IPOs. Should You Bite?

After reading an article about the upcoming Initial Public Offering (‘IPO’) of Roots Ltd., a Toronto based clothing company, Mermaid, a friend of mine, called to ask for my thoughts. She was familiar with the Roots brand, had shopped there over the years, and wanted to know if this beaver sporting Canadian retailer presents a good investment opportunity? So I checked it out.


Chewy Bit

‘IPO’ refers to the first sale to the public of company issued stock. Prior to an IPO, the company is not listed on a stock exchange, and it is virtually impossible for Joe /Jane Investor to buy stock of a private company. Although private companies do have shareholders, they are few in number and there does not exist any sort of market where their shares may be bought and sold.

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Be Wary The Hype

A whole mess of companies ‘go public’ every year. And for the biggest of the bunch, there’s extraordinary hype. Why the hype? To generate investor interest. The more interest, the more buyers, the higher the price climbs, the more money made by the company, insiders, and underwriters, so the thinking goes.

Who’s responsible for the hype? The company that is going public plays a role of course. But the bigger role is played by investment banks who ferociously vie for a piece of the action. And when we’re talking about a company that presents juicy profit opportunity, the big boys come to the table: JP Morgan, Goldman Sachs, RBC Capital Markets, Barclays, and the like. And they talk up the company like it’s the greatest thing since Muhammed Ali. Master salesmen, these bankers are.

Journalists also play a role, and so they should. When Roots or Snap or Blue Apron morph from private to public status, it’s a matter of public concern. And when media presents a balanced take on a company’s current business and future prospects, this helps investors weigh the pros and cons of whether or not to add shares to their portfolio. But when media cheerleads, this is where you have to be careful. This is where you have to recognize noise for what it is and not get swept up by the hype.

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How Do Investment Banks Make Money On An IPO?

The company going public often uses more than one investment bank to underwrite the IPO. Here’s how it works: the banks and the company agree upon a price at which shares of the company will be purchased. This happens before shares are actually listed on a stock exchange, i.e., before shares are made available to the public.

Profit is to be made on the difference between the purchase price paid by the banks and the price they sell the shares to the public. For example, let’s say Roots Inc. goes public at $15/share. This means that the banks bought the shares at $15.

Now let’s say that investor interest has been stoked in the lead up to the IPO, bids come pouring in, and the stock ends the day at $22. So, banks made a profit here of $7/share. If they sold one million shares, that’s $7m bucks.

Still, IPOs are by no means a slam dunk for investment banks as they do take on significant risk. Facebook was enormously hyped prior to its IPO. In retrospect, for good reason. But in the beginning, it looked like a dud.

One of the largest IPOs ever, more than half a billion shares traded on the first day. The opening price was $38, rising to $45 during the day, and closing at $38.23. Shortly thereafter, share price dropped to about $18 and wouldn’t see $38 again until 15 months after the first day of trading.

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What The Company Does With The Money

Plain and simple, companies go public to make money. The idea being to raise funds by selling shares to the public. Companies often use IPO proceeds for one of two reasons.

First, to raise money that is reinvested in the company’s infrastructure or expanding the business, the underlying purpose being to accelerate growth leading to higher revenues and profit.

Second, the IPO is an exit strategy, a way for founding shareholders to cash in their chips, so to speak, and sell all or part of their shares to the public.

Is one reason better then the other? Well, you can’t really make this call without knowing a companies specific situation. When management reinvests most or all IPO proceeds into the business, this tells me that they’re aligning their personal financial interest with that of new shareholders, and they’re committed to growing the business.

That said, I wouldn’t touch an IPO based exclusively on founding shareholders cashing out. As a shareholder, I want to know the company is working for the benefit of all shareholders, not merely to enrich the founders.

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Roots is Flawed

Roots Inc. has been around as a private company since 1973. After decking out Canadian athletes in Roots apparel for the 2010 Olympics in Vancouver, the company’s brand recognition soared, not just in Canada but globally. And in 2015, the company sold a majority stake to Searchlight Capital LP, a private investment firm based in New York.

Here’s the thing about private investment firms: their purpose is to increase the value of companies in which they invest. A good thing? Maybe. Really depends on your perspective. Because ‘value’ is subjective. And investment firms are all about financial value, how much money is the company worth, how much profit may be generated.

In contrast, business founders are rarely so myopic in their definition of ‘value’. Not looking to turn a quick buck, founders have a long-term outlook, and take personal interest in relationships with their employees, customers and their reputation. They care.

Based on available information, Searchlight is typical, taking Roots public in order to cash out. How do I come to this opinion? Well, when companies file for an IPO with the Securities and Exchange Commission, they craft a lengthy document known as a prospectus. And in their prospectus, Roots baldly states that money raised will not be used to assist with expanding the business. Instead, and this is chutzpah for you, Searchlight will be selling its shares to the public and pocketing the proceeds.

Outraged at the nerve of Searchlight? Don’t be. This is how the game sometimes works. But the thing is, you don’t have to play. Playing is optional. And unless the line of suckers who want to buy shares at any price on the first day of trading is endless, the only people virtually guaranteed to be smiling when markets close will be those employed by Searchlight.

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Moths To A Flame

Will thousands of people still buy Roots shares on their first day of  trading? You bet they will. Because the hype will only grow in the weeks and days leading up to the companies reincarnation as a public company. And some people will read about the ‘opportunity’ in newspapers or listen to talking heads on business news programs and they’ll trust what they read and hear.

As I said to my friend, Mermaid, maybe investing in Roots will turn out well for early investors. Maybe it won’t. We really don’t know. But for me, the unknowns of a relatively small clothing company don’t inspire confidence. And the known of a private investment firm selling their shares to Joe/Jane investor and pocketing their money convinces me to watch from the sidelines.

Expert, Shmexpert: What Do They Know?

Financial experts aren’t shy about telling you which way the wind will blow. Confident, at times brash, they broadcast insights into the future. Deliver crystal ball readings. And talk as if predictions and reality are one and the same. As if they KNOW what will happen tomorrow.

How kind. How thoughtful. How generous. To play nice and share such valuable information. How, um, uh … wait a second here! Unless comic book super heroes have transmogrified into living, breathing beings plying their usual trademark scaling of tall buildings, saving our planet from evil dictators and, notable for our immediate purposes, reversing the globe’s spin, peering into the future is little more than a step right up and place your betscrapshoot.

02fin3So when you read about, or listen to, a financial advisor, hedge fund manager, stock analyst, journalist, economist, media savvy CEO or any other self-appointed expert serve up their predictions hot off the press, please, for the good of your portfolio health, take it with an ever so large grain of salt.

Because predictions are just that: guesses, extrapolations, prophesies. Whether spoken by a rich guy or corporate big shot, whether published in a reputable publication such as the Wall Street Journal, Bloomberg, or Barrons, or a fly by night investor newsletter baldly touting the latest and greatest crypto-currency, understand that the only certainty about investing is that the future cannot be foretold.

