Do You Feel Lucky?

A fellow investing friend of mind (let’s call him High Flyer) likes to invest in penny stocks (i.e., share value less than a buck). And though he knows I don’t touch highly speculative stocks, he still likes to share his excitement with me. Every time he does so, I remind him that he may as well be laying bets at a Vegas roulette table given the high risk nature of companies with minimal revenue, profit, and business prospects. But High Flyer comes by his name honestly: he’s a gambler and gamblers get their kicks through taking risk that us non-gambler types shy away from.

A few weeks ago, High Flyer is telling me why I should I buy a company called Petrolia Inc. (CVE:PEA). PEA is a Canadian based oil and gas exploration company. In Canada, given the outsized contribution of the energy sector to the national economy, these kinds of companies are a dime a dozen, all eagerly searching for pools of black gold.

That said, the vast majority of them do not go on to find Alaskan sized gushers. Rather, they stay small, burn through money provided by seed investors (i.e., people who fork over the initial dough necessary to get the business running) and eventually shrivel and die.

Though High Flyer was his usual buoyant self when trying to sell me on buying PEA, I listened to his harmless ramblings in stride, eventually telling him I’m not particularly fond of flushing money into a sewer. Not that I expected High Flyer to follow my lead on this one. Because his style is to go it alone.

So, in keeping with his nature, High Flyer bought a fair amount of PEA shares. And yesterday, he calls again to inquire whether I loaded up on PEA, knowing full well I didn’t.

“That’s too bad,” he says with a glint in his eye (sure it was a telephone conversation, but I swear I could hear the glint).

“Why’s that?” I ask, playing the game, knowing he desperately wants to share his good news.

“Because they just announced payment of a one time 25% special dividend. Meaning, I just earned myself a 25% return in two weeks! And this is before the shares have started to take off! See, you should have listened to me, Mr. Bigshot BuddhaMoney!”

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What’s Luck Got To Do With It?

Daniel Kahneman, Princeton psychologist, recipient of the 2002 Nobel Prize in Economic Sciences, known for his work regarding the psychology of judgment and decision-making, and for playing a significant role in creating the field of behavioural economics, wrote a bestselling book titled, ‘Thinking Fast and Slow’. For anyone who manages money (that would include, um, let’s see, well … just about everyone), and for anyone who wants to learn more about the chaotic and fascinating workings of the mind, the book is an informative read.

Okay, inadvertent book plugging aside, here’s a noteworthy comment from Kahneman:

“There is general agreement among researchers that nearly all stock pickers, whether they know it or not – and few of them do – are playing a game of chance. The selection of stocks is more like rolling the dice than like playing poker.”

Kahneman doesn’t believe that ordinary investors (i.e., if you’re not Warren Buffett, you’re ordinary; okay, slight exaggeration, but not by much) are able to beat market returns.

Disagree? Think your hand picked investments can perform better than an S&P 500 index ETF over the next 5, 10, 40 years? Maybe. But not likely.

Marketwatch recently reported that a mere 1 in 20 actively managed large cap (i.e., holdings include companies like Pepsi, Ford, Google, etc.) mutual funds beat returns of the S&P 500 index over the past 15 years. And across all fund categories, more than 80% did worse than an S&P 500 index ETF.

Add to this billionaire extraordinaire all time greatest investor Warren Buffett stating that, after he’s passed on to that hallowed place where genius investors pay no heed to earthly concerns such as money, his 80 or so billion dollars should be invested as follows:

“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)

I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

In the end, we all roll the dice. For some, however, (i.e., Buffett) the dice are loaded in terms of knowledge and information facilitating more advantageous decision-making. Yes, these people will lose on some investments, but they win more often than not.

As for the ordinary investor, our dice rolls are governed more by the Gods of Chance, and the Gods of Chance really don’t give a hoot as to whether or not you win or lose money, whether or not your bills are paid on time or not.

So before buying your next stock instead of the safe and boring (oh, but safe and boring are the best type of investments!) index fund, ask your self: do you feel lucky? And even if you do, know that the long odds point to you losing.

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“Success = talent + luck; Great Success = a little more talent + a lot of luck.”

This is another quote from Kahneman who says that luck plays a large role in every story of success. Okay, if this is true and accurate, the challenge for investors is distinguishing between one’s own skill and luck.

Unfortunately, when short term success comes our way, too many of us attribute this to skill. And when we lose? Well, naturally, that’s just bad luck.

Actually, win or lose, like Kahneman says, it’s a combination of skill (or lack thereof) and luck. And to think otherwise means you are under the spell of that little something we call greed, accompanied by a healthy side dish of delusion.

