Clippings 2017

Recommended reading, economic debates, predictions and opinions.
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Re: Eligibility For Foreign Social Security If Canadian

Post by gobsmack » 03 Apr 2017 19:15

Park wrote:
03 Apr 2017 16:12
I'm writing this post, because there will be many Canadians who have worked outside Canada.
I am not sure but I think I might have ran across that link in this other thread: viewtopic.php?f=30&t=118988&p=569968&hi ... ep#p569968 . I thought you might be interested in checking out that other thread as well.

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Stocks Do Better Than Bonds In Deflation?

Post by Park » 07 Apr 2017 23:45

I was under the impression that when deflation occurs, bonds do better than stocks.

http://osam.com/pdf/Commentary_Apr11.pdf

The link above looks at bond and stock returns in a variety of inflation rates, including deflation. It looks at the 18 years of deflation in the USA between 1900-2010. Bonds had a positive real return in each of those 18 years, with the average being 9.45%. Stocks had a positive real return in 14 out of those 18 years, with the average being 16.74%. When inflation was between 0 to minus 3%, stocks had a real return of 23.69%. When inflation was between minus 3% and minus 11%, stocks had an average real return of minus 1.34%.

There are some caveats here. First of all, 18 years of data is not a lot, and doing subset analysis on those 18 years results in smaller samples yet. Also, it only looks at US data. Since 1990, Japan has experienced modest deflation at times, and I wouldn't be surprised if bonds did better than stocks at that time. The counter to that is that Japanese stocks may have been overpriced.

With fiat currencies, deflation is less common, and tends to milder when it occurs. In view of the deflation that we're likely to experience in the future, do bonds have any advantage over stocks in such periods?

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Re: Stocks Do Better Than Bonds In Deflation?

Post by patriot1 » 08 Apr 2017 07:15

Park wrote:
07 Apr 2017 23:45
Stocks had a positive real return in 14 out of those 18 years, with the average being 16.74%. When inflation was between 0 to minus 3%, stocks had a real return of 23.69%. When inflation was between minus 3% and minus 11%, stocks had an average real return of minus 1.34%.
1929, the year of the great stock market crash, was not a deflationary year. The problem with looking at individual years is that the stock market tends to be a leading indicator of deflation or inflation. You really should look at running averages over several years, and if you do I don't think stocks would look so good in deflationary periods. The other problem is that it's been a very long time since the US saw outright deflation so what happened then is not likely to be relevant today.

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Re: Clippings 2017

Post by longinvest » 08 Apr 2017 08:35

Inflation-protected bonds, Treasury Inflation-Protected Securities (TIPS), did not exist in the U.S. in 1929. They were introduced in 1997. That's barely 20 years ago.

The Government of Canada issued its first Real-Return Bond (RRB) in December 1991 while simultaneously adopting a monetary policy based on inflation targeting. Since then, inflation has remained close to target.

Inflation-protected bonds significantly change the investing landscape as investors can now choose to avoid inflation risk.

We're not in a pre-1991 world, anymore. We live in a different investing world.
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Market Timing

Post by Park » 23 Apr 2017 15:28

To advocate market timing is somewhat heretical for an investor. But there are those who state that you can market time at extremes. The following is from an amazon.com review by a person named Michael Emmett Brady. Based on what I can find out about him ( https://papers.ssrn.com/sol3/papers.cfm ... id=2938271 ), his comments have credibility.

https://www.amazon.com/Investment-Fable ... geNumber=2

"between September, 1999 and March,2000,Soros, Buffett,and Lynch liquidated practically all of their stock market holdings in Nasdaq stocks,as well as much of their other stock holdings,the one major exception being Buffett's holdings of Coca-Cola."

So around the peak of the US stock market bubble in 1999-2000, Soros, Buffett and Lynch were engaging in market timing, based on the above quote.

