Friday, September 23, 2022

Short Takes: Investment Signs, Alternative Asset Class Returns, and more

I’ve been reading a lot lately about how a recent ruling in Ontario has crushed the hopes for making the designation “Financial Advisor” meaningful.  Sadly, this is hardly surprising.  The big banks want to be able to call their employees financial advisors.  Banks will always be formidable foes, and any designation a bank employee is able to hold is necessarily meaningless.  Bank financial advisors may mean well, but they are no match for the carefully constructed banking environment that forces them to sell expensive products to unwary customers.

I wrote one post in the past two weeks:

Nobody Knows What Will Happen to an Individual Stock

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has an entertaining and important list of investment signs we should look for.

Ben Felix and Cameron Passmore come up with estimates of returns for alternative asset classes including private equity, venture capital, angel investing, private credit, hedge funds, private real estate, and cryptocurrencies.  I don’t know much about most alternative asset classes, but I do have a way of modeling investing in things you don’t understand.  Just load your cash into a device most people have in their backyards, spark it up, and feel the heat of investing for your ego.

Morgan Housel explains how incentives can bend our definitions of right and wrong, even though few of us believe this is true of ourselves.  This reminds me of discussions about Nortel after the tech bubble burst.  The CEO cashed in stock options for a 9-figure payday before the stock burned to the ground.  It was widely believed that the CEO had taken actions to enrich himself at the expense of the company’s future health.  However, when I asked these people if they could have resisted hundreds of millions of dollars themselves, they all said they would have resisted.  I guess I’m the only one in the world who doubts whether his morals would have survived such temptation.

Tuesday, September 20, 2022

Nobody Knows What Will Happen to an Individual Stock

When I’m asked for investment advice and I say “nobody knows what will happen to an individual stock,” I almost always get nodding agreement, but these same people then act as if they know what will happen to their favourite stock.

In a recent case, I was asked for advice a year ago by an employee with stock options.  At the time I asked if the current value of the options was a lot of money to this person, and if so, I suggested selling some and diversifying.  He clearly didn’t want to sell, and he decided that the total amount at stake wasn’t really that much.  But what he was really doing was acting as though he had useful insight into the future of his employer’s stock.

He proceeded to ask others for advice, clearly looking for a different answer from mine.  By continuing to ask others what they thought about the future of his employer’s stock, he was again contradicting his claimed agreement with “nobody knows what will happen to an individual stock.”

Fast-forward a year, and those same options are now worth about 15 times less.  Suddenly, that amount that wasn’t that big a deal has become a very painful loss.  He has now taken advantage of a choice his employer offers to receive fewer stock options in return for slightly higher pay.  It’s hard to be sure without seeing the numbers, but in arrangements I’ve seen with other employers, a better strategy is to take the options and just sell them at the first opportunity if the stock is far enough above the strike price.  Again, he’s acting as though he has useful insight into the future of his employer’s stock.

The lesson from this episode isn’t that people should listen to me.  I’m used to people asking me for advice and then having my unwelcome advice ignored.  What I find interesting is that even if I can get someone to say out loud “I don’t know what’s going to happen to any individual stock,” they can’t help but act as though either they know themselves, or they can find someone who does know.

Friday, September 9, 2022

Short Takes: Microsoft Class Action, New Tontine Products, and more

I finally got my $84 from the Microsoft software class action settlement.  As I predicted 19 months ago, I had forgotten about this lawsuit, and when the money arrived, it brightened my day (at least until I had to fight with Tangerine’s user interface to figure out how to deposit a paper cheque).  I’m not sure why it pleases me so much to get these small sums from class actions, but I’ll keep putting in claims when it’s convenient to do so.

Here are some short takes and some weekend reading:

Jonathan Chevreau describes Moshe Milevsky’s latest work on tontines to solve the difficult problem of decumulation for retirees.  Milevsky says “until now it’s all been academic theory and published books, but I finally managed to convince a (Canadian) company [Guardian Capital] to get behind the idea.”  Guardian Capital offers 3 solutions based on Milevsky’s ideas.  I’ve complained in the past that academic experts such as Moshe Milevsky and Wade Pfau write about the benefits of idealized products, such as fairly-priced annuities, but that these products don’t exist in the real world.  Every time I dig into the details of existing products, I find some combination of excessive fees and poor inflation protection.  Perhaps these experts feel the same frustration.  Hopefully, these latest products from Guardian are better.

Robb Engen at Boomer and Echo takes an interesting look back at what would have happened if he had invested differently back in 2015.  He tried several alternate investing strategies.  His actual investing approach fared well compared to what would have happened if he had stuck with dividend investing.  However, shifting to a U.S. stock index would have given the best outcome.  This kind of thinking is harmless as long as you treat it as just fun as Robb does, and you don’t get upset over what might have been.  There’s always going to be some choice you could have made differently that would have worked out better.

