests starting small and increasing the percentage of one's self-managed portfolio over time.  Avoid getting overwhelmed - start with the advice of the bank you already deal with.  As for international diversification, she recommends it.  To me, that is out-dated advice.  Inverse Exchange Traded Funds allow us to make money when the market is falling, not just when it is rising.      In my humble opinion, most people don't know enough about foreign markets to invest in them.  Paper trading is the best way to start to learn the mechanics of investing.  Investopedia has one such free account to start the learning process.

Have you ever used an inverse ETF, or started by paper-trading?

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?

Using The 200-Day Moving Average

Click To Enlarge

The 200-Day Moving Average
Plotting the 200-day moving average involves computing the average price for the previous 200 days,  then for another 200 days starting one day later, and so forth for the specified duration.  The reason for using moving averages is to smooth out some of the day to day volatility.  The longer the current price is above the 200-day moving average, the higher the average, resulting in the line on the chart curving higher.  Of course, the inverse is true when the price remains below the average.



Technical Analysis
Any student of technical analysis soon learns of the 200-day moving average.  When the price is above the 200-day moving average, that is taken as a positive sign.  When the shorter 50-day moving average crosses the 200-day moving average from below, that is also seen as positive.   Since there are 5 market days in a week, the 200-day moving average is also the 40-week moving average.  Today, not many people would probably assign much importance to a period of 40, but in the Bible, it was always seen as a significant period of time, whether days, weeks, months, or years.

Transition Point
The Basic Timing Model I propose on this blog uses the XIU Exchange Traded Fund (ETF of the largest 60 stocks on the TSX) and the 200-day/40-week moving average as the transition point from a good market to a poor one, or from a poor market to a good one.  It can also serve as a level of resistance when the price is below, and a level of support when the price is above.  The direction the price is headed will often reverse right at the 200-day moving average.  Whether this is self-fulfilling, or not, is irrelevant.

XIU
Such is the case with the price of the XIU ETF on the TSX.  The price has been steadily rising since before the end of last year, crossed yesterday, only to go lower today.  For people without the benefit of any knowledge of technical analysis, yesterday's price crossing the 200-day moving average would be taken as a buy for equities traded on the TSX.  Myself, I prefer to play the probabilities afforded me through technical analysis.  The above chart shows us the trend is growing rather tired.  Longer term, and perhaps even in the shorter term, the price would appear headed above the 200-day moving average, but the probability is the price will go lower than it is currently before continuing the uptrend.  I always look for the possibility of buying lower and selling higher.

Net Return
It may make little difference in the long run, but careful analysis could prevent us from bouncing in and out of the stock market as the price struggles in an effort to cross the 200-day moving average.  Regardless, buying  as the price crossed yesterday (after selling when it crossed going lower last summer), would result, according to my calculations, in an almost 6 percent gain relative to those who rode the market all the way down, and back, again, since the moving average has dropped that much during that time.  If/when the price rises above the 200-day moving average, it may signal a more favourable market, but given the headwinds the stock markets are facing, I am still quick to take profits when I can.

Questions?  Comments?

November Portfolio Update

Click To Enlarge

November began with a classic triangle pattern.  All of the major North American markets made the pattern, but the S&P 500 illustrates it best.  It is a perfect example with volume decreasing close to the breakout point when the market finally dropped.  I got caught in the whipsaw back and forth before giving up.  From there, the drop was quick enough that I failed to find a good entry point.  

Click To Enlarge

Materials and Technology stocks are seasonally strong this time of year.  I expect to be long in them for at least a little year-end rally.    

The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 

Eleven month return for TSX @ November 30, 2011 = -9.04 percent
Eleven month return for Basic Timing Model using XIU = -0.98 percent
Eleven month return for Advanced Timing Model (my returns) = -2.95 percent
Money for charity = $411.27


What is your plan?

Position Size

80/20 Rule

Decisions, Decisions.
Size matters, or so I am told.  From "too big to fail", to sports like boxing, size is a factor.  The question is, how does size affect one's investment portfolio decisions?   For those who don't have a sell strategy (i.e.: Buy and Hold) diversification is the only hope, and what follows will be of little use.  Having a sell strategy provides me with a few more options.

