Friday, June 22, 2018

Short Takes: Asset Location, Placebo Effect, and more

Yesterday, regulators went about 10% of the way to eliminating investment industry practices that silently drain money from Canadians’ retirement savings. Maybe in a few years they’ll put a stop to another 10%. Here are my posts for the past two weeks:

The Power of Passive Investing

Blockchain and Cryptocurrency News

Exploiting Innumeracy

Here are some short takes and some weekend reading:

Justin Bender explains that “it’s your post-tax asset allocation that determines your ending portfolio value.” As I explained in a post on Asset Location Errors, there are many people who get asset location decisions wrong because they mix up pre-tax asset allocation and post-tax asset allocation. Justin does an excellent job of explaining these issues in detail with clear examples.

Scott Alexander reports on a research finding that the placebo effect seems to be just mean reversion. There seem to be a great many “results” that owe their existence to poor use of statistics.

Canadian Couch Potato interviews Ben Rabidoux who has a sensible take on real estate as an investment. CCP also discusses how hedge fund returns don’t live up to their reputation, and explains the danger of having some initial success with stock-picking.

Big Cajun Man lists his 5 best investments. The last one might help me with my sore back.

Thursday, June 21, 2018

Exploiting Innumeracy

It’s not news that governments and businesses take advantage of those who can’t or won’t do basic math. A good example is lotteries. Another recent example comes from a regulator of massage therapists, called the College of Massage Therapists of Ontario (CMTO). To justify a large increase in fees, CMTO is counting on its massage therapists being innumerate.

Annual fees for massage therapists will be going from $598 to $785, a 31% increase. In their announcement of the rising fees, the first part of CMTO’s justification is as follows.

“CMTO has not raised fees much beyond inflation in almost a decade (since 2009), while the size of our registrant base has increased by more than 40 percent.”

Most people’s eyes glaze over at the sight of numbers, but it pays to think a little. Let’s pull this statement apart. If “CMTO has not raised fees much beyond inflation in almost a decade (since 2009),” you can guess what happened in 2009. CMTO increased registration fees by 29%, which is more than a decade of inflation.

The next part is the most troubling: “while the size of our registrant base has increased by more than 40 percent.” If you don’t think much about this, it seems to make sense that you need more money to regulate more massage therapists. However, the fees are paid by an increasing number of therapists. So, even if CMTO never increased fees at all, they’d still be getting 40% more money. The 31% increase from $598 to $785 per year is on top of any increase in the number of registrants.

Here is a rewrite of the quote above removing the spin:

“Despite fee increases over the past decade that total more than double inflation, CMTO is now raising registration fees by 31% to $785 per year.”

The truth is that as the number of registrants increases, an efficient organization could have used economies of scale to control the fees paid by each registrant. But it’s not surprising that CMTO is looking for a big fee increase. C. Northcote Parkinson explained the nature of administration decades ago.

Tuesday, June 12, 2018

Blockchain and Cryptocurrency News

I’ve received 10 blockchain and cryptocurrency announcements in just the past week. To save you time, I’ve summarized them here. I’m guessing the PR firms sending the announcements might quibble with my summaries.

  1. A market for investments you should never own now plans to use blockchain to track share ownership.
  2. You can buy a service that mines cryptocurrencies for you. Try to guess whether they price the service above or below the value of the mined coins.
  3. Another cryptocurrency exchange is opening. Hopefully, it won’t get hacked like the others.
  4. Another cryptocurrency is available.
  5. Cryptocurrencies are getting hacked.
  6. There’s another cryptocurrency app.
  7. And another app.
  8. Cryptocurrency “experts” are eager to get their messages published.
  9. Bitcoin could go to $30,000 soon. Of course, it probably won’t.
  10. “Experts” predict huge increases in cryptocurrency values. Of course, they might go down instead.

Monday, June 11, 2018

The Power of Passive Investing

“Passive investing is power investing.” This line from Richard Ferri’s book The Power of Passive Investing: More Wealth with Less Work is proof that he’s far better at persuading people to use index investing than I am. Who wouldn’t want to be a power investor?

