Outstanding Financial Pornography

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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nadreck
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Post by nadreck »

Norbert Schlenker wrote:Have a gander at this.
I did, from what I read they take $10,000 from you, buy strip bonds for 2013 for $10,000 face value for $7,000, they take $475 and pocket it as commission, then they take $490 and give it back to you in a year with interest as your 5% guaranteed coupon and then they take $2025 and spread it around in some futures and futures dirivative positions and if those positions are profitable they pocket some of the profit (just how much I can't say exactly) and give the rest to you.

I have seen these schemes based on leaps on the S&P and TSX-60 and TSX-300 being sold by Scotia Bank since about 2001.
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Post by Ken »

Norbert Schlenker wrote:Have a gander at this.
Oh my lord!
I would never have bought this anyway, but thanks Norbert for the link and Nadreck for the analysis. What an eye opener! I knew there were good reasons why I hate banks (not that they're alone in this type of scam).
Ken
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Bylo Selhi
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Post by Bylo Selhi »

N.B. This isn't an example of FP but rather an expose on the abuse of FP by the fund industry.

Pair take aim at asset-allocation ads
Two men schooled in scientific rigor are taking aim at mutual fund marketers, alleging they've misquoted research on the importance of asset allocation to help lure new clients to buy expensive services.

Chances are slim the Ontario Securities Commission will chase after refunds for tens of thousands of investors. The link between sales and marketing claims would be hard to prove. But knowing their concerns might reduce your own chances of being misled....

Nuttall states in a paper posted on the Web at http://publish.uwo.ca/~jnuttall/ that he and his daughter originally collected about 50 misleading references to the 1986 and 1991 papers by a research team led by Gary P. Brinson, a widely respected U.S. institutional money manager...

His primary concern is marketing materials and fund managers' websites frequently omit the words average, variance and pension plans, and never mention Brinson's admittedly unsupported conclusion that fund managers who beat market returns are just lucky, not skilled.

Nuttall suspects investors who see the abridged claims about asset allocation will expect higher returns with lower risk if they use an investment professional's asset allocation service. Yet his research leads him to believe the selection of the mix of assets will be less significant than the choice of asset classes, the individual securities selected and timely shifts in asset mix. These choices require skill, and speculation about the future.

Nuttall does not take a position on whether the outcome will be a matter of luck or skill. He merely argues it makes no sense for investment companies to rely on Brinson's early findings to promote asset allocation and then ignore his observation about investment choice being a matter of luck in order to direct clients to their actively managed mutual funds.

"It would be obvious that they have no reason to charge management fees for the equity portion of an asset allocation program much beyond those charged by an index fund," Nuttall told Macfarlane a year ago.

Nor does it make sense to Nuttall that companies should imply they can optimize the risk and return of a client's portfolio without providing evidence that they know how...
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Norbert Schlenker
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Post by Norbert Schlenker »

An email brought an article by Sonia Horvitch in today's FP to my attention. I see lots of gossip in there but, as I had a few minutes, I thought I might see how the quoted experts have been managing. Take a look at the last 5 years for Myszkowski, O'Reilly, Blackstein, and Chang. Hensen lists as a US equity guru but the only fund I find where he's big cheese is 2/3 Canadian equity, so this comparison seems more likely to be appropriate than this.

Gee, indexing really sucks. :wink:
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Post by yielder »

Norbert Schlenker wrote:Gee, indexing really sucks. :wink:
So does cherry picking. :lol:
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Post by Norbert Schlenker »

Hey, they weren't my experts.
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Post by worthy »

In long days past, I spoke a number of times with Ira Gluskin, now president of Gluskin & Sheff, but then a mere analyst. He explained that as long as you could say interesting, even outrageous, things about investing and investments, you could make a good living. Much more important than being right or wrong.

How else to explain James Cramer?
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Post by ghariton »

worthy wrote: as long as you could say interesting, even outrageous, things about investing and investments, you could make a good living. Much more important than being right or wrong.
It ain't the analysis that sells the stock, it's the story.

