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.

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.

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.