Market Volatility & Exchange Traded Funds

Exchange Traded Funds
The video that follows is about Exchange Traded Funds (ETF’s) and the growth seen in that type of investment product.  I have chosen this particular video for a couple of reasons.  The first reason has to do with managing expenses within our portfolios and the second is to talk about the way in which I use ETF's.  iShares used to be a separate company that offered ETF’s.  It is now owned by Blackrock and is a subsidiary of that company.  The good news about ETF’s is they are cheaper to buy and own than mutual funds.  The bad news is ETF’s are not actively managed like most mutual funds. Since ETF’s normally mirror a particular index, they don't need to be managed the same way as a mutual fund.

Expenses
Personally, I like ETF’s because they offer better diversification than individual stocks, while at the same time, controlling expenses better than mutual funds (or buying the stocks individually).  I'm not a big fan of mutual funds.  The biggest reason is their larger fees which are not justifiable given most mutual funds under-perform the markets over longer periods of time.  I have owned many, many different mutual funds in the past.  Given the growth in the popularity of ETF’s in recent years, I have long since replaced all of my mutual funds with ETF’s.

Volatility
Periodically I will also trade individual stocks, but with the volatility in the current markets, I find that ETF’s provide me with much more diversification and less volatility than simply owning a few stocks.  Since I'm not a buy-and-hold type of investor, my goal is to own whatever sector is outperforming at any point in time.

Constructing Portfolios
The discussion in the video talks about creating portfolios using ETF’s.  Personally, I think that most portfolios are way, way, way over diversified and that's largely because of the need on the part of the financial services industry to sell more products.  More product, in my experience has never improved returns.  Some would argue it's not about returns, it's about the safety of our portfolio.  By spending only a few minutes a day on my investments, I get both.  I see no reason if we're actively managing our portfolios why we need any more than the top 60 companies in the TSX.  I understand most people don't actively manage their portfolios, but I have to believe they don’t understand the magnitude of the increase in returns they can achieve in only a few minutes a day.

Less Is More
Regardless, there are a couple of portfolios listed in this video.  Some people may want to model their own portfolio on one of those shown, and that's fine for people who are not actively managing their portfolios.  Myself, I tend to largely use ETF's, rather than stocks or mutual funds, but, I hold a very small number of ETF’s at any particular time because I'm only interested in the funds that are performing.  That is why I incorporate Technical Analysis into my methodology.  The non-performers are dropped from my portfolio once they stop outperforming.  Either way, whether  you want to build a portfolio of ETF's, or you simply want to use ETF's to dampen  the volatility in the current markets, the use of ETF's will reduce expenses and, to me, provide a better alternative than mutual funds

Would you care to share your preference(s)?

Click Here To See The Video

Buy Agriculture Now?

Yes, COW
I am not a financial professional, and cannot recommend equities for you to buy.  Having said that, I want to share my analysis with you.  I do this as a means of teaching others a (relatively) simple approach to arriving at price targets.  Why agriculture?  This is a seasonally strong period of the year for agriculture stocks.  Second, my calculations  indicate there is as much as a 24 percent upside to the Exchange Traded Fund (ETF) with the ticker symbol COW on the TSX as at Saturday, Sept. 22.  I will provide additional details of my calculations over the next few posts, but first, a little more about COW.

Diversification
iShares lists the top holdings in COW by weighting.  By adding the weightings, we can see the top 13 companies make up 81 percent of the fund.  These companies are headquartered in Canada, the U.S., Chile, Brazil, Japan, and Switzerland.  As in this case, ETF's give me the most diversification at the cheapest price.  I could go out and buy each of the 13 companies (or only the one's I like), but the cost of the commissions to do so quickly adds up.

Price
Prices of ETF's such as this one follow an index.  As such, there is no fund manager deciding which company to buy, and when.  iShares manages the fund so it reflects the holdings in the index it is tracking.  The price follows that of the index because institutional providers package up the stocks of companies in the index to sell to iShares when it is cheaper to do so, and buy them back again when they become cheaper than the stocks. As a result, the constant buying and selling of ETF units causes the price of the ETF to mirror the index of stocks.  Price is a function of earnings.  At any given point, we can show the price of a share of stock as being the amount of company earnings divided by the number of shares multiplied by some number.  In other words, Price = Earnings/Share Times X.  Calculate the future price based on future earnings for most of the companies in an ETF, and we can compute the target price of the ETF.

