Clippings 2017

Recommended reading, economic debates, predictions and opinions.
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ghariton
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Re: Clippings 2017

Post by ghariton » 11 Aug 2017 20:28

Consumption and Income Inequality in the U.S. Since the 1960s

This paper claims that inequality in the U.S. has been growing much more slowly when measured in terms of consumption than in terms of income. ISTM that consumption is at least as important as income. After all, the only point of earning money is to spend it.

The abstract:
Official income inequality statistics indicate a sharp rise in inequality over the past five decades. These statistics do not accurately reflect inequality because income is poorly measured, particularly in the tails of the distribution, and current income differs from permanent income, failing to capture the consumption paid for through borrowing and dissaving and the consumption of durables such as houses and cars. We examine income inequality between 1963 and 2014 using the Current Population Survey and consumption inequality between 1960 and 2014 using the Consumer Expenditure Survey. We construct improved measures of consumption, focusing on its well-measured components that are reported at a high and stable rate relative to national accounts. While overall income inequality (as measured by the 90/10 ratio) rose over the past five decades, the rise in overall consumption inequality was small. The patterns for the two measures differ by decade, and they moved in opposite directions after 2006. Income inequality rose in both the top and bottom halves of the distribution, but increases in consumption inequality are only evident in the top half. The differences are also concentrated in single parent families and single individuals. Although changing demographics can account for some of the changes in consumption inequality, they account for little of the changes in income inequality. Consumption smoothing cannot explain the differences between income and consumption at the very bottom, but the declining quality of income data can. Asset price changes likely account for some of the differences between the measures in recent years for the top half of the distribution.
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Re: Clippings 2017

Post by gaspr » 14 Aug 2017 10:01

Mike Piper's latest post on whether dividend stocks belong in your portfolio. I totally agree with his conclusions.

http://www.obliviousinvestor.com/do-div ... portfolio/

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Re: Clippings 2017

Post by Descartes » 15 Aug 2017 10:10

gaspr wrote:
14 Aug 2017 10:01
Mike Piper's latest post on whether dividend stocks belong in your portfolio. I totally agree with his conclusions.

http://www.obliviousinvestor.com/do-div ... portfolio/
finally and most importantly: dividend stocks are not a substitute for bonds
Mind-blowing.
"A dividend is a dictate of management. A capital gain is a whim of the market."

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Re: Clippings 2017

Post by ghariton » 17 Aug 2017 12:13

The left thinks that increases in the minimum wage have no impact on jobs and makes workers better off. The right thinks that increases in the minimum wage lead to loss of jobs and increases in the unemployment wage. Past studies have tended to show little impact either way. The problem with those studies is that they have looked at all workers as a single homogeneous group. Recently studies have distinguished low-skill from high-skill workers and have concluded that low-skill workers are indeed harmed by increases in the minimum wage. One such study found this result in Seattle as a result of their wage hikes. (The study was denounced by Seattle City Council, because they didn't like it. Now another study, much broader in scope, comes to similar conclusions. The abstract:
We study the effect of minimum wage increases on employment in automatable jobs – jobs in which employers may find it easier to substitute machines for people – focusing on low-skilled workers from whom such substitution may be spurred by minimum wage increases. Based on CPS data from 1980-2015, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low-skilled workers in automatable jobs become unemployed. The average effects mask significant heterogeneity by industry and demographic group, including substantive adverse effects for older, low-skilled workers in manufacturing. The findings imply that groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.
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Re: Clippings 2017

Post by Park » 26 Aug 2017 17:39

One criticism of indexing is that if enough money is indexed, then indexing won't work. How much active investing is needed for indexing to work?

https://fsrankings.com/category/blog/

"nearly 15% of the global equity market indexed, only about 5% of the trading volume of individual U.S. equities reflects activity of passive investors. In other words, 95% of the daily price discovery is being made by investors assessing the relative value of individual securities (i.e., active views)."

The quote above would suggest that what is important is not the proportion of assets that is actively managed, but what proportion of trading is by active investors. The data presented would indicate that we're very far from having to worry about too much indexing.

