Are Hedge Funds A Con?

There’s this guy named Ray Dalio. He’s a multi-billionaire. And he makes his money running hedge fund company, Bridgewater Associates. Bridgewater is the biggest boy on the hedge fund block, managing $160 billion (USD) on behalf of investors. In 2016, when the S&P 500 clocked a total return of 12.25%, Bridgewater’s largest fund, Pure Alpha, returned a measly 2.4%. Dalio’s reward for huge underperformance? Take home pay of $1.4 billion.


The Big Fat Pitch

You see, hedge funds are something of a … hmmm, let’s be kind and call this sort of corporate structure a promotional vehicle. The sales pitch goes like this:

‘We have access to information that you don’t; we’re smarter, more knowledgeable and more talented than you when it comes to managing investments; AND we will earn you higher returns than anyone else.’

For the past few decades, wealthy investors and institutions (those who typically have access to hedge funds) greedily swallowed the pitch. And they paid big time fees for the privilege of handing over millions, or hundreds of millions, of dollars to this or that star studded hedge fund.

What kind of fees give investors access to media savvy, hot shot fund managers promising outsized returns?

Fees higher than most any other fund out there. Standard industry practice among hedge funds is what’s known as ’2 and 20 compensation’. Meaning, hedge funds charge fees equal to 2% of funds under management and 20% of profits earned above a certain threshold.

To make this clear, let’s use Dalio’s company as an example. As mentioned, Bridgewater manages a tidy $160 billion. Two percent of that is $3,200,000,000. And Bridgewater skims this ten–figure fee off the top regardless of investment performance. Rise or fall, Bridgewater collects the fee.

Ahhh, but that’s not all that has Bridgewater and other hedge fund managers salivating.

Typically, if hedge fund returns hit 8%, then the fund is entitled to receive 20% of any profits. This is on top of the 2%. The upside here for investors is the incentive. Presumably, Bridgewater strives for returns higher than 8%. If achieved, both investors and funds managers benefit. If not achieved? Well, think of it as foregoing a bonus payment. Because the 2% ($3,200,000,000) isn’t exactly a paltry payday.

So you see, the hedge fund game is even more about attracting money as it is about performance. Because the more money a hedge fund manages, the more guaranteed money it makes.

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Are The Gazillions Justified?

Does Dalio, or any other hedge fund manager, deserve such lavish sums for his work?

Well, that depends on your perspective. I mean, here you have Dalio saying, ‘I’m the best at what I do and this is my fee, pay me or take your money elsewhere’. And investors pay. So in this sense, sure, he deserves the money.

It’s not like Dalio is forcing anyone to hand over their money. He’s simply tossing the sales line, and investors are biting. Presumably, these are wealthy, sophisticated investors who have read the fine print, understand the risks, and know the cost.

Okay, sales pitch aside, greed, ignorance and lemming like investor behaviour aside, does Dalio and other hedge fund managers offer substance? Sure, these guys are consummate salesmen, but are they excellent money managers? Do they generate fat returns for investors? Is their alleged talent worth the price?

I can’t answer these questions any better than Warren Buffett who said,

“There is huge money in selling people the IDEA that you can do something magical for them.”

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Index Fund Trounces Hedge Funds

In 2007, Buffett made a million dollar bet with Protégé Partner, a New York based hedge fund. You can read Protege’s … uh, um, say, questionable sales pitch here.

The bet was simple: over an extended period of time, an S&P 500 Index Fund (in this case the Vanguard 500 Index Fund Admiral Shares with a, get this … 0.04% management fee) would outperform a portfolio made up of several different hedge funds.

Ten years later, the results are in: Index Fund up 85%. Hedge Funds, 22%.

In the financial world, this is a total wipeout. And it’s largely, though not entirely, owing to fees charged by Hedge Funds. Deducting fees would have seen a return of close to 50%; better but still not even close to a passively managed index fund.

Instead of gloating about his win, Buffett took the opportunity to:

  • Reinforce the fact that excessive investment fees destroy wealth.
  • All investors, including the wealthy, are better off placing their money in a low cost index fund.

And investors seem to be catching on.

In 2016, a record amount of money (close to half a trillion dollars) flowed out of active funds and into passive index funds. Also in 2016, hedge funds saw their first annual outflow of money ($28 billion) since 2009. The reason is simple: high fees and poor returns. Expect the bleeding to continue.



Even If It’s Not a Con, Don’t Believe The Hedge Fund Hype

Though there are active fund managers who are able to consistently (i.e., minimum 10 year stretch) beat passive funds, they are few and far between. As for hedge fund managers, Buffett said it best when rhetorically asking:

“How many hedge fund managers in the past 40 years have said … I only want to get paid if I do something for you? Unless I actually deliver something beyond what you can get for yourself, I don’t want to get paid.”

Of course, no one has said this. Because they do not, and cannot, do anything for investors beyond that which an Index fund may do.

As for Dalio, if huge investor fund flows into passive funds are any indication, it could be that he’s a dinosaur. An absurdly rich dinosaur no doubt. But maybe, hopefully, for the sake of investors, for the sake of fairness, honesty and transparency, him and his kind are on the verge of extinction.

 

 

 

 

 

 

Canadian Bank Stocks Rock

On the global stage, Canada is a minor player. And going by the numbers, you may not expect much on the economic front: with a population (36 million) less than California, Canada ranks 10th for gross domestic product (GDP); and 32nd for GDP per capita. But numbers alone don’t tell the whole story. The thing is, on several fronts, seemingly polite Canadians don’t hesitate to punch well above their weight.


Incredible Cash Machines

For those with a long term investing horizon (that should be everyone, since investing is a long game), who believe that capitalism is going to stick around awhile, the population will grow owing to domestic baby creation, immigration, and ever increasing life spans, and that consumers and businesses will continue to rely on financial institutions … you can’t go wrong with the big five Canadian banks.

These are hulking, multinational corporations operating in a well-regulated (i.e., government oversight) home environment. These are companies that churn out profits to the tune of 1 to 3 BILLION dollars every three months. And who give back to shareholders in the form of dividend increases and share price growth.

On a stock risk/return measure, there isn’t a much safer bet.

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Closer Look

  • Consider Royal Bank of Canada (TSE:RY)(NYSE:RY), Canada’s largest bank with a $137 Billion market value. Though more than half of its revenue is generated from domestic operations, this is expected to change in the near future as RY has significant American based operations, as well as conducting business in 35 other countries.

Adjusted for stock splits, in 1998, RY traded above $22. Today, it’s trading at $92. And while you’re enjoying the stock ride, every quarter the bank pays a healthy dividend to shareholders. During the past 17 years, dividend payments have increased from 13.5 cents per share to 0.87 cents per share. Typically, dividends are increased twice/year, because they make so much money! Currently, the percentage dividend payout is about 3.75%.

  • Next up is Toronto-Dominion Bank (TSE:TD)(TSE:NYSE), nipping at the heels of RY with a $118 Billion market value. TD also maintains a large American presence and is now counted among the top 10 banks in the USA.

Adjusted for stock splits, in 1998, TD traded at above $8. Today, it’s trading at $63. Like RY, dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from 10.5 cents per share to 0.60 cents per share. Currently, the percentage dividend payout is about 3.8%.

  • Bank of Nova Scotia (TSE:BNS)(NYSE:BNS) is the most international of the Canadian banks. With a market value of $92 Billion, BNS operates in 55 countries not including the USA.