Technical Analysis
Technical Analysis only goes so far when it comes to individual stocks.  That is doubly true of stocks which have a limited trading volume.  A volatile market such as the one we find ourselves in currently compounds the problem even more.  A price of a widely held ETF of widely held stocks is much more predictable than a single company.  The fundamental analysis I am in the process of sharing with you shows me what to buy.  I then use technical analysis to determine when to buy what I have calculated as having a cheap valuation relative to the current price.

Questions?  Comments?


   

Bearishness

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Risk On; Risk Off
My desire in writing this blog is to share my years of experience in the stock market in the hope of helping others to be successful.  My approach has evolved over the years, and continues to, as the opportunities arise.  Currently, I am trading Exchange Traded Funds (ETF's), rather than individual stocks.  Lately, the market has all but ceased trading on fundamentals, and is following some irrational "risk on", "risk off" approach.  ETF's add diversification and more predictability during these highly volatile times.

Nothing To Show
Because of the market volatility I am trying to develop more of a trading methodology, with mixed success.  Since I am not at the point where I feel this would be helpful to others, I decided earlier in the year to share my investing club trades in this blog.  The problem is there hasn't been any trades.  Prior to the end of last year we purchased two inverse ETF's.  One makes money as the Nasdaq goes down, and the other as the TSX goes lower.  We are also holding some silver coins.

Moving Averages
None of those positions in our investing club has proven profitable, year-to-date.  With the exception of the Nasdaq, neither has there been any longer term signals which would justify reversing these positions.  You might know from other posts on this blog that I recommend using the 200-day moving average to manage risk.  The TSX has been below its 200-day moving average most of the year except for a brief high it made at the end of February.

Invest Responsibly
I have three reasons for remaining bearish.  In order to take a responsible and more conservative approach, I am not going to recommend bullish trades to my readers or to members of my investing club while the TSX remains below its 200-day moving average.  While I might take a more aggressive approach with my own personal money by making very short-term tactical trades, sharing those would not be helpful to people who aren't sitting in front of their online investment account all day.

Long Term Trends
Secondly, long term trends are negative.  The deleveraging required to restore government budgets and remove most of the unnecessary  risk in financial markets is going to take years to come.  Demographics will not substantially improve before the end of the decade.  If we look at the U.S. markets they have already reached a peak according to the Elliott Wave theory.  Trust in government intervention is almost all that is currently propping the markets up.  Wait until everyone wakes up to the fact it isn't going to make any real difference!

Head & Shoulders
The third reason is the technical pattern called a Head and Shoulders which the TSX is making.  This is a very bearish pattern which, if we break the horizontal neckline just beneath the recent lows, it could mean a possible return to our 2008/2009 lows.

Cash Is King
I know there is a segment of investors who would scoff at my lack of returns this year.  They would say four or five percent dividend returns is good in this environment.  Those are likely the same people who lost half, or more, of their life savings during the last great recession.  Let's see - four percent upside and 30 percent downside, that is not a bet I am willing to make.  As for not knowing when to get back into the market, I know where that point is, and it is NOT here, except for very short-term tactical trades.  In the mean time, my funds are mostly in cash, thank you very much.

That is my outlook.  Does your outlook differ?

Buy Energy Companies?

Click Here To Play The Video

John Manley from Wells Fargo talks about his liking energy companies.  He says he doesn't believe oil prices will go as low as people are predicting.  He also thinks oil will stay more expensive longer than people think, and that natural gas will stay lower longer than people think.  He especially likes big dividend paying energy companies.


Myself, I would like to see a break in the longer term down trend in energy stocks before I would buy.  The way I personally would play it is with the Horizons leveraged energy Exchange Traded Fund - HEU on the TSX.  These leveraged ETF's are only for shorter term trades, so if I wanted to hold it for longer term durations I would likely use the iShares Energy ETF (XEG).


How is your energy level?

