Friday, October 24, 2014

Short Takes: PRPPs, Sticking with a Plan, and more

Here are my posts for this week:

Stock Market Momentum

The 4-Hour Workweek

Here are some short takes and some weekend reading:

Preet Banerjee explains why he thinks that PRPPs don’t offer enough to make them attractive compared to TFSAs, RRSPs, and group RRSPs.

Canadian Couch Potato offers three specific reasons why you should stick with your asset allocation plan in the face of recent stock volatility.

The Blunt Bean Counter highlights the huge gap in income tax levels between Alberta and Ontario on incomes above $150,000. So far Ontario has kept the top marginal rate a hair under the psychological barrier of 50%. Their game seems to be to lower the income that gets hit with higher rates. If they ever do go over 50%, it should make some people rethink where they want to live or how hard they want to work.

Big Cajun Man managed to finally stop paying for AOL. I didn’t even know that AOL was still around. I used to joke that I belonged to their CD of the month plan. I still use some of their CDs as coasters.

My Own Advisor runs through the basics of PRPPs, but finds that they don’t add much to existing plans without being mandatory.

Wednesday, October 22, 2014

The 4-Hour Workweek

I had heard so many different things about Timothy Ferriss’s book, The 4-Hour Workweek, that I thought it couldn’t possibly cover all the subject areas. But I was wrong. Ferriss gives step-by-step instructions for changing many different aspects of your life all unified under the theme of “escape 9-5, live anywhere, and join the new rich.”

The main themes of the book are getting past fear of change, eliminating time waste, creating a low maintenance business, getting agreement to work for your current employer remotely, mini-retirements, and living in other parts of the world. Some of these themes may seem familiar, but Ferriss’s detailed strategies for completing these goals make this book unique. Few readers will attempt everything they read about in this book, but almost all readers will find some useful information for improving their lives.

The type of reader who will get the most out of this book is the 9-to-5 cubicle-dweller who yearns for a different life. We get some insight into Ferriss’s personality when he says that we shouldn’t be trying to figure out what we want or setting goals; we should be seeking excitement. He goes on to say that “boredom is the enemy, not some abstract ‘failure.’”

The discussion of taking mini-retirements instead of short vacations seems compelling, but I think it is only likely to be helpful for talented people who can find a new job or career fairly easily. I can see the concept of mini-retirement being used as an excuse not to look for a new job by someone who loses a job and can’t really afford to sit around.

A quote from Dave Barry sums up feeling s about meetings among fed-up office workers: “Meetings are an addictive highly self-indulgent activity that corporations and other organizations habitually engage in only because they cannot actually masturbate.”

Another quote from Robert Frost that will resonate among cubicle-haters: “By working faithfully eight hours a day, you may eventually get to be a boss and work twelve hours a day.”

Continuing with this theme, Ferriss writes “Most people aren’t lucky enough to get fired and die a slow spiritual death over 30-40 years of tolerating the mediocre.”

We get some encouragement to take a chance from a Colin Wilson quote: “The average man is a conformist, accepting miseries and disasters with the stoicism of a cow standing in the rain.”

One area where Ferriss’s ideas and mine differ is with investing. He chooses to own only fixed income investments and stocks of companies he is able to influence through angel investing. I’d rather just own every stock in the world and focus on other things.

The author emphasises the importance of not letting email chew up too much of your time. He says to check it only a couple of times per day, or even better a couple of times per week. He makes a good point about avoiding work email on the weekend: “Is your weekend really free if you find a crisis in the inbox Saturday morning that you can’t address until Monday morning?”

I can’t do this book justice in explaining how thorough Ferriss’s prescription is for transforming your life. No doubt most readers will not choose to follow Ferriss’s path exactly, but he does a great job of giving the tools necessary to change the things you want to change.

Monday, October 20, 2014

Stock Market Momentum

People tend to think of the stock market as something that moves up and down like an airplane. There are problems with this way of thinking that cause investors to make poor choices.

If the stock market really were like an airplane, it would have momentum that makes it difficult for the market to change direction from rising to falling or vice-versa. The truth is that prices can change on a dime because they are determined by the bid and ask prices of traders who can change their minds in an instant. There is a technical concept of momentum in stock prices, but it isn’t the same as momentum in physics; there is no physical object that must be slowed down and turned in the other direction.

The problem with a false analogy like the airplane is that it creates the illusion that if markets move in one direction a few days in a row, they are almost certain to continue that way for a while. But this isn’t true for stocks.

