Monday, July 16, 2018

The Best Investment Writing

When I saw a book called The Best Investment Writing, edited by Meb Faber, I couldn’t resist reading it. The book contains about 30 well-written articles, mainly on topics related to active investing. As an index investor who has given up trying to beat the market, this book served as a test of whether I might change my mind. I didn’t.

There are too many articles to comment on all of them, so I’ll just pick out a few parts I find interesting or feel the need to comment on.

Jason Zweig discussed how markets have become more efficient: “If you’re applying the tools that worked so well in the inefficient markets of the past to the efficient markets of today, you are wasting your time and energy.” That’s the conclusion I came to several years ago.

Gary Antonacci gets many people looking to tap into his 40 years of investment experience. I found one typical question and answer both wise and funny:

Question: I just looked at my account, and it is down. What should I do?
Response: Stop looking at your account.

Todd Tresidder says that “if you’re 55 and just starting to build for retirement, then beware of investment advice pushing you toward passive investments like paper assets. Your situation may require the leverage only available in business and real estate to allow you to make up for the late start and still achieve your financial goals.” This sounds like terrible advice to me. It’s better to accept a modest future than to swing for the fences and risk ending up with less than nothing.

Aswath Damodaran says that before answering the question of whether stock markets are too high, “you should consider where you would put your money instead.” Just because the expected return on stocks is low due to high valuations doesn’t mean that bonds or other assets have higher expected returns.

Jason Hsu and John West say that “A preference for complexity is almost hardwired into investors, their agents, and managers because the intuition is that a complicated investment landscape requires a complex solution: a complex strategy also supports a higher fee from both agents and managers.” Simplicity is better.

Charlie Bilello argues that nobody is really a passive investor. For you to be a passive investor “requires a lump sum investment into the market portfolio on the day you are born and only sold on the day you die.” I find this about as useful as saying a person isn’t thin because he or she weighs more than zero pounds. Owning a house, rebalancing your portfolio, and investing new savings do not disqualify you from being a passive investor. I see this reasoning frequently from those who make their livings from active investing. Perhaps this black-and-white reasoning is meant to persuade index investors that since they’re already getting their feet wet with active investing, they might as well dive in.

This book is useful for anyone looking for a diverse set of well-written discussions of investing topics. It didn’t change my mind about sticking to index investing, but it’s a good idea to venture outside your circle of like-minded friends.

Friday, July 6, 2018

Short Takes: Asset Location, Vanguard’s new Canadian Mutual Funds, and more

I managed only one post in the past two weeks about a “zero-interest” loan with high “fees”:

0% Interest

Here are some short takes and some weekend reading:

Justin Bender and Jason Heath disagree on whether to hold stocks in your RRSP or taxable account. Properly accounting for taxes, Justin is right; stocks are better in your RRSP.

Boomer and Echo report that Vanguard is entering the Canadian mutual fund market with 4 funds whose MERs are below 0.5% per year. It seems likely that Vanguard will do more to help Canadian investors than the Canadian Securities Administrators (CSA).

Tom Bradley at Steadyhand says the Canadian Securities Administrators’ failure to ban embedded commissions in their recent reforms caused “A bad day for the Canadian investor.”

The Blunt Bean Counter shares his experience and advice on giving money to your adult children or your parents. Don’t miss part 2 where he covers the reasons for money requests: need, seed, and greed.

Big Cajun Man sees a lot of FUD in financial markets.

Tuesday, July 3, 2018

0% Interest

Does a 0% interest loan sound too good to be true? You can get a 12-24 month installment loan from Brim Financial, and they claim to charge 0% interest. Not many borrowers will truly believe the cost is zero, but few will guess how expensive these loans really are.

Brim replaces “interest” with “fees”. There is a one-time installment fee of 7% of the loan amount that you have to pay in the first month. Then there is a 0.475% monthly processing fee. This fee is based on the original loan amount, not the declining balance owed.

Suppose you borrow $1200 for 12 months. The monthly payments before fees are $100. In the first moth, you pay the 7% installment fee ($84 in this example). You also pay a monthly processing fee of $5.70. In total, you pay $189.70 in the first month, and $105.70 for the remaining 11 months. The internal rate of return works out to 2.00% per month, and this compounds to $26.9% per year.

So, these carefully crafted loan terms combine 0% interest with a one-time 7% fee and an ongoing 0.475% fee to create a debt that costs 26.9% a year. That’s impressive ... and nauseating. Even those who read the fine print about fees are likely to think they’re paying a rate below 10%.

If you go for the two-year option, the cost compounds to 19.4% per year. That’s not much better, and you have to suffer through the payments for an extra year.

If this type of loan advertising is legal and remains legal, then it’s open season on borrowers.

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.