For those who truly want to evaluate their investing chops, chart your portfolio over a period of at least ten years. Then compare results to the S&P 500 performance during the same time period. If you outhit the index, only then can you count your self among those whose skill plays a larger part than luck when it comes to investing.

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High Flyer Grounded

PEA looks like a winner, short term at least. Not only did High Flyer earn several thousand dollars from the company’s special dividend payment, but the company will be reverse-splitting its stock (i.e., shares are merged to form a smaller number of proportionally more valuable shares) so shares that were worth 40 cents will now be worth $4.80.

The share merger in itself doesn’t make the stock more valuable but it does remove the company from penny stock ranks. In turn, this may serve to attract more retail and institutional investors who attach more credibility to non-penny stock shares. Once again, in turn, this may serve to lay a foundation for further share price increases should the company’s business perform well.

Notice my use of the word “may”. Because there are no guarantees. High Flyer is still rolling the dice, even though these dice now appear to be slightly more advantageous.

And if PEA shares zoom, well, good for High Flyer. He could use a win. Because for every winning horse in his stable, he’s had five who’ve been taken out to pasture. That’s what happens when you roll the dice often: you win some, you lose lots.

 

Hot Stocks Burn!

A little bit of knowledge can be dangerous, so its been said. And in the stock market, oh man, ain’t it the truth! Especially in a boom market like the technology heavy NASDAQ.

During the past nine years, ever since the financial world began healing from the Great Recession, the return on a NASDAQ index fund has been relentlessly positive.

Sure, temporarily, price dips into the dreaded valley of bears but give it a day or two or thirty, and charging bulls wrestle momentum forward as price resumes its heady ascent. Currently, the NASDAQ stands above 6110. A mere one year ago, it was at 4800. That’s a 27% gain in one year! Such a gain is outrageously potent when considering that equities historically return an average closer to 8%.

‘Ya, well, that was then, this is now. Get on board the gravy train or stand there with your hands in your pockets, money in a savings account and earn your 1%. Good luck with that!’

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Derailments Happen

More or less, that’s what Jake said to me the other day. Jake is in his late 70s. His wife, Nancy, passed away several years ago. Until bidding farewell, Nancy held the title of family investing guru. Despite having next to no knowledge nor experience with investing, Jake figured, how hard can it be?

And since he’s taken over the portfolio reins, Jake has done well. As have others who have invested in American based index funds.

But here’s the thing: Jake attributes success to his investing prowess. Fact is, Jake has no knack for investing, no know-how, no prowess. I don’t say this as a knock against Jake. Not at all. He’s a fine person with a warm disposition and a kind heart. It’s just that I know Jake well enough to understand that he’s been following the crowd.

And the investing crowd has been riding a tsunami sized wave of good fortune since late 2009. And for anyone whose investment days only just started after the last recession ended, it’s quite possible that all they’ve known are good times.

Cool. Good. Excellent for all who have seen their portfolio grind and bump higher and higher as the NASDAQ, S&P 500, Dow Jones continue to break records. And should Stock Market Gods continue to stoke global economies and shine light upon corporate profits then, hey, whose to say that, far from nearing its end, this party isn’t just getting started?

Hmmmm … hope for the best, nothing wrong with that. But choose to remain blind to the fact that the longest period of sustained economic growth in the USA was 10 years (1991-2001), that from the 20th century onward, recessions typically occur every three to six years, that we are currently in year nine of the economic expansion cycle … and you may be in for a nasty turn of your portfolio.

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This Is Not Chicken Little Calling

Jake talking:

‘Australia is experiencing its 26th consecutive year of economic growth; old age doesn’t derail economies, something has to kill them; consumers are spending; banks are lending; full employment; property prices rising … tell me: where’s the dark, foreboding cloud indicating recession and stock market collapse? Huh? Where?’

Absolutely, Jake. All signs look positively stellar. I mean, who can argue with what you just said or the zooming stock prices of Amazon, Apple, Google and Facebook this year? Wowzers!

But you know what? The stock market, and life, is about looking forward, not backward. Sure, we check out history to learn from others, to learn what worked and what didn’t. Still, as far as my limited knowledge reveals, we humans don’t know what’s coming in the next minute nevermind the next year or two or ten and beyond.

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What’s This Game All About

I’ll give Jake this: economies of the developed world are healthy and look to be getting stronger. And in year five and six and seven and eight, and now nine of the US expansion, pundits have been tripping over themselves to call the next recession and stock market downturn. Yet all they’ve done is fall flat on their face as growth continues and stock markets chug along.

But does this mean you shouldn’t be careful? (yes, yes, be careful!) Re-assess your portfolio? (again, yes!) Consider selling winners and taking profit (oh, yes!) rather than staying fully invested and letting all the chips ride? (yikes, don’t do that!).