The recent downtrend in stock prices has many commentators saying that we are “in a correction.” But all we can say with any certainty is that we have had a correction. It may or may not continue. Saying that we are in a correction implies that falling prices will continue over the short term, which is far from certain.

The wiring of our brains makes humans very good as finding patterns. The trouble is that we sometimes see patterns that aren’t there. Stock prices over the short term are largely random. If you think you see a pattern, blame your brain.

Friday, October 17, 2014

Short Takes: Lessons for Bill Gates, Robo-Advisors, and more

I wrote one post this week reviewing a book that solidified my view that I won’t pay any attention to market predictions:

Clash of the Financial Pundits

Here are some short takes and some weekend reading:

Bill Gates discusses three things he’s learned from Warren Buffett.

Dan Bortolotti discusses the effect robo-advisors will have on the financial advice industry. He concludes that “To justify their fees, advisers will need to improve the level of personalized planning services they deliver.”

Million Dollar Journey shows where to get help for starting or growing a business.

Big Cajun Man makes his case for allowing couples to split their income. We’ve been getting lots of hints that this is coming but only for couples with young children.

Tuesday, October 14, 2014

Clash of the Financial Pundits

The book Clash of the Financial Pundits by Joshua M. Brown and Jeff Macke promises to tell readers “how the media influences your investment decisions.” For the most part the authors deliver on this promise. In the end this book solidified my view that it’s not worth paying any attention to those who make market predictions, but that’s not what the authors intended as the takeaway for readers.

Much of the book consists of transcripts of interviews with various financial pundits, the most well-known of which is Jim Cramer. While I found these interviews somewhat interesting, the best parts of the book were short chapters 9, 13, 15, and 19, none of which contained interviews.

Chapter 9 explained that the pundits who attract viewers are those who make the most outrageous predictions. “So long as you’ve still got a recognizable name, you’re still in the [punditry] game.” “And being right is irrelevant, so fire away!”

Chapter 13 explains that among pundits “it’s better to be confident than accurate.” Whether you really know what will happen isn’t important. What matters is “acting like you know.” This is “what the public wants anyway.”

Chapter 15 makes the very good point that well-known investment rules contradict each other. It goes on to list 18 pairs of rules that are contradictory. One example is “no one’s ever been wrong taking a profit! But let your profits run and don’t sell your winners.”

Chapter 19 shows how pundits make predictions in ways that allow them an out if the prediction turns out to be incorrect. They “couch their predictions in outrageousness and wackiness” or use “the subtle art of making a suggestion that can later be construed as a prediction” if the prediction turns out to be correct.

The authors try hard to make the case that to “have some hope that your portfolio will help you maintain your purchasing power through decades of retirement” you have to pay some attention to financial media. I’m not convinced. You need to learn about asset allocation and many other things, but you don’t have to listen to anyone who makes market predictions. As Charlie Munger said “Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”

I liked a quote from Ben Stein: “I have to say that every time I see anyone make a specific prediction about the future ... I shake my head because those predictions are useless. There’s only one guy whose predictions are incredibly useful; that’s John Bogle.” Bogle is considered the “father of index investing.”

In an exchange between Jeff Macke and Jim Cramer, they agree that their critics should just “take the other side of every trade.” This would be a dream for pundits. Everyone either loves you or hates you, but they all watch you. I think Cramer’s picks are just random and so I don’t pay any attention.

I liked one of Cramer’s quotes: “if you really understand [what you’re talking about] you can make it simple.” This is very true. Those who make things seem complicated often have a poor understanding of what they’re talking about. You need to understand a subject well to be able to explain it clearly.

In the authors’ conclusion they say that “predicting the future consistently cannot actually be done—by anyone” and “that despite this inability to be right all of the time (or even most of the time), there is still value to be gleaned from the words and ideas of the market commentariat class.” I disagree. All evidence is that people who act on ideas to beat the market end up losing to the market, on average. Mechanical strategies with appropriate levels of risk are a better bet than trying to outsmart other traders. What investors often need is an antidote to market pundits. During the 2008-2009 crash, Warren Buffett tried to remind people that the U.S. has a great economy and that the future would be better than the past, despite the then current troubles.

Another frequent justification in this book for the existence of pundits is that people wouldn’t watch a show that just said to buy index funds. This is true. I fully expect financial media to do whatever makes money. But attracting eyeballs isn’t proof that they are a net benefit to the viewers.

Overall, I found this book to be an easy and interesting read. It clearly lays out the techniques financial media use to attract viewers, which I liked. It even suggests that viewers should be very selective about what they watch. But, in my opinion, they still overstate the value of pundits.