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Certainly, There Is No Certainty

In my humble opinion, Barrons is one of the few excellent investor friendly daily publications. And while I do glean helpful investment related tidbits from their articles, I nevertheless read them with a critical eye. Because if I didn’t, if I swallowed whole what someone else was serving up, well then, shame on me for blindly following, for responding no different than sheep (or llama!) waiting to be fleeced. Baaaa, Baaaa.

Here’s the reality: there is no certainty when it comes to predicting movements in the price of securities or growth of economies. So when someone, anyone, offers certainty in their analysis of the future, know that the offer falls under the category of HOOEY.

Now, this doesn’t necessarily mean that there is active intent to deceive on the part of the person providing information. Rather, there are a few other explanations.

First up is arrogance, an unfortunate trait too common among those in positions of power. Of course, arrogance is delusional in the sense that, however large your bank balance or expansive your influence, this doesn’t make you privy to writing history before events unfold.

Second, we the people, habitually grasping for certainty in all aspects of life, tend to respond positively to strongly worded opinions. Attracted to the ‘with us or against us, take it or leave it, black and white opinions’, we don’t care much for wafflers.

Because wafflers are colored gray, they’re messy, they confuse issues by offering more than one explanation or possible outcome, and never seem to just get to the point and tell us what we should do.

The sad thing is, this sort of thinking, this wanting to have a clear cut answer, is harmful for many reasons. Not the least of which is because, surprise, surprise, those who give off the appearance of certainty are no more likely to KNOW what tomorrow will bring than the perceived wafflers.

Personally, my bias is toward wafflers. Because they have considered more than one side of the issue (there are always at least three sides, you see) and understand that REALITY IS MESSY AND IT’S ALWAYS CHANGING.

As an investor, you don’t want to be spoon fed information, you don’t want to be told what to do. Rather, you want to (uh oh, seems I’m telling you what to do … read on, you’ll see I’m one of the good guys) think, ask questions, empower yourself by accepting the information, rolling it around, chewing on it, digesting it, spitting it up, letting it sit, looking at all angles, comparing it to contrary information sources, then using your best judgment to render a decision about its worth.

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Case In Point

Back to Barrons. I recently landed on an article written by Byron Wien, vice-chairman of Blackstone Advisory Partners, a subsidiary of The Blackstone Group, an investment firm managing more than $300 Billion.

The subheading for the article is, ‘Wall Street’s Best Minds’. And the article itself is titled, ‘Smart Money Analyzes The Market.’

Hmmm, best minds you say? Okay, fine, this is marketing hype but still, given his background, I took a leap of faith here and accepted that Byron is a guy who knows a fair bit about the workings of financial markets. That said, regardless of Byron’s position or net worth, I read his words closely.

Wein. “Howard Marks of Oaktree, one of the most insightful thinkers in the money management business, has written a 22-page paper on the risks facing investors, and he concludes that this is a time for caution because of the condition of asymmetry: the potential rewards are not sufficient to justify the uncertainties and stretched valuation of equities.”

BuddhaMoney. Okay, Howard is a smart guy. Knows his stuff. But should I FOLLOW his conclusions? Does it matter that his analysis runs 2, 12 or 22 pages? Should I be cautious about investing at this time? Maybe. But even if I agree with Howard, I’m well aware that Howard’s crystal ball reading is just as accurate as any other. Translation: his ball is on the fritz.

Wein. “One investor recalled the “Rule of 20” from what now seems like ancient times: the combination of inflation and price earnings ratios should be no more than 20. On that basis, the market is a little more than fully priced but not egregiously overvalued.”

BuddhaMoney. Really? The Rule of 20? It’s ridiculous how many myths are out there trying to explain future stock market movements. And this Rule of 20, like other silly and simple ‘rules’ is meant to make clear sense of current financial conditions. And it fails. Like every other rule. Because financials conditions are too complex, there are too many moving parts that don’t allow for simplistic answers packaged in a neatly titled Rule.

Wein. “Looking at historical price earnings ratios, the market certainly appears to be fully valued, even assuming earnings continue to come in better than expected.”

BuddhaMoney. Ya well, we can and should learn from history. But history is not a dead on predictor of what will happen tomorrow. And note here that Wein himself is hedging …’the market certainly appears to be fully valued’. How is this statement helpful? Is it fully valued or not? The thing is, this phrase is purposeful since Wein knows what he doesn’t know … and he doesn’t know with any certainty whether or not the market is in fact fully valued.

Wein. “… other potential impediments to equity appreciation are not currently negative: investors are optimistic but not euphoric, inventories are not excessive, unemployment is declining rather than rising, leading indicators are making new highs and inflation is modest. Accordingly, we could be several years away from the next recession or bear market.”

BuddhaMoney. What Wein is saying is that, um, who knows! Who knows where the market is headed!

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Passive Index Funds Don’t Require Tea Leaves

So what’s the take away? I’m not here to disparage Wein. The article’s title says that it’s intended as an analysis. And Wein delivers with a wealth of facts and insights, risks and other expert opinions leading to a conclusion that some of the best minds on Wall Street believe the market will go up, others believe it will go down.

And really, that’s the best that may be offered. Because no one knows with any certainty what will happen tomorrow, all we may do is inform ourselves and use our best judgment to make decisions.

That said, wise investors know enough to pay little attention to media generated noise, to not get caught up in the guessing game of when is the next market meltdown or economic recession.  Because when you have a long term game plan, short term hiccups don’t matter much.

Thus the relatively recent volcanic flow of money into passive index funds, where the only bet you’re making is that, over time, markets will go up. Is it a lock that, with an adequate investing horizon, markets rise? Nope. But a passive index fund is a safer bet than any individual security. And thats about the best we may do in the investing game.

 

 

 

 

Risk is NOT a 4-Letter Word

My father-in-law retired from the practice of medicine a few years ago. During his fifty-year career, not only did he establish himself as a highly skilled and dedicated physician, he also displayed a head for numbers as they relate to investments. And because he was smart enough to enlist the aid of a savvy financial advisor, to plan for the future and nurture his investment portfolio, him and his wife are now enjoying a financially stress free retirement, living a comfortable existence courtesy of dividends and interest generated mostly from stocks and a sprinkling of bonds.

That said, not everyone shares his tolerance for investment risk taking. In this regard, one of his colleagues (let’s call him Dr. Aversion), was more inclined to place his discretionary cash in a bank savings account, earning a sometimes decent, sometimes woeful rate of return. Regardless the amount of interest earned, Dr. Aversion gained comfort from watching his bank balance grow, and he slept well at night knowing his money was not subject to stock market whims and fancies.

Now, keep in mind here that, save for a brief stint in California early in his career, my father-in-law lived and worked in Canada. And in this northern nation, the vast majority of medical docs are civil servants owing to the publicly funded health care system. While they are certainly paid well enough to afford a comfortable lifestyle, the pay is nowhere near the lavish sums heaped upon some State side physicians.