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Re: Market Timing

Post by ghariton » 23 Apr 2017 19:14

Park wrote:
23 Apr 2017 15:28
Based on what I can find out about him ( https://papers.ssrn.com/sol3/papers.cfm ... id=2938271 ), his comments have credibility.
I;ve gone through the paper and it is the worst sort of gibberish. It concerns a review by F. Y. Edgeworth of Keynes' Treatise on Probability, and declares that Edgeworth is the only person in the last ninety-five years who understood what Keynes was really saying. But his critique of other reviewers makes no sense to me.

He reads like someone with a bee in his bonnet.

As to his claim that, between September 1999 and May 2000, Buffett, Soros and Lynch liquidated practically all of their Nasdaq holdings, I would like to see some support other than a bald assertion. I do recall many prominent investors saying that they were staying away from tech stocks because they didn't understand them, but that is very different from market timing. I call it common sense.

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Re: Clippings 2017

Post by longinvest » 29 Apr 2017 16:38

Jack Bogle on CNBC (April 28, 2017):

http://video.cnbc.com/gallery/?video=3000614106
Transcript: In general, the best rule for an investor is to stay the course. I've never been in favor, by the way, of making the wholesale changes like getting out of the stock market, or getting out of the bond market for that matter, but to do something on the edges. I look at it as, you know, kind of a normal position of let's call it 50/50 for all investors of all types, and if you're maybe younger 80% in stocks and 20% in bonds, and when you're older, depending on your circumstances, maybe something like 30% in stocks and 70% in bonds. I happen to be right in the middle of that. I'm 50/50. And, Becky, I'm a human guy. I have my own concerns and worries, and I know I don't have all the answers, so I tell people I'm 50/50 stocks and bonds, and half the time I wonder why I have so much in stocks and the other half of the time I wonder why I have so little. So, I'm probably about right.
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Re: Clippings 2017

Post by SkaSka » 08 May 2017 17:50

Over half of Canadians are $200 or less away from not being able to pay bills

60% of respondents don't understand that a 1% increase by the Bank of Canada on the key interest rate, which would likely push up mortgage interests rates as well by 1%, would increase monthly payments on a mortgage by around 33% (ex. going up from 3% to 4%).

This one popped out for me as well:
Regret was another theme of the survey. Nearly half said they wished they hadn’t racked up so much debt during their lifetime, and nearly 40 per cent said they regretted the debt they’ve taken on in the past year alone.
I am curious as to what starts happening in Canada as the Bank of Canada starts the process that the US Fed has begun with slow raises to the interest rate.

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Re: Clippings 2017

Post by Norbert Schlenker » 08 May 2017 18:39

At the end of 2016, over half of US households have abandoned landline phones. I would be interested in seeing similarly definitive Canadian statistics.
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Re: Clippings 2017

Post by ghariton » 08 May 2017 23:24

Norbert Schlenker wrote:
08 May 2017 18:39
At the end of 2016, over half of US households have abandoned landline phones. I would be interested in seeing similarly definitive Canadian statistics.
From the CRTC's 2016 Monitoring Report. The 2017 Report, with data for 2016, should be out in a couple of months.

From Table 5.2.6, between 2011 and 2015, the traditional telephone companies' residential wireline subscribers have declined by an average of 7.4 per cent annually. But many of those were going to other service providers, such as cable companies, so the net decline over all was 4.1 per cent per year. Business wireline subscribers have declined by an average of 3.4 per cent on net, for the same period. Earlier data are available from earlier editions of the Communications Report, but are less clear cut, due to the presence of a declining number of second lines prior to 2011.

Note that these numbers are net losses, i.e. old subscribers giving up service less new subscribers. Given that the number of households has been growing, the number "cutting the cord" is larger than the 4.1 per cent shown.

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Re: Clippings 2017

Post by ghariton » 10 May 2017 13:31

Rob Arnott argues against market-cap-weight indexing and for fundamental indexing. My take-away is that market-cap-weighting is unduly influenced by performance chasers ("lemmings"), who cause deviations from true value. In turn, those deviations are corrected by long term mean reversion, and so market-cap-weighting does badly.

Of course, Arnott favours fundamental indexing. Indeed, he seems to like any method that "breaks the link" between the prices of stocks and their weighting in the index.