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Re: Clippings 2017

Post by Descartes » 31 Aug 2017 09:29

An opportunity to jump on WFC again for another eventual rebound?

Wells Fargo uncovers up to 1.4 million more fake accounts
Wells Fargo (WFC) now says it has found a total of up to 3.5 million potentially fake bank and credit card accounts, up from its earlier tally of approximately 2.1 million. The additional fake accounts were discovered by a previously-announced analysis that went back to January 2009 and that reviewed the original May 2011 to mid-2015 period.

About 190,000 accounts were slapped with unnecessary fees for these accounts, Wells Fargo said. That's up from 130,000 previously.

Wells Fargo also discovered a new problem: thousands of customers were also enrolled in online bill pay without their authorization. The review found 528,000 potentially unauthorized online bill pay enrollments.
"A dividend is a dictate of management. A capital gain is a whim of the market."

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Re: Clippings 2017

Post by AltaRed » 31 Aug 2017 15:23

Seems like a lot of either lack of internal controls (compliance), or authorizations by rogue line-of-authority, or both. They clearly must have had algorithms to identify customers they knew they could prey on because I have had WF accounts (bank and credit) for many years and there is nothing identifiable in all my diagnostics online that uncovers anything nefarious. Indeed, my WF experience has been stellar, on par with anything my Cdn banking experiences has been.
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Market Cap Indexing

Post by Park » 01 Sep 2017 09:26

http://beta.morningstar.com/articles/82 ... folio.html

"there are three obvious things investors can do to improve their well-being: minimize costs, diversify, and keep the taxman at bay. While there are many ways to do that, Vanguard Total Stock Market Index (VTSAX) is a natural starting point when it comes to investing in U.S. stocks.

This fund tracks the CRSP U.S. Total Market Index, which represents the composition of the entire U.S. stock market. This broad, market-capitalization-weighted index effectively diversifies firm-specific risk, promotes low turnover (making taxable capital gains distributions less likely), and harnesses the market's collective wisdom. Any deviation from this U.S. market portfolio represents an active bet. For every active bet, there is a winner and a loser. Before taking those active bets, it is important to understand your probability of placing a winning wager, who you're wagering against, and why they are willing to sit across the table from you. If you don't have any special insights, a total market index fund should be the default option...

Despite its imperfections, most investors should still stick with a broad, market-cap-weighted fund like Vanguard Total Stock Market Index for their core U.S. equity allocations. No matter how inefficient some pockets of the market may be, active investing will always be a zero-sum game. Net of fees, it is a negative sum game. This passive fund should do better than most of its peers over the long haul, especially after taxes. And it requires less of investors than an actively managed strategy."

Much effort is put into obtaining above average performance using security selection and market timing. But the irony is that a financially unsophisticated investor, with little effort, can very likely obtain above average long term performance relative to other investors using a market cap indexing strategy.

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Re: Fixed Income For A Taxable Investor

Post by Park » 02 Sep 2017 21:11

Park wrote:
06 Aug 2017 19:11
If you're in a higher marginal tax bracket and are investing in fixed income in a taxable account, you have a problem.

What can be done?

https://www.canadianportfoliomanagerblo ... b-vs-gics/

Justin Bender points out that HBB is one solution:

"This ETF uses a total-return swap structure, which effectively converts the interest payments (which are taxed at the investor’s marginal tax rate), into deferred capital gains (which are taxed at only half the investor’s marginal tax rate, and only when the ETF is ultimately sold). Due to this advantage, HBB would be expected to have higher after-tax returns than a traditional bond ETF, like XBB"

He then goes on to show though that investing in GICs might result in a similar (possibly slightly higher) aftertax return than HBB. This is due to the fact that pretax return would be higher on GICs than HBB.

There are advantages to HBB. HBB is more liquid than GICs. If interest rates go up significantly, HBB would likely be more attractive.

There are advantages to GICs. You run the risk of the government disallowing the swap structure of HBB. As long as your GICs are backed by the CDIC, there's less credit risk with GICs. With the ETF structure of HBB, you give up the certainty of interest and return of principal that you have with GICs. The weighted average duration of HBB is 6.82 years. If you're looking to match assets to liabilities within the next 5 years, GICs would be preferable.


