Monday, January 24, 2011

Guide to What’s Good, Bad, and Downright Awful

In Rob Carrick’s Guide to What’s Good, Bad, and Downright Awful in Canadian Investments Today, he delivers on his promise to be opinionated rather than polite, respectful, and boring. However, Carrick doesn’t propose a single method of investing. He just points out the good and bad ways to go about many different approaches to investing.

The book is written in a style of lists related to different subjects. For example, the first two lists are “four examples of investment industry propaganda that you can’t take at face value,” and “seven dumb rookie mistakes investors make and how to avoid them.”

The most useful section to me was the one on investment advisors (as I said in an earlier post). This is mainly because I’ve never had a good answer when asked how to go about choosing a good investment advisor.

In the section on “big, fat mutual fund industry rip-offs,” Carrick is careful to say that some mutual funds are excellent but that investors should avoid almost all money market funds, most bond funds, many balanced funds, bank index funds (except for TD’s e-Series), and fund wraps. Another section points out some good mutual funds. This approach is more useful than most commentary that either whole-heartedly embraces mutual funds, or rejects them entirely.

In my opinion, Carrick is a little too accepting of high mutual fund MERs. Just because a fund is cheaper than most in its class doesn’t mean that it is reasonably-priced. I have a hard time understanding the logic of paying even 1% each year. But if an investor is going to buy mutual funds, it does make sense to focus on the cheaper ones even if they are still quite expensive.


Some Good Quotes:

“If you buy a stock at $10 and it rises to $20, then falls to $15, you haven’t lost $5.” This reminds me of people who planned their retirements when their stocks rose during the tech boom, but then felt cheated when stocks dropped. It is extremely rare to get out at the peak and investors who think this way are doomed to disappointment.

“Raise the issues of fees with companies offering wraps and you’ll get a blast of nonsense about all the inherent benefits of investing this way.”

On owning bonds: “Let’s just say it’s a mental health thing. My sense of the investing masses is that an all-stocks, no-bonds approach is a nervous breakdown waiting to happen.” I didn’t have a nervous breakdown during the recent stock market crash, but I agree that most stock investors did get very nervous.

“Not that you’d want to, but you can also buy such investment-industry refuse as principal-protected notes and wrap accounts.”

On investors nervous about being a small fry buying just a few shares: “no one from your brokerage firm is going to call you up and laugh at you.”

On being intimidated by boastful investors: “Anyone who claims to bat anything close to 1.000 as a stock picker is a liar.”

Overall, I’d say this book may not offer much to very knowledgeable investors, but it is definitely useful for novices through to those who only think they are knowledgeable.

5 comments:

  1. "“If you buy a stock at $10 and it rises to $20, then falls to $15, you haven’t lost $5.” This reminds me of people who planned their retirements when their stocks rose during the tech boom, but then felt cheated when stocks dropped."

    For passive investors, it's PROBABLY true nothing has been lost because the intention was to buy and hold.

    However, if the investor ignored proper asset allocation and chose not to rebalance by selling half of this stock position - when it truly represented twice of much of the portfolio as prudence dictated that it should, then the investor absolutely made a mistake and did lose money.

    The active trader is another story. That trader did lose money.

    The active trader should be looking at his/her portfolio every day (or week) and making decisions. Once again proper asset allocation ought to have been a warning that there was too much downside risk in holding this position. There is nothing wrong with selling half of a winning position. It part of re-balancing.

    Thus, my conclusion is that some people have indeed 'lost money' while others have not.

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  2. @Mark: It's certainly true that the investor has $5 less than he or she used to have. I took the remark to mean that you can't just look at the high water mark to decide if you're happy with your investments. Failing to sell at peaks is inevitable.

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  3. I think many people just don't grasp that when they invest, they no longer have the money. They have bought an investment, meaning they traded their money in for the investment. The price is just an "FYI". What you really own are X shares or Y units, not Z dollars.

    Also I think there's a better antidote than bonds to fear of the stock market: it's your advice not to invest any money you need in the next few years. In that case, it's much easier to look at stock prices as just numbers on paper, and to be level-headed about buying low, selling high, and re-balancing. I know because I followed that advice in 2008 and came out way ahead for it.

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  4. @Patrick: I'm glad your 2008 rebalancing worked out for you. A book I'm reviewing tomorrow argues against rebalancing from bonds to stocks. This isn't my strategy, but it may sound good to those who are more conservative.

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  5. Agree Michael. No one should expect to sell at tops nor buy at bottoms.

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