Ben Lavine writes a rebuttal to Arnott. He thinks that Arnott has cherry-picked his examples. More generally, he thinks that market-cap-weight is a momentum strategy and Arnott's version of fundamental weights, RAFI, is a vale-weighted strategy. Sometimes value will do better, sometimes value will do better. But in the long run, market prices are probably the best indicator of value (with some striking exceptions).

I think that both make good points and are worth a read. It's too bad that financial journalism rarely is this interesting.

George
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Re: Clippings 2017

Post by gaspr » 10 May 2017 14:55

An interesting look at the Warren Buffet vs Ted Seides ten year bet, which is almost over.
http://ritholtz.com/2017/05/interesting ... eides-bet/

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Re: Clippings 2017

Post by AltaRed » 19 May 2017 16:14

Many women think men are better investors, they're not is just one of a number of studies, some more rigorous than others, that shows women are better investors than men. My own anecdotal evidence is very small but tends to support the thesis that men are over confident and make too many investing decisions with a mug of testosterone in their left hand. 'Wanting to be doing something' and getting 'fixated on immediate results' seems pretty disproportionately a male trait. We see that manifet itself in financial forum postings.
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Re: Clippings 2017

Post by Jo Anne » 19 May 2017 20:23

AltaRed wrote:
19 May 2017 16:14
Many women think men are better investors, they're not is just one of a number of studies, some more rigorous than others, that shows women are better investors than men. My own anecdotal evidence is very small but tends to support the thesis that men are over confident and make too many investing decisions with a mug of testosterone in their left hand. 'Wanting to be doing something' and getting 'fixated on immediate results' seems pretty disproportionately a male trait. We see that manifet itself in financial forum postings.
My investment decisions are dictated by ennui. (That's not exactly the right word, but it's the closest I can think of right now.) I watch the markets move, and I sit there paralyzed by indecision. And I do nothing. And everything turns out just fine.

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Re: Clippings 2017

Post by ghariton » 19 May 2017 21:09

Jo Anne wrote:
19 May 2017 20:23
I watch the markets move, and I sit there paralyzed by indecision. And I do nothing. And everything turns out just fine.
:thumbsup: :thumbsup: :thumbsup:

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Re: Clippings 2017

Post by Thegipper » 19 May 2017 22:18

ghariton wrote:
19 May 2017 21:09
Jo Anne wrote:
19 May 2017 20:23
I watch the markets move, and I sit there paralyzed by indecision. And I do nothing. And everything turns out just fine.
:thumbsup: :thumbsup: :thumbsup:

George
Letting emotions make decisions almost always ends up being wrong. On Wednesday I knew things weren't going well so I tuned right out and only took a look at my situation on Friday at about 1;00 PM..

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Re: Clippings 2017

Post by ghariton » 20 May 2017 13:50

Report on a new study concludes that, while stocks over all beat bonds and Treasury bills by a wide margin over the long run, that is not true of individual stocks. What you are seeing is a few stocks doing phenomenally well, with the average stock quite mediocre.
What’s more, 58 percent of individual stocks since 1926 have failed to outperform one-month Treasury bills over their lifetimes, he found. That is a low bar, given the piddling returns on one-month Treasury bills, which now yield less than 1 percent.

Professor Bessembinder found that a mere 4 percent of the stocks in the entire market — headed by Exxon Mobil and followed by Apple, General Electric, Microsoft and IBM — accounted for all of the net market returns from 1926 through 2015. By contrast, the most common single result for an individual stock over that period was a return of nearly negative 100 percent — almost a total loss.
Have I mentioned the importance of diversification?

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Re: Clippings 2017

Post by kcowan » 20 May 2017 18:14

I have held them all. Still hold XOM, IBM and AAPL. They are all on the potential sell list in that order.
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Re: Clippings 2017

Post by Lazy Ninja » 20 May 2017 22:59

ghariton wrote:
20 May 2017 13:50
Have I mentioned the importance of diversification?
Out of curiosity, I did a search for "diversification" with you as the author. It returned 157 hits. I think we can safely say the answer to your question is an unqualified yes.