Call Me Arrogant
First, I have heard it said that buying a whole position all at once is the dominion of the arrogant.  That may be true if we are not using technical analysis to time our entry points.  My method of determining when to buy has proven to me that what I call a buy signal is just that - the point in time when the odds are most in my favour.  Averaging into the market almost always reduces my returns, it does not improve them.  If I buy all at once, and I am only partially right, then I can begin to reduce the size of my position.  If I am completely wrong (read: losing money) then I sell everything I just bought.  I would rather be out the commission than lose capital.

Diversification
Next, we should talk about the size of a position.   I have seen academic studies that demonstrate even twenty stocks is not enough for any one portfolio.  (That study was probably commissioned, pardon the pun, by the financial services industry - cha ching!)  Note that a single broadly based Exchange Traded Fund (ETF) can contain well over the twenty stocks required to provide me with enough diversification.

Market Correlation
What I am saying is holding broadly based ETF's provides me with all of the diversification I need, thank you, even if I put my whole portfolio into one ETF!  "Wait!" the experts will say, "You need diversification between various regions of the world!"  Do you hear the cha ching in the background, again?  Since I have a sell strategy, if my investments in the TSX are under performing, when I do sell, nothing says I have to buy the TSX, next time around.  Understand that markets around the world are highly correlated, these days.  By that I mean when one market tanks, the others are likely to do so, also.  Maybe not at exactly the same time, but close enough.  

80/20 Rule
Having said all that, I believe in the 80/20 Rule.  Applied to investing, the rule tells us that 80 percent of our returns will come from 20 percent of our holdings.  Rather than watering down my returns by casting my money into everything in every market, I use seasonality, technical analysis, and fundamental analysis, to focus on the areas of the market that are working, and simply forget about everything else until the conditions change, again.

Returns
The major lesson the market has taught me is I don't have to have all of my money in the market all of the time.  I used to think I was wasting opportunities by not being all in!  Nothing could be further from the truth.  If I divide my portfolio into five, how much of a return do I need to make 20 percent, over all?  You get it, I still have to make 20 percent each time.  Each fifth of my portfolio that makes 20 percent contributes 4 percent to my overall results.  Do that five times, and at the end of the year I end up with 20 percent.  Or, I can make 10 percent on any one position (each time contributes 2 percent), and do that 10 times, and still end up with 20 percent per year.

Better Than Average
Do you get what I am saying?  I only need to have 20 or 40 percent of my portfolio in the market at any one time, and as long as it returns 10 percent in a month, or two, I can take two months of the year off, and still make a twenty percent return.  Not bad, when the average annual rate of return for the markets is around 8 or 9 percent! (Which, by the way, most active fund managers fail to do over the longer term, after expenses). 

Sleep Tight
I am not saying this is what you should do with your own portfolio.  I am not qualified to give that kind of advice.  I am saying, with practice, and experience, it is possible.  Consider the possibilities that not having everything in the stock market all of the time creates.  If nothing else, it helps me sleep better, especially in these crazy markets!

How do you decide how much to put into any one investment?

BEAR Markets

Click To Enlarge

I mentioned in my previous post that I did not believe we have started another bull market.  There are a couple of reasons for this.  I posted a while ago about Mr. Craig Alexander's (Senior VP and Chief Economist at TD Bank) take on the economy.  During his presentation, he said something I found of great interest.  He said in assessing our recovery we had to compare it,  not to other recessions, but to other financial events of the past.  In that regard he felt we were on track as far as a recovery from that type of event was concerned.  Whether we are or not, it made me realize there is a difference between what we should expect during this recovery and one that follows a normal bear market. 

Incidentally, research has shown bear markets occur on average every four years and last for an average of one year.  If you look at the data, however, you will see the frequencies and durations for bear markets are all over the map.  They can be only a couple of years apart, or they can be ten years apart.  They can last for a few months, or they can go on for years.