Another solution would be discount bonds.

There are advantages to discount bonds. Discount bonds are more tax efficient than GICs. Discount bonds may have lower costs; HBB's costs are up to 0.24%. With discount bonds, you get certainty of interest and return of principal. You can also match the duration of assets to your liabilities. You get liquidity, compared to GICs. You can choose your credit risk exposure; HBB is 43.8% AAA, 37.4% AA, 9.8% A and 9% BBB. About one third of HBB's exposure is to corporate bonds. With discount bonds, you're not exposed to the risk of the swap structure. You don't have the $100K limit of CDIC coverage; this also applies to HBB.

There are disadvantages to discount bonds. Discount bonds will be less tax efficient than HBB. The biggest disadvantage of discount bonds is that there isn't a lot of them right now, although that may change.

At present, I'm not shopping for fixed income products. But I wouldn't be surprised if GICs now and in the future would be an attractive alternative to discount bonds.
There's another advantage of discount bonds. I see fixed income as a way to bridge a cyclical stock bear market during retirement. In a cyclical stock bear market, bonds often have a negative correlation with stocks, and their price goes up. So just when I need fixed income, the value of my bonds will increase. And even better yet, that increase will be in the form of cap gains. But that won't happen to my GICs. The negative correlation in a cyclical stock bear market is also an advantage of bond funds.

In 2008, iShares funds had the following returns:

Government Bond Index 8.7%
Short Term Bond Index 8.03%
Bond Index 6.13%
Corporate Bond Index -0.59%

In 2008, Vanguard mutual fund returns were as follows:

Long Term Treasury 22.52%
Intermediate Term Treasury 13.32%
Short Term Treasury 6.68%
Long Term Investment Grade 2.29%
Intermediate Term Investment Grade -6.16%
Short Term Investment Grade -4.74%

I'd be investing in short term bonds. The negative correlation is more with government bonds than corporate bonds. And to take advantage of the negative correlation, the bonds would have to be liquid. From what I understand, provincial bond liquidity was an issue in 2008. Those who are more knowledgeable, please correct me on the last point. So I"d be looking at short term government of Canada bonds. Short term Treasuries went up 6.7% in 2008. So you probably did better in 2008 with short term Treasuries than CDs (American equivalent of GICs). But there won't be many years where short term Treasuries do better than CDs.

I think I may stick with GICs.

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Re: Clippings 2017

Post by longinvest » 02 Sep 2017 21:24

I wouldn't touch a structured ETF (such as HBB) with a ten-foot pole! As for discount bonds, they have a longer duration for the same maturity, and to buy them I need to find a seller. What does the seller know that I don't? :wink:
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Re: Clippings 2017

Post by Park » 02 Sep 2017 21:54

longinvest wrote:
02 Sep 2017 21:24
I wouldn't touch a structured ETF (such as HBB) with a ten-foot pole! As for discount bonds, they have a longer duration for the same maturity, and to buy them I need to find a seller. What does the seller know that I don't? :wink:
I wouldn't buy a structured ETF also. Based on the present federal government's attitude towards taxation, I wouldn't be surprised if structured ETFs are on borrowed time. Discount bonds have a longer duration, but if held to maturity, that's not an issue. What does the seller know that I don't? From what I understand, nontaxable investors play an important role (dominant role?) in the fixed income market. So a nontaxable seller and a taxable buyer could have a win win situation with discount bonds.

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Re: Clippings 2017

Post by Peculiar_Investor » 05 Sep 2017 10:11

I'll put it here, but this may be worthy of it's own topic.