Adjusted for stock splits, in 1998, BNS traded at $34. Today, it’s trading at $76. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $1.00 per share to 2.88 per share. Currently, the percentage dividend payout is about 4.0%.

  • Bank of Montreal (TSE:BMO) (NYSE:BMO) sports a market value of $61 Billion and has substantial US operations.

Adjusted for stock splits, in 1998, BMO traded at $32. Today, it’s trading at $93. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.25 per share to 0.90 per share. Currently, the percentage dividend payout is about 3.8%.

  • Canadian Imperial Bank of Commerce (TSE:CM)(NYSE:CM), weighs in at $42 Billion market value. Outside of Canada, CM has operations in the USA, Europe, Asia, Australia, Latin America, and the Caribbean.

Adjusted for stock splits, in 1998, CM traded around $36. Today, it’s trading at $106. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.33 per share to 1.27 per share. Currently, the percentage dividend payout is about 4.8%.


What To Buy and When

You’ll get opinions all over the map on the issue of which bank stocks offer the best investment potential. Although I’m not about to throw my hat in the ring here, I will say that sound arguments may be made for any of the banks listed in this post. And if you can’t decide which one belongs in your shopping cart, then you may want to opt for one of the following exchange traded funds (ETF):

  • ZWB, Covered Call Canadian Banks, issued by Bank of Montreal, currently pays a +5% yield with a 0.72% management fee.
  • XFN, S&P/TSX Capped Financials Index, issued by iShares, currently pays a 3% yield with a 0.55% management fee.

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The Magic Key: BUY ON SALE!

Whether you buy an individual bank stock or an ETF, your portfolio will greatly benefit from patience.

Currently, bank stocks are trading at about 10% off their 52-week high. This is what I call a middling discount. It’s a decent entry point and you’ll do well in the long run. But you’ll do better if you wait for a deeper discount like what was on offer in January, 2016, when bank stocks were beaten up, so much so that their dividend yields were between 4.5% – 5%, which is a fantastic yield for companies of this quality and size.


If You Can’t Beat ‘Em, Join ‘Em

Sure, there are valid complaints about bank fees and services, and sometimes banks do jump offside, strong arming consumers to pay for unnecessary services. And that’s a topic for another day. For now, from a practical investor perspective, it sure is worth your while to own some of these incredible money making machines.

Think about it: you know those monthly fees you pay out of pocket? Well, wouldn’t it feel better to take from the bank’s pocket, in the form of quarterly bank dividends, to cover the cost of those fees and more? That said, as good as it feels, there are bigger issues at play than taking satisfaction from reaping financial revenge.

Canadian banks offer boringly, consistent profitability. When financial institutions around the world were melting down in 2007-2009, Canada was held up as the model banking system and its banks as the model banks. Yes, Canadian bank share prices were hammered during this time but that was only because investors predictably panicked (in retrospect, this time period was an extraordinary buying opportunity). The banks themselves were never at risk of harm.

Boring isn’t a problem. In the world of investing, boring is often exactly what you want. You want the unassuming turtle portfolio that grows little by little, year after year. The one that makes you wealthy.


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Enter Buddha

Be patient and wait. Ordinarily, the mind does just the opposite. Grumbling for that which has not happened. Complaining, not grateful. Desiring instead of creating the capacity to receive. Create the capacity to receive and much will happen.

 

Risky Business

Starting in late 2007, and continuing throughout the so-called Great Recession, conventional talking heads prophesized the end to America’s reign; tea leave readers foretold China’s economic belly flop; the European Union threatened to unravel, to be undone first by Greece, then Portugal, then Ireland, then Spain, then … and the all mighty consumer stopped spending thus greasing the downward spiral.

With eyeballs bugging out left and right, folks terrified of an impending crash landing fled financial markets. Too risky, too dangerous, they said. So equities were dumped en masse and shelter was sought under cover of Government Treasury Bills and mattresses.


And Now … The New And Improved America

Nearly a decade later, the American economy has healed. U.S. manufacturing is undergoing a renaissance, fracking has transforming the energy sector for better or worse, housing markets are humming, unemployment targets have been exceeded, and, as a matter of self-interest, global economies are cheering, and benefitting from, America’s phoenix like rise. Compared to the dark days, the financial world as we know it is at relative peace.

And in the wake of perceived macro economic risks falling by the wayside, stock market indices are hitting one new high after another. Feeling secure about domestic and global economic prospects, investors continue to pour record amounts of cash into equity index funds and mutual.

Seems like a smart move, yes? I mean, with systemic, default, credit, liquidity, operational and market value risk sirens no longer screaming, isn’t now the perfect time to get into the stock market, to shoulder more risk in exchange for higher return?


Reality Check

Risk. It’s double-sided. In the investing world as in life in general, risk may simultaneously present danger and opportunity. Yet, many people hear the word risk and run, as if it’s a fatal hazard to avoid. And sometimes it is. Sometimes, after plotting bar charts, measuring graphs, researching and analyzing, doing due diligence until the cows come home, we rightly conclude that the chance of potential harm outweighs any possible reward.

At other times (i.e., Great Recession), we get scared. Emotions drive decision-making. We panic and sell into downdrafts at a loss. Then we stand on the sidelines biting our fingernails, waiting for calm to return, convincing our self that we’re safer bearing the risk of not investing.

Are we safer on the sidelines when markets implode? Or we missing out, failing to capitalize on golden opportunities?


Fear of Loss May Equal Loss of Opportunity

When it comes to investing, emotions are your nemesis. When they take over, we become blind to unbiased data.

We minimize the fact that North America has experienced more than forty economic recessions during the past two hundred years. We overlook the reality that every one of those recessions came to an end, that the sun never stopped rising, and growth eventually resumed an upward trajectory.

Meaning? That recessions are part of the natural capitalist cycle, and that while extreme volatility has been known to cause shallow breathing and digestive issues, it may also be understood as a measure of temporary price fluctuation. Not loss (unless you sell at exactly the wrong time), but fluctuation. And these fluctuations often present opportunity for gathering low hanging fruit leading to juicy returns.


Mental Wonkiness

Why the persistent, near universal investor short sightedness? Why, without fail, does the appetite for equities decrease when markets are volatile and increase when markets are stable?

Blame one of the biggest risks of all, the risk residing between our ears, that conceptual notion called The Mind.

Embedded in the mind is fear, a primal emotion. According to behavioral finance’s prospect theory, fear saddles investors with what is called loss aversion, i.e., we place more weight on the pain associated with loss than the good feeling resulting from gain.

True, it’s only a theory. But just for fun, test it out. Ask yourself, what emotions did you feel back in 2007-2009 when reading successive month end statements showing lower and lower portfolio values? And when daily media reports gluttonously shared the feast of bad news how often did your stomach turn? Did those feelings make you want to buy stocks or bolt for the exit, courtesy of fear?

Fear overpowers the investor’s two most effective weapons: logic and rationality. Without these, we’re practically defenseless against the onslaught of panicky herds. And certainly, unlike Warren Buffet, we forget that market uncertainty may be our friend.


Profiting from Uncertainty

Late 2008, holding fast to the conviction that global capitalism wasn’t flat lining, Mr. Buffett wrote a cheque for the tidy sum of $5B to buy Goldman Sachs (NYSE:GS) preferred shares yielding a hefty ten percent (equals $500M/annually). At the same time, he buys warrants allowing for purchase of 43.5M common shares at $115.