May 2012 Returns

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I would rather not spend a lot of time or energy being negative about the markets and how things continue to go from bad to worse.  I want to be more positive than that.  It is not difficult to understand why people would think stock markets are completely unregulated and out of control, or at least controlled by big money with nothing in it for the small, personal investor.  I still feel small is beautiful, especially under current conditions.  We can run rings around the big fund managers and still minimize our risk with Exchange Traded Funds.  That strategy can be  particularly effective during months like this last May when inverse ETF's allow us to profit while the markets are trending down.  The markets appear to be more oversold than last year, at this time, but that doesn't mean we can't go a lot lower.  It is the fourth year in the U.S. election cycle.  Markets tend to be stronger during the second half of that year than others.  We will have to watch and see!  


17 month return for TSX @ April 30, 2012 = -14.59 percent
Return for Basic Timing Model using XIU = 10.57 percent
Return for Advanced Timing Model (my returns) = -4.36
Money for charity = $0.00

Real Trades

You might notice a couple of changes today.  I have added a disclaimer page so that I can share my actual trades with you.  The links are on the right.

Preferences
I have always wanted to do so, but didn't know if I should.  When it comes right down to it, though, I don't know a better way of sharing the thought process that I use in deciding what to buy and when to buy.  You are going to notice that, currently, my time horizon is very short.  Also, my current preference is Exchange Traded Funds (ETF's) over stocks (or bonds).  That hasn't always been the case, but I feel it necessary to adjust to market conditions.  I let the market tell me what to do, and market volatility is the deciding factor for me, right now.

Returns
For ETF's, I divide my portfolio into five equal parts.  Sometimes, I will only take half of a position (one tenth of my portfolio), but usually I stick to using one of the five parts.  For the sake of simplicity, I will count the results of each trade as if it were one fifth.  A gain, or loss, of ten percent in one trade, for example, would translate into a two percent change in my overall portfolio (ten percent of twenty percent, or, 0.1 X 0.2 = 0.02).

Position Size
I know some people advocate changing the size of positions in an attempt to manage the amount of risk.  My experience has been that is a recipe for disaster.  For whatever reason, I end up winning the small returns, and losing the big ones.  If I am going to invest, I am going to wait for an opportunity which is worth taking the risk.  When in doubt, I wait for a situation where the doubt is gone.

So, follow along.  Despite my slow start, I remain optimistic, overall.

January 2012 Portfolio Update

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I don't have anything to show for January results, this time.  The XIU timing model was below its 200-day moving average for the month.  Until the XIU crosses above the 200-day moving average, there is nothing to count, year-to-date.  My personal results are flat.  According to my calculations, the TSX is up 4.16 percent at the end of January.  I have some catching up to do, but after the bee-line higher the markets have made since the middle of December, I expect at least a small correction, shortly.

If you read my December portfolio update, then you will know I started off this rally in a Materials Exchange Traded Fund (ETF), but the volatility quickly stopped me out.  It turns out, it was a poor choice, because I missed out on a nice gain made by even less volatile ETF's.

As for this time of year, Materials, and Financials are in their strong season.  Energy will be, by the end of the month.  It seems a lot of analysts are talking about technology stocks, but we have just passed the part of the year when they are strongest, so I am waiting until later in the year, after the market has pulled back, again.

Are you optimistic, or pessimistic regarding the markets?

Alison Griffiths on Lang & O'Leary Exchange

Interview with Alison starts at 47 min. and 30 sec. into the video

The first thing I want to talk about the interview is what she had to say about using advisors.  In her words, "Very few advisors add value to most investors."  She isn't saying advisors never provide value, but that few do, most of the time.  She also said up to 75% of the portfolios of people she talks to are in the negative position!  Even if it is only 50%, that means the average advisor is making more money than the average investor!  She says that, "Advisory services are about selling product."  Of course, Kevin O'Leary disagrees, and he isn't the only one who compares investing to brain surgery.  I agree with Alison - it doesn't need to get that complicated!  Again, advisors and people like Kevin want us to believe that so they can sell us more product.

Alison says "Don't buy junk."  I agree, stick to quality.  We don't get more RRSP contribution room because we lost money buying junk.  She also makes the point that depending on how much money you have saved, GIC's (guaranteed investment certificates) might even work (despite losing to inflation).  She recommends we  forget mutual funds (too expensive); buy broadly based exchange traded funds (ETF's), instead.  Keep it simple - we don't need a lot of product.

When asked about yield she failed to mention REIT's.  There are ETF's which consist of Real Estate Income Trusts.  Globeinvestor.com shows the yield of iShare's XRE as 4.8%.

I haven't read her book, but I may do just that after seeing the interview!