Dr. Aversion too was a Canuck based doc. One who didn’t understand the role that investments would play during his retirement. Who didn’t get that a pile of cash sitting in a savings account generating relatively meagre interest would dwindle once he retired, once his primary revenue stream (i.e., salary) came to an end.

Today, predictably, Dr. Aversion is paying the price for his unwillingness to become educated about investments and the role of risk, for clinging to the illusion of safety represented by cash. A few years after retiring in his early seventies, reality gave the good doctor a cold, bare handed slap. And he sold his luxury home and downsized to more modest accommodations because he needed to raise cash for living expenses.

Now near the age of 80, Dr. Aversion is doing his best to hold steady on the financial front, having finally enlisted the guidance of a financial expert. And though he is not likely to slip into poverty, he certainly will not return to his once financially stress free lifestyle. Though he was a fine physician, Dr. Aversion was an inept steward of his family’s money.

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You Want Success? Embrace Risk

In the investment world, ‘risk’ refers to the probability of losing part or all of your investment. Risk is not, as way too many people view it, the same as volatility. And it’s volatility that turns investors into scaredy-cats. And scaredy-cats make terrible, horrible, no-good investment decisions that most often turn into losses.

You see, volatility is part and parcel of the stock market. It’s simply the stock markets nature, ingrained in its DNA. If you understand this, then you accept the ups and downs and wild rides. Because you are confident that, based on more than 100 years of stock market performance, if you hang on for long enough, the stock market will smile upon you.

Check out the chart below published by Investors Friend:

total-real-26-2016Unlike other assets, stocks go through severe ups and downs from time to time. And investors with a long term horizon know this. They know that media noise heralding the end of the financial world as we know it (think 2007-2009 meltdown), is just that: noise, distraction, media publishing their usual ‘the sky is falling’ nonsense because it makes for good copy, believing readers want to be fed fear.

But if investors can muster the will to stomach the occasional precipitous fall in their portfolio value, they will be rewarded. When? No one can say for certain. Still, I’ll venture out on a limb here and say … it’s only a matter of time.

Let’s use the 2007-2009 meltdown as an example. Global markets dropped what, 40% or so? And for those who ingested a daily dose of Gravol to help calm nerves and restrain the fear impulse from hitting the sell button? Well, these folks reaped juicy rewards.

Check out the chart below (which is current only to 2015; sorry folks, a bit outdated. Given the continued market climb from 2015 through 2017, you can safely add on an even higher return than that shown by the chart):

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So, we’re talking more than a doubling or tripling of your money if you invested in 2009. And the way to have made this happen if you’re not the type to buy individual stocks but still wanted exposure to stock markets? Buy passive index Exchange Traded Funds (ETF).

How do you get a piece of the 30 blue chip companies comprising the Dow Jones? Buy an ETF such as the SPDR Dow Jones Industrial Average ETF (NYSEMKT:DIA).

Prefer to focus in on the technology sector? Buy Fidelity Nasdaq Composite Index ETF (ONEQ).

More comfortable investing in the broader market? Consider the Vanguard S&P 500 Index ETF (VFV). With each of these ETFs, your fortune is tied not to one individual company stock, but to all of the companies that make up the stock markets.

With each of these ETFs, your fortune is tied not to one individual company stock, but to all of the companies that make up the stock markets. (chewy bit: I do not own any of these ETFs, and am not recommending them one way or another. However, I do recommend you use these ETFs as a starting point for your research).

 

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Time Is On Your Side … Until It’s Not

On the issue of investing, Dr. Aversion was paralyzed by fear. And while fear led him to grow his cash stash, it wasn’t enough to last him for 20 or 30+ years of living post-retirement. Because today, you’re actually losing money by holding funds in a savings account, i.e., the rate of inflation is higher than interest paid so, in effect, these funds are worth less at the end of each year.

What would have happened if Dr. Aversion had a better understanding of stock markets, was willing to embrace at least some risk during the past 50 years? Most likely, he would not have downsized his home, nor would he be worried about outliving his money.

The huge, colossal, gargantuan, mistake that folks make is paying attention to stock market daily gyrations underpinned by self-serving political and media generated fear.

If we can block this out, if we can educate our self about the true nature of the stock market leading to a clear understanding of what it is we’re doing when investing, if we accept that volatility does not equal risk, and that we should have at least a three, five, ten, twenty or more year investing horizon, then we’ll be just fine.

And with patience as our ally, we’ll get to that place where our money is working for us, a place that affords us a financially stress free retirement not unlike that currently enjoyed by my father-in-law.

 

 

Inside An Investor’s Mind

Little more than one year ago, I bought shares in Canada’s largest airline, Air Canada (TSE:AC), at about $9 per share. At the time, my investor geek friends (naturally, I count myself among the geeks) questioned whether jello had replaced the brain previously inhabiting my head.

Historically, you see, the airline industry has not been friendly to investors. That, I suppose, is putting it mildly. For the brutally honest take, lets defer to legendary investor and gazillionaire, Warren Buffett, who called the airline business a ‘death trap’ as recently as 2013.

From one notable quip to another, Buffett offered this in your face sketch:

“If a capitalist had been present at Kitty Hawk back in the early 1900s, he should’ve shot Orville Wright; he would have saved his progeny money.”

So … if I haven’t been invaded by jello, what makes me think I know more about investing than Buffett?

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Research, Research, Research, Before You Buy

Let’s get this out of the way: I fully recognize the limits of my investing chops. Besides, comparing myself to Guru Buffett? Really? He’s a self-made gazillionairre. I’m not. Enough said.

Then what was I thinking?

To start with, life is nothing if not teeming with change. And that includes the aviation industry. So when I read a research report issued by TD Securities (TSE:TD)(TSE:NYSE) that argued the case for AC, saying that the airline was massively undervalued, and slapped a $21 target price on a stock hovering around $9, I took notice.

But, hey, it’s just a research report. And it’s essential to keep these reports in perspective, to understand that the company issuing the report may be self-interested (i.e., they may own the stock directly or through a subsidiary). That if you have ten securities companies issuing reports on one publicly traded company, often, nine will have a ‘buy’ or ‘hold’ recommendation and one lone voice will issue a ‘sell’ recommendation.

What does this all mean? While stock analysis may be informative, prudent and reasonable, it’s also self-promotional. By way of research reports, analysts do what they can to support the investment industry, to get investors to enter and stay in the game.

So while TD’s report was intriguing, it wasn’t enough to convince me to buy AC.

And the $21 target price? Which was more than double the current value?

Every investor must absolutely, positively, take these with a healthy grain of salt, skepticism and doubt. If I’m not making myself clear, how about this: Do NOT make investment decisions based solely on a stock analyst saying a certain stock is about to lift off, destination moon.

Because here’s the thing about target prices: they’re educated guesses, nothing more. Granted, securities analysts have access to more information than your typical investor, and may have more of an understanding of a particular industry and inner workings of a particular company. But, and this is hugely important, they do NOT know where a stock is headed, no matter how confident and blustery they appear.