Friday, August 26, 2022

Short Takes: Portfolio Construction, Switching Advisors, and more

I haven’t found much financial writing to recommend lately, and I haven’t written myself, so I thought I’d write on a few topics that are too short for a full-length post.

Be ready for anything

I sometimes see this advice in portfolio construction: be ready for anything.  On one level this makes sense.  It’s a good idea to evaluate how it would affect your life if stocks dropped 40% or interest rates rose 5 percentage points.  Would you lose your house or would it just be a blip in your long-term plans?

However, those who give this advice sometimes use it to mean that you should own some of everything that performs well in some circumstances.  So they advocate owning gold, commodities, Bitcoin, and other nonsense along with stocks and bonds.

Just because you always own at least one thing that is rising doesn’t mean your overall portfolio will do well.  What you want is a portfolio that is destined to do well over the long term, with the caveat that you’ll survive any shocks along the way.  This means controlling leverage and risk.  It doesn’t mean you should own a bunch of unproductive assets.

Switching advisors

“My guy has done very well for me.” People think their returns come from their advisors’ great choices, but returns really come from a rising market.  When markets inevitably fall, many of these people will dump their advisors looking for something that doesn’t exist: an advisor who can steer them away from losses.  What a good advisor can do is help you choose a sensible risk level, keep you from making impulsive decisions, tax planning, and other services unrelated to portfolio construction.

How I would run my portfolio if it weren’t automated

For a DIY index investor, my portfolio is fairly complex.  I’m able to maintain it with little work because I run it with an elaborate spreadsheet that automates almost all decisions.  What would I do if I couldn’t automate it this way?  I’d own just VEQT for stocks, and a mix of VSB and high-interest savings accounts for my fixed income.  I need to be able to ignore my portfolio for weeks at a time without anything bad happening.


It’s not hard to compare the premiums of insurance policies from different insurance companies.  What is difficult is figuring out whether they’ll pay you or fight you if you make a large claim.   If I had useful information about which insurance companies are fair and which are most aggressive in denying claims, I might be willing to pay a higher premium to a better company.

Friday, August 12, 2022

Short Takes: Factor Investing, Delaying CPP and OAS, and more

I haven’t written much lately because I’ve become obsessed with a math research problem. I’ve also had an uptick in a useful but strange phenomenon.  I often wake up in the morning with a solution to a problem I was thinking about the night before.  Sometimes it’s a whole new way to tackle the problem, and sometimes it’s something specific like a realization that some line of software I wrote is wrong.  It’s as though the sleeping version of me is much smarter and has to send messages to the waking dullard.  Whatever the explanation, it’s been useful for most of my life.

Here are some short takes and some weekend reading:

Benjamin Felix and Cameron Passmore discuss two interesting topics on their recent Rational Reminder podcast.  The first is that they estimate the advantage factor investing has over market cap weighted index investing.  They did their calculations based on Dimensional Fund Advisor (DFA) funds used in the way they build client portfolios.  They also take into account the difference between DFA fund costs and the rock-bottom fund costs of market cap weighted index funds.  The result is an expected advantage of 0.45% per year for factor investing.  Others would be tempted to try to justify a much larger advantage, but to their credit, Felix and Passmore came up with a realistic figure.  As far as I could tell, this figure doesn’t take into account their advisor fees.  So they still have to sell the value of their other services to potential clients rather than claim these services come “for free” with factor investing.  The second interesting topic is a discussion of a study showing that “couples who pool all of their money (compared to couples who keep all or some of their money separate) experience greater relationship satisfaction and are less likely to break up.  Though joining bank accounts can benefit all couples, the effect is particularly strong among couples with scarce financial resources.”  Although my wife and I never joined bank accounts, we do think of all we have as “ours” instead of “yours” and “mine”.  For example, which one of us gets cash from a bank machine or pays the property taxes is determined by convenience rather than some division of expenses.  However, it appears that this study would lump us in with the group that didn’t pool their money.

Robb Engen at Boomer and Echo does an excellent job illustrating the power of delaying CPP and OAS to age 70 for certain retirees.  However, this creates what he calls the Retirement Risk Zone, during which the retiree spends down assets in anticipation of large CPP and OAS payments at age 70.  This approach makes a lot of sense for those with average health and enough assets to get through the Retirement Risk Zone, but most people are very resistant to this idea.

Neil Jensen announces that Tom Bradley of Steadyhand Investment Funds was inducted into the Investment Industry Hall of Fame.  Tom Deserves it.  He created an investment firm that focuses on client success rather than treating client assets like an ATM, and he regularly writes articles that teach important investment concepts in an age when we see so much useless commentary on stock prices.