May 2013
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May 13, 2013 5:12 PM
Rona Birenbaum
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You’ve heard of High Frequency Trading (HFT) but have you seen it?
The 2010 flash crash has been blamed on HFT. For those of you who forget the details, the term “flash crash” was coined when the U.S. stock market lost 1000 points in a matter of minutes before recovering most of these losses a few minutes later. The crash was triggered by HFT algorithms initiating a selling cycle that wiped out billions of dollars of value before anyone knew what was going on. The trades were processed by computers, rather than human beings making buy and sell decisions based on fundamental valuation measures.
Market data research firm Nanex created this amazing video that illustrates a ½ second of trading activity in Johnson & Johnson (symbol JNJ) on May 2, 2013.
I asked Keith Graham, veteran portfolio manager with Rondeau Capital and manager of the NexGen Turtle Canadian Equity fund if investors should be concerned.
“I view it as legalized “front running” and it should be stopped. I think it creates enormous volatility and is bad for the capital markets overall. It is another issue that is causing the public to lose faith in capitalism etc. and this is very bad for our economy (and our society I think) in the long term.”
Regulators around the world are trying to figure out whether and how much they should regulate HFT. That is an emerging story. Stay tuned.
"This information is general in nature and is not intended to constitute specific investment advice for any individual.” |
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September 2011
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Sep 16, 2011 11:16 AM
Rona Birenbaum
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Yesterday, CNBC interviewed the President of the International Monetary Fund (IMF) Christine Lagarde on Europe’s fiscal problems. You can see the interview here. It is well worth 8 minutes of your time.
In our view, resolution of the debt problems in Europe will take time, and will be expensive. To protect our clients, we have avoided European bonds, and minimized exposure to European equities for some time now. That being said, uncertainty regarding Europe’s fiscal imbalances and the likely cost of restructuring that the European banks will have to bear will continue to drive stock market volatility globally.
We believe that the fear triggered by bad economic news and increased market volatility will result in short-term indiscriminate selling of a wide range of quality company shares. The rational and prudent investor will benefit over the longer term by accumulating shares in great companies during this time of volatility.
Will you be rational and prudent? |
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Sep 5, 2011 2:57 PM
Rona Birenbaum
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Every once in a while I come across an investor who was convinced to borrow money and invest the loan proceeds. This was presented to them as a smart way to build their net worth and reduce their tax bill at the same time.
There are a number of financial organizations that are known to encourage their financial advisors to recommend leveraged investing as a way of building their assets under management. How else can one get a prospective client with few or no investment assets to make an investment that will generate a sizeable commission?
I came across an example of such a case recently, and present it to you along with information about the strategy that you should read thoroughly before leveraging to invest.
Investment loan snapshot
(A) Initial loan value: $50,000
(B) Market value $41,358
(C) Current loan balance $49,052
(D) After tax interest cost since inception (2007 to present): $4,625
Total loss if strategy closed out $12,319 [$49,052 (C) - $41,358 (B)] + $4,625 (D)
So, the client has invested $4,625 in the form of loan payments, and if she wanted to close out the strategy now should would experience a loss of $12,319.
Leveraging lesson #1 – If the investments go down in value and you have borrowed money, your losses would be larger than had you invested using your own money.
Clearly, closing out the strategy now will only trigger the loss. If the investor can afford to continue making the loan payments, they would be wise to hang in there until the portfolio recovers in part or whole.
Now, if the investor had not borrowed to invest, but simply invested cash, the portfolio, which has declined 17%, would need to grow by 21% to break even. Unfortunately, the leveraged strategy raises the break-even hurdle rate to 42% because of the additional after tax cost of the loan.
Lesson #2 - If the investments go up in value, you may still not make enough money to cover the costs of borrowing.
Here is the full summary that I share with clients when they ask about leveraging.
Is leveraging right for you?
Borrowing money to invest is risky. You should only consider borrowing to invest if:
- You are comfortable taking a high level of risk.
- You are comfortable taking on debt to buy investments that may go up or down in value.
- You are investing for the long-term. (20+ years).
- You have a stable income.
- You do not have any non-deductible debt such as credit cards, lines of credit, car loans or mortgage.