 


Off Target

Consider a research study published in 2006 by Mark Bradshaw of Harvard Business School and Lawrence Brown of Georgia State University. These two guys examined nearly 100,000 12-month price targets issued by analysts from 1997 to 2002.

And here’s what they found: only 25% of stocks were at or above target at the end of a 12 month period; and less than 50% of stocks exceeded the target (then fell back) at some point during the 12 months.

This is their conclusion:

“Target price forecasts are overly optimistic on average, and … analysts demonstrate no abilities to persistently forecast target prices.

This evidence is consistent with prior findings of low abilities of various experts to forecast interest rates, GDP, recessions and business cycles, and the infrequency with which actively managed funds beat the market index.”

Okay, fine. Then are price targets and analyst reports of any use? Sure. Read the reports. Understand the rationale for slapping on a high price target. But don’t be sold. And certainly don’t let these reports be your only information source upon which investment decisions are made.

Getting back to AC, reading TD’s report was step one. After which I reviewed AC reports issued by other securities firms; researched and compared other airlines based within Canada, USA, and elsewhere; and read domestic and foreign newspapers, searching for information about the airline industry. And after taking time to digest all this information, I made the decision to buy AC.

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The Times, They Have A Changed

It just so happens that as I was contemplating purchasing shares in AC, Warren Buffett was considering buying certain American based airlines. And after word got out that Buffett invested nearly $10 billion in four airlines in late 2016, he had this to say:

“It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope.”

As an investor, what did Buffett’s considerable investment do for my psyche, for my decision to buy AC? Reflexively, I experienced a boost, felt good about my call. ‘Hey, look at me, I got in the game before Buffett.’

Then I talked myself down. I mean, what did it really matter that I spotted an investment opportunity before Buffett? It meant nothing other than I may have had access to some similar information. And just because Buffett is buying airlines, that in itself is no reason for me to buy. Because my investment objectives are likely different than his. Because he can afford to lose $10 Billion, and I’ll be hurt if I lose a lot less. And most importantly, even though Buffett is an investing genius, he’s human (gasp!) – no, really, he is – and he too experiences losing investments.

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Higher and Higher … Not

This week, nearly one year after my buy of AC, the stock soared to $22. More than doubling my money. Well, look at that, the TD analyst was right! Uh huh. And on 50-75% of his other predictions he was wrong. So, as my teenage son would say: whatever.

Still, I have to tell you I was feeling good. To my thinking, I bought low, and sold high. The perfect trade. And I rode that wave of satisfaction for about 24 hours. Because the next day, I read a new report issued by TD. Seems that they have now upped their target price to $34. Other securities analysts have also increased their target price, most to the mid and upper 20s, with one lone voice calling for a fall back to the teens.

And for a few minutes after reading these ambitious price targets, jello does jiggle my brain. Suddenly anxious, I’m thinking, uh oh, did I sell too early? The analysts say AC stock is going even higher! I could make even more money! Oh no! Why did I sell?!

The insanity then passes. BuddhaMoneyLama takes hold, reminding me that greed sucks. Telling me to be grateful for my good fortune, for my wisdom to sell at a peak. All is good now. Mental balance returns.

Will AC go higher still? Maybe. Do I care? No. Because I’m no longer invested. Because I’m satisfied with my profit and am now looking forward to investing the proceeds in other companies that offer better value.

And I’m certainly not buying the analysts bluster that the stock will now rise another 75%. I mean, this is what analysts do. If they’re lucky enough to make a correct call on target price, as soon as the price is reached or within spitting distance, they raise their target even higher. ‘Hold forever; the stock will go up, up, up!’ And they do this because it’s their job, to entice more people to invest in the stock market.

Here’s what I have to say to that: don’t succumb to jello brain. Once a security has reached YOUR target price, whether on the upside or down, stay disciplined and sell. Say thank you very much. And move on to the next investment.

 

 

 

 

 

 

 

Stock Market UnderBelly: Part II

A friend of mine, Tom, is a marketing expert. After reading the post published earlier this week (The Stock Market’s Dark Side), he flashed me a thumbs up for telling it like it is in the stock market world. Then he urged me to go further, not only because the subject matter makes for a good story, but …

“because people should know about the promotional side of the stock market, have their eyes wide open, before deciding to become an investor.”

So hats off to Tom for inspiring me to write Part II. To explaining to you why it would be wise to carry healthy skepticism toward corporate press releases, media reported snippets from CEOs, and any other sort of promotion be it splashy, widely circulated headlines, small time investment newsletters, or the ever more popular personal finance blogs (BuddhaMoney included).

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Let Me Tell You A Story …

Our society is huge on promotion. Whether it’s selling political drama on the right or left, running shoes, the latest Hollywood flick, toothpaste, tourism, financial products … whatever good or service or viewpoint is out there, it’s being promoted in big and small ways.

That’s all good. I mean, if old-fashioned word of mouth isn’t bringing in as much business or converts as desired, then you turn to other mediums to build awareness, bring in customers, and drive sales. This is simply how our system of commerce works.

The problem, however, arises when we’re not fully aware of the rules of the game, not seeing promotion for what it is, believing, hook, line and proverbial sinker, that the advertisement is completely truthful. When this happens, we’re bound to be disappointed, maybe taken for a ride, because the vast majority of promotion is about story telling. And commercial story telling, by its nature, involves suspending reality, manufacturing illusion, exaggerating a little or a lot here and there for the purpose of drawing more eyeballs, opening more wallets.


Watch Out For Cow Pies

Sticking to the financial world, noise is constant and relentless. Partly because the corporate arena is crowded  and you may have to raise your voice if you want to be heard.

Fair enough. And partly because the folks running banks, corporations, mutual funds, index funds, whatever financial product or service provider is out there, know full well how to play the human propensity toward fear and greed.

They know that, for too many folks, dangling fear and/or greed under the nose sells. And this isn’t cool, fair, or kosher.

Because it’s not a level playing field. Because financial service providers have vastly more information than Jane or Joe Consumer, and not sharing that information is detrimental to J or J Consumer. And when this happens, financial service providers are acting purely out of self-interest (i.e., with intent to gain more business) having little or no regard to potential harm done to honest folks handing over their hard earned money. And that … well … that’s just not the sharing, caring world that we want for our kids, or our self.

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Alright then, since it’s not a level playing field, since we don’t have access to certain relevant information, and are sometimes fed misleading information, what do you do?

You block out the noise and cut through stinky cow pies. Here’s a few pies I stepped around this morning while scanning through financial websites:

  • Sell These Stocks Before Market Closes!
  • Runaway Stock Baffles Analysts!
  • How One Man Turned $50,000 Into $5 Million!
  • Biotech Stock Explodes After Drug Announcement!
  • This Is Not An Investment Opportunity You Want To Miss!

