Clippings 2017

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kcowan
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Re: Clippings 2017

Post by kcowan »

ghariton wrote: 21 May 2017 10:08At the extreme, that would be the lottery ticket approach to investing. Apparently, it is quite popular with some people.
George
Ironically, all the super-rich made their fortunes through stock concentration! JD Rockafeller with Standard Oil, Gates, Musk, Ellison, any founder of a successful company, even Buffett!

So the challenge is to Invest in those companies right after they go public and hang on long enough! Both Nortel and BBY gave plenty of signs when the good times were over! Yes it is risky but not rocket science. But it requires you to be hands on.
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Re: Clippings 2017

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longinvest wrote: 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?
Au contraire mon ami! Canadian indexing it's a sector bet mathematically.
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Re: Clippings 2017

Post by longinvest »

kcowan wrote: 21 May 2017 10:47
longinvest wrote: 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?
Au contraire mon ami! Canadian indexing it's a sector bet mathematically.
Please explain.

Note that I am not implying that one should put 100% of one's portfolio into the Canadian stock market; that would be imprudent, in my opinion. But, for whatever part of one's portfolio invested into the Canadian stock market, I don't see why we should suspend the laws of arithmetic.

Actually, the laws of arithmetic hold regardless of what we would like. It's annoying; I know. :wink:
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Re: Clippings 2017

Post by Shakespeare »

Ironically, all the super-rich made their fortunes through stock concentration!
You concentrate to make money (if you can stand the risk) and diversify to keep it.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: Clippings 2017

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Shakespeare wrote: 21 May 2017 11:18
Ironically, all the super-rich made their fortunes through stock concentration!
You concentrate to make money (if you can stand the risk) and diversify to keep it.
... all the while keeping in mind that most people suffer from over-optimism bias.

To Keith Cowan's point, most of the super-rich did not make their money by taking risky investments. They made their money by exploiting monopolies that produced something that was popular or, even better, a necessity. A low-risk avenue...

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Re: Clippings 2017

Post by Lazy Ninja »

Shakespeare wrote: 20 May 2017 23:36 Here's one article:

The 15-Stock Diversification Myth
That's a good article. I must have stumbled across it at some point, because I distinctly remember this bit:
Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough.
SkaSka wrote: 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.
Looks interesting. I'll take a look at it. Thanks.
SkaSka wrote: 21 May 2017 01:26 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.
Thus the importance of moats.
ghariton wrote: 21 May 2017 10:08
Lazy Ninja wrote: 20 May 2017 22:59Four 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
I've never had a "play money" portion of my portfolio, nor have I ever purchased a lottery ticket. The closest I've ever come was likely a disastrous purchase of Barrick Gold in 2013. I was down 45% when I sold it five months later. I don't regret it though; far from it. It was a small price to pay to learn a valuable lesson.
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Re: Clippings 2017

Post by big easy »

longinvest wrote: 21 May 2017 10:52
kcowan wrote: 21 May 2017 10:47
longinvest wrote: 21 May 2017 08:47 Lazy Ninja,



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?
Au contraire mon ami! Canadian indexing it's a sector bet mathematically.
Please explain.

Note that I am not implying that one should put 100% of one's portfolio into the Canadian stock market; that would be imprudent, in my opinion. But, for whatever part of one's portfolio invested into the Canadian stock market, I don't see why we should suspend the laws of arithmetic.

Actually, the laws of arithmetic hold regardless of what we would like. It's annoying; I know. :wink:
The consensus amoung some here seems to be that the TSX60 and other Cdn indices are highly concentrated in banks, oil and mines (roughly 70%). Furthermore, oils and mines are highly cyclical. While you may be indexing, you aren't diversified. So it may be best to avoid indexing the Canadian market.

Incidentally there is an equal weight version of the TXS60 tracked by the Horizons HEW etf. However it is still skewed towards banks, oil and mines but perversely, oils and mines have a higher weighting than the banks in the equal weight index.

Edit to add a clipping:
http://business.financialpost.com/inves ... ir-weights
Last edited by big easy on 21 May 2017 12:29, edited 1 time in total.
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Re: Clippings 2017

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longinvest wrote: 21 May 2017 08:47 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?
I assume anything that shows how poorly constructed Canada's stock market index wouldn't suffice? If not then I don't have a source. Do I need one for every statement I make (note to self: make fewer statements)? I was merely thinking in terms of the contrast between the two markets that I choose to stock pick. With all else being equal, would you rather invest in VTI or VCN? Does it not make sense to suggest that the concept of diversifying broadly makes more sense when applied to a well diversified index? Would you not agree that it makes less sense to invest in individual stocks in the U.S. than it does in Canada?