- You have maximized your RRSP and Tax Free Savings Account contributions.
You should not borrow to invest if:
- You have a low tolerance for risk.
- You are investing for a short period of time.
- You intend to rely on income from the investments to pay living expenses.
- You intend to rely on income from the investments to repay the loan. If this income stops or decreases you may not be able to pay back the loan.
You can end up losing money.
- If the investments go down in value and you have borrowed money, your losses would be larger than had you invested using your own money.
- Whether your investments make money or not you will still have to pay back the loan plus interest.
- You may have to sell other assets or use money you had set aside for other purposes to pay back the loan.
- If you used your home as security for the loan, you may lose your home.
- If the investments go up in value, you may still not make enough money to cover the costs of borrowing.
Tax considerations
- You should not borrow to invest just to receive a tax deduction.
- Interest costs are not always tax deductible. You may not be entitled to a tax deduction and may be reassessed for past deductions. You may want to consult a tax professional to determine whether your interest costs will be deductible before borrowing to invest.
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August 2011
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Aug 23, 2011 4:53 PM
Rona Birenbaum
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I subscribe to one daily blog, and it is the one written by Seth Godin. Seth is a wonderful thought leader on all things business.
He posted a second blog on August 23 following an earthquake in Virginia that measured 5.9 on the Richter Scale.
Please replace the word “earthquake” with the words “stock market correction” and it makes just as much sense. Seth's blog follows:
Two earthquake-related thoughts about human nature
1. The first thing that happens after we encounter an earthquake is to wonder if anyone else felt it. The need for group validation is widespread and happens for events that don't involve earthquakes as well.
If those in the tribe feel something, we're likely to as well. That's why people look around before they stand up to offer an ovation at the end of a concert. Why should it matter if any of these strangers felt the way you did about the event? Because it does. A lot. Social proof matters.
2. Organizations are busy evacuating buildings, even national monuments. Even though experience indicates that the most dangerous thing you can do is have tens of thousands of people run down the stairs, cram into the elevators and stand in the streets, we do it anyway. Why? Because people like to do something. Action, even ineffective action, is something societies seek out during times of uncertainty.
Seth does a great job summing it up doesn’t he?
Now, I’m one of those people that stand up to offer an ovation right away if I’m so inclined. I’m not at all interested if no one else in the audience does so.
That also may partially explain my tendency to recommend that investors add to equities when the majority are selling.
I don’t give standing ovations for just any performance, and I don’t recommend just any equity investment when bear markets strike. But for the deserving, I am happy to be one of the first to recognize the value that I see, stand up, and be counted.
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Aug 7, 2011 7:57 PM
Rona Birenbaum
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Investors are again wondering what they should do as stock markets decline around the world.
They wouldn’t be wondering if they had a well crafted Investor Policy Statement (IPS).
An IPS is developed by your investment manager/advisor with your input, participation and ultimate endorsement. It represents the guiding principles for the management of your portfolio.
If your advisor has not prepared one for you, ask them why.
When done properly, it prevents advisors and clients from making some of the most common investment mistakes:
• Investing in equities with a short-term time horizon
• Choosing illiquid investments when access to capital is needed
• Expecting less volatility than is likely
• Expecting higher returns than is likely
• Paying more tax than is necessary
• Buying high and selling low
How can an IPS do this?
It outlines the following parameters specific to a client:
• Risk Tolerance – including quantifying how much of a decline you can take and for how long.
• Time Horizon – when you will need access to part or all of the investment.
• Return Expectations – what your portfolio return is most likely to be, and if it differs from what you would expect.
• Asset Mix – an outline of what percentage of your portfolios will be in stocks, bonds, GICs, cash, annuities, etc.
• Rebalancing – when and how your portfolio would be adjusted as market conditions change.
During times of volatility, the IPS reminds clients (and advisors) what strategic adjustments are appropriate (and inappropriate) for you. It can act as a form of discipline, leading to rational vs. emotional investment decisions.
Let us know if you would like to see a sample Caring for Clients Investor Policy Statement.