Three years later, GS buys back the preferreds at a ten per cent premium (another $500M for Buffet; another day at the office) and, as of the time of this writing, GS commons trade near $215 making for a plus 90% value increase.

When most everyone else was sprinting to the bunkers, how could Buffett be sure that stock market declines were not a harbinger for the end of the world as the Mayans predicted?

Well, other than stating the obvious that hindsight is 20/20, I’m not going to pretend to have an answer. But I’ll go out on a limb and say that, as a student of history, Buffet knew the following:

  • Since the 1940s, the Dow Jones Industrial Average (DJIA) has declined by at least 20% more than 12 times;
  • Since 1906, the DJIA has been on an upward climb, moving from 100 to near 21,000; and
  • About every five years or so, there’s a temporary market pullback before resuming the march to new heights.

Related, I wouldn’t be surprised if Buffet’s faith in the upward trend of financial markets mirrored a similar faith in civilization as so eloquently stated by Franklin D. Roosevelt in 1945 (quoting Rev. Endicott Peabody, Roosevelt’s former teacher):

“Things in life will not always run smoothly. Sometimes, we will be rising toward the heights, then all will seem to reverse itself and start downward. The great fact to remember is that the trend of civilization is forever upward; that a line drawn through the middle of the peaks and valleys of the centuries always has an upward trend.”


Learning From The Giant

Though there will never be another Warren Buffett, we mere mortals may learn from him. During the next recession (a matter of time), investors would do well do pop an antacid or two and consider buying fundamentally sound, large cap, domestic and global companies that happen to get sideswiped by general hysteria.

As for today, some market indices are trading at or near record highs. For the most part, the easy money’s been made. So this brings us back to the question, is now a good time to buy equities?

Some say, yes, buy now. Others say the present day rotation into equities is little more than another chance for sheep to get fleeced. While a third investor subset isn’t so sure, believing there are still too many question marks and it would be best to wait for greater clarity.

The thing is, the future is never clear. So for investors, it’s more about injecting rational thought and sidestepping fear. It’s more about asset diversification and long term perspective, rather than timing purchases. Do this, and balance and wealth are bound to grow.

 

 

 

Avocado Toast Ruining Retirement

Avocado is a pear shaped, alligator skinned nutritional powerhouse, a veritable stand-in for your one-a-day multivitamin. Humble, ordinary, unassuming, The Avocado is packed with protein, carbohydrates, healthy fats, fiber, zero sodium and a teeny amount of sugar (0.7 grams per 100 grams of avocado); boasts more potassium than the mighty banana; is high in antioxidants such as Lutein and Zeaxanthin, both beneficial to eye health; is loaded with heart healthy fatty acids such as Oleic Acid; and is chock-full of other vitamins and minerals, including calcium, iron, magnesium, copper, manganese, phosphorous, zinc, vitamins C, B6, B12, A, D, E, K, thiamine, riboflavin, and niacin. [big thanks to healthambition.com for providing the link to The Avocado – yes, minor plug here, bit of a positive energy exchange, with no money changing hands].

As extraordinary as this fruit is, spread avocado on toast and you better buckle up. Prepare your self to enter the fifth dimension. A dimension above and beyond sustenance and dietary needs. A dimension indifferent to price, but focused only on what is hip, trendy, and fashionable.

 

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YOU PAID HOW MUCH?

A super food if there ever was one, in the USA average cost for one avocado is about $1.30 (USD). As for Canada, land of minimal corporate competition and resulting higher prices, you’re looking at about $2.25 (CAD) per avocado.

But … once the green on the inside avocado is slathered on a piece of toast, gussied up to induce maximum salivation, and served at a stylish cafe/restaurant, the price rockets to $7 (USD). Sure, bread adds to the total cost and the bread is pricier when artisanal. Still, bread doesn’t add much since you could buy a whole loaf of most breads, artisanal or not, for $7 or less. Assuming a conservative estimate of 15 slices per loaf, that works out to about $0.47 per slice.

Tallying up the numbers, we’re looking at $1.30 for the avocado and no more than a buck for two slices of toast. Grand total cost: $2.30, but that’s only if you dare to toast your bread at home then mash up the avocado on the toast.

Yet, people are more than willing, to fork over more than 3x cost for avocado on toast. Why?

Maybe the following online review of a certain café will give a glimpse of the what’s important for the I-Don’t-Care-What-It-Costs-Because-I-Love-It-And-Toast-Is-Way-Cool crowd:

Their avocado toast is amazing. A clever balance of soft and crispy textures that appeals to both sweet and savory taste palates.”

Okay. Whatever gets your eyes and stomach dancing, I suppose. Although, I can’t help but think that when you pay that much money for simple food requiring so little preparation, you have to rationalize cost somehow.

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Hold The Toast and Choose to Salivate Over Your Growing Wealth

The preceding paragraph was completely judgmental. But not in the way you may think. I’m not judging the ways in which people spend their money. It’s their money to do with as they wish.

What I am judging is the choice to make a habit of dropping $7 on toast. Because small discretionary purchases add up. Just like the $5 specialty coffee adds up when you’re a regular customer. And if purchases like these are part of your budget, you should be aware of the downside. You should know that this sort of spending cuts into savings, and lessens the odds of financial freedom today and down the road.

This is the spiel I gave to my 26 year old Toronto dwelling niece. And she shot back,

‘I like going to cafes. I like getting my coffee on the outside. And if I indulge in avocado on toast now and then, I’m okay with that too. Besides, it’s not like I’ll ever be able to afford a house in this city so this is what my friends and I spend our money on.’

Have you done the math? Coffee $5/day, 30 days/month x 12 = $1800. Add in trendy toast, say twice/week for 52 weeks working out to about $730. Total bill: more than $2,500 per year.

‘Sure, I get it. That’s a fair bit of money. Still, you know much the average home costs here. Almost one million! Trust me, abstaining from toast and coffee is not enough for me to accumulate a down payment.’

She’s right. But the thing is, it’s not just about the toast, avocado and coffee bill. Rather, it’s about a way of thinking, it’s about perspective and goals.

As for perspective, if you’re only thinking about the here and now, not the future, then odds are savings is not a priority. And if indulging now is the priority then, without a doubt, large purchases, such as a home, will not happen. As well, current debt, such as student loans or credit card debt, will not be paid down, and financial strain will weigh heavy on your shoulders.

But if you have one eye toward the future, if one of your goals is to become financially independent and free, then it makes sense to sacrifice some small pleasures.

These sacrifices yield immediate results in the form of increased savings. Savings may be invested. Investments grow. And, eventually, you just may have enough for that down payment. And your future self will thank you for your foresight, for your balanced approach to life.

As for avocado on toast? No need to fret; you can still indulge. But at home. With you and your friends taking turns at the toaster, spreading on the avocado, and making coffee. Try it. You never know, this way may be even be more fun.


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Enter Buddha

Ordinarily, our minds impatiently grumble about that which has not happened. Instead, learn to be patient. Express gratitude for that which has already happened, and patience for that which will happen.

 

Prairie Investors Do It Better

If you haven’t visited Winnipeg, Manitoba, well, put it on your list of places to go. Smack dab in the geographical middle of nowhere, some 450 miles…

If you haven’t visited Winnipeg, Manitoba, well, put it on your list of places to go. Smack dab in the geographical middle of nowhere, some 450 miles (735 km) north of Minneapolis, flatter than the proverbial pancake, the 8th largest Canadian city is the antithesis of La La Land; gritty and real, its people genuine and down-to-earth.