As for the laws of arithmetic, I wonder how they'd be affected by as simple a decision as permanently turning one's back on heavy cyclicals as suitable buy and hold investments.
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Re: Clippings 2017

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big easy wrote: 21 May 2017 12:12 While you may be indexing, you aren't diversified. So it may be best to avoid indexing the Canadian market.
I think that's the crux of the argument, regardless of whether one believes it or not. We all have to decide for ourselves. I guess you could say I'm trying to find a better way to be poorly diversified.
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Re: Clippings 2017

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Big easy,
big easy wrote: 21 May 2017 12:12 The consensus amoung some here seems to be that the TSX60 and other Cdn indices are highly concentrated in banks, oil and mines (roughly 70%). Furthermore, oils and mines are highly cyclical. While you may be indexing, you aren't diversified. So it may be best to avoid indexing the Canadian market.

Incidentally there is an equal weight version of the TXS60 tracked by the Horizons HEW etf. However it is still skewed towards banks, oil and mines but perversely, oils and mines have a higher weighting than the banks in the equal weight index.
I've heard that argument before. When I hear it, my brains believes that it sounds reasonable. But, unfortunately, as soon as I take the time to confront the statement with arithmetics, I'm reminded that beating the market is a zero-sum game, before costs; there's no escaping it.

One way to see the fallacy in the "equal weight" argument, is to pick two companies in the Canadian stock market and think how we could invest equally in both and achieve lower risk through this weird equal-weight definition of "diversification". Let's pick the biggest and the smallest companies, based on VCN's current holdings:
  • Royal Bank of Canada, ticker: RY, weight: 6.98239%
  • Concordia International Corp., ticker CXR, weight: 0.00001%
Would I have a more "diversified" portfolio by investing my money 50% into RY and 50% into CXR, or 99.9999% into RY and 0.0001% into CXR?

Before answering, one should not forget that the market capitalization of RY is 700,000 times the market capitalization of CXR. Yes, seven hundred thousands times!

Of course, one could still think that CXR is a great company. Here's how it describes itself:

http://concordiarx.com/about-us/
Concordia is a diverse, international specialty pharmaceutical company focused on generic and legacy pharmaceutical products and orphan drugs. The Company has an international footprint with sales in more than 100 countries, and has a diversified portfolio of more than 200 established, off-patent molecules that make up more than 1,300 SKUs. Concordia also markets orphan drugs through its Orphan Drugs Division, consisting of Photofrin® for the treatment of certain rare forms of cancer. Concordia operates out of facilities in Oakville, Ontario and, through its subsidiaries, operates out of facilities in Bridgetown, Barbados; London, England and Mumbai, India.
What if RY was to break itself into 9 mini-RYs. Would that mean that I would have to rebalance my portfolio, reducing the weight of CXR from 50% to 10%?

And what if all investors into the Canadian market wanted to buy as much of CXR as they have in RY? What would happen to the prices of RY and CXR?

Here's my take. The price of RY would drop and the price of CXR would increase until they would lead to equal (free-float) market capitalization. This would bring the price of RY way lower than its intrinsic value and that of CXR way above its intrinsic value. An investment into CXR would be much riskier than an investment into RY.

No. This does not hold up to scrutiny.

The way to diversify away the narrowness of the Canadian stock market is to put parts of one's portfolio into other assets, such as bonds (nominal and inflation-indexed) as well as international stocks.
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Re: Clippings 2017

Post by longinvest »

Another interesting fact. The market capitalization of CXR is currently $90 millions, according to Bloomberg. The net assets of VCN are currently $857 millions, almost 10 times more. And, VCN is a quite young ETF (2013), much smaller than XIC ($3 billions) and XIU ($12 billions).

My opinion is that equal weighting is an argument by fund managers to attract money from those who don't understand mathematics.
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Re: Clippings 2017

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Lazy Ninja wrote: 21 May 2017 11:51
SkaSka wrote: 21 May 2017 01:26 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.
Thus the importance of moats.
Yes moats are incredibly important in order to maintain returns on capital above the cost of capital for prolonged periods of time, which creates excess returns. However, with the frequency in which the word "moat" is bandied about in the world of finance, one might mistakenly be under the impression that moats are easy to create and defend: they are not as it is incredibly rare to build strong moats that can withstand the forces of capitalism and time!
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Re: Clippings 2017

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SkaSka wrote: 21 May 2017 14:55 Yes moats are incredibly important in order to maintain returns on capital above the cost of capital for prolonged periods of time, which creates excess returns. However, with the frequency in which the word "moat" is bandied about in the world of finance, one might mistakenly be under the impression that moats are easy to create and defend: they are not as it is incredibly rare to build strong moats that can withstand the forces of capitalism and time!
Agreed. When I first started investing in individual stocks, I was exclusively backward-looking. I would review 10 years of a companies key ratios on Morningstar and base my decisions on that, on the basis that 10 years was too long a time frame for a company to be simply fortunate. I reasoned that a decade of success must be indicative of something: a moat, a niche, superior management etc.