Are you a fan of what Alison Griffiths is telling us?

Investing Expenses & Returns

The Border Crossing
I once heard the story of a man who worked as a border crossing guard.  During the time he worked there, he would often see one man, in particular, riding a bicycle across the border.  The interesting thing about his bicycle was he always carried a box of sand on the handlebars.  Needless to say, the guards felt compelled to, usually, check by sifting through the sand to make sure there was nothing there.  Finding nothing, they would wave the man through, and let him cross.  Week after week, the same man could be seen riding his bicycle across the border.  Each time they sifted through the sand in the box, they found nothing.  Obviously, the guards found this behaviour suspicious, but were never able to find anything illegal.

Sand, or ...?
Many years went by, and finally, the border guard retired from his job.  From time to time, he would remember the man on the bicycle and wonder what it had all been about.  One day, to his surprise, he ran into the man on the street, who himself was now much older.  He stopped to chat for a moment, and the subject of the man's frequent border crossings came up.  He mentioned that in all those years, they never found anything other than sand, so what was he doing with all those boxes of sand?  The man smiled and said, "It wasn't sand I was taking across the border, it was bicycles!"

Market Returns
It makes me smile when I listen to people who think financial institutions make their money in the stock markets, and that personal investors can't.  While there is a component which is made up from investment returns, don't be fooled into thinking that is how the professionals make the real money.  Financial institutions make their returns from fees and service charges (in good times and in bad).  Historically, the stock market has done something around a nine percent average annual return.  Very few managers have consistently beat the markets over a long period of time.  Ask your financial advisor what return to expect on your investments and they will say five, or six percent.

Do The Math
Are we really expected to think returns of five, or six percent account for the lion's share of financial institutions earnings?  Have you ever wondered why so few people know about Exchange Traded Funds, and everybody (almost) knows about Mutual Funds?  Might the difference in service charges and loading fees, and management expenses, and commissions explain some of the discrepancy?  I'll let you do the math.

Expenses
The easiest way for personal investors to increase returns is to decrease expenses.  Obviously, that would not be in the industry's best interest.  I find it interesting how returns receive so much attention, while so little interest is given to explaining expenses. 

Could it be that our bicycle riding friend also worked for the financial services industry?  It seems they both know how to distract others from seeing what really matters.

Do you still own mutual funds?  

Trading vs. Buy and Hold

Same, But Different
Everyone is entitled to their opinion.  I am posting this because I am of an almost entirely different opinion than a blog I recently read.  I agree with many of the assertions made in that post, yet I came to an entirely opposing conclusion.

Volatility
The first assertion is the discount brokerage business has changed the way the investing game is played.  According to the author, the new lower commissions combined with the excessive amount of opinions on TV, leads people to think they could be the next Goldman Sachs hedge fund manager.  Lower fees and more information,  they say, is bad because it causes people to trade too much.  I have heard a lot of theories, but I have yet to see any research that says the present market volatility is caused by lower brokerage fees!  If anything, I would say the volume of trading, on average, has decreased since the Great Recession.

Competition
Next they imply that trading does not add capital to the best companies in the stock market, and that long term holds are good, therefore all short term trading is bad!?!  Further, they assert we shouldn't even try to beat professional investors with their automated systems and state-of-the-art technology.  This suggests we are in competition with the professional money managers, where nothing could be further from the truth. We do not have millions, or billions of dollars to invest. We do not have to be in the market 24/7. We do not even have to be fully invested. We do not need to meet weekly, quarterly, and annual investing targets. We do not need to appease fund holders and shareholders. We do not need to meet any forced redemptions. However, we do want to know what the big guys are doing. Doing so gives us an edge because we can do what they are doing, only faster.

Sources of Income
Also, according to the author, Buy-and-Hold always beats riding the latest trend.  The implication is hedge fund managers make their "outrageous returns" from the "suckers" dumb enough to make trades in the market.  Personally, I don't know who this person is invested with, but in taking a close look, we can see only a very small handful of professionals manage to outperform the index.  These organizations do not make their outrageous returns from their investing ability, they make it from the fees they charge!  Have you ever noticed they collect their fees even if you and I lose money?  If I say, "Bank", what do you think of?  I think of fees and service charges!