And the sky! Oh man, the immense prairie sky is reason enough to visit. Perennially blue, sometimes painted with light, fluffy clouds, home to sunshine more than 300 days each year, the sky is truly Awesome with a capital ‘A’; it’s size, it’s scope evoking a sense of wonder, mystery, and boundless freedom.

That’s what I experienced when visiting last weekend. Walking about town, I couldn’t stop myself from repeatedly looking up, marveling at nature’s deep blue canvas. And as I daydreamed, I wondered how the Winnipeg sky affected people. I mean, is the sky’s awesomeness related to the sense of humility typical among prairie folks? Does it transmit power to its residents in the form of industriousness, creativity and ambition, all characteristics unusually common in North America’s bread basket region?

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Billionaire Peg

For short, locals call Winnipeg ‘the Peg’. And its here, in the Peg, where an unassuming billionaire named Bruce Flatt was born and raised. You probably haven’t heard of Flatt. Outside of corporate Canada and America, few investors know the name.

But if you are familiar with Flatt, the CEO of Brookfield Asset Management (TSE:BAM.a) (NYSE:BAM), then you know that his investing acumen has been favorably compared to that of Warren Buffett. Not least because, since 2002, BAM shareholders have taken comfort in average annual returns of 19%! Phenomenal.

The extraordinarily refreshing thing about Flatt, which may have to do with living his formative years under the great Prairie sky, is that he’s not looking to make headlines or go for rides to St. Barts with the cool kids on their $50 million private jets. In fact, the guy is so self-assured that he often takes the subway to his office whereas financial peers are driving their Bentley or being chauffeured.

Despite his being a member of the billionaire club, like Buffett, Flatt sees no need to accumulate stuff, to artificially inflate his sense of worth by surrounding him self with expensive toys. Whereas Buffett has lived in the same stucco house in Omaha since 1957, Flatt lives in a modest two-story brick house in Toronto.

As for his office? Given that he runs a $38 Billion (USD) company, you might be thinking corner office with all the trimmings. But you’d be wrong. Instead, Flatt is content with a cubicle set near a window. Well then, surely the office is outfitted with expensive art work, like so many other wealthy corporations? Nope. None. Unless you count a cartoon showing white sheep heading toward a cliff as a lone black sheep moves in the opposite direction.

Smart, humble, determined, focused, Buffett and Flatt both know who they are. They’ve done the inner work. They know their values. And they act in accordance with their values, not wasting time or money running with crowds or building an image. Nah, with these two, what you see is what you get. How refreshing.

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Humble Investors Rock

We learn best by doing. And we can learn faster, with fewer mistakes, by learning the ways of exceptional investors. So, without further ado, let’s check in with the man called Flatt and consider his wisdom.

  • Long Investment Horizon

Every successful investor has a long-term outlook, including Flatt. Here’s a quote, “We’d rather earn a 12% – 15% net return over twenty years than a 25% return over three.”

What Flatt is getting at is that the 12% – 15% return is sustainable over a long time period whereas 25% returns are not. He’s not investing for the short term, looking to make a killing fast. He’s well aware that the turtle wins the race. And the race is a marathon, not a sprint.

  • Positive Perspective

When global financial markets were tanking in 2007-2009, Flatt acknowledged the difficulties ahead. At the same time, he was looking ahead to opportunities for the next 25-60 years.

Then he went ahead and started investing in infrastructure plays – pipelines, wireless towers, power generation, alternative energy, ports and toll roads – areas where he saw tremendous long term growth, based on a tea leaf reading predicting upward global productivity and growth. So far, his reading is proving to be prescient.

For us non-billionaires, the takeaway here is to not get caught up in doom and gloom when markets fall. Rather, focus on your next opportunity; focus on moving forward.

  • Buy On Sale

Buffett said,

“Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Excellent investors patiently wait for buying opportunities; they buy quality companies on sale. Flatt has taken a page from Buffett’s playbook in this regard.

He bought Australian construction and real estate giant Multiplex at a bargain price once it was teetering on bankruptcy; purchased a significant piece of infrastructure behemoth Babcock and Brown when it was in bankruptcy; in 2010, acquired 26% ownership of bankrupt mall operator General Growth for a tidy $2.6 billion (USD) which, today, has generated more than $10 billion (USD) profit for BAM.

While the non-billionaires among us don’t have this kind of pocket change lying around, we can wait for stock market opportunities in the form of share price pullbacks among quality companies. Instead of being fearful when stock prices drop, shift perspective and recognize opportunity.

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Blue Sky Ahead

Confident enough to follow your instincts, sensibly maintaining healthy skepticism about crowd behavior, wise enough to live in accordance with your values, understanding that simply because you have money doesn’t mean you have to spend it, perceptive enough to recognize opportunity where others lock into fear … these are a few worthy traits of excellent investors. Traits that Flatt and Buffett possess. Traits that you too may develop, with or without exposure to a colossal prairie blue sky, although Flatt [Manitoba] and Buffett [Nebraska] certainly make the case for a Prairie advantage!

 

 

Emotions Are Not Your Friend

Coming up on ten years ago, during the Oh-My-Goodness-The-Sky-Really-Is-Falling-This-Is-The-Big-One-Retreat-To-The-Bunker-And-Hunker-Down era, a friend of mine I’ll call Dwayne for the purpose of this post, liquidated his healthy, six-figure investment account.

It was 2008, Lehman Brothers had collapsed, Bear Stearns had collapsed, Merrill Lynch had collapsed, panic swept through Wall Street and Main Street, global financial markets teetered, tottered, wobbled, and reeled, and conventional wisdom had reckoned the end of capitalism to be nigh.

Dwayne, certain that impending Armageddon would leave fiat currencies worthless, resolved to eliminate perceived financial danger. He would protect himself and his family by using much of his cash stash to buy gold. Speaking with me about his intentions, Dwayne insisted not only that his actions were perfectly reasonable, they were also the only sane path forward.

Brushing aside my assertions that fear was driving an extreme, irrational response to cyclical market gyrations he, in turn, charged me with misguided hope for the future. Whether fear or hope, the fact is that underlying both of our ways of thinking were, dare I say it, feelings.


Whoa Whoa Whoa Feelings

At their core, investment decisions are emotional decisions. And, unfortunately for investors, irrational, short-term thinking too commonly supercedes logic and reason. The result? We buy or sell a security not based on objective, diligent research but moreso rooted in emotional responses triggered by screaming headlines, doom and gloom pundits or chicken little next door.

Why is it do difficult to block out these meddlesome emotions?

The answer lies partly in the perpetual tug o’ war between two radically different parts of our brain. While the prefrontal cortex wires us for rational, long-term thinking, the limbic system is geared to short-term emotions leading to irrational decisions.

Being human, and being predisposed to fluctuating degrees of emotional bias, we will (make no mistake about it) mess up here or there.

So, for those investors not blessed with Vulcan heritage (for those readers not familiar with Mr. Spock / Star Trek, think ice in your veins), how do you rein in wayward behaviour for the purpose of minimizing risk and maximizing profit?