Now, you may read these headlines, all of which are taken from small publications with important sounding names, find them mildly amusing and not give them another thought. But some folks don’t. Some folks click on the link, then get sold on shady content that feeds their investment decisions.

Unfortunate? Yes. Because here’s the thing: no legitimate, worth your time publication is going to run headlines like that, the purpose of which is none other than to draw you in. And once you’re in, that’s when the real selling starts. And if persuaded to buy (sigh), you’ll likely lose money.

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All Dressed Up

Major media players, multi-billion dollar companies, aren’t all that different from the small fish. In fact, because big media and big corporate have much deeper pockets, their promotions may be a less obvious sell, slicker, and more persuasive to a wider audience.

Take Nike, (NYSE:NKE) for example (I could have used any large corporation-not picking on Nike here). Are their shoes really better than Adidas or Reebok or any other shoe manufacturer? Because Michael Jordan is paid a gazillion dollars to promote Nike shoes, and you went out and bought Nike shoes, will you become a better basketball player, will you become like Mike, or just feel more cool? (I own Nike shoes because they’re comfortable and I can buy them on sale at discount outlets).

Aside from product quality workmanship, Nike isn’t selling guarantees. Plain and simple, Nike sells its shoes in the best way it knows how: by placing a storyline in your head. And we, the consumer, read into the ad whatever we want. And once we own the product, we feel whatever we want to feel, we perpetuate whatever illusions we like.

Financial companies are no different. Let’s use Blackrock Inc. (NYSE:BLK) as an example. The largest asset manager in the world, and provider of index funds and mutual funds, says this on its homepage:

“A suite of 18 low cost funds that can help make your long-term investment goals a reality.”

Yes, the funds could do that. And they could just as well blow up in your face. But Blackrock doesn’t mention this. However, in keeping it legal, Blackrock does state, in teeny, tiny print at the bottom of the page,

“The funds are not guaranteed, their values change frequently and past performance may not be repeated.”

Okay, good for them, check off the box next to full disclosure. But, really, how many people are reading teeny, tiny print? Even if you do read it, is the message really sinking in? I mean, it’s boring legalese with no emotional resonance.

Fact is, most of us focus on the stuff that gets our juices flowing, that makes us dream of rich, comfortable retirement years. And the ideal placement for emotional triggers is the top page. This is where Blackrock seems to promise to make my investment goals a reality. Shouldn’t I believe what they say? In short, nope. Trusting in any sort of promotional literature would not be wise, especially a promotional hook that is completely undermined by the teeny tiny legal print.

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Keeping It Honest

By healthy skepticism, I mean ask questions. Ask what is the motivation of a company to issue this or that press release, to have their CEO run the talk show circuit, or invite media to corporate sponsored events.

Know that certain major publications lean politically left or right (the center seemingly in hibernation) and this will influence both what information they present and the way in which they present information.

Know that stock analysts, those people who like to make you think they have a crystal ball when it comes to stock forecasting, are in the sales game too. Sure, they have access to company and economy specific information that we don’t, but their predictions remain simply that, predictions.

Know also that stock analysts almost always issue BUY or HOLD recommendations. SELL recommendations are exceedingly rare. Why? Do all stocks go up, indefinitely? Do all companies succeed?

The only reason SELLS are rarely issued is because analysts are engaged in their own form of stock promotion. And the last thing a stock analyst wants is to influence stock markets to move lower.

There’s a ton of promotional noise out there. The sooner you’re able to recognize noise for what it’s worth, the better informed you will be, the wiser decisions you will make.

ps. big thanks to Tom for the inspiration and a bit of promo in support http://www.reinfluenceinc.com/.

 

The Stock Market’s Dark Side

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked …

Elon Musk, founder and CEO of Tesla Inc. (NASDAQ:TSLA), recently did something highly unusual: he disparaged his company. Specifically, he knocked Tesla’s share price, saying it is “higher than we deserve.” Whether true or not, to publicly state that your company is not worth its current trading value is not only rare, it’s virtually unheard of. It’s just not what a CEO does.

Because in addition to assuming responsibility for day to day operations, a CEO also acts as a company’s primary media pitchperson, head cheerleader, numero uno fan, selling the company’s virtues to the public and financial analysts. And always with a positive spin. Unless you’re a rare breed known as Musk, so it seems.


Sales, Man, That’s What Corporate Life Is All About

I’m not here to riff on corporations as evil entities myopically bent on achieving profit and maximizing shareholder value, all the while paying little heed to contributing to the social good and society at large. To varying degrees, some companies adhere to a social conscience, others don’t. For better or worse, such is the diverse nature of organizations, and humanity.

Still, regardless of how much or little a for-profit company gives back to its employees, communities, and our world, they all share something similar: they’re in the sales business. Whether selling goods or services, companies need sales to generate revenue to turn a profit to stay in business. And selling involves promotion, marketing, and advertising. And if you have a media friendly CEO, well then, all the better for driving sales, all the better for business because that CEO’s favorable image connects with consumers, persuading consumers to use, watch, listen to, or wear a company’s product.

Think Steve Jobs and Apple. Media loved writing about Steve, and Steve knew how to play the media, to manufacture himself as a near mythical legend, and position Apple as not only best in class but in a class of its own worthy of sticker prices considerably higher than rivals products. This sort of image making, however close or far removed from reality, impacts consumers buying habits and investors desire to own the stock, and consequently bid up share price.

Now, I’m not saying that Steve wasn’t a genius visionary or that Apple doesn’t make exceptional products. Instead, what I am saying is that you can have the most excellent product or service on the planet but if relatively few people know about it, and sales lag, then the company will soon fade away.

Apple doesn’t have that problem. They remain as extraordinary at the sales game as they are at manufacturing. And to this day, their image among consumers remains intact, best in class. As does their market value, which is higher than any other company on this planet, by far.


Promotion, Man, That’s What The Stock Game Is All About

Whether you’re a stock market behemoth like Apple or Google (NASDAQ:GOOGL), or a teeny tiny penny stock, in one way or another, you’re promoting your stock, i.e., you’re selling the merits of owning your stock because you want more buyers than sellers; this is how share price marches upward.

The typical medium in which behemoths promote their stock is mainstream media. Be it an interview with the CEO, a quote, a prediction as to what comes next in the stock market or economy, an annual meeting turned Woodstock for Capitalists (i.e., Berkshire Hathaway’s (NYSE:BRK.A) annual shareholders meeting), or a product unveiling (i.e., Apple’s annual Worldwide Developer’s Conference).

And while the CEO may firmly, honestly, believe in what they are promoting, we the consumer would be wise to interpret their words with a grain or two of salt. Because they’re just words. In the investing game, words are not enough. Not even close.

Numbers, not words, tell the story. On a basic level: Revenue, Expenses, Profit, these matter more, so much more, than words. I mean, words can be beautiful and flowery and convincing, and we’re all susceptible to oratory charm. But it’s important to see words for what they are, and in the financial world, words decidedly take a back seat to numbers.