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Norbert Schlenker
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Post by Norbert Schlenker »

This week's assortment.

An RBC note. Advisors use this for compensation and DSC details.
Another RBC note. You have to love the "efficient fee structure". You'll need this for the upfront commission, trailer, and DSC details.
A CIBC note. Here's the advisor's greensheet, which looks very similar but for one added line.
Investor and advisor documents for another CIBC note.

Finally, something out of today's G&M. Ira Gluskin writes for them regularly and here is today's offering about the political risk to Ottawa in messing with income trusts. We've hashed that out in other threads but I really loved one line out of the column, bolded below.
My belief is that tax revenues have gained from trusts. Many investors who own trusts are paying huge taxes, whereas in years past they would have frittered away their disposable income and left us other taxpayers footing the bill. I am not expecting that the finance department experts are going to quickly accept this subjective conclusion.
It's good of him to admit that he's spouting an unsupported argument but that middle line is a masterpiece of woolly thought.
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Post by Shakespeare »

ETFs luring passive investment dollars

Started out well, with
ETFs are a cheaper and more tax efficient alternative to many index funds, said Dan Hallett, Windsor, Ont.-based independent fund analyst[8)]. Annual costs paid by the unitholder for an ETF are about 25 basis points compared with 50 to 75 basis point fees for index funds. In Canada, Barclays ETFs trade on the Toronto Stock Exchange and can limit taxable capital gains for the unit holder, he said.
but degenerated into things like
"It's probably worth paying a little extra fee to make sure somebody is watching the pot and making sure the right ingredients are going in," she said. "What you want is someone who knows what they are doing and is watching the money. A passive index doesn't do that."
and
"If your whole portfolio is ETFs . . . then you are missing out on professional management," he said. "When everybody is healthy, any doctor can do well. When people are sick, when someone is actively involved in your health you will do better. It's the same thing with your money."
Now, proper asset allocation - aided, if necessary, by a professional advisor - can do wonders for your portfolio's health. But portfolio management is separate from fund management.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Norbert Schlenker
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Post by Norbert Schlenker »

Kitces’s keys to change:
  • * Buy a few stocks rather than a bunch; only the best will do.
    * Shun weak industries.
    * Use alternative investments, like commodities.
    * Violate the biggest taboo of all, and start market timing.
I like his ideas because I share them. So here I’ve fleshed them out with some concrete suggestions on how you can fit these innovations into your portfolio...
http://moneycentral.msn.com/content/P149325.asp
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Bylo Selhi
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Post by Bylo Selhi »

My Jack Bogle Problem
Only one thing bothers me about Bogle, and it bothers me a lot. It is his hectoring insistence that it's impossible for individuals to select fund managers who can beat the market.
Only one thing bothers me about this assertion. It's that it's completely false.
I think Bogle won't bend because he's so appalled at the failures of most fund managers -- 80% to 85% of funds fail to beat the market over time -- and at the even more dangerous habits of individual investors who flit back and forth between hot and cold funds, invariably at the wrong time.
I think he just answered his own question.
Bogle wants to protect investors from themselves -- and index funds do serve that prophylactic function.
And the problem with that is...?
I agree that most of us should index.
Cudda fooled me.
But some of us can beat the dickens out of the market if we try -- and we should be encouraged rather than told we are on a fool's errand.
Some can. Good for them. Now what about the other 85% or 90% who can't? What words of wisdom do you have for those "fools" apart from "Nice try. Too bad you lost."?

"Successful investing, based on indexing, depends on trading off the low possibility of doing better than the index, for the high probability of doing better than most other funds."
-- Ted Cadsby [From: The Power of Index Funds, 1999]
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Post by yielder »

Bylo Selhi wrote:My Jack Bogle Problem
Only one thing bothers me about Bogle, and it bothers me a lot. It is his hectoring insistence that it's impossible for individuals to select fund managers who can beat the market.
Only one thing bothers me about this assertion. It's that it's completely false.
Except for the "aberrations" with a +10-year track record. Select those and you might just be selecting managers who can beat the market over time. ;)

It's an interesting article because it mushes together the nonsense of EMH and the difficulty of identifying managers who consistently outperform. EMH is not a reason for indexing; the difficulty of identifying winning managers early is.