If Mr. Alexander is correct, and we are not looking at the average recovery after an average bear market, with which I would have to agree, the above chart becomes rather fascinating.  What makes it particularly interesting is the fact the percentage in change in weekly index values is derived from inflation adjusted numbers.  What that means is the recent markets peaked in the year 2000, and not 2007, as we might otherwise believe in observing unadjusted charts.

While not the same indexes each time, two of the three indexes combine to create definite up and downward trends.  If that continues, then most of the next two years in the stock markets, starting almost any time now, will be lower, rather than higher, as most of the academics and vendors of equities would have us believe.       

Do I think we are headed lower?  In the short term, yes.  It doesn't make a whole lot of difference in my case.  I play a trend until it ceases to be one.  So, even while the longer term trend may be down, there could be opportunities for me to take advantage of a shorter up trend.  For people with a longer term investing horizon, the decision as to what to do is more complicated.  In 1998 I had a rather large (for me) pension adjustment which I wanted to invest.  I put the whole thing into a good mutual fund at the beginning of the year.  By the fall I had lost almost one third of my investment.  Nobody had suggested to me that was even a remote possibility!

Based on my experience, I would not invest any of my money in mutual funds today.  Mutual fund managers will try to minimize losses in a down market, but they cannot avoid them.  For the longer term, I would only invest in a broad index based Exchange Traded Fund (ETF) like XIU and watch it very closely.  I would set a maximum daily, weekly, and monthly loss limit and sell if I attained any one of them.  I would only try to reenter the market once the market direction regained an upward trend.  The problem with this approach is my portfolio could end up dying a death of a thousand cuts - enter the market, lose, sell, enter the market, lose, sell... .  Since I have little faith in the longer term, what I would most likely do is shorten my investing horizon to a much shorter term.

I am not an investment professional, so I cannot advise you in what to do with your money.  What I would recommend is being very careful.  History would seem to indicate things could get a lot more worse before they get a lot more better.

Do you think we are currently in a new bull market?

What Are ETF's?

ETF stands for Exchange Traded Fund.  When I wrote about my basic market timing model, I mentioned the purchase of an ETF which tracked the total stock market rather than a mutual fund.  Before I talk about ETF's I would like to talk, first, about the problems I have with mutual funds.

Most mutual funds are actively managed, where a fund manager decides what to include in the fund according to the prospectus which defines the types of investments to be held.  There are equity mutual funds, fixed income mutual funds, and money market mutual funds.  Many have sales fees, either when I buy, or when I sell.  They charge a management fee, and deduct certain costs from the returns they generate.  Mutual funds pay a commission to the person who sold me the fund.  While there are a couple of good reasons to buy a mutual fund, generally, the cost of doing so is the reason I am not a fan.  Just to be clear, I am not a financial advisor, or anything of the sort, either.  In a case of I can buy better, but I can't pay more, most funds, because of the expenses involved tend to under perform the market.  One's that outperform rarely do so for long periods of time.  Guessing which mutual fund to own is a bit of a mug's game.

ETF's, on the other hand, tend to mirror a particular index, or commodity.  Since there is usually nobody picking what to include and what not to (that has already been determined by the index), the charges to me for fund management are less.  What that also means is when the index goes lower, so does the ETF, by an equal amount.  There is nobody trying to slow the decline.

They are called exchange traded funds because the shares trade on a stock exchange in the same fashion as other stock equities.  When I buy shares in the fund, I pay a commission fee, instead of a sales charge.  The management expenses are deducted prior to the share's value being determined.  If my shares go up ten cents each, then that means I made ten cents after the fund company has taken their portion.

There is a difference between regular shares and ETF shares.  With regular shares I purchase shares in one company at a time.  With ETF's I buy a basket of shares (of whatever makes up the underlying index), or contracts based on commodities.  A few ETF's allow me to buy the actual underlying commodity itself, with the fund manager having to store it for me.

Another difference is one of supply and demand.  A company offers a number of shares in the company to raise money.  ETF's are bought and sold from a float which is for most purposes, practically limitless.  I do not need to be overly concerned with supply and demand, as those constraints apply to the price of the underlying index, or commodity.