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When The Numbers Don’t Add Up, Run!

Penny stocks are a different animal.

Technically, a penny stock is defined as any stock that trades for less than $5 / share. But for our purposes, a penny stock is one that trades for less $5 / share AND is not listed on a major stock exchange AND is a small company AND is often illiquid (i.e., relatively few shares are traded each day, making it difficult to buy and sell).

Now here’s the dark side of penny stocks: scammers LOVE them! And they can make a small fortune off people who don’t know any better, people who chase pots of gold and ends of rainbows, people who lay their bet on spam email promoting the latest and greatest 10 cent stock promising to power through to $10 or $50.

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The typical penny stock company touted by scammers? Little to no revenue, little to no shares traded daily, little to no business prospects.

And the angle, the hitch, the hook? The company says (words, words, words) that it’s changing its business model and is now in a HOT SPACE. For example, if the price of gold takes off, the company will morph into a gold mining company. If biotech is hot, you guessed it, the company reinvents as a biotech company.

Then, if it’s a big time scammer, they pay a promoter(s) serious coin (we’re talking hundreds of thousands to millions of dollars) to scream about the INCREDIBLE, UNBELIEVABLE, FANTASTIC investment opportunity presented by this itsy bitsy shell of a company. And the promoter(s) sends out millions of emails, many press releases, and arranges for inclusion in hundreds of investment newsletters and stock chat rooms. This is the modern version of a boiler room (i.e., refers to a bunch of guys [rare for women to engage in this activity] hard selling stocks to random people over the phone – well depicted in the movie, Wolf of Wall Street).

Once the word is out, once enough people have been suckered into becoming buyers of this worthless stock, the scammers start selling. Because, you see, before all of the promotional activity was set up, the scammers arranged for most, maybe all, of the issued stock to be in their name or, if sophisticated, the name of a faceless corporation. The faceless corporation gives them cover from regulators who have rules regarding the boundaries of promotional activity.

And if the CEO of Penny Stock Corp. says he doesn’t know who is behind the promotion, and the regulators cannot identify the promoter, then Penny Stock Corp. CEO has no worries. And he dumps his stock to pie in the sky investors who bid up the price. Until, that is, buying momentum halts, selling ensues, and stock price craters in a matter of hours or days.


The Case of Dry Ships

But you need a real life example. So let’s briefly describe what happened recently with a company called DryShips Inc. (for the full story, check out the detailed accounting here).

In November, 2016, DryShips disclosed a huge loss and suspended debt payments to preserve liquidity. Shortly after, the company, with a market value of close to $5 million, didn’t just catch fire, it was a veritable inferno! In just four days, the stock price leapt more than 1500%!

On November 8, its stock was priced at $5107, with a grand total of 38 shares being traded. Two days later, price jumped to $13,328 with more than 5,000 shares traded. Come November 15, price it $81,760 with more than 9,000 shares traded. By November 29, price had tumbled to $4849.

The journalist who wrote the article referenced above ends his story by referring to the “stock’s mysterious rally.” Well, other than being able to prove who was pulling the scam strings, there’s no mystery. The stock blasted higher owing to deceitful manipulation and nefarious promotional activity. Because absolutely nothing related to the company’s business activity justified a massive move in volume and price. And at the end of the day, guess who loses? Right, Joe/Jane Investor who were suckered into buying worthless paper.

As an investor, you do not want to get anywhere near this kind of stock. So please do your best to ignore any spam investing emails, ignore talk of a stock being “the next Facebook”, ignore any and all penny stocks because buying penny stocks is akin to gambling, not investing, and nine and half times out of ten, you will not exit your stake a happy camper.

Dividends: The Ultimate Second Income

Bored with the same old games, my 11-year old son and teenage daughter rummaged through the games closet and found an ancient relic, Monopoly. And as I excitedly told them about its history, that is was invented by self-described anti-monopolist, Elizabeth Magie, in 1903, that its purpose is to illustrate the hazards of concentrating land in private monopolies, my kids looked at me as if what they were hearing was, ‘blah, blah, blah’, rolled their eyes in tandem, and walked away.

Not an unexpected response. I mean, hey, the kids just want to be free to play, not weighed down by an adult (that would be me) spewing historical facts and economic theory. And play they did.

From time to time, they would ask me to clarify rules, which I was only too happy to oblige. Eventually, after surreptitiously spying on them from the kitchen, watching and listening as they learned rules and strategy, I came in from the cold and asked, ‘Can I play?’

Of course, being the adult whose headspace has not yet adjusted to the idea of summertime freedom, to the idea that summer is a time for letting it all go, for letting it all be, for being here, now, the Dad in the room (that would be me) had a hidden agenda.

And as I sat on the family room rug, took a seat at the playing board, and chose the Hat piece because the RaceCar was swiped by my son, I prepared to teach the kids a thing or two about the joy of property ownership.

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Interest and Dividends Rule

In other blog posts (see Property Investing: Need To Knows and Thinking About Investing In A Condo), I’ve discussed upsides, downsides, and things to be on the lookout for when buying real estate as an investment. And I also batted around the advantages of owning Real Estate Investment Trusts (REITs). Whether we’re talking about owning REITs (i.e., stocks that pay monthly dividends) or real property (i.e., bricks and mortar buildings with tenants paying rent), the beauty of both is … they’re Income Generators.

I love Income Generators! What’s not to love? In essence, you’re paid for being the owner. An ‘income stream‘, is the somewhat poetic phrase describing the monthly cash flow that makes its way to your pocket.

While playing Monopoly, I tried explaining the concept to the 11-year old as he insisted on buying RailRoads (a kid with a fervent imagination, a romantic at heart, naturally he finds RailRoads captivating) instead of Marvin Gardens or Tennessee Avenue.

Listen, even if you own all four RailRoads, you collect only $200 each time someone lands on Pennsylvania or Reading or the others.

So.

So? You know how much rent you collect when someone lands on Tennessee and you’ve put up a hotel? $950!

I don’t care. Besides, I have way more money than you!

True, you do have more money. But I have more properties. And eventually, you’ll be paying that money to me for landing on my properties. Then Ill have the properties AND the money, and you’ll be left with bubkus.

I still want the RailRoads.

Ya well, kids see something special about trains and RailRoads. I get it. As for that particular game, it played out as expected, the kid coming up short. Same in the next game. But the third time around, the kid’s romantic heart took a back seat to his competitive nature. Taking a page from my playbook, the kid gave first priority to property accumulation, knowing that this was the eventual way to riches. At least in the game of monopoly.

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Knowing The Deal

Let me back up a moment. I’m not saying you’ll become wealthy if you own property. It may happen but it’s far from certain. But I am saying that property ownership is a truly excellent, outstanding way to generate income. That said, income is only one half of the equation. The other half being expenses.

When you own real property, like a condo (Thinking About Investing In A Condo), it’s absolutely essential to get a firm handle on expenses. Because if expenses outstrip income, then you have to revisit the question of … what’s the purpose of this investment?