Why? Because managing your portfolio is about managing risk. There is ALWAYS risk in your investment portfolio with some assets inherently riskier than others. And you can best manage risk by coming up with a plan that allocates fixed percentages of your portfolio to different asset classes.

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Laws Of Gravity Still In Play

Okay, real world example instead of blathering on: let’s say Jake’s plan involved allocating 20% of his investment portfolio to equities in the technology space, either through buying individual stocks or index funds. And with the gains Jake has made in the tech sector during the past few years, tech’s share of Jake’s total portfolio has ballooned to 45%.

Having too much exposure to tech, i.e., too much risk, makes for a portfolio out of balance. Because when (not if, but when) there’s a market fall, you can be sure that those tech related gains will wither if not evaporate entirely.

Now, since Jake wants to maintain technology exposure at 20%, assuming he accepts sage guidance from BuddhaMoney, he’ll happily sell 25% of his tech assets, pocket the profit, and reinvest elsewhere.

For example, maybe Jake will bump up his fixed income allocation (currently at 20%) and buy a Bond index or individual bonds because he wants to reduce portfolio volatility. Or maybe with interest rates seemingly, finally, on the rise, he’ll put his money to work in financial companies, banks and insurance, since their bottom lines tend to benefit from rising rates. Or increase his cash holdings (nothing wrong with cash; best to be patient and wait for opportunity rather than rushing into investment action).

Whatever Jake decides, the most sensible course of action is to maintain a balanced portfolio, diversified across asset classes (i.e., stocks, bonds, real estate), industries, and geographically. Because booms don’t last forever, crystal balls are the stuff of dreams, and the laws of gravity will not be repealed any time soon.

 

 

 

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.

 

Swinging For Singles

Search the Internet for a phrase like, ‘how may individual investors beat the market’, and you’ll turn up headlines like this:

  • You Can’t Beat the Market So Stop Trying (CBS Moneywatch)
  • Try As You Might, You Probably Can’t Beat the Stock Market (Forbes)
  • 86% of Active Fund Managers Failed to Beat the Market in 2014 (CNN Money)

Stop there and you’re likely to close your browser thinking, no way can I pick stocks on my own and perform better than the market. So what’s the point of investing in anything other than Passive Index Funds?


Chewy Bit. Passive Index Funds mirror the holdings of a market index such as the NASDAQ or S&P 500. If the index goes up, the value of your fund goes up. Likewise on the way down.


But don’t close your browser just yet ’cause it’s not that straightforward. You have to question the integrity of headlines. Because media is in the sales business. Sexy headlines attract eyeballs (I know, I know, I’m guilty on this post with its double meaning – my saving grace: I’m not selling anything). Buckets full of eyeballs attract advertisers. And advertisers are revenue sources.

That’s all fine; we live in a society where commerce greases the wheels. What isn’t fine is when media is irresponsible, publishing poorly researched articles for the sake of filling print or web space, rather than accurately informing the consumer. Regardless, to use a well worn phrase, it is what it is. Unreliable reporting happens and will continue to happen. This is our world. So what do you do? Question the source, research the issue, and bring a healthy dose of skepticism to whatever you read (yes, including BuddhaMoney … we can handle it).

Let’s get back to headlines. Searching the same phrase, ‘how may individual investors beat the market’, also brings up the following, entirely contrary, headlines:

  • Beating the Market: Yes It Can be Done (The Economist)
  • Look Who’s Beating the Market (Wall Street Journal)
  • Shiller says Easy to Beat the Market Long Term (Bloomberg)

Agh! Now what?! From all these presumably respected sources comes polar opposite advice … who do you believe?


Enter Buddha. Reflect upon contradictory information before making a decision. And know that there is no certainty when it comes to investing, and life in general.


Fair enough, you say, both views are valid, they are simply judgment calls. Still, which one is right for me? Before anyone can speak, you answer with the silver bullet question that impresses even BuddhaMoney: knowing that stock picking is higher risk, knowing the odds are stacked against me, why would I try to achieve investment returns that exceed market indexes? Sure, I may get lucky here and there, feel good and pound my chest when the bet pays off, but in the long run, odds are that I’ll have more losers than winners, and my portfolio will be worse off. So , why would I want to swing for the fence with stocks rather than hit singles with an Index Fund?

Follow Alpha

Warren Buffett’s company, Berkshire Hathaway [NYSE: BRK.A], manages a stock portfolio worth somewhere in the stratospheric neighborhood of $130 Billion. Does this mean you should follow Buffett’s lead and invest in stocks too?