An interesting list to read and review, 36 Obvious Investment Truths
Ben Carlson wrote:1. If you need to spend your money in a relatively short period of time it doesn’t belong in the stock market.
2. If you want to earn higher returns you’re going to have to take more risk.
3. If you want more stability you’re going to have to accept lower returns.
4. Any investment strategy with high expected returns should come with the expectation of losses.
5. The stock market goes up and down.
6. If you want to hedge against stock market risk the easiest thing to do is hold more cash.
7. Risk can change shape or form but it never really goes away.
8. There’s no such thing as a perfect portfolio, asset allocation or investment strategy.
9. No investor is right all the time.
10. No investment strategy can outperform at all times.
I would agree those are pretty obvious, but sometimes we choose to forget some or all of them. A couple of others that I'd highlight are:
14. “I don’t know” is almost always the correct answer when someone asks you what’s going to happen in the markets.
25. Compound interest is amazing but it takes a really long time to work.
29. The best investment process is the one that fits your personality enough to allow you to see it through any market environment.
I know that I frequently practice #14, but the investing world would become much more boring if everyone else did.
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Re: Clippings 2017

Post by DenisD » 05 Sep 2017 12:44

I ask myself this question whenever one of my screens is underperforming:
27. It’s almost impossible to tell if you’re being disciplined or irrational by holding on when your investment strategy is underperforming.

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1/N Asset Allocation

Post by Park » 06 Sep 2017 08:47

This is intended for less financially knowledgeable investors, such as myself. The link is to a review of an important paper that found that equally weighting assets, as an asset allocation strategy, compares favorably to much more complicated models. The benchmark strategy is a "naive portfolio in which a fraction, 1/N, of wealth is allocated to each of N assets available for investment at each rebalancing date".

http://www.cfapubs.org/doi/full/10.2469/dig.v39.n4.13

"The authors conclude that none of the optimizing strategies always dominate the benchmark in terms of the Sharpe ratio. In terms of CEQ returns, none of the optimal strategies are consistently better than the benchmark. In terms of turnover, only the value-weighted market portfolio strategy is better than the benchmark. The authors also suggest that the 1/N diversification strategy should serve as a benchmark for evaluating the performance of other optimal allocation strategies"

So 1/N is a good strategy for a DIY investor. The one exception may be that a market cap indexing strategy results in less turnover, which will result in less taxes and lower transaction costs. And the performance of a 1/N strategy depends on rebalancing. Especially for a taxable investor, whether one should rebalance or not is not necessarily a straightforward decision.

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Re: 1/N Asset Allocation

Post by ghariton » 06 Sep 2017 15:21

Park wrote:
06 Sep 2017 08:47
This is intended for less financially knowledgeable investors, such as myself.
You're much too modest.
So 1/N is a good strategy for a DIY investor.
Of course, there's the problem of choosing N. Since most of us can't handle a very large N, this will have to be a subset. But of what? The S & P 500? The Russell 2000?

By contrast, market-cap indexing is straightforward. As the companies get smaller, their weights get smaller too, and so you can ignore them or choose a very small sample.

George
The plural of anecdote is NOT data.

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the age of data monopolies

Post by Profit not Prophet » 06 Sep 2017 21:15

from the mawer site 'The age of data monopolies'

'About a decade ago, was an investor to ask, “What are the best businesses? The ones nearly immune to competition?'

http://artofboring.com/the-age-of-data- ... 1444187219

or a tiny url of http://preview.tinyurl.com/y886q27m

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Why Active In Bonds Does Better Than Stocks

Post by Park » 13 Sep 2017 08:03

http://beta.morningstar.com/articles/82 ... eding.html

There is evidence that active investing in bonds does better than it does it stocks. The following are excerpts from a morningstar article:

"Baz presented data that two thirds of active bond mutual funds and ETFs beat their passive counterparts over the last 10 years, a finding he described as "striking." For active equity funds only one third were able to outperform. He said that these findings held across all time periods that they studied.
Importantly, this outperformance holds when comparing managers against actual investible passive products and not the index itself...

Why have active fixed-income managers had success? One of the major drivers according to Baz is that half of the active bond market is made up of noneconomic players like central banks and insurance companies. These actors are buying bonds to execute quantitative easing programs or to match long-dated liabilities not to just maximize returns...

Another factor is that the turnover of bond indexes is much higher than for stocks, creating more opportunities to beat the index. The S&P 500 has only 4% turnover every year, while the Bloomberg Barclays Aggregate sees 40% turnover.

Add the ability of active managers to deploy active tilts (like having longer duration), purchase securities outside of the index, trade in options and trade different styles (value momentum) and Baz says you can see how bond managers have been able to turn in a good track record."