Unfortunately, some of us (myself included), obviously still aren't getting the message. I have about 45% of my net worth invested in 14 individual stocks, half in Canada and half in the U.S.

From the article:
All that gloom about individual stocks may seem counterintuitive. After all, it’s often said that stocks outperform bonds over the long haul. That’s why long-term investors are generally advised to hold stocks in their portfolios.

The problem is that the rosy long-term outlook for stocks, as opposed to bonds, is based entirely on the big picture. When you look more closely, the details are disconcerting.
Disconcerting indeed. I've read on multiple occasions that winners can more than make up for the losers in your portfolio, which seems quite intuitive, but this is the gloomiest outlook I've seen for pointing out how few winners there are out there. In the past, I've seen similar articles that attributed all stock market gains to 25% of investable stocks. Four percent seems like pretty lousy odds. On the other hand, I wonder if this news might make people more tempted to try to pick winners, as opposed to less. In other words, the study shows that the odds are poorer than I thought, but, by extension, the potential reward is greater.

I really should start comparing my U.S. stock picks to an appropriate benchmark. Thus far, I've only been comparing my overall portfolio to a benchmark on an annual basis. By now I'm an experienced enough investor to have a pretty good grasp of what I don't know (I think). I wonder why I still find the allure of stock picking so strong. Something for me to think about....

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Re: Clippings 2017

Post by Shakespeare » 20 May 2017 23:06

but this is the gloomiest outlook I've seen for pointing out how few winners there are out there
Bill Bernstein mentioned it a long time ago in The Efficient Frontier.
“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

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Re: Clippings 2017

Post by Lazy Ninja » 20 May 2017 23:16

I enjoy William Bernstein's work very much, but I'm still not sure I want to read all those articles to look for the proof of your assertion :wink:

He's about as consistently opposed to individual stock picking as anyone I can think of off the top of my head. I've often wondered what advice he would give to Canadian investors for the domestic equity portion of their portfolios, given that the case for indexing appears much weaker here.

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Re: Clippings 2017

Post by Shakespeare » 20 May 2017 23:36

Here's one article:

The 15-Stock Diversification Myth

As for Canada, the few times we have had a 'superstar' stock (Nortel, Bre-X) it turned out to be a POS. :roll:

Added: any real Canadian superstar stock will wind up in both VT and VTI.
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Re: Clippings 2017

Post by SkaSka » 21 May 2017 01:26

Understanding base rates of the stock market is incredibly insightful. The Base Rate Book report by Credit Suisse is a great primer.

It's a long report but in a nutshell, the conclusion is that exceptional individual company outperformance over long periods of time are extreme outliers.

The competitive pressures of capitalism are simply too much for the vast, vast majority of companies to be able to generate excess returns on capital above the cost of capital for very long. I think it is something like under 10% of all publicly traded companies in history have been able to generate returns on capital in excess of their cost of capital for greater than 10 years.

That's why it is deemed prudent in a discounted cash flow exercise to only project an assumed growth period of 5 to 10 years where the returns on capital will exceed the cost of capital, then to make the assumption that growth in terminal value will equal the risk free rate (g = WACC).

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Re: Clippings 2017

Post by longinvest » 21 May 2017 08:47

Lazy Ninja,
Lazy Ninja wrote:
20 May 2017 23:16
I've often wondered what advice he would give to Canadian investors for the domestic equity portion of their portfolios, given that the case for indexing appears much weaker here.
What is the source of your statement that the case for indexing appears much weaker in Canada? Does it assume that the laws of arithmetic have been suspended?
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Re: Clippings 2017

Post by ghariton » 21 May 2017 10:08

Lazy Ninja wrote:
20 May 2017 22:59
Four percent seems like pretty lousy odds. On the other hand, I wonder if this news might make people more tempted to try to pick winners, as opposed to less. In other words, the study shows that the odds are poorer than I thought, but, by extension, the potential reward is greater.
At the extreme, that would be the lottery ticket approach to investing. Apparently, it is quite popular with some people.

George
The plural of anecdote is NOT data.

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