Theory
Next they assert the efficient market theory has been disproved.  I agree.  This theory supports the idea that assets cannot be mispriced since enough people always have enough information to accurately determine the correct price.  Three things - nice theory, but it is not about what people think, but what they actually DO.  Have you ever paid too much for something, knowing that is exactly what you were doing?  (Ever just had to buy that present for your child, no matter what the cost?)  Second, are we to believe that prices are never manipulated?  Third, the "efficiency" of information has never been greater, but that applies to misinformation, as well.  If the market is so efficient, then how did so many professionals get taken by Sino Forest?  Largely because of that theory, one of the main arguments against trading has been that assets cannot be mispriced, so the odds of buying low and selling high would be zero.  The fact the theory has been disproved supports the case for trading, rather than refutes it.

For What It Is Worth
If we want to just Buy-and-Hold this market, then I would purchase a couple of index ETF's.  Not I, since I personally, have zero expectation the stock markets will be any higher a decade from now.  Think deleveraging, and demographics.  If we do want some sort of return, then I believe (based on my years of experience) a good trading strategy - one that uses low commission rates - is the only way to go.

As I said at the beginning, everybody is entitled to their opinion.  What's yours?

Attitude

Character Traits
First, I want to correct a mistake I made in my first post about traits.  I called these traits I am describing, personality traits.  Wrong.  They are not personality traits, but rather, character traits.  As a means of making the distinction between the two, think of many personality types sharing the same character traits.  Every person has the capability of being courageous, or disciplined, even though we may find it hard at times.  Which leads me to what I think of as the most important trait of all, for personal investors.  Attitude.  Yes, I know we all have attitude, but few of us cultivate it enough, or master it.

Money
Take our attitude about money, for instance.  If we fail to have an abundance of money in our possession, then we have either given most of it away, or we have a poor attitude about money.  In any aspect of our life, if we think we can, or if we think we can't; we are correct.  What do you tell yourself about money?  Or, is it really you?  I can still hear my mother reminding me that money doesn't grow on trees.  How many times did I hear my parents say, "Just when we started to get ahead of our bills..."

Beliefs
I can teach people how to invest money in the stock markets, but their success has more to do with their attitude than it does about what they know.  Do we see the stock market as a zero sum game, where our winning means somebody else has to lose?  Do we know there is an abundance of wealth in this world, or do we see it as being limited to only a few lucky individuals?  Do we think making money has to be difficult, and time consuming, or do we see making money as an exchange of value?  In every case, what we believe makes us right!

Focus
Even if we manage to amass a significant amount of money, it will soon disappear if we have the wrong attitude.  Studies have shown that lottery winners and their money are soon parted when they have a poor attitude regarding money.  That is why I find it important to designate a portion of what I make to charity.  I am grateful for the opportunity to do so.  One of the best things about gratitude is it forces us to think about what we are grateful for, as opposed to the things we don't want, and don't like.  I also get to share the fruits of my success with others less fortunate - others who may not have the capital to invest, or a good strategy for doing so.

Do's & Don'ts
To be honest, attitude is something I struggle with in writing this blog.  We are all being manipulated by the humongous advertising budgets of the financial services industry.  Most people believe nobody can time the markets because the "experts" don't want us to think otherwise.  They will promote the ideas of any academic or "expert" who says so.  Even though we can achieve a better return from Exchange Traded Funds (ETF's), their solution is to invest in Mutual Funds.  Guess why?!?  In the face of all of the misinformation designed to mislead and confuse, I find it very difficult to ignore the things that people should not be doing and focus, instead, on only those things we should be doing.  (See, more proof that their plan works!)

Positive Thinking
Fear begets fear, just as love has the power to change everything in our lives.  We can choose one, or the other.  No person can be fearful and loving at the same time.  We can go from one to the other in a hurry, but we cannot hold onto both emotions at the same time.  Fear is the enemy in investing as surely as it is the enemy in life.  Positive things are always, always, the result of thinking about and believing in positive things.  Mother Teresa was known to have said she would never attend an anti-war rally.  However, she would be happy to be invited to a peace rally!

Positive Results
The change in attitude is sometimes really very subtle, as in the previous example.  To believe we can achieve one result while thinking about a different one, is impossible.  I admit, it is one of the things I could  be better at.  Not only do I believe it would make me a better personal investor, I believe it would also make me an even better person.

Do you have the attitude for success?