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!’


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.


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.


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.



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.


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.


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.


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


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


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.


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


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





Cars Are Terrible Investments

Here’s what one journalist wrote about Tesla cars: ‘Tesla fans are crazy advocates. They attach deep emotional significance to the car. They’re not just paying for a mode of transportation, they’re paying for a slice of the future.’

Yup. There’s a whole lot of wildly passionate car lovers out there. People whose emotions drive them to buy a cool, fast or stylish car. People who see their car as a reflection of them self, an object that reinforces their self-image. People who want a visible status symbol broadcasting to others that they’ve arrived, have dough, care about the environment, or lean left or right in the political sense.

Then there are the folks who don’t get caught up in the hype. These people don’t quite understand why others form an emotional bond to a 4,000-pound hunk of steel, aluminum, glass and rubber.

They see cars as utilitarian objects, the purpose of which is to efficiently transport you from A to B, from home to the office, school, the grocery store, kids soccer games. And just like the dreamy car lovers, the emotionally-detached-from-cars types let the world know who they are through choosing a car based on safety ratings, fuel efficiency, and price.

Still, no matter who you are or what your reason is for owning a car, be it a luxury or economy model, cars are terrible, horrible, no good investments.


Virtually Guaranteed To Lose Money

Question: Name an investment that loses 25% of its value immediately upon purchase, and even more value down the road?

Answer: Your Car.

As soon as you sign the transfer papers for that $30,000 car, its resale value drops about $7,500. Because a car is what’s known as a depreciating asset, meaning it loses big value, fast. Own a collector’s classic that has held or exceeded its original sticker price? That’s all fine and good, and your car would be an exception. But for the overwhelming majority of owners, cars are a non-stop money burn.

Question: Aside from a lower resale value, will I incur other car ownership costs?

Answer: Oh ya, a whole lot more!

We’re talking annual insurance payments, licensing and registration, repairs not covered by warranty, and ordinary maintenance costs including gas (or electricity), new tires, brake pads, etc.

Question: How else will I lose money from car ownership?

Answer: Finance your purchase.

Look, if you don’t have enough money to buy the car, then don’t buy it. Think about it: if you borrow funds for the purchase, just like taking out any other loan, you pay interest. So if you’re paying interest for, say, five years, you’ve not only shelled out 30k, you not only incur ongoing expenses, but you also pay even MORE than the sticker price thanks to interest payments.

Question: What’s even worse than financing your purchase?

Answer: Leasing.

Leasing is renting. You’re renting the car for several years. At the end of the lease term, you have zero equity in the car. Yes, when the lease expires you’ll have the option to purchase the car but don’t expect to get any sort of deal. You’ll be paying full price. And usually, you’ll end up paying more for the car than if you had purchased it at the outset.


So What Do You Do?

Cars are expensive. Cars are money pits. But a bicycle, scooter, or hoverboard doesn’t suit your needs. So what do you do?

Ideally, make an all cash purchase of a used vehicle sporting high resale value. And keep the car forever.

By not shelling out for a new car every three to five years (and remember that the resale price of your old car will not even come close to paying for new wheels), you’ll save serious dough that may be put toward saving and investing. That’s the beauty of cutting expenses: more money in your pocket, more financial stability, more freedom today and down the road.

If an all cash purchase isn’t possible, then hold your breath and go the financing route.

Borrow the least amount necessary and no more. Don’t get sucked into the ‘low monthly payments’ sell job. Fact is, with any sort of financing you’ll end up increasing the bottom line price for your car. And work out the money details before you commit to the buy, i.e., know what you can afford, and know that you will pay off the loan within a fixed time period.

Finally, do your best to negotiate cost downward. Because in the car sales business there’s a few things you absolutely need to know:

  1. You can always negotiate on price. And if the dealership refuses, then take your business elsewhere. That said, they all negotiate. It’s part of the game. But the onus is on you to insist on a better deal.
  1. Car dealerships are not in the business of losing money. Keep this in mind when they’re tossing sales pitches your way. You know, stuff like ‘$2,000 cash back offer!’ or ‘employee discount available for a limited time!’.

The usual nonsense where dealerships try to make you believe (‘make believe’ being the key phrase) that you’ll get the car for less than dealer cost. The thing is, dealerships are profiting on every sale. And they should. I mean, if they didn’t turn a profit, then they wouldn’t be in business for long. But instead of fattening their profits, you should be looking to minimize their take by driving the best bargain possible.


Pad Path To Wealth By Keeping Emotions in Check

Car ownership is a lifestyle choice. And it would be wise to make choices that do not hamstring your finances, negatively affect your way of living, or interfere with your financial goals. With more money in your pocket, those leisurely Sunday drives will have you smiling.


Boost Your Energy Account

A student approaches his meditation teacher and says, “My meditation is horrible! My mind is bouncing from one thought to the next, my back hurts, and I’m straining just to stay awake.”

“It will pass,” the teacher responds calmly.

One week later, the student returns to his teacher. “I can’t believe the change! My meditation practice is wonderful! I feel so aware, peaceful, and focused!”

“It will pass,” the teacher responds calmly.

Little Story, Big Message

I love this little story with the big message: throughout our life, we experience all sorts of feelings and thoughts that constantly change, sometimes from moment to moment.

And once moments pass, they cannot be recaptured or experienced again the same way. Sure, that may be obvious to you now as you’re reading this post. But sometimes, when our self-awareness is, um, let’s say compromised, we forget. Sometimes we try to hold on to good times, wanting to extend our experience indefinitely into the future. But in a world where change is the only constant, life doesn’t work that way.

Instead, events and circumstances go our way … until they don’t. And when they don’t, we might feel frustrated, irritable, confused or disappointed. Then we might start struggling for solutions because we want these feelings to go away. And we think that the only way for these feelings to recede is to adjust the external world, have it conform to our wishes. But a funny thing happens on the way to struggling for solutions: the more we ‘want’, the more entrenched becomes the struggle.