As a Bogleite, do you know if he directly addresses the Neffs, Millers, & Lynchs? How does he explain them away? How does he explain DFA?
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Post by beaverlodge »

Show me a philosopher, industrialist, statesman or financier to name four who does not have feet of clay.
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Post by Bylo Selhi »

yielder wrote:Except for the "aberrations" with a +10-year track record. Select those and you might just be selecting managers who can beat the market over time. ;)
If only we knew today who will turn out be the Bill Miller of the next 15 years, eh? ;)
EMH is not a reason for indexing; the difficulty of identifying winning managers early is.
Exactly. EMH is a red herring when it comes to the indexing vs. active debate. It's all about low costs. And Vanguard's low-cost actively-managed funds have an impressive record indeed.
As a Bogleite, do you know if he directly addresses the Neffs, Millers, & Lynchs? How does he explain them away? How does he explain DFA?
The correct term is Boglehead ;)

He hardly condemns them. From his first book, Bogle on Mutual Funds,
Some of these managers have done such a good job for such a long time that we can fairly assume they have unusual talents. Warren Buffett, Peter Lynch and and John Neff would surely be among this group.
As I said above, many of Vanguard's funds are actively managed and Vanguard continues to introduce new ones to this day. Bogle's mantras are: "Costs matter", "Buy right and hold tight.", etc. not something like "Index good. Active bad." as many who apparently haven't read his books/speeches seem to imagine.

And since Neff was the manager of Vanguard's Windsor fund for several decades, I'd imagine Bogle holds him in especially high esteem. (Not to mention that Neff was also the only director of Wellington Fund Management who didn't vote to turf Bogle back in 1974 ;))

As for DFA, from a recent online Q&A
Q: What do you think of DFA and DFA-affiliated advisory firms? They allege to be the cats meow, but I understand their minimums are large, their affiliates' fees can be quite high, and that their funds cannot be purchased other than through an adviser. Thank you.

John C. Bogle: I have a great deal of respect for the DFA organization. However, I am not sure their cats will actually meow in the future. First it's very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is, "reversion to the mean" i.e. what goes up must come down, and it's true more often than you can imagine. Second while the returns the DFA publishes are accurate returns for their funds, those who invest in their funds are paying an extra 1% per year to do so significantly reducing capital accumulations over time.
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yielder
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Post by yielder »

Bylo Selhi wrote:If only we knew today who will turn out be the Bill Miller of the next 15 years, eh? ;)
How bout starting with those who have 10 year outperformance?
He hardly condemns them.


Hmmm. That doesn't jive with his reversion to mean observation although it may have been quoted out of context.
John C. Bogle: I have a great deal of respect for the DFA organization. However, I am not sure their cats will actually meow in the future. First it's very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is, "reversion to the mean" i.e. what goes up must come down, and it's true more often than you can imagine. Second while the returns the DFA publishes are accurate returns for their funds, those who invest in their funds are paying an extra 1% per year to do so significantly reducing capital accumulations over time.
I wonder how long Bogle would need before he stopped being catty. :lol: Which is it: the market can be beaten consistently over time or reversion to mean prevails? As for his last comment, so what, if the fund is outperforming the relevant benchmark. At the end of the day, despite the cumulative effect of 1%, the capital accumulation is greater than what it would have been investing in the relevant index + expense.
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Post by Shakespeare »

reversion to mean prevails
ISTM that the value advantage has been shown to prevail in several different countries, although value investing has periods of underperformance.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Post by Bylo Selhi »

yielder wrote:How bout starting with those who have 10 year outperformance?
And then what? How many of those who have such a record continue to outperform during the ensuing 10 years? (How many are even still in the business or still with the same fund?)
So what, if the fund is outperforming the relevant benchmark. At the end of the day, despite the cumulative effect of 1%, the capital accumulation is greater than what it would have been investing in the relevant index + expense.
How many DFA funds can lay claim to that record?
ISTM that the value advantage has been shown to prevail in several different countries, although value investing has periods of underperformance.
Yabbut those periods of underperformance can be longer than many investors' willingness (or ability if they're now retired) to tough it out. There's no benefit in having the "right" plan if you can't follow it through thick and thin.