Well, consider this: Buffett is one of the fortunate few who follow an active investment strategy (see Chewy Bit, below) that is consistently successful, long-term. But before you go and think you can emulate his success, think about how you stack up to his knowledge, wisdom, experience, temperament, and all star team of experts who engage in this sort of work 5, 6, 7 days / week.


Chewy Bit. The purpose of an active investment strategy is to find pockets of the market, and particular companies sitting in those pockets, that are undervalued and provide the opportunity for above-average returns at average or below-average risk. If an active investment strategy is not able to reliably identify and seize upon such opportunities, then the strategy is worth bubkus.


Let’s pull back on the reins here. I’m not saying you cannot be successful at the stock game if you’re not Warren Buffett. Not at all. What I am saying is that if you’re intent on implementing your own active investment strategy, know that the bar is set high, and not a whole lot of folks clear the bar on a year-in, year-out consistent basis (see, Is Stock Investing For You – http://buddhamoney.com/stocks/is-stock-investing-for-you/.

But hey, if you have a system that works, then good for you, that is truly excellent. I’m not here to dump cold water on investing in stocks, only to say: be cautious, do your research, analyze objectively, know the challenges that lie ahead. And if glitches arise, you always have the option of re-balancing your portfolio and switching to Index Funds.

The Road to Retirement is Paved with Index Funds, Not Gold

According to the master himself, “… by periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”

Reinforcing this quote, in his 2014 annual letter to Berkshire Hathaway shareholders, Buffett says that, upon his death, the trustee should place: “90% [of his money] in a very low cost S&P 500 Index Fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

Buffett goes on to say: “Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”

The farm reference is a telling analogy. When planting seeds, it takes time for a crop to grow. Same with investing in an Index Fund. You buy the Fund and you wait for it to grow, rather than frequently buying and selling and being obsessed with the stock markets daily movements. Over the long term, if the past 100 years of stock market activity is any guide, the stock market will grow and you will make money. It’s an utterly humdrum, low cost way to invest in stocks. And it’s been shown to be a heckuva way to grow your wealth.

Nitty Gritty: What Funds To Buy

Alright then, Passive Index Funds it is. Still, which Funds to buy? Like most investing issues, you’ll get opinions all over the map on this one. Here’s my calm, collected thinking:

Buy funds only from reputable financial behemoths, ones that would shake planet Earth to its core were they to falter, i.e., would be bailed out by government should geo-political meteors strike. In particular, Vanguard and Blackrock’s iShares. Canadian investors may also check out BMO funds.


Chewy Bit. American readers may be familiar with BMO through its American bank, BMO Harris Bank. Chewy Bit beneath the Chewy Bit: three Canadian Banks – Royal Bank of Canada, TD Bank and BMO – went on a shopping spree of sorts in America some time after the recession debacle of 2008; enhancing the two countries continuing path toward commercial integration.


For Americans with stock funds on their radar, you need only two:

  • US Large Cap. Vanguard S&P 500 ETF (VOO:NYSE)
  • Global Small Cap. Vanguard Small-Cap Growth ETF (VBK:NYSE)

For Canadians, consider these two:

  • CAD Large Cap. BMO S&P / TSX Capped Composite Index ETF (ZCN:TSE)
  • Global Small Cap. Mawer Global Small Cap Fund (Fund Code: MAW150)

Why a small capitalization Fund you may ask?

Buying small companies (i.e., market capitalization under $500 million) on an individual basis is generally higher risk, no question. But in a Fund that comprises hundreds of companies, this risk is mitigated simply because of the number of companies involved. If one or two or three companies blow up, the effect on the fund’s value would be minimal
presuming those companies make up only a small percentage of the total value of the fund.

According to Morningstar Ibbotson data, from 1926 through 2012, small-cap stocks averaged an annual return of 12.28 percent, compared to 10.08 percent for large cap.

[http://www.bankrate.com/finance/investing/small-cap-funds-versus-large-cap.aspx] You’re recommending a Mawer mutual fund? That doesn’t wash! Mawer follows an active investment strategy.

True, Mawer Global Small Cap is a no-load, actively managed mutual fund, not an Index Fund. And the management fee for this Fund is definitely higher than that charged by Index Funds.

But based on the long term performance of this Fund, Mawer makes a compelling case for being cut from Buddha/Buffett cloth. And those pricier management fees are more than made up for in net return: the Fund has been crushing the benchmark Russell Global Small Cap Index [http://www.mawer.com/our-funds/fund-profiles/global-small-cap-fund/]. For what its worth, I have happily held this fund for many years for friends and family whose investments I manage.

It’s important for me to end this post by telling you that, in no way, shape, or form have I received any sort of compensation from any of the financial companies mentioned. Just sharing my knowledge and opinion, folks, for the greater good. Would you expect anything less from BuddhaMoney?