If it’s not about generating net income, then it’s all about capital gain, i.e., expecting property value to increase before you sell the property. And if capital gain is the sole purpose, then you’ve ratcheted up risk level because you just don’t know what the property will be worth tomorrow or ten years from today.

Personally, I’m a big fan of REITs. And I’ll step outside my usual commentary and say that I prefer individual REITS over a REIT Index Fund. Why? Because while the REIT Index Fund typically offers less price volatility as compared to owning one or two or a handful of individual REITs, it will also pay a lower dividend, sometimes much lower.

So, I’m willing to trade off more volatility for more income. And I’ll do so knowing that REITs in general are not a volatile group like, say, technology stocks. And they usually do not see wild price swings.

Granted, you also won’t see price gains like you might in the technology sector. But I’m good with that. I’m good with owning stable REITs that offer relatively smaller price gains and a healthy dividend.

And I’m real good with watching the monthly dividend deposits to my account, knowing my total ownership expense is $9.99 for each purchase and sale.

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What Kind Of Income Are We Talking About

Let’s say you have a spare $100,000. And you want to invest in property. You could apply that 100k as a down payment toward a condo. Incur the costs of taking on a mortgage, monthly condo fees, legal fees, title fees, any property transfer tax. Then find a renter. And hope the renter is reliable, cares for your property, and minimizes your maintenance costs.

And maybe you would turn a profit each month. It just depends on the numbers involved. And you, being a BuddhaMoney enthusiast, would crunch, crunch, crunch all the numbers before making your purchase decision. I’m not trying to be a wet blanket here; these are just some of the realities of property ownership.

Or you could take that 100k and buy a few REITs. I lean toward REITs listed on the Toronto Stock Exchange because their dividend yields tend to be much more generous than those offered by companies with U.S. listings.

While there’s a whole bunch to choose from, I’ve listed a few below (though I want to emphasize that I’m not advising, telling, suggesting or otherwise whispering in your ear to go out and buy any of these REITs without first doing your research):

  • Pure Industrial REIT (TSE:AAR.UN). Pure Industrial’s portfolio concentrates on industrial properties located in both Canada and the U.S.A. It pays a yield of 4.65%.
  • Slate Office REIT (TSE:SOT.UN). Slate owns Canadian based commercial properties, with an emphasis on office buildings. It pays a yield of 9.65%.
  • RioCan REIT (TSE:REI.UN). RioCan is Canada’s largest REIT with a market cap near $8 Billion (CAD). It focuses on shopping centers, retail and mixed use properties. It pays a yield of 5.80%.
  • Dream Office REIT (TSE:D.UN). Dream owns a stable of office properties throughout major urban Canadian cities and pays a yield a whisker under 8%.

So for simplicity sake, let’s say on 100k the average yield for these four REITs is 7%. That’s $7,000/annually, less trading fees which would equal $9.95 x 4 = $39.80. And the bonus is that dividends are taxed at a lower rate than interest income (think rental income) meaning more money in your pocket.

Putting money to work for you. Generating an income stream. All helps toward building your wealth.

 

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.

 

 

 

Power to Robo-Advisors

The word is that Robo-Advisors are good for your financial health. Why? Because they offer similar services as the human kind of financial advisor at lower cost. If you’re paying less in management fees, your returns are higher, your portfolio fatter. That’s the dominant sales pitch. And with the nascent industry growing from $16 billion (USD) under management in 2014 to more than $160 billion today, there’s reason to stop and look at what a Robo-Advisor may do for you.

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Financial Giants Muscling Into The Game

As retail investors flock to Robo-Advisors (i.e., software programs using mathematical algorithms to generate investment advice and manage your portfolio), pioneers like Wealthfront and Betterment must now compete against big boys such as Charles Schwab, TD Ameritrade, Vanguard Group, and Fidelity Investments.

And the bandwagon keeps growing. Bank of America activated Merrill Edge Guided Investing earlier this year, Morgan Stanley announced that they’ll be launching Morgan Stanley Access Investing in the fall, 2017, and Goldman Sachs is gearing up to introduce its own Robo-Advisory services.

In Canada, several independent firms (i.e., WealthSimple, QuestTrade Portfolio IQ) offer Robo-advisory services with Bank of Montreal being the only bank having a firm foothold. With momentum and money on the side of robots, it would be surprising if Canada’s other big banks didn’t roll out their own Robo-Advisor in the next year to secure their slice of this particular money pie.

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How Does It Work, This Robo-Advisor Thing?

Robo-advisors are a third option for investing; doing it your self and full service financial advisory services being the other two options.

Robo-advisors are convenient (24/7 online access) and more accessible and affordable than hiring a financial advisor (you often need a minimum of $100,000-$250,000 to retain the services of a financial advisor; as for Robo-advisors, some do not require a minimum balance to open an account, others are as low as $500).

Depending on the specific Robo-advisor, they offer different degrees of automation: fully automated or a hybrid set up offering access to old fashioned humans for an additional fee.

Either way, getting started involves you answering some questions about your age, assets, financial goals, risk tolerance, investing time horizon, etc. Moments later, computer algorithms propose a cookie cutter portfolio most suitable to you.

Available investments typically include a range of exchange traded index funds. The software continually monitors your portfolio and periodically buys and sells to maintain your stated risk tolerance and financial goals.

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Hype or Substance?

Despite impressive growth of Robo-Advisors in a relatively short period of time, $160 billion is no more than a few drops in a financial industry bucket worth somewhere around $20 Trillion. Still, this niche is expected to continue growing thus more players entering the market.

So … should you bite?

That depends.

  • If you have less than, say, $100,000 for investing, and you want some guidance, then definitely give it a go.
  • If you prefer interfacing with computers rather than humans, again, Robo-Advisors are for you.
  • If you’re currently working with a financial advisor and are not entirely satisfied with the value they bring to the table, then consider opening a Robo-Advisor account to see if it better suits your needs (this may include intangibles other than fees such as guiding you on debt reduction issues, divorce, house purchase, loans, estate planning, and any other financial issues not directly related to investing).

Well, what if your advisor places you in passive funds? They’re still charging you 1 or 2 points. Why pay high fees when an effective Robo-advisor portfolio may be built for less than half the cost?

  • Back to value, let’s give a little more space to fees.

Depending on your robot of choice, we’re talking management fees in the neighborhood of 0.25 – 0.50% for a Robo-Advisor.

Compare this to financial advisors of the human variety who typically charge between 1.0 – 2.0%.

Seems like a small difference in fees? It’s not. Fees matter.

Consider a simple example: your portfolio is worth $500,000. Fees are 2%. Total fees for the year equals $10,000. For simple illustration purposes, if your portfolio remains at $500,000 for 30 years, that’s $300,000 in fees paid. Compare that to 0.5% fees that results in annual fees of $2,500. After 30 years, the final tally is $75,000. Either way, that’s a whole lot of dough toward fees but the 75k is much more palatable than 300k.