There's also the problem in Canada that the higher distributions from foreign value investing are taxed at ordinary income rates. That moves the barrier up a few more notches.
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yielder
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Post by yielder »

Bylo Selhi wrote:And then what? How many of those who have such a record continue to outperform during the ensuing 10 years? (How many are even still in the business or still with the same fund?)
I didn't say that it was easy or even certain. You have to do some digging into why the fund's performance is the way it is & you have to monitor it on an ongoing basis. Why did you decide to buy PH&N Div? Why do you continue to hold it? Why not bite the bullet and pay the cap gain a bit at a time rather than take the risk that performance will dry up? I suspect that a goodly part of the decision is based on the fact that it's tough to accept index performance in place of this fund's current and past performance.

How many DFA funds can lay claim to that record?
The small cap value which is what got DFA started.
Yabbut those periods of underperformance can be longer than many investors' willingness (or ability if they're now retired) to tough it out. There's no benefit in having the "right" plan if you can't follow it through thick and thin.
Irrelevant. The same problem applies with a diversified index porfolio. Just ask the question: How many of you have a US weighting? How many of you will increase it back to its target?
That moves the barrier up a few more notches.
So be tax efficient. Hold the investment inside an RRSP.
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Post by Bylo Selhi »

yielder wrote:Why did you decide to buy PH&N Div?
Because I didn't know any better at the time. If I had it to do over again (and I have in the past several years) I'd buy only the individual stocks (which I have done.) I'd also consider an ETF like XDV if only the MER was lower.
Why do you continue to hold it? Why not bite the bullet and pay the cap gain a bit at a time rather than take the risk that performance will dry up?
I'm not that concerned that performance will "dry up" any more than you are that the performance of your dividend-growth portfolio will somehow "dry up." PH&N, like Vanguard, is a reputable company. The fund is managed by committe rather than by some "star" manager.
I suspect that a goodly part of the decision is based on the fact that it's tough to accept index performance in place of this fund's current and past performance.
What index? The TSX 60 or Comp are hardly valid for a fund that's tilted towards dividends.
Irrelevant. The same problem applies with a diversified index porfolio.
Except that something that's tilted to value (or growth) may exhibit wilder swings.
Just ask the question: How many of you have a US weighting? How many of you will increase it back to its target?
I've been doing it gradually. Admittedly, I'm not back to target. (My "target" has a several-percentage-point band. I'm within a point of the bottom of the band. No one said it's easy ;))
So be tax efficient. Hold the investment inside an RRSP.
Hard to do when the RRSP is much smaller than the taxable portfolio and it's already filled to the gills with RRBs and XSB. Besides, then there would be the possibility of US estate tax to deal with.

But getting back to the original assertion that "Only one thing bothers me about Bogle, and it bothers me a lot. It is his hectoring insistence that it's impossible for individuals to select fund managers who can beat the market." That's bull, plain and simple. Easy, no. Possible, yes.
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Post by yielder »

Bylo Selhi wrote:
yielder wrote:Why did you decide to buy PH&N Div?
Because I didn't know any better at the time.
Yabbut you did have a reason, didn't you?
Why do you continue to hold it? Why not bite the bullet and pay the cap gain a bit at a time rather than take the risk that performance will dry up?
I'm not that concerned that performance will "dry up" any more than you are that the performance of your dividend-growth portfolio will somehow "dry up." PH&N, like Vanguard, is a reputable company. The fund is managed by committe rather than by some "star" manager.
How do you define reputable manager?