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Striving for Clarity

Modifying our behaviour (be it investment or otherwise) is not a simple task. If it were, there would be a whole lot more champion investors weighing in on scale with Ben Graham, Irving Kahn, Warren Buffett and Peter Lynch.

Famously, Buffett is quoted as saying,

“The secret of getting rich on Wall Street is you try to be greedy when others are fearful and fearful when others are greedy.”

Aside from his other talents, Buffett understands that emotions play an integral role in investing. For the rest of us mere mortals, we would be wise to emulate the Omaha Oracle and, gulp, get in touch with our feelings (the ‘gulp’ is for the guys, given the guy tendency to shy away from f, f, f … feelings).


Emotional Rescue

A useful starting point is the Investor’s Cycle of Emotions. The Cycle helps to shed light on (a) the kinds of events responsible for activating certain investment related emotions; and (b) how these emotions may affect our decision-making behavior:

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  • Optimism. We buy when feeling positive about the future.
  • Excitement. Paper gains reinforce belief in ourinvesting prowess. We consider how this new money may be put to use.
  • Thrill. When gains grow, overconfidence sets in.
  • Euphoria. As gains continue, we begin ignoring risk and expect each investment to be successful. Here we encounter maximum financial risk.
  • Anxiety. Incurring unrealized losses as investment values decrease we rationalize that, being long-term investors, our investments will ultimately bear fruit.
  • Denial. Markets slide. Investments go into free fall. We bravely maintain confidence in our investment choices and hold onto hope that values will rebound.
  • Fear. The markets unrelenting descent brings confusion. We begin to doubt our investments will ever again increase in value.
  • Panic. Frozen, we do not know what to do.
  • Capitulation. Convinced that our portfolio has suffered irreversible damage, as a matter of eliminating risk to ensure survival, we sell everything.
  • Despondency. We decide never to make another stock market investment. Here, when the herd is despondent, we encounter maximum financial opportunity. [for example, when Warren Buffett agreed to loan $5 Billion to Goldman Sachs during the height of the Great Recession. Three years later, with the recovery underway, Goldman Sachs paid back the loan and Buffett pocketed a tidy $3.7 Billion profit].
  • Depression. We try to makes sense of what we believe to be our foolish actions.
  • Hope. Time heals. Eventually, clouds disperse and we attribute our loss to the reality of experiencing a down cycle. We start looking for new opportunity.
  • Relief. Tentatively, we re-enter the stock market. Our investments turn profitable. Faith returns. The Cycle begins anew.

Sound exhausting? Familiar? In capitalist markets like our own, this scenario plays out time and again because it’s not a matter of if markets go down, but when.

Now, I’m not saying that loss may be avoided simply by cultivating awareness of your emotional responses. But I am saying that, if you know how the typical investor’s emotions play out when bulls stampede or herds blindly rush for exits, then you’ll be in a stronger mental position to dodge infection of fear, act rationally and productively manage your portfolio.


Taming the Limbic System, Maximizing Investment Dollars

Because excessive emotional reactions will make for an unhappy investor, the best you can do is learn to understand and effectively manage your emotions.

Alternatively, farming out decision making to an objective, emotionally detached Robo-Advisor or one of the human variety, may be worth looking into. Whatever you choose, keeping a lid on detrimental emotions is important.

One of these destructive mental states is GREED. Left unharnessed, greed is powerful. And when greed takes over, when logic is shunted to a corner and we watch an investment run up 25%, 50%, 100%, 200%, and continue holding on because we’re hoping for more so we can buy that new car or take that European vacation, we perilously ignore the unlikely repeal of the law of gravity.

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So how do you soften the penchant for wanting more? Focus on risk management. Focus on the possibility of losing instead of winning. Focus on satisfying your needs instead of wants. Ask yourself whether, based on prudent research, you would make an investment at the current price. If not, then let reason be your guide, stay disciplined to your exit strategy and listen to the voice imploring u to ‘sell’ when your target price flashes green.

Another harmful way of thinking involves OVERCONFIDENCE. Research shows that close to 75% of people judge themselves better than average at, well, everything. Of course, by definition, about half of any group must be less than average.

In the realm of investing, overconfidence leads investors to take on more risk than initially anticipated, commonly deviating from a methodically crafted investment plan only to be trampled by emotions gone wild.

And when stocks go down, emotions again push reason to the sidelines. Investors continue to hold, often believing that by not selling they will avoid the pain and regret of having made a poor investment decision and embarrassment of reporting a loss on their tax return, or telling their accountant or spouse.

First comes losses, second comes pain, third comes regret.

Behavioral finance experts claim that the prevalence of fear of regret stems from people’s unwillingness to accept responsibility for pain they caused themselves. And when you’re stuck in the regret phase, you’re mired in the past, beating yourself up, and unable to get back in the game.

Since wallowing doesn’t benefit anyone, for your own well being, it’s essential to ride out regret by learning to accept loss, accept mistakes, and acknowledge the fact that even well-researched investments may, and will on occasion, turn sour. Once you’re moving forward, remember to carry with you lessons learned and, in the future, stick to an investment plan honed during a period of calm reflection.


Hope is not a Strategy

Too many folks are prone to chasing investments whose value is going up. According to research, we become overly optimistic about past stock market winners and excessively pessimistic about past losers.

Apparently, neither optimism nor pessimism is justified since, over time, extreme winners underperform and extreme losers outperform. Yet, we can’t help ourselves. Maybe we’re just too excited to hop on for the ride, carried away by the hope that we’re going to hit it big.

Consider this little gem:

As of March 13, 2017, a company called Stemcell United (ASX:SCU) was effectively worthless trading at one penny on the Australian Stock Exchange. Then, on March 14, 2017, the company issues a press release stating, “SCU to pursue opportunities in Medicinal Cannabis sector.’

Well, this general, vague, zero details statement was enough for speculators to move the price to $1.09 on March 14. That’s right, from one penny to $1.09 in one day. Insane. Still, before the day was out, the stock closed at 41 cents. And as of yesterday, the stock was priced at 13 cents.

The outrageous stock price movement had nothing to do with company fundamentals: the company has no revenue, sells no product and offers no service. But what it did have was a statement saying that it would enter the potentially lucrative marijuana industry. And that was enough to fuel the dreams of hordes of speculators.

The point being: whether you’re buying a penny stock or a behemoth like Apple (NASDAQ:AAPL), you’ve got to look in the side view mirror, the one where it says that past performance gives no indication of future returns. Then look ahead and keep in mind that investments should be made on the basis of solid business fundamentals and favorable prospects, not because hopes and dreams spurred us to the bottom of an investor pile on.


Embrace the Rational Path

Human nature is inherently paradoxical.

Impulses and emotions clash against reason, contributing to adverse investment decisions. As investors, our goal is to discipline the mind such that we recognize emotional reactions and learn to manage their potentially harmful consequences. And though there is more than one path to investing success, all include abiding by decision-making emphasizing cold logic rather than runaway emotions.

Whatever path you choose, consider what ninety-three year old Charlie Munger, Berkshire Hathaway vice-chairman, said when asked how he became such a successful investor: “I’m rational.”

Weed Rush Down Under

I’ve written about marijuana stocks a few times now. And I’ve had feedback from some kind, respectful folks saying, ‘no disrespect intended BuddhaMoneyLama dude but … the legal marijuana industry is only just learning to crawl and, as a result, these are high-risk plays that BuddhaMoneyLama has no business recommending’. Sure, no problem, point well taken since I fully stand behind the wisdom of investing for the long term in passive index funds.