Consider it this way: you know when you’re trying to think of a particular word, and you’re certain that the word is there but for whatever reason it remains hidden, teasing you, resting on the proverbial tip of your tongue? And the more you try to coax out the word, the deeper it goes into hiding and the more aggravated you become?

Eventually, you give up. Your mind stops searching. You forget about the word. You let it go. Then, other thoughts drift through your mind. And soon, without trying one itty bit, the word suddenly appears. And you smile, say the word out loud, repeat it more than once, and with great self-satisfaction say to your self, ‘yes, I knew it was in there!’


Relax, Come To It

Energy is our natural currency. When we squander our energy reserves through stress, worry, envy, judgment, and greed, we’re less able to think clearly. And cloudy thinking leads to poor decision-making, leads to undesirable outcomes, leads to stress and compounding negative energy.

It’s not like we actively, consciously, search for negativity or want to waste our energy. Still, darkness comes and goes. Largely because we want to control external circumstances and have not learned to accept that which we cannot change.

So … how do we experience inner contentment, happiness, blue skies, for extended periods of time regardless of which way our external world is turning?

Ahhh, well now, I suppose this is the $64 question. This is where my duty to you is one of introducing the magic elixir, revealing to you ingredients guaranteed to swell your energy account with positive ions, leading to feelings of ease and satisfaction, feelings conducive to excellent decision-making, decisions that benefit your spiritual, psychological and financial well-being.

And the answer is … Yoga.

No, wait. Let me back up. It’s not that easy. It never is because it’s not supposed to be. The thing is, there’s nothing at all magical about yoga. Rather, what I’m getting at, what the practice of yoga allows you to get at if you’re open to it, is a healthy, serene, sense of balance.

How so? Well, um, really, I don’t exactly know. I mean, I could blather on about studies detailing the many beneficial physiological effects of yoga practice, or I could tell you about my personal experiences, tell you how amazing I feel after every single yoga class and how I wish I could bottle up those good and scrumptious feelings to use at my whim. Still, the only way to truly understand the benefits of yoga is to practice yoga.

That said, here’s what I do know: start your day with a bit of yoga, a sprinkling of laughter, a dose of fun … and that in itself is magic. Call it magical reality. Call it an amazing form of medicine, one that acts as a powerful antidote to stress, pain, conflict and any other form of negativity.

Want to feel physically stronger, mentally alert, emotionally balanced? Get your self to yoga class. Want to bring more light in? Laugh! Want to keep the light around permanently? Laugh more! Play! Have fun!

Yes, yes, we have responsibilities, we have bills to pay, investments to make, debts to repay, budgets to draft, research to undertake, retirement to prepare for, BuddhaMoney blog posts to read … of course we do. Still, when we lighten our duties, responsibilities and burdens with a hearty guffaw, a gut busting chortle, a relaxed smile, playtime, then we’re healthier. And our good health leads to a calm perspective, a broader outlook, a sense of grounding, focus and alertness. All of which doesn’t just smooth out your time on planet Earth, it also leads to you becoming a better investor, and a wealthier person.


If You Want It, Here It Is, Come And Get It

I know, yoga is trendy, it’s all the rage. But don’t let this turn you off. Look past the trivial, superficial, North American marketed aspect of yoga, the Lululemon (NASDAQ:LULU) tight tops, check-out-my-butt pants and hotty hot (actual name) shorts, and you’ll find a more than 5,000 year old practice that offers participants the opportunity to grow their positive energy reserves partly through learning to be self-aware and responsible for our feelings and happiness.

You want a buff body? Sure, yoga will take you there. But that’s not what yoga is all about. Not at all. Rather, yoga practitioners seek awareness of their deepest nature. Because through self-awareness, through learning to be present for every sensation in every moment, we learn to be responsible for who and what we are.

And we learn to understand that, to a large degree, we have the power to make our self. When this is understood, then we know that happiness is a choice; that we are responsible for our own happiness. Because our happiness, our contentment, is unrelated to external circumstances. Happiness, you see, is an inside job.

And it’s kinda, sort of, really excellent when you’ve done the inner work, and bring peace to your daily life, including money matters. Because money management, saving and investing can be fraught with emotion and confusion. So if you’re coming at it from a peaceful place, with a clear mind, where you’re able to tune out noise then, sure as Buddha is sitting cross-legged, smiling by the Bodhi tree, you increase your likelihood of finding balance, wealth and success.


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.


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.”



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.


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.


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.


Enter Buddha

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


Risky Business

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

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

And Now … The New And Improved America

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

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

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

Reality Check

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

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

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

Fear of Loss May Equal Loss of Opportunity

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

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

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

Mental Wonkiness

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

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

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

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

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

Profiting from Uncertainty

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

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

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

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

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

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

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

Learning From The Giant

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

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

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

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




Prairie Investors Do It Better

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

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

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

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


Billionaire Peg

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

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

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

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

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

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


Humble Investors Rock

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

  • Long Investment Horizon

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

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

  • Positive Perspective

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

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

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

  • Buy On Sale

Buffett said,

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

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

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

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


Blue Sky Ahead

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



Emotions Are Not Your Friend

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

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

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

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

Whoa Whoa Whoa Feelings

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

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

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

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

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


Striving for Clarity

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

Famously, Buffett is quoted as saying,

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

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

Emotional Rescue

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


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

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

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

Taming the Limbic System, Maximizing Investment Dollars

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

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

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


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

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

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

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

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

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

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

Hope is not a Strategy

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

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

Consider this little gem:

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

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

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

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

Embrace the Rational Path

Human nature is inherently paradoxical.

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

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