An IPS cannot make your portfolio bulletproof, but it can ensure that you and your advisor are on the same page, in black and white. |
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March 2011
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Mar 28, 2011 7:06 PM
Rona Birenbaum
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In past blogs I have highlighted how to find an unclaimed bank balance and a missing life insurance policy.
As it turns out, there are millions of matured Canada Savings Bonds (CSBs) that are sitting un-cashed somewhere.
The good news is that the federal government keeps a record of the owners, and many matured bonds have received an interest payment extension. This means that although the bonds have matured, the government will continue to pay interest for a further 10 years.
Getting at the principal investment is the key though. For Series 1 to 31 (the old ones with the interest coupons attached) you need to call the Bank of Canada at 1-800-665-8650.
For Series 32 and later, you should call 1-800-575-5151. You will want to be prepared with the CSB certificate number is you have it. If not, the service agent will ask you a variety of questions to confirm your identity and to identify which particular CSB issue they are to search for.
If it is determined that you are the rightful owner of matured bonds, and after a 120 day waiting period, The Bank of Canada will send you a letter of indemnity form to complete. This form must be completed in the presence of a Commissioner of Oaths or Notary Public. Check out http://www.redsealnotary.com for a cost effective notary in your neighbourhood.
The Bank of Canada has arranged a program for you to obtain Bonds of Indemnity from The Guarantee Company of North America (GCNA) at very favourable pricing. This program is available exclusively through an insurance broker, HKMB HUB International (HKMB HUB).
If the total amount of CSBs is less than $1000, the charge is $25.
If the total amount of CSBs is between $1000 and $3500, the charge is $65.
If the total amount of CSBs is between $3500 and $100,000, the charge is 2% of the total.
If the total amount of CSBs exceeds $100,000, HKMB HUB will help you find a surety/bonding company that will handle the transaction and the fees would be determined by that company.
Once HKMB HUB International has received your completed documentation, along with the associated premium fee payment, a replacement certificate(s) for your un-matured certificate(s) or a cheque for your matured certificate(s) will be issued. It takes 6 to 8 weeks for this portion of the process to be completed.
If this information has not motivated you to retrieve your matured bonds, perhaps knowing that the interest rate being paid on most outstanding and matured CSBs is only .65% will.
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August 2010
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Aug 8, 2010 9:25 PM
Rona Birenbaum
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I took my daughter to Great Wolf Lodge recently, which is a family resort built around an indoor water park.
The park highlights are the water slides. They range from the kiddie slides to the high intensity Vortex.
Now, if you really must know, if I could get away with it, (and if I was under 48 inches tall), I would choose the kiddie slides every time. However, my 11-year old daughter is adventurous, but not so adventurous that she'd go on the slides alone so I made the sacrifice and joined her on the more “exciting” slides.
We inched our way towards the “Eagle”, which appeared to be the most tame option at 1,100 feet of twists and turns. During the approach I listened to the squeals of glee and the screams of fear. I watched each person shoot out the end of each slide, focusing on their facial expressions. “Were they upset? Were they laughing?” How would I feel when I got to the bottom?”
It got me thinking about investing. Anyone can go on a water slide and survive (even thrive) because at the scariest point of the slide you can't get off. There are no escape hatches, or ejector seats. All you can do is hold on tight, scream if that helps, and you get to the bottom safe and sound.
Investing can be as unnerving as a wild water slide for some people. The problem is an investor can bail out at any time. Research tells us that they do so frequently when it is scariest, which is usually the worst possible time.
So picture some water slides of varying intensities but you cannot see the end, and you cannot see how people are when they get to the end. Which slide would you choose and see the related investor risk tolerance.
Lazy River – not actually a slide, but a slow moving current where you can coast on an inner tube enjoying the ride while the sound of laughter and screaming surrounds you. Risk profile – Ultra Conservative. Forget investing, go for high yield savings accounts and cash equivalents.
Kiddie slide – a gentle, sloping ride ending in a light splash. Risk profile – Conservative, stick with GICs and quality bonds.
Eagle – a medium speed slide with a few twists and turns. Risk profile - Moderate, a preponderance of GICs and bonds with a sprinkling of quality equity investments.
Grizzly – a fully enclosed tube with higher speed twists and turns. Risk profile – Moderate/high, a balanced mix of fixed income and equity investments.