Managing by committee has risks as well - group think. Given that the fund isn't restricted to Canadian securities despite its name, it's open to currency bets gone wrong & market timing gone wrong. And they place pretty heavy sector and stock bets. There's plenty of room to get it wrong. Personally, I think that +20% in just two stocks (RY & MFC) and 53% in one sector is nuts and risky as hell. Shit happens.
What index? The TSX 60 or Comp are hardly valid for a fund that's tilted towards dividends.
A lot of the outperformance comes in the past 10 years. For the longest time, an investor would have been better off with the index and not PH&N.

Image
Except that something that's tilted to value (or growth) may exhibit wilder swings.
Unless it's a natural resources dominated index.
Admittedly, I'm not back to target.
And you're a true believer. :shock:
Easy, no. Possible, yes.
How'd we get to agreement so fast? :lol:
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Post by beaverlodge »

Mackenzie Financial had many funds that were run by a commitee or group think.

Star Managers outside Mackenzie had funds that were run by these STARS themselves.

Both fell on their swords.

Clay feet? Just wondering.
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Post by Bylo Selhi »

yielder wrote:Yabbut you did have a reason, didn't you?
Yeah, ignorance. To which the great oracle has this advice:
Warren Buffett wrote:By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb.
I've (mostly) learned ;)
How do you define reputable manager?
I said "reputable [fund] company." That both PH&N and Vanguard meet my criteria, the most important of which is to put the interests of the investor ahead of the fundco, doesn't mean there aren't others. There are.
Managing by committee has risks as well - group think.
But it's less likely that the star manager will up and leave. Nothing is risk free. Ya pays yer money and ya takes yer chances. PH&N owned Bre-X when that fraud was exposed. They're human like everyone else.
Given that the fund isn't restricted to Canadian securities despite its name, it's open to currency bets gone wrong & market timing gone wrong.
One more reason why I'd not do it again. That's still not a good reason to sell though.
And they place pretty heavy sector and stock bets. There's plenty of room to get it wrong. Personally, I think that +20% in just two stocks (RY & MFC) and 53% in one sector is nuts and risky as hell. Shit happens.
Which is why it's only ~3% of our portfolio.
A lot of the outperformance comes in the past 10 years. For the longest time, an investor would have been better off with the index and not PH&N.
Thank you for reinforcing the point that you can't reliably chose funds (or managers) based on their 10-year performance numbers ;)
And you're a true believer. :shock:
You're making a mountain out of a molehill. My target for US equities is 13%±5%. Last time I looked, about a month ago, I was at 8.9%.

(But if you want something to be :shock: ed about, I've been watching the loonie soar higher and higher (to almost 0.91 earlier today) before I pull the trigger on more US equity. Yeah, I'm human too. And yeah this too could backfire.)
How'd we get to agreement so fast? :lol:
Dunno. I thought the Cadsby quote in my original post essentially said just that ;)
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Post by NormR »

In 2003, John Bogle Jr. told the Baltimore Sun that as a child, he could sometimes see his breath inside the house. "My mom wanted to save the environment and my dad wanted to save a nickel, and so I remember being constantly cold in the wintertime," he said.
This John Bogle Sr. guy sounds like a fine fellow :D
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Post by yielder »

Bylo Selhi wrote:Yeah, ignorance.
Past performance? ;)
the most important of which is to put the interests of the investor ahead of the fundco, doesn't mean there aren't others. There are.
And they would be?
That's still not a good reason to sell though.
What would be?
A lot of the outperformance comes in the past 10 years. For the longest time, an investor would have been better off with the index and not PH&N.
Thank you for reinforcing the point that you can't reliably chose funds (or managers) based on their 10-year performance numbers ;)
Have a closer look at the chart. It's quite possible that PH&N was the better bet for those with a wonky stomach. The PH&N graph is smoother as you'd expect from a dividend fund.
You're making a mountain out of a molehill.
And you're ducking the fact that re-balancing into a cold wind blowing in your face is a tough act. It's not so much that you're human too but that you're a great deal more experienced and knowledgable than the neophyte indexer and probably even the average indexer. If you have a tough time, imagine what they're up against.
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