Of course, you could slash fees even more by avoiding both humans and robots. Instead, open a discount brokerage account, buy exchange traded index funds, and pay the $5-$10 transaction cost for each buy and sell.

But … what if you’re not the do-it-yourself type when it comes to investments? What if you don’t have the time, knowledge or inclination to manage your investments solo?

Well, then a Robo-advisor would be your next best choice.

 

 

 

 

 

 

Optimists Make More Money

Several years ago, believers in the ‘Peak Oil’ theory prophesized that our world had reached the height of oil extraction. Moving forward, they said, oil extraction was doomed to permanent decline before eventually ceasing altogether.

A friend of mine (“Squawker”) was an unwavering proponent of the theory. He was bug eyed passionate about telling all who would listen that when oil supplies get squeezed way, way tighter than the early 1970s oil embargo, our economy and lifestyle will spiral down. And the only thing you’ll be able to count on will be the fact that imminent disaster is just a matter of time.

You see, said Squawker, once oil prices skyrocket, transportation costs will be prohibitive. This will translate to an exorbitant rise in the price of food, since food cost is closely tied to oil cost.

And the next domino to fall will be the suburbs, which will transform into ghost towns. Because extraordinary fuel costs will essentially shut down individual commuting and public transportation. Biblical proportion exodus from nationwide suburbs will lead to higher and higher density and massive congestion (we’re talking Hong Kong style density multiplied by 100) in urban centers convenient for walking and cycling to work.


Squawker Does Not Come Home To Roost

Of course, Squawker was wrong. He was also wrong about impending Armageddon resulting from the Great Recession of 2007-2009. And he was wrong about returning to the gold standard and consequent end of paper money’s reign owing to perceived incompetence and self-interest of central banks worldwide.

I could go on but the point is not to flog Squawker. He’s a good person, smart guy, big heart. And as much as I shrink from labeling anyone, from boxing anyone in with a fixed, unchangeable trait, more often than not Squawker sees life’s glass as half empty.


 Enter Buddha

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Your mind belongs to you. Your perspective belongs to you. You may always choose what you see, and the way in which you see life.


Here’s the thing about pessimism: it rests on the notion of a perceived problem, or even crisis, that cannot be solved. Pessimism says that once we enter economic recession, especially a once-in-a-many-generations-shock-shiver-and-quake-in-your-boots-to-the-financial-system-set-back, you may as well drop the curtain and cut the lights because the party’s over. Pessimism says human ingenuity and capacity for problem solving is limited and finite. Pessimism says that never before seen difficulties, puzzles, and complications cannot be solved so it’s best to run and hide.


Optimists Rock

Optimists have another take. And Optimists, thankfully, dominate our scientific, engineering and business world, especially those in the following countries: South Korea, Japan, Germany, Finland, Israel and the USA. These six countries sit atop the Innovation List.

And individuals resident in these six countries are positively changing the way we live, empowering more and more global citizens through inventions that solve humanity’s problems and raise our standard of living.

Of course, residents of other countries contribute too, but I’d hazard a guess that there’s something about the culture of the six leading countries that encourages and cultivates an outsized share of Optimistic Thinkers and Do-ers.

Moreso than other countries, there’s something in the air or the water or the general rights and freedoms given to people in these six countries that facilitates determination, resilience, perseverance, strength, motivation, enthusiasm and flexibility, all traits common to the glass half full folks.

Unlike Pessimists, Optimists are fond of saying, hey, we sure would prefer to see human and economic development advance on a straight line up. But we’re realists too, and we know that just isn’t going to happen. We know that there are, and will continue to be, hiccups along the way. Two steps forward, one step back, and all that jazz.

And when the step back happens, we don’t freeze up, we don’t wallow and moan and hunker down with a multi-year supply of food, water, guns, and a mind wracked with fear. Nahhhhh! Optimists recognize the step back for what it is, knowing forward movement will soon resume.

As for us folks in the investment game, we know that the step back in the form of economic recession or a particular, fundamentally sound, company falling off the revenue/profit rails for a short time period presents prime opportunity to buy top quality shares on the cheap, paving the way for juicy long-term gains.


Enter Buddha

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The Pessimist complains about the wind. The Optimist expects it to change and adjusts her sails.


Optimism Leads to Success

Some folks attribute Warren Buffet’s unrelenting optimism to the fact that he’s the most successful investor ever and, for those keeping score, the third richest dude on this planet.

But here’s what Bill Gates, Microsoft founder and numero uno on the global rich list, says about his friend Warren:

“Warren’s success didn’t create his optimism; his optimism led to his success. Because optimism isn’t a belief that things will automatically get better; it’s a conviction that we can make things better.”

One research study after another has shown that optimism favorably impacts success of any endeavor. Because those who are optimistic, those who are able to envision a brighter tomorrow, are resilient and don’t hesitate to dust them self off after falling down, again and again and again.

What exactly are the ingredients stirred into the optimist’s mix? Dr. Susan Kobasa (1982) found that ‘resilient’ folks have certain characteristics that contribute to their constructive, positive perceptions:

  • Curious.
  • Accept that change is part of life.
  • Accept that change is essential for growth.
  • Believe in them self; believe that they make a difference and influence change by what they imagine, say, and do.
  • Are intent on making their life experiences meaningful and interesting.

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Looking On The Bright Side

Our brain works kind of like a muscle. Work it, and it grows stronger. Keep it idle, and it atrophies.

Our mental perspective operates in the same way. Grooves for cynical, pessimistic thought are dug deeper, little by little, each time such a thought takes root in your headspace. And if pessimism dominates thinking for an extended period of time, well, that’s going to result in an awfully deep hole, one that will detrimentally color your views on life, including investing and money management. Unfortunately pessimists often seek company from other pessimists, people who think like them, thus reinforcing the dark loop. And the longer the loop persists, the tougher it is to find an exit.

Looking on the bright side comes naturally to some; others have to work hard for it. Take Thomas Edison. Apparently, he ‘failed’ close to 1,000 times before perfecting the light bulb. And he had many other ‘failed’ inventions. Here’s a glimpse into Edison’s mindset:

“I have not failed 10,000 times—I’ve successfully found 10,000 ways that will not work.”

Getting back to Squawker. In 2008, he sold all of his stock market investments at a loss. Then he bought gold bars. And to this day, he holds the gold and hasn’t returned to the stock market. A stock market (let’s use the Dow Jones Industrial Average here) that has gone from a low point of about 6500 to today’s close above 21,000. A gain of about 325%. Easy pickings if he’d just stayed in a DJIA based passive index fund; if he just stayed invested in equities, which is a bet on the global economy, a bet on human resilience and innovation, instead of letting fear lead him astray, to the detriment of his personal finances.

Life, finances, investing … it’s sooooo much about perspective. And perspective is a choice you can make each and every day.


Enter Buddha

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The Optimist believes they are living in the best of all possible worlds. The Pessimist fears this may be true.