That said, for clarity’s sake since clarity is a good thing when communicating ideas, when I post about marijuana related stocks or any other individual stocks, my purpose isn’t to recommend that readers buy this or that stock. Not at all. Instead, my purpose is to inform, educate, apprise, and enlighten readers. And I do this about a host of issues, as any BuddhaMoney member will know. Whether or not you want to try juicing performance returns with individual stocks, that’s where you’re going to have to step up and consider the pros and cons.

Still, I’ll go the extra word or sentence here to be extra clear, doubly clear, as clear as clear can be, and say that this post, concerning the fledgling Australian Marijuana Industry, is not meant to persuade, cajole, convince, encourage, sway or induce you to call your broker and place a trade on the Australian Stock Exchange. But if you do venture into weed Down Under, know the risks involved, know the share price volatility to be expected and, as with any investment, do not make that investment unless you can afford to lose.

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Aussies Moving Momentum Forward

Marijuana has already been legalized for medicinal purposes in twenty-nine American States and D.C., Canada, Chile, Czech Republic, France, Germany, Israel, the Netherlands, and Uruguay. And eight States, D.C., and Uruguay have legalized recreational use while Canada is expected to make recreational pot use legal nationwide sometime in 2018.

Now, the Australian government is positioning to further break down the pot taboo. Following the lead of these other countries, Aussies have amended laws and regulations to allow marijuana use for medicinal purposes. The investing community’s response? Stock market investors are bidding up any publicly traded company that so much as hints at partaking in the weed business.

 

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Regulatory Regime Change

Stock market action started heating up when the Australian government took concrete steps aimed at de-criminalizing marijuana. Here’s a brief rundown of what has happened in the past year:

February 24, 2016. With political support across the ideological divide, government amended the Narcotics Drug Act to allow for growing cannabis and cannabis related products for medicinal purposes. Under new regulations, patients with a valid prescription can possess and use medicinal cannabis products manufactured from cannabis legally cultivated in Australia.

February 17, 2017. Nearly one year later, Australia issues its first Medicinal Cannabis Research License to Cann Group Ltd. (ASX:CAN). The license permits Cann Group to cultivate medicinal cannabis and conduct research on the use of cannabis for medicinal purposes, including the formulation of medicinal cannabinoid oil, of consistent quality, for a range of medical conditions.

February 23, 2017. Acknowledging that local supply is unable to satisfy demand, government enables faster access to import marijuana from approved international suppliers.

One such supplier is Canada’s Canopy Growth Corp. (TSE:WEED), the largest publicly traded marijuana company with a market value near $1.5 billion (CAD). Canopy supplies AussCann Group Holdings Ltd. (ASX:AC8) with all of its marijuana.

A second supplier is Canada’s Aurora Cannabis Inc. (CVE:ACB), market cap more than $600 million (CAD), who is Cann Group’s supplier.

March 8, 2017. Australia issues its first Medicinal Cannabis Research License to Cann Group Ltd. This license allows Cann Group to grow and harvest pot that may be prescribed for patient use.

May 5, 2017. Australia issues its second Medicinal Cannabis Research License to AussCann Group Holdings Ltd.

 

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Weed Gone Wild

As the Australian government is making good on its promise of legalization, shares of companies involved in the cultivation, production and research of medicinal marijuana have zoomed up an average of 130%. The major players include:

  • AusCann Group Holdings Ltd. (ASX:AC8) trading at 20 cents in mid-February, 2017, has increased more than 220%, closing March 8 at $0.65. Interestingly, the largest shareholder (10.6%) of AC8 is Canopy Growth Corp. (TSE:WEED).
  • Cann Group Ltd. (ASX:CAN) raised $13.5 million (AUD) via IPO at $0.30/share. Opening for trading on May 4, 2017, the closing price of CAN on May 8 was up more than 130% at $0.70. Another note of interest: Aurora Cannabis Inc. (CVE:ACB), owns 19.9% of CAN.
  • Hydroponics Company Ltd (ASX:THC), also started trading May 4, 2017, opening at $0.33 and closing May 8, 2017 at $0.385.
  • Zelda Therapeutics (ASX:ZLD), traded at 4 cents a year ago then completed a $6 million (AUD) private placement at seven cents per share. Closing price on May 8, 2017, was 10 cents.
  • MMJ Phytotech (ASX:MMJ), 24 cents a year ago, soared to 83 cents in March, 2017, and now sits at 42 cents.
  • Creso Pharma (ASX:CPH), trading at $0.26 in October, 2016, saw a healthy bump up to $0.64 as of May 8, 2017.
  • Stemcell United (ASX:SCU). Stock movement of this stock is outrageous, reminiscent of the wild west dot com early days of the mid to late 1990s. Consider: prior to announcing it would change tack and move into the marijuana space, SCU was effectively worthless, trading at one penny. Then, on March 14, 2017, the company issues a press release stating, “SCU to pursue opportunities in Medicinal Cannabis sector.’ And speculators proceed to lose their collective mind, bidding up share price to $1.09 (you read that right) and closing at $0.41. Keep in mind that the company has not announced any concrete plans whatsoever regarding its proposed transformation, has no revenues, and nothing in the pipeline. Smart traders recognized the temporary mania and got out quick with profit in tow. As of today, the stock price remains over valued but has been reduced to $0.14.

Its early days in the budding Australian marijuana market. And with extraordinary investor interest, some industry players are seeing extraordinary share price gains, not unlike Canadian marijuana companies during their early trading days.

That said, if you’re so inclined, who do you back at this stage? That’s where the high risk comes in. With local companies having a market cap much less than $100 million (AUD), and with speculation rampant, predicting eventual winners involves a bit of a roll of the dice. Still, anyone interested in placing a bet would do well to consider those companies who have secured a competitive, Canadian flavored advantage.

 

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Canuck Connection

What’s with the Canuck connection to the two Australian pot horses that have jumped out of the gate and into the early lead?

Well, Canadian pot producers have established themselves a well-deserved industry leading reputation. First off, owing to a clearly formulated government regulatory regime allowing medicinal pot use since 2001, and with the green light expected for nationwide recreational use in 2018, they are years ahead of pot companies in other countries.

The result being that Canuck operated companies have grown much larger and are more experienced than the vast majority of competitors. This places Canadians in the enviable position of transforming into multi-nationals who supply pot and expertise to earlier stage companies such as AussCann Group and Cann Group.

And the longer it takes governments of other countries, especially the American federal government, to let go of their dated anti-drug laws, the more time Canuck producers have to establish international partnerships, create higher barriers to entry, and build themselves a good ole’ moat.


Crystal Ball Gazing

Yes, it’s early days. Yes, it’s a high risk, high reward scenario. Yes, available investments are in relatively small companies with minimal, if any, industry know-how. And if the experience of other countries who are walking the weed legalization path is any guide, Australian laws and regulations will continue to loosen in support of widespread use of marijuana for medicinal purposes.

As for recreational use, all signs point to this happening too, but it will take more time. And during this time, the legal market will continue to grow, and some of the early entrants will be around one, two and ten years from today, as the industry matures, as weed goes as mainstream, and the current frenzy eventually quiets.