I agree with the first point, that noneconomic players indirectly help active bond investors. And the high turnover of bond indexes doesn't help. One of the reasons that stock indexing works well is low turnover: that keeps costs, including taxes, down. About the preceding paragraph, I'm not convinced that necessarily helps active bond investor. Those are all ways for an active bond investor to outperform. But those ways are mostly zero sum games. Overall, they can't help active bond investors in aggregate outperform.

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Re: Why Active In Bonds Does Better Than Stocks

Post by ghariton » 13 Sep 2017 14:26

Park wrote:
13 Sep 2017 08:03
I agree with the first point, that noneconomic players indirectly help active bond investors. And the high turnover of bond indexes doesn't help. One of the reasons that stock indexing works well is low turnover: that keeps costs, including taxes, down. About the preceding paragraph, I'm not convinced that necessarily helps active bond investor. Those are all ways for an active bond investor to outperform. But those ways are mostly zero sum games. Overall, they can't help active bond investors in aggregate outperform.
Intuitively, I would expect that the low liquidity of most bond issues would help an active investor or fund manager who has time and patience on his side. This would be especially true for corporate bonds, but perhaps for provincial and state bonds as well. The patient investor can provide liquidity to such markets and be rewarded for it. As well, ISTM there should be more opportunities to spot mispricing of a bond, rather than a stock, and so more low-risk arbitrage opportunities.

George
The plural of anecdote is NOT data.

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Advisors

Post by Park » 24 Sep 2017 09:08

https://www.valuewalk.com/2016/06/the-b ... stments/2/

“The investor should not be his own sole consultant unless he has training and experience sufficient to qualify him to advise others professionally. In most cases he should at least supplement his own judgement by conference with others.”

Graham and Dodd Security Analysis p.259

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Re: Advisors

Post by twa2w » 24 Sep 2017 13:25

Park wrote:
24 Sep 2017 09:08
https://www.valuewalk.com/2016/06/the-b ... stments/2/

“The investor should not be his own sole consultant unless he has training and experience sufficient to qualify him to advise others professionally. In most cases he should at least supplement his own judgement by conference with others.”

Graham and Dodd Security Analysis p.259
Agree, even if trained you should consult others.
The legal profession has a similarly saying
A lawyer who represents himself in court has a fool for a client.

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Re: Advisors

Post by deaddog » 24 Sep 2017 16:07

Park wrote:
24 Sep 2017 09:08


“The investor should not be his own sole consultant unless he has training and experience sufficient to qualify him to advise others professionally. In most cases he should at least supplement his own judgement by conference with others.”

Graham and Dodd Security Analysis p.259
The problem is most who claim they are trained are in reality salespeople.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Advisors

Post by Descartes » 24 Sep 2017 16:41

twa2w wrote:
24 Sep 2017 13:25
The legal profession has a similarly saying
A lawyer who represents himself in court has a fool for a client.
That's about viewing a case objectively not competence.
"A dividend is a dictate of management. A capital gain is a whim of the market."

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Post by Park » 24 Sep 2017 18:02

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Last edited by Park on 24 Sep 2017 21:16, edited 1 time in total.

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Re: Advisors

Post by twa2w » 24 Sep 2017 18:12

Descartes wrote:
24 Sep 2017 16:41
twa2w wrote:
24 Sep 2017 13:25
The legal profession has a similarly saying
A lawyer who represents himself in court has a fool for a client.
That's about viewing a case objectively not competence.
True but the same applies to advisors, fund managers etc.

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Diversification Works During Market Crises

Post by Park » 24 Sep 2017 20:01

http://post.nyssa.org/nyssa-news/2010/0 ... ssure.html

Harry Markowitz

"If diversification is of little use during crises, then concentrated portfolios should do perfectly well. Consider concentrated portfolios during 2008—their performance clearly depended on the areas in which they were concentrated.

A portfolio concentrated in government bonds would have done quite well. The problem with putting all one’s wealth in government bonds, of course, is that they usually yield less than corporate bonds, and over the long run their performance is much lower than that of equities. On the other hand, if a portfolio was concentrated in AIG, Citigroup, General Motors, or the financial or auto industries generally, the result would have been tragic."

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