These days I insist on being more forward-looking. It's a pain in the ass. I miss the certainty of basing my evaluations exclusively on that which has already happened.
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Re: Clippings 2017

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Big easy,
big easy wrote: 21 May 2017 12:12 Incidentally there is an equal weight version of the TXS60 tracked by the Horizons HEW etf. However it is still skewed towards banks, oil and mines but perversely, oils and mines have a higher weighting than the banks in the equal weight index.
Let's compare HEW to XIU over the longest period of available data in PortfolioVisualizer:
  • Portfolio 1: XIU (blue)
  • Portfolio 2: HEW (red)
Source: PortfolioVisualizer
xiu-vs-hew.png
Over that period, HEW was significantly more volatile than XIU (12.20% vs 8.96%), while delivering lower total returns. It was probably an unlucky run, returns wise, for HEW. The returns could have been higher, but that would have been compensation for the higher volatility. The higher volatility is quite likely to remain, in the future, due to higher investments into smaller corners of the S&P/TSX 60. That's just the nature of the beast.
big easy wrote: 21 May 2017 12:12 Edit to add a clipping:
http://business.financialpost.com/inves ... ir-weights
Thanks for the link.

Apparently Mark Yamada, president of PUR Investing Inc., did not expect this higher volatility. Here's what Chevreau's article reports:
Mark Yamada, president of PUR Investing Inc., has compared the Horizons S&P/TSX 60 Equal Weight ETF (HEW/TSX) to the market-cap weighted iShares S&P/TSX 60 Index Fund (XIU/TSX), which has a disproportionate weight to the financial sector.

Yamada found the unintuitive fact that the equal-weight ETF was more volatile in the short one-year term, since the higher number of smaller companies generally have higher volatility than larger ones.

But from 2000 to 2014, the equal-weight index outperformed, in part because there was less drag from Nortel Networks Corp. in the early part of the period and BlackBerry Ltd. in the later part.

“Equal weight offers an effective way to diversify risk associated with any one company, so for investors looking for sector or industry exposure, equal-weight indexing makes good sense,” Yamada said.
I think that the risks of a narrow market can be more effectively to diluted by investing into other assets (such as bonds and international stocks), instead of tilting one's investments into the market's smaller corners.
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Re: Clippings 2017

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longinvest wrote: 21 May 2017 17:45 I think that the risks of a narrow market can be more effectively to diluted by investing into other assets (such as bonds and international stocks), instead of tilting one's investments into the market's smaller corners.
Indeed.

But then you run into home country bias.

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Re: Clippings 2017

Post by longinvest »

George,
ghariton wrote: 21 May 2017 18:19 But then you run into home country bias.
Yes, I agree. And this applies to both stocks and bonds. :twisted:

My portfolio is overweight into Canadian stocks by a factor of 17 (that's less than a factor of 700,000, though :wink: ). I also have 100% of my bond investments ([fixed]: more than a factor of 700,000, as it is infinite :!: silly me: it's a factor of 33!) in Canada, representing maybe 3% of the world's bond markets. I am fully aware of my active stand on the matter, and of the potential loss in diversification of my portfolio, because of it. But, as I've previously mentioned, domestic and foreign investors are not exposed to similar risks, skewing the diversification argument.

From a pure indexing point of view, it would be much harder to defend the overweight exposure of my portfolio to Real-Return Bonds. But, in this case, it's definitely a personal preference for lowering my portfolio's exposure to the inflation risk of nominal bonds. The same applies to my portfolio's lack of exposure to junk bonds and commodities: I don't like to invest into things below investment grade, and into things that don't pay me to hold them*.

* Or, maybe I should say "unproductive things". Bonds (even zero-coupon ones) produce interest. Stocks produce dividends, or grow, or something. Commodities just sit there producing nothing and have storage costs.
Last edited by longinvest on 21 May 2017 21:34, edited 1 time in total.
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Re: Clippings 2017

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longinvest wrote: 21 May 2017 18:32it's definitely a personal preference for lowering my portfolio's exposure to the inflation risk of nominal bonds.
Me too. I come from a part of the world where inflation was significant, and got completely out of control from time to time. Plus my mortgage came up for renewal in 1982.
The same applies to my portfolio's lack of exposure to junk bonds and commodities: I don't like to invest into things below investment grade, and into things that don't pay me to hold them.
Agree. I hold bonds for safety, not for their return. The higher rates on junk bonds are just not worth it. Similarly, I would rather not incur FX risk on my bonds.

As for commodities, I have always thought of them as speculative (for me at any rate). They are for people who use them as intermediate inputs in their production of other stuff.