 

 

 

Millennials Money Mistakes

Mistakes. We all make them. To err is human … and all that jazz. And when your perspective includes understanding that ‘mistakes’ are not failure by any means, rather an opportunity to learn, then you dust your self off, pick your self up, and continue tweaking your approach until desired results are achieved.

Just ask Confucius, who said that, ‘our greatest glory is not in never failing but in rising every time we fail.’

More contemporary example? How about Michael Jordan, the phenomenal basketball magician: ‘I’ve missed more than 9000 shots in my career.
I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.’


Learning To Crawl

As they continue to shape our world, Millennials (folks who arrived on this planet sometime in the 1980s and 1990s) are manufacturing their fair share of mistakes, no different than past generations.

Consider my Twenty-Something Nieces: independent, ambitious, career oriented, single (with doe eyed beau in tow), no kids, no car, renting, socking away some earnings into savings, and tackling whatever life throws their way. Except personal finances. In this category, they’re somewhat at sea. Not that it will make The Nieces feel any better, but there’s a whole lot of other Millennials who are also scrounging around to find solid financial ground.


Don’ts and Do’s For TwentySomethings

I’m not pointing my finger or tsk tsk-ing the Millennial crowd for their general lack of financial savvy. There’s a learning curve for whatever we do in life. But I am saying, hey, it’s helpful to take stock, assess the current state of your finances, and consider how to improve.

For starters, there are some basic actions you can take to boost your balances for today and tomorrow. These actions (listed below) will not only make you ‘feel’ more financially stable, but will actually improve your net worth.


  1. Budgets Are SO Boring!

A budget is a roadmap, a guide, a friendly reminder as to what you may afford. Without a budget, spending is less disciplined and debt is more likely.

Sure, drafting a budget is not uno numero on your list of things to do on a sunny Saturday afternoon. Or any day for that matter. But I’m guessing that having a positive balance, and growing net worth, ranks high on the list of life goals. If yes, then set aside next Saturday for the boring task of budget drafting.

  1. Blind Eye To Debt

You carry debt. Okay, fine. Now, what are you going to do about it?

Whatever you do, don’t make believe that the debt does not exist. I bring this up because there are some folks who abstain from reality, choosing instead to live under clouds of illusion. Debt can be a tough issue to manage. I get it. But avoiding the issue only makes your situation worse and lessens the likelihood that you’ll achieve good financial health.

Figuring out a plan to pay off your debt, that’s what is necessary. Include this plan in your budget (oh, look, the budget is already coming in handy), and determine the monthly amount to be paid toward debt reduction. Sure, the faster you can pay down debt the better. But even if you’re paying a only small amount each month, that’s something. It’s building constructive financial habits. And as long as you keep on chipping away at debt, eventually it does disappear and you won’t regret it. No one regrets paying off debt.

  1. Sneaky Plastic

Airline Miles! $500 Cash Back! Free Hotel Night!

Financial institutions trip over themselves to offer an array of enticing credit card inducements. Why? Because they earn outrageous sums of money from interest charges.

As for you, the consumer, fact is that unless you pay the balance owing by the due date, you’ll be accumulating debt. Fast. And making financial institutions richer.

Plastic makes it too easy to give in to temptation, to buy something because you WANT it NOW. Financial institutions know this, they employ experts advising on human behaviour. And they know that there are millions of folks who have a terrible time trying to exercise self-discipline. And these folks buy STUFF they can’t afford, and they rationalize that they’ll be able to pay off the purchase before the bill arrives, and they get the bill and stick their head in the sand by making the minimum payment of ten dollars or so each month, and then incurring exorbitant interest charges.

Oy! Under NO circumstances is credit card debt a smart play.

Am I going too heavy on the chicken little act? I don’t think so. This is an issue that only seems to get bigger and bigger. Credit card debt, debt of any kind, can be a hefty psychological burden. Of course, financial too. And given enough time with too few payments, it bankrupts people.

So unless it’s absolutely essential to use plastic AND you know the full balance may be paid by due date, avoid credit cards. Instead, use a bank debit card, or a Visa / Mastercard debit card. This way, you spend only what you have since payment is debited directly from your bank account. And for you old-fashioned types, last time I checked, there’s no chance of going into debt when you pay with cash.

  1. Dormant Dough

THE NIECES, they’re accumulating savings but they’re either not investing or investing wayyyyy too conservatively. This is a problem. And this absence of risk tolerance is unique to this generation. Some researchers posit that it’s related to the deep recession of 2007-2009, and the resulting stock market meltdown.

Whatever the reason, Millennials would be wise to loosen up. I’m not saying to roll the dice on high-risk investments. But I am saying that the 0.25% savings rate offered by your local bank isn’t going to contribute much, if any, to your financial independence.

And you would be wise to consider the stock market. Yes, it’s a volatile venue. But volatility doesn’t necessarily mean you’re walking on the wild side of risk. Especially if you’re a BuddhaMoney wise investor who doesn’t pay much attention to daily financial news headlines. Instead, focus is on the long term (5+ years), knowing that stock market returns historically beat other asset classes.

Consider that, during the past 40 years, the S&P 500 index has averaged total returns (capital gains and dividends) of close to ten per cent. Let’s say the index returns about the same for the next forty years. If so, and you invest $100 / month, in forty years your account will be worth close to $600,000.

How do you get that $100 / month? You plan for it in your Budget (see, it’s a handy little document). It doesn’t matter if it’s $25, $50, $100, or $1,000 investment account contribution. Every dollar adds up. And the thirty-something YOU, the forty-something YOU, etc, will thank twenty-something YOU for being so wise and planning for your future.

For those who do not have the time or inclination to operate a discount broker investment account, find yourself a Robo-Advisor or skilled financial advisor (not all financial advisors are cut from the same pin-striped cloth) to help manage your investments. And definitely place a healthy portion of your investment dollars in equity based Index funds, such as the Vanguard 500 Index Investor for US investors, and the Blackrock S&P/TSX 60 Index for Canadian investors.

  1. High On Spending

In your 20s, you’re likely to start earning real money. And maybe you’re salivating at all the STUFF you can buy knowing it’s within reach: a new car, luxury condo, designer clothes. Right. But within reach doesn’t mean you may afford to buy the luxury condo.

Rather, it likely means you’re the lucky winner of a whopper of a mortgage, get to stress over making monthly payments, and go light on furniture because daily spending is tight now that housing costs eat up more than half your take home pay. Sure, you want a materially comfortable home like your parents. But you’re forgetting that your parents likely worked five, ten or twenty years before being able to afford all the cozy extras.

So for all you Impulsive Izzys, slow it down. Bring Patience into the mix. Only buy what you can afford without taking on unmanageable debt. And when you get that raise at work, this doesn’t mean you should go all ga ga and run out and buy more STUFF, or more expensive STUFF.

Instead, it means it’s time to review your Budget, allocate more money to debt reduction and investing, and then determine how best to spend discretionary funds. This is a Balanced approach to finances, one that reduces debt, increases net worth, and lets the shine sun on your financial health.


 

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A jug is filled with water drop by drop. There is no other way.

Investors Magical Thinking

I have a friend named Ben (Magician Ben) who seemingly possessed unearthly wisdom together with emotional fortitude sufficient to resist Facebook’s (FB) IPO hype onslaught back in May, 2012.

Instead of rushing to buy some of the more than half a billion shares trading on that first day at a price anywhere between $38 – $45 (USD), Magician Ben waited on the sidelines, biding time. And during the next three months he continued to wait and to watch as FB’s market price plummeted. As of September 4, 2012, the stock had shed about 60% of its initial value, closing at $17.73 (USD).