For people who have not heard about ETF's from a financial advisor, it is likely because advisors do not make any money when recommending the purchase of an ETF.  They do when selling mutual funds, but not for ETF's.  Since they trade like stocks, purchasing ETF's is seen to be more for the sophisticated investor, and less so for the beginner.  To avoid full service brokerage fees, I also need my own discount brokerage account online.

When starting out, I looked at purchasing widely based ETF's which performed as closely to the actual TSX as possible.  Sector, and specialty funds came later only after I gained more experience.  Claymore, Ishares, Horizons, as well as many of the Canadian banks have ETF's which are bench marked to the TSX.

Again, learning to manage my own funds took a little time and effort, so I started by "paper" trading without plunking down any actual money, and then started very, very small.  By small, I mean no leveraged ETF's - ETF's that return a multiple of the underlying index (i.e.: two times, or three times) until I gained some experience and understood what they were and how they worked.

I can make more by earning higher returns from my investments, or better still, by simply avoiding many expensive mutual funds.

Timing The Market



Click to enlarge

The new FCIC report came out yesterday with blame for everyone as to who caused the financial crisis.  Most deny any wrongdoing by saying, "Nobody knew!"  Do they mean to tell me that the actuaries at AIG who are trained in probability analysis figured there was a zero percent probability that the U.S. housing market might correct?  Are they telling me the rating agencies whose job it is to assess the worthiness of a security had no idea products based on mortgages from the U.S. housing market might be less than AAA?

I would have a difficult time proving anyone is that stupid.  Assuming they aren't, then doesn't it go to follow they are not telling us the truth?  Why would they lie to us?  Could it have to do with how they were  being compensated and by how much?  I have read stories of traders who barely understood how to spell the word market (okay, I'm exaggerating) were pulling in multiples of six figure incomes.  Would you lie for a million dollars?  I know some people who would.  I think we all do.

What if I told you some of these people are the same people who are telling us we cannot time the market?  Are you surprised?  Please look at the chart.  This is a very basic chart showing the monthly price ranges of a security that trades on the TSX.  The ticker symbol is XIU.  It is an Exchange Traded Fund (ETF) that derives it value from the Toronto Stock Index.  In other words, as the TSX goes up, so does the ETF by the same percentage.  Likewise when the TSX goes down.

Also shown is the line which, basically represents the 200-day moving average.  Take the average price of the XIU for the last 200 days and draw a dot on the chart.  Take the 200-days one day prior to that and do the same.  And so on.

How do I use that information?  Once a week, I look to see if our price is above, or below the line.  When it has crossed from below, I buy XIU.  When it has crossed from above, I sell XIU.  Doing that from even the peak of the market in the year 2000, and I would likely have more than doubled my return since then, even after paying any commissions.  A little better than that of the "buy and hold" mutual fund owners, wouldn't you say? 

I'm sure I could show that to some children and they would be able to do it for themselves.  Do you really think your financial advisor has never seen this?  Can they really be that dumb?  Of course not.  The reason they don't tell us about it is because they won't make any money if that's all we do.  More importantly, the company they work for will only make a lousy little commission.  Now, we couldn't have that!  Now I'm not saying I will double my money every ten, or so years, but I like the returns a lot better than a "buy and hold" approach.

Still, I can hear the protests.  "But you're not diversified, the TSX isn't always going to do so well, nobody can predict the future", etc., etc., etc.  Do I really think the world is going to stop growing?  Does the world have too much oil, copper, wood, grain, fertilizer, water, that nobody is ever again going to buy anything from a free, democratic, trading country like Canada?  Maybe Australia will fill all the needs!  Come on folks!  I'm not saying we have to put all of our money into the TSX, and even though it may represent only three percent of the companies in the world, it is three percent of the best financial, mining, and energy companies anywhere on this entire planet!

There is no doubt in my mind there will come a time when what Canada has to offer will no longer be so desired.  Until then, why make it more difficult than it needs to be?  Simplify, simplify, simplify.  Look past the elaborate smoke screens and misinformation and marketing ploys.  There are any number of companies who want to mislead us in order to lighten our pockets.  Never mind a million dollars, there are people who will lie for a lot less than a million dollars.  After looking at this chart, do you really mean to tell me there is no timing the market?!?