When we see a consumer item deeply discounted, we tend to react in one of two ways: 1. “What a bargain! I’ll take five.” 2. “I knew those things were no good.” Sometimes we see a low price as an opportunity, and other times we see it as a sign of low quality. In their paper, Motivating Discounts: Price Motivated Reasoning , researchers On Amir and Erica Dawson sought to find out what determines which way we react. It turns out that our reactions are determined by what we thought of the product before seeing the discounted price. If we’re already attracted to a product, then we see a discount as a bargain. If we’re neutral or negative about a product, we see the discount as a sign of low quality. A curious side effect of our behaviour is that deep discounts “discourage purchases by all except those who liked the product in the first place.” We’re less likely to buy a deeply discounted unfamiliar product than we are to buy it at the regular price. We can see this happenin...

The dividend yield reported on preferred shares is often misleading. These reported figures don’t take into account potential gains or losses when these shares are redeemed. Unwary investors can get surprised if they chase high yield without reading the fine print. Preferred shares are issued by companies to raise capital. Typically, they are sold for $25 each and promise fixed quarterly dividends until they are redeemed for $25 each. With common stock, shareholders own a slice of the company, but investors in preferred shares just get dividends. The name “preferred” comes from the fact that if the company has financial trouble, owners of preferred shares get paid before owners of common stock. Just because a preferred share starts and ends its life at $25 doesn’t mean that it holds steady at $25. If market conditions make the fixed dividend payment more or less attractive, the share’s price will fluctuate up and down. Usually preferred shares get a higher dividend (in perc...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Many investors seem unaware of the fees they pay to own their mutual funds. Disclosure rules are intended to prevent this sort of problem, but they don’t seem to be effective enough. Suppose that you meet with a financial advisor and agree to invest with her. She seems like a great person, and her investment advice seems sensible as far as you can tell. Then she hands you the following disclosure statement: Initial portfolio size : $150,000 Initial investments : 30% bond fund, 50% stock fund, 20% international stock fund Estimated Fees : Immediately : $6300 Year 1 : $3135 Year 2 : $3324 Year 3 : $3526 Year 4 : $2718 Year 5 : $2781 Year 6 : $2838 Year 7 : $4815 Year 8 : $5164 Year 9 : $5540 Year 10 : $5944 10-year total : $46,086 Gulp. Surely these can’t be right. Will you really pay this much? Yes, you will. These numbers wer...

1. Preet explains how leveraged Exchange-Traded Notes (ETNs) hide snowballing interest charges . 2. Big Cajun Man found that opening a Registered Disability Saving Plan (RDSP) isn’t as easy as opening RRSPs and TFSAs . 3. Million Dollar Journey looks at how to claim a capital loss on a de-listed stock like Nortel . 4. Mike at Four Pillars decided to collapse his leveraged investing plan (the web page with this article has disappeared since the time of writing). The big danger for anyone considering leveraged investing is that it will seem like a great idea when the stock market is booming (expensive stocks) and will later seem like a terrible idea when the stock market is crashing (cheap stocks). At least Mike stuck it out for the last 9 months while stock prices rose from their lows. 5. Potato concludes his story of looking for a place to rent in Toronto and has some advice for landlords .

In a recent post, Canadian Capitalist showed that the effect of the HST on investor returns in mutual funds is small compared to the drag caused by fund MERs. I thought that while this conclusion is correct, his calculation of the MER impact was a little off. It turns out that we were both (slightly) wrong. In the example, Investor A puts $100 to work in the equity market for 25 years at an average annual return of 8%, giving a final portfolio value of $685. Investor B makes a similar $100 investment in a mutual fund with a 2.5% MER. Reasoning that Investor B’s return dropped to an average of 5.5% per year, his final portfolio value works out to $381. With the HST, the MER drag rises to 2.7% leaving 5.3% average return each year, and the final portfolio value is $363. So, compared to Investor A’s $685, the MER costs Investor B $304, and the HST costs him another $18. It’s clear that while the HST isn’t helping, the real problem is the high MER. At first I thought that thes...

There is no shortage of commentators making predictions about interest rates. This is because they can get the attention of just about anyone who has investments. Those who depend on interest income want higher rates, and those who have stocks and bonds generally prefer dropping interest rates. It is possible to predict interest rates with better success than flipping a coin, but not in any useful sense. The market’s prediction on interest rates can be found by examining the current yield curve, which is a chart showing short-term and long-term borrowing interest rates. Typically, yield curves focus on government borrowing costs in the form of bond interest rates. The Bank of Canada maintains data on yield curves going back to 1986. Here is the most recent yield curve data for the last day of August: Typically, short term rates are lower than long-term rates because investors demand a higher return when their money is tied up longer. So, the yield curve tends to slope up...

The book Understanding Wall Street by Jeffrey Little and Lucien Rhodes is in its fifth edition and has a history going back 30 years and over a million books sold. The main strengths of this book are the wide range of investing concepts explained with clear language. The main weaknesses, although relatively minor, are the authors’ curious biases and the fact that the book hasn’t quite been updated for the internet age. The main topics covered are – the nature and history of different types of investments including stocks, bonds, commodities, and derivatives – accounting basics and the various fundamental analysis ratios such as price/earnings, dividend yield, and several others – technical analysis – the history of Wall Street and some of its colourful personalities – price bubbles through history Newspaper and the Internet Curiously, a separate section is devoted to the internet, rather than just mentioning its use as necessary in the other sections. Some of the discus...