The next day, Ben had a feeling that now was the time to get into the game. Acting on intuition, on a hunch that FB had hitched itself to a shining light hovering not far above Bethlehem, he bought $50,000 worth of shares at little more than $18 (USD) a piece. Then he hurried back to the sidelines where he resumed waiting.

More than four years later, seeing that FB was trading above $130 (USD), Ben considered whether to hold or pull the sell trigger. Calculating that his investment had now risen eight-fold, he was pleased to see that selling his shares would net serious money, even after paying capital gains tax.

Yet, Magician Ben wanted more. He wanted FB to make him a multi-millionaire, an after tax multi-millionaire, a thank you-very-much-Mark Zuckerberg-for-allowing-me-to-retire-early-multi-millionaire. His head bobbing about among dream clouds, convinced that FB had been anointed chosen stock of the 21st century, Ben made his decision. His gut told him to hold, that FB’s ascension had a ways to go. There would be no gun smoke that day.

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Magical Thinking

Ahh, magical thinking. Arriving at conclusions based on little more than … thin air, fantasy, delusion. Regardless of the investment merits of FB (and any other investment for that matter) what’s concerning is that Magician Ben’s genius lay in little more than wishing upon a star.

Okay, you say, but so what? The fact is that Magician Ben called it right. Just look at the results! Given FB’s impressive run, isn’t it fair to say that his crystal ball is the real deal, that genius may be extrapolated from his prescient sixth sense, that his forecasts will continue to be accurate and Magician Ben’s dream will come true?

Not exactly. Gain or loss does not prove whether the decision to invest was ‘right’ or ‘wrong’. Rather, the usefulness of the rear view mirror is limited to showing how an investment fared. In the long run, if Magician Ben is to manage a successful portfolio, if his stable of stocks are to produce more winners than losers, he will need more than intuition to form the basis of his decision-making.

 

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All About Process

Investing is far from an exact science. It’s an art form. It always has been and will remain an art form, meaning that it is interpretive, allowing ample room for differing approaches and paths to success.

Even Magician Ben’s wishful thinking approach qualifies within the investing art’s broad parameters. However, although it is easy to implement and commonly employed, reliance on intuition alone, without any substantive support, is foolhardy and ultimately doomed to fail.

Consistently successful investors rely on a process for choosing securities. Within the framework of an investment process, the investor starts with an idea that, on the surface, appears to be an opportunity.

Then research is conducted, far beyond the writings of an analyst tout, crowd jubilance or a popular media outlet in the business of attracting reader eyeballs through loud promotion. The process is relied upon for as long as the investor holds a particular security, guiding the investor through to the time of sale.

Knowing that a closed mind is a dangerous mind, the investor gathers and analyzes objective facts and remains open to evaluating all relevant information. Regardless of what kind of securities market analysis is utilized (i.e., technical, fundamental, macro, behavioural) or what type of investor you profess to be (i.e., growth, value, income, contrarian, momentum), information should include that which does not support preconceived theories or biased feelings.

Tellingly, investing legend George Soros (he of the many, many billions) is known to review and reflect upon at least one contrary opinion before deciding whether to proceed with an investment.

So, would anything change for Magician Ben if he was diligent and relied on a rigorous process when investing? Well, the frustrating answer is … maybe. Since there is no perfect investment process, one that generates profit from every investment, the best an investor can do is stack the odds in their favor.


Investor’s Oath

Every stock market investor experiences loss. Without exception. Not once or twice but many times. Loss is part and parcel of the game. That said, successful investors win more than lose. They do so by staying disciplined.

They consistently execute their process, knowing that sticking to their road map reduces, or even eliminates, poor decision-making and ill-informed trading. Through strict adherence to the process, through honoring the Investor’s Oath, i.e., thou shalt do minimal harm to thy portfolio, the investor increases the odds of success.

Because the portfolio will suffer losers, a well thought out process plans for the inevitable. It prepares for loss by deciding beforehand when to fold. While this knowledge is essential, it is only a first step. The second and crucial step involves staying disciplined, selling at a pre-determined price.

Such a plan might look something like this: when a stock is down fifteen percent from purchase price, it is automatically sold thereby rendering magical thinking impotent. By letting go of hopes and dreams that a losing stock will rebound, by accepting loss and moving forward before the possibility of market carnage sets retirement plans back a few years, the winning investor limits downside and juices the odds that total portfolio gain will outweigh loss.


Running Interference

Investment process, comprehensive research, objective decision-making, discipline, all of these are essential to the winning investors playbook. And what would help even more would be an entirely rational mind, one divorced from errant thinking and destructive emotion.

However, investors are human too. Knowing this, and knowing that even superstar investors get sidetracked, winning investors study their own behavior so as to minimize the effect, or prevent the occurrence, of one or more of the following obstacles to success:

  1. Optimism. Under most circumstances, optimism is considered to be a positive trait. However, it may become troublesome for investors when it leads to an unrealistically rosy view of themselves and the future.
  1. Overconfidence. Often stemming from the illusion of knowledge, and overlapping with optimism, over-confident investors may fail to realize that their knowledge is limited, tend to chase returns, and underestimate risk.
  1. Anchoring. After forming an opinion based on limited information, the investor is not willing to change that opinion regardless of new information.

Anchoring inhibits the investor from searching for evidence contrary to their opinion and even if found, this evidence is often dismissed.

It causes an investor to stick with a losing investment or not buy a fundamentally strong company because, for example, they have determined that its price/earnings ratio is too high or are irrationally attached to some other numeric metric that does not meet arbitrary criteria.

Ambiguity. Investors prefer certainty. Unfortunately, the stock market is not in the business of offering certainty.

To compensate for lack of conviction in decision-making, an investor will seek expedient authority (i.e., media, experts) supportive of their position instead of taking the initiative to dig deeper on the research end.

  1. Herding. We are programmed to feel that the consensus view is the correct view. As a result, most of us are hard wired to follow the herd. Big mistake. You have heard it umpteen times: the crowd buys high and sells low, thinks like a lemming and is prone to falling off a cliff. As an investor, having the strength to break from, or not blindly follow, the crowd will serve you well.

Did I Mention Having A Process?

Today, FB is trading above $150 (USD). The higher the stock price goes, the more Magician Ben believes it’s ascent is never ending. Maybe Ben will be right. Probably not. And he’s a fool for at least not taking some of his enormous profit off the table by selling some of his shares.

But such is human nature when greed comes in to play. Risk is underestimated, or even ignored. And 9 times out of 10, Magician Ben will get burned by his delusional overconfidence. Maybe not with FB, given that many tech stocks are rocketing to the moon just now.

Then again, stocks are notorious for running out of fuel and, in turn, conforming  to the laws of gravity. And this is why an investment process would serve Magician Ben well in the long run. Because all magic carpet rides eventually come to an end.


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Enter Buddha

Greed is an effort to stuff yourself with something: be it money, sex, power or food. Greed is the fear of inner emptiness. One is afraid of being empty so one strives to possess more and more things. One wants to go on stuffing things inside so one may forget one’s emptiness.

With less greed, there will be fewer possessions, and more joy, more music, more dance, more love. People may not have many gadgets but they will be more alive. As long as we relentlessly accumulate gadgets, the soul goes on disappearing.