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Re: Clippings 2017

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Let's continue to have fun with the equal weighting argument. :mrgreen:
longinvest wrote: 21 May 2017 13:19 One way to see the fallacy in the "equal weight" argument, is to pick two companies in the Canadian stock market and think how we could invest equally in both and achieve lower risk through this weird equal-weight definition of "diversification". Let's pick the biggest and the smallest companies, based on VCN's current holdings:
  • Royal Bank of Canada, ticker: RY, weight: 6.98239%
  • Concordia International Corp., ticker CXR, weight: 0.00001%
Would I have a more "diversified" portfolio by investing my money 50% into RY and 50% into CXR, or 99.9999% into RY and 0.0001% into CXR?
Let's look at historical performance. First, let's compare RY with the total Canadian stock market (XIC):
  • Portfolio 1: RY (blue)
  • Portfolio 2: XIC (red)
Source: PortfolioVisualizer
ry-vs-xic.png
RY had higher returns than the market (12.98% vs 6.68%), but at the cost of higher volatility (17.26% vs 13.15%). Some people would say that it was riskier.

Now, let's compare RY with CXR. Note that PortfolioVisualizer's data for CXR starts in February 2014:
  • Portfolio 1: RY (blue)
  • Portfolio 2: CXR (red)
Source: PortfolioVisualizer
ry-vs-cxr.png
Oh boy! That's real volatility at work; RY looks as tame as short-term bonds, in comparison to CXR, thanks to the vertical scale.

Anybody still convinced that equal weighting is less risky? :twisted:
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Re: Clippings 2017

Post by Shakespeare »

So why not just buy RY? :twisted:
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Re: Clippings 2017

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Shakespeare wrote: 21 May 2017 22:26 So why not just buy RY? :twisted:
Why not leverage the market, instead? :twisted:
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Re: Clippings 2017

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longinvest wrote: 21 May 2017 22:06 Anybody still convinced that equal weighting is less risky?
How do you feel about capped ETFs? Any objection to those?
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Re: Clippings 2017

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Lazy Ninja wrote: 21 May 2017 22:36
longinvest wrote: 21 May 2017 22:06 Anybody still convinced that equal weighting is less risky?
How do you feel about capped ETFs? Any objection to those?
I have no strong opinion about them. I don't use them because my AA guarantees that no single security can grow bigger than 25% of my portfolio. But, if I had a high percentage of my portfolio invested in the TSX (something like 60% or 80% of my portfolio), I would definitely look at capped ETFs. I've unfortunately learned the Nortel lesson the hard way (I wasn't indexing, at the time).
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Re: Clippings 2017

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More numbers for longinvest. At TMXMoney, you can compare capped and equal weight versions of the S & P TSX 60 and S & P TSX indexes. For 2005 thru 2014 for the S & P TSX 60:

Code: Select all

Description           Capped Equal weight
10 year returns         8.24         8.30
10 year risk           13.79        13.97
Not much different for 10 years. With a little work one can extend those returns to 2017. TSX capped does better than equal weight.

https://web.tmxmoney.com/assets/docs/in ... t_TXEW.pdf
https://web.tmxmoney.com/assets/docs/in ... t_TX6C.pdf
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Re: Clippings 2017

Post by longinvest »

DenisD wrote: 21 May 2017 23:01 More numbers for longinvest.
Thanks.

Just to clarify my previous post: Before getting into a capped ETF, I would look more deeply at it first. I'd want to know about the process used to implement the cap (e.g. what happens when a security gets bigger than 10%; does the fund continually sell and buy shares as the price fluctuates up and down, respectively?).
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Re: Clippings 2017

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DenisD wrote: 21 May 2017 23:01 At TMXMoney, you can compare capped and equal weight versions of the S & P TSX 60 and S & P TSX indexes. For 2005 thru 2014 for the S & P TSX 60:

Code: Select all

Description           Capped Equal weight
10 year returns         8.24         8.30
10 year risk           13.79        13.97
Not much different for 10 years. With a little work one can extend those returns to 2017. TSX capped does better than equal weight.

https://web.tmxmoney.com/assets/docs/in ... t_TXEW.pdf
https://web.tmxmoney.com/assets/docs/in ... t_TX6C.pdf
Some additional info about the S&P TSX 60:

Why does the S&P/TSX 60 exclude some of Canada’s biggest stocks?

It discusses free-float (expected in a well-designed index), but also weirder stuff (sector balancing to be more representative of the total market balance). I prefer to invest into the total free-float market (e.g. VCN). Of course, my preference amounts to counting angels dancing on the head of a pin, much like comparing the S&P 500 with the total US market.
  • Portfolio 1: XIU (blue) iShares S&P/TSX 60 Index ETF
  • Portfolio 2: XIC (red) iShares Core S&P/TSX Capped Composite Index ETF
Source: PortfolioVisualizer
xiu-vs-xic.png
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