Ferri goes through the academic evidence and makes the case for passive investing to individual investors, charities and personal trusts, pension funds, and advisors. The typical individual investor will get the central ideas of this book, but it’s mainly aimed at much more knowledgeable investors.

Ferri takes dead aim at the “utter failure of active managers to deliver on their promises of market beating results while enriching themselves with fees extracted from investors who entrust money to them.”

“A fund that tracks an index may charge only 0.2 percent in annual fees compared to an active fund with the same investment objective, which may charge 1.2 percent per year.” Over 25 years, these costs grow to 4.9% and 26%, respectively. But Ferri is focused on U.S. funds. In Canada, we often pay about 2.5% per year (46% over 25 years).

Ferri estimates that “tactical asset allocation errors cost investors about 1 percent per year.” Doesn’t this mean there is someone on the other side of these trades making money at tactical asset allocation? Perhaps not depending on exactly how this cost is measured. I find I’m often left with questions about exactly how some statistics are calculated.

One section of the book quotes results from DALBAR on the eye-popping gaps between mutual fund time-weighted returns and the money-weighted returns of actual investors. I’ve written before about how DALBAR’s measure of investor underperformance is wrong. Fortunately, the rest of the evidence in this book supporting passive investing doesn’t depend on DALBAR’s results.

Ferri has some counter-intuitive advice for you: “Avoid strategies that promise to deliver excess returns and you will earn higher returns.” Investing is an area where trying harder can make things worse.

As for finding a talented active manager to handle your money, why would someone capable of beating the market need your money? “If an active manager were talented, chances are you’ve never heard of him or her, and if you did, you’d never be able to hire them.”

Ferri believes that advisors cling to active management “because they believe it’s what their clients want.” But he says “Individuals who go to an advisor aren’t looking to beat the markets. They’re looking for prudent investment advice that’s appropriate for their needs.”

“When an inexperienced person visits an advisor for advice and councel [sic], it is the responsibility of the advisor to disclose how they are paid up front.” No advisor I ever worked with passed that test.

Overall, Ferri does a strong job of presenting evidence for the superiority of passive investing, but few investors would have the patience to go through it all. More likely, Ferri will persuade a group of more knowledgeable investors, and some of them will take a simplified message about passive investing to individual investors.

Friday, June 8, 2018

Short Takes: Public Service Pensions, Bad Investor Behaviour, and more

I wrote only one post in the past two weeks, but I think it’s worth reading for anyone who understands that investing is important but would rather think about almost anything else:

How My Sons Invest

Here are some short takes and some weekend reading:

The C.D. Howe Institute explains how public service pensions are much more expensive than the federal government claims. A side effect of this fact is that government employees contribute much less than half the cost of their pensions, even though the split is supposed to be 50/50. The full report in pdf form is written to be understood by non-specialists.

Frederick Vettese points out some serious problems with the Public Service Pension Plan and how it should be fixed.

Morgan Housel “describes 20 flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.” The ninth one is “Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.” It’s true that you can’t beat the market by following the crowd. However, it’s possible for a large group of index investors to match the market by following each other.

Tom Bradley at Steadyhand previews the likely end to our long bull market in stocks. With markets setting new records daily, it’s hard to get people to think about whether their stock allocations are too high, but that’s what they should be doing. Right now, I’m set up to weather 5 years of poor stock returns without having to sell low. This feels dopey as I watch stocks continue climbing, but it’s important to know I’ll be fine no matter what happens in the markets.

Big Cajun Man reviews Doug Hoyes’ book Straight Talk on Your Money. I reviewed this book as well (https://www.michaeljamesonmoney.com/2017/09/straight-talk-on-your-money.html).

The Blunt Bean Counter tells us about the issues he’s been seeing with his clients’ Notices of Assessment (NOA). It seems that the NOA may say you owe money when you’ve already paid, and there have been issues with alimony claims.