The Japanese Experience

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Automobiles
I don't know if people are aware of the story, but there is a particular reason Japanese auto imports grew to dominate the North American industry.  The single biggest reason, in my opinion, was product.  They made a better car for less, and targeted the entry level buyer.  Their target market was key, since they were limited by North American quotas at the time.  Why target the lower-priced entry level when they could have tried to go after the higher-end, more expensive category?  After all, that is what the North American car makers would do, and they did - SUV, gas guzzlers anyone?

Demographics
No, the Japanese were smarter than that, or were they?  The answer is yes, and no.  The Japanese learned from their own experience that customer loyalty was important.  Satisfied customers tended to buy again from the same company.  Not only did they buy from the same company, they tended to trade up, as well.  After paying off their first car, they tended to buy a more expensive one the next time.  If Japanese customers did so, what made them believe the U.S. customers would do the same?  Demographics, plain and simple.  With an older average Japanese population, it was expected the North American population would follow a pattern similar to that of the Japanese consumer.  And it did.  Brilliant, yes; original, no.

Same Old Same Old
Now, the question is, are we going to learn from the Japanese experience.  I don't mean their auto industry, but their economy.  Sure, there are some fundamental differences in the Japanese and U.S. economies, but let's take a look at Japan over the last two decades.  Their problems really began in the late 1980's.  There were a number of banks misbehaving, and a housing bubble that burst (sound familiar?)  For much of the last two decades, Japan has been trying to stimulate itself out of recession.  The central bank continues to buy government bonds to provide liquidity to the government, and the economy.

So?
Is it working?  By all accounts, Japan's economic course is unsustainable.  While growth has never  recovered, to any great extent, the government debt continues to rise.  The last data point in the chart above was 2008.  Their debt level as a percentage of GDP has only increased since then.

Again?
No, we have tried giving our money to the rich (one percent) with the expectation of jobs, in return.  Clearly that didn't work.  So whose idea do you think it was in the first place?  Now, we are being asked to believe that when it comes to governments, we can borrow our way around the trouble caused by, among other things, too much government debt from bailing out some of the richest corporations on the planet.  And whose idea do you think that was, and is?

Micro Economics
We need to do as they say, and not as they do.  We need to live within our means, and concentrate during these difficult times on reducing debt, and not just maintaining the status quo.  For you and I, reducing expenses is easier than increasing revenues, although we could all use some additional investment income.  The Japanese experience should teach us it is going to take a very long time before things actually begin to start to get a whole lot better!

Do you think we will learn from history?

The Case For Market Volatility

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Signs of Struggle
With an economy which generates almost 18 trillion (US) dollars of goods and services, the European Union is the largest economy in the world.  In the video, Larry Berman gives the litany of problems facing that economy, and consequently, the world economy, as well.  The level of European debt, demographics, and fiscal austerity all add up to a struggling economy and higher than usual stock market volatility for a very long period of time to come.

Volatility; Not Demand
Sovereign debt levels world wide mean political and economic volatility unlike anything we have seen in generations. All this, just at the time the Baby Boomers are beginning to ease back on their spending as their need for housing, and everything that facilitates going to work every day decreases.

New Paradigm
We have just experienced the peak of a period of economic growth unlike anything the world has ever seen.  The engines are low on fuel.  I hate to be the bearer of bad news, but we are not going to see the markets return to all time highs (at least not new highs after adjusting for inflation).  Still, the financial services industry continues their steadfast and unwavering support for the Buy and Hold approach despite the fact it makes a better marketing strategy than it does an effective portfolio management strategy.  As long as they receive sufficient participation, they aren't going to be the ones to tell us the bad news, let alone admit the hoax they have funded all of these years at their clients' expense.

The alternative to Buy and Hold?  Buy lower, and sell higher.  What a concept!

Have you, or are you making changes to your approach?

Peter Hodson and 5I Research

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Interesting story how a former analyst and fund manager felt enough of a conflict of interest to start his own rating company.  He doesn't give Buy, Sell, Hold ratings since they are used to mislead investors.  Instead 5I Research uses a grade of A, B, C... etc..

In  his company, employees are not allowed to trade the stocks of Canadian companies since that is what they provide ratings for.  He also talks about how management of the companies he would meet with while working as a fund manager would always be giving him a sales pitch instead of being objective.  Compare Hodson's   approach to the major rating agencies that are paid by the firms that they do the ratings of and for.

Clearly, the major rating agencies contributed to the problems leading to the Great Recession.  I have said that I believe the ratings system is broken.  I guess it isn't just me who thinks so.

March 2012 Portfolio Update

Typically, seasonality favours the TSX during March.  Not so this year.  While the TSX was down each week in March, the major U.S. markets were up and down.  Despite the long rally since the third quarter last year, I have been reluctant to chase it.  My own Elliott Wave analysis would suggest a high of 1425.  The S&P 500 Index hit 1419 during the last week of March.


The media talks about the U.S. markets decoupling from the rest of the world markets.  I have my doubts, although the huge government stimulus is having an affect.  Normally the markets should continue higher until the first week of May, but if 1419 is, in fact, the high, then I would not expect any major rally until the last quarter of the year.  According to the Elliott Wave theory, we could see the lows of last fall, again.


My investing horizon remains very short.    


15 month return for TSX @ March 30, 2012 = -7.23
Return for Basic Timing Model using XIU = 5.84
Return for Advanced Timing Model (my returns) = -4.36 percent
Money for charity = $0.00


What are your expectations between now and the end of the year?

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?!?