Niagara River Rapids – a roller coaster like ride with unexpected ups and heart pounding downs. Risk profile – High, primarily equity investments including smaller, non dividend yielding holdings.
Vortex – a dramatic drop down a dark tube into a huge wide basin where you are whipped around at a high rate of speed ending in a final dark, deep descent. Risk profile – Very high, speculative equities including the penny stock that the cab driver told you about yesterday.
Which slide would you choose?
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June 2010
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Jun 29, 2010 7:36 PM
Rona Birenbaum
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Now I've seen it all.
A friend of mine recently told me about a financial advisory firm that offers:
A FREE financial plan
OR
A FREE Clublink golf lesson.
All you have to do is book a meeting with the financial advisor and bring in your investment statements to qualify. I checked it out and indeed, the offer was on the advisor's website in black and white.
It reminds me of an offer I received when visiting Las Vegas recently.
The friendly individual offered me and my husband:
$100
OR
Tickets to a show such as Cirque de Soleil or Donny and Marie (yikes!)
All we had to do was attend a 90 minute presentation and the “gift” would be ours.
Now, I wasn't born yesterday, so I know a sales pitch (aka scam) when I see one and so we moved on while the salesperson was throwing every sales technique at us in the book.
Having chatted with a number of Vegas tourists, we found out that the 90 minute presentation is really a five hour, high pressure sales pitch for a time share investment.
My bottom line message is this.
If you want a financial plan, would you rather deal with a salesperson that offers one for “free” if you bring in your investment statements, or with a professional with no strings attached?
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Jun 16, 2010 11:21 AM
Rona Birenbaum
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It amazes me that millions of Canadians have billions of dollars invested in Money Market Funds (MMFs) that are earning no interest for all intents and purposes. In fact in the six months to the end of 2009, the average Canadian Money Market Fund earned just 0.02% after costs.*
The potential opportunity cost for Canadians is between $300 million and $400 million. That is because secure, higher interest savings options do exist. We know this because we use them for our clients.
So why are Canadians not selling their MMFs and finding better alternatives? Here is what I think:
• Investors are unaware that they are not earning any interest on their MMF investments.
• Inertia – it’s easier to do nothing than do something.
• Advisors are not incentivized – There is a lot of work and administration and very little (or no) compensation related to moving clients into higher yielding savings vehicles.
• Investors are stuck in Deferred Sales Charge funds and would pay a redemption fee to get out, thus negating the benefit of earning more interest.
None of the above reasons are acceptable in my view. If you own a money market fund, ask your advisor what you are earning on it and why you haven’t been presented with a better alternative.
*source: Globefund.com
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Jun 4, 2010 8:50 AM
Rona Birenbaum
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We ask a lot of questions before developing an investor policy statement for our clients and one of them is about their rate of return expectations.
But we don't ask with the intention of developing a portfolio designed to achieve those expectations. So why bother asking?
Well, we ask to get a sense of how much, and what type of client education will be necessary when we present the optimal portfolio.
One of the things we might discuss is the impact of volatility on returns. Here is a theoretical illustration to prove the point:
Beginning investment $100,000
| Year |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Average return |
Accumulated Value |
| Portfolio A |
6% |
6% |
6% |
6% |
6% |
6% |
6% |
6% |
6% |
6% |
6% |
$179,085 |
| Portfolio B |
15% |
15% |
15% |
15% |
-30% |
- 10% |
0% |
15% |
15% |
15% |
6.5% |
$167,580 |
Now, we realize that these numbers are constructed to illustrate the point, but the point is an important one nonetheless.
Individuals seeking double digit returns will typically purchase the Portfolio B investment in year three or four after the great returns have come to their attention. Then they experience the declines of years five and six. Typically, by year seven a number of them will decide that it wasn't such a good investment after all and sell at a loss. With this kind of volatility, most investors don't hold on long enough to receive the average 6.5% rate of return. And the bad news is that even if they were invested for the full 10 years, the 6.5% average gets them less money at the end of the day than the boring portfolio that generates 6% each year.
The bottom line is that volatility and sequence of returns matter. More on both of those subjects to come.
Stay tuned. |
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