Saturday, September 19, 2009

The 5 W's (plus 'How') in Investing

A recent story in Canada's Globe and Mail, by Tom Bradley, President of Steadyhand Investment Funds prompted this blogging.

Mr. Bradley's story contends that most mutual fund investors are far too complacent when there has been a change of managerial talent at the head of a fund (or a merger into another fund), as this may produce a radical change in investment style - a style which perhaps does not fit into your risk profile or asset allocation plans.

"Sometimes the investment approach has a history and is more enduring than any one individual. At Burgundy and Beutel Goodman for instance, the investment teams are fine-tuned from time to time, but the approach never changes. The “who” is important, but not as much as the “how.”

So every change is different and they don't all necessitate the client taking action. But like my old institutional clients did when there was a significant shift in investment philosophy, people or business practices, you should at least put the fund on a watch list. In a well-constructed portfolio that holds between five to eight funds, every slot has a purpose. If someone else is making changes to it, you need to pay attention.

Mr. Bradley's comment covers a couple of the W5 (& "How") questions you should ask when allocating to your portfolio. What is left unsaid, is the larger question of "Why?"

I would ask "why" invest in mutual funds today? If you don't know the difference between MER and REM and don't know the pain of one of them, and the beauty of the other, then you shouldn't be investing in mutual funds (other than index funds). What you should be doing is setting up a risk profile, a broad asset allocation strategy, then seeking the lowest cost method to accomplish that task (hint - see MER).

I have written many times on couch potato portfolios, and the rationale for, and outperformance of, them remains as strong as ever. For most equity investors, an EFT or index portfolio with equal measures of:

  1. Their home country index;

  2. Emerging market exposure;

  3. US index;

  4. International index; and

  5. One speciality index (here's where you get to "freestyle") ....

should be sufficient to match or better the market in the long haul. Control of risk, and costs, as always, remain key. A low cost, low turnover, portfolio constructed per above should ably help with both criteria.

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The Confused Capitalist

Thursday, July 09, 2009

US Dollar Strength - DO NOT be complacent

As I have written several times in the past few years, it seems obvious that the US dollar is poised to continue its long-term descent that started a half-dozen years ago.

A presentation I watched today, put on by the IAAO, reminded me of this once again - it seems inevitable the currency will continue it's decline, given the amount of debt the US government is currently taking on.

Time immemorial has shown that the temptation for a government to inflate it's way out of external-owed debt - denominated in national currency - is too tempting for most governments.

Expect the US to follow the same path - be wise and move some of your assets out of USD denominated investments, or at least into hard assets that historically have shown some resistance to "inflation-depreciation". Think real estate, oil, gold, minerals - generally, "hard assets". The first path is usually better (movement out of the currency entirely), but the second path allows you to hedge your bets, should the currency not decline as (much as) expected.

Many commentators have commented on the fact that Treasury bills are currently well oversubscribed, meaning there is currently much more demand than available bonds. They perceive this as an indication of health of the US finances, and foreign appetite for such debt. This is a short term trap, based upon investors seeking the most liquid assets during times of turmoil. Neither will last - diversify now.

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Saturday, June 27, 2009

Proposed securitization rules

I see that the administration has come to some roughly similar conclusions as me, in regards to reducing incentives to willy-nilly securitize crappy loans. Have they achieved the appropriate balance between efficiency of capital, and systemic risk reduction and system redundancy?

According to reports, the administration intends to reduce the vile habit of bankers throwing crappy loans through to unsuspecting investors (imagine, investors EXPECTING banks to have performed some sort of reasonable underwriting in the first place).

It appears that the administration intends to force the underwriting firm to hold at least 5% of the securitized loans through to completion, and further disallow firms to immediately book securitization profits. Instead, they would book the profits as the loans matured and would have that securitization income reduced if the loans performed badly due to weak underwriting standards.

While this is not quite as good as the 15-25% loan book hold-back I felt would be prudent, this is certainly a large step forward.

The 5% hold-back still amounts to 20 to 1 leverage in effect, atop the normal leverage that banks enjoy. Given banks particularly important place in our economy, I am not sure that is prudent enough.

While this is not quite as good as the minimum 15-25% hold-back, it is a large step forward from existing standards - yet I am still left wondering whether this is not a half measure.

I'm therefore hopeful that FASB rules will further help to dampen the capital leveraging effect through some proposed rules, yet to be issued.

Now, of course, reforming executive pay remains a important topic which needs serious attention in order to also reduce further systemic risk.

This is something I have written about previously, and that my internet "colleague", Rick Konrad, at Value Discipline, is writing about in greater detail.

I encourage you to visit his blog, read some of his posts (1, 2, 3) on the matter, and to add your voice by sending your elected official a quick email (find your congressperson here, find your senator here) encouraging such reform.

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The Confused Capitalist

Monday, June 22, 2009

Thinking ahead - planning your investment game

The last time I wrote, it seemed like the global economy generally, and the American economy in particular, was in for a serious bout of greacession.

However, the coordinated global attack on the economic slowdown and banking sector crisis appears to have had some effect with, most importantly of all, confidence being restored. That's not to say there won't be some washouts in the road ahead, but most commentators seem to agree that "The Great Depression, Redux" just won't happen at this time. Opinions on the severity and remaining length of the recession in front of us, and the inflation to follow (or not!) now seems to be the subject of debate, rather than the collapse of the economic system itself.

With all that in mind (or not) and remembering that the most important aspect of investment is the right temperament, here is an investment clock that can suggest various investment timing to be had in the cycle in front of us. Whereas it can often be quite difficult to tell exactly where in the cycle we are, at this time it is unusually clear, at least to the extent of knowing that we aren't in the boom phase, nor have we really reached recovery yet. We appear to be, undeniably, in the recession phase at this time.

Therefore, if you like sector rotation and feel you can use it to your advantage, then this Merrill Lynch clock should be very handy at this time.

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Tuesday, February 24, 2009

Officially, we are looking at GREACESSION

Well, it now seems clearer and clearer that this economic period going forward is going to be very tough sledding for some time.

It might be a year or two more, it might be four or even six.

What it isn't, it is becoming clearer and clearer, is a garden variety recession, which usually lasts two to six quarters of consecutive GDP decline.

Yet, to reasonable people, all signs and current actions do not point to a "Great" Depression. The hungry 30's were characterized by unemployment in the very high teens, possibly into the mid-20s, accompanied by significant deflation. And it lasted nearly ten years. Alternative "great" depressions in other eras have featured also high unemployment, and hyper-inflation. And they also lasted for a long period. Like what Zimbabwe has been suffering through since 2000.

No, what we appear to be in for here, is a "Great Recession", a "Greacession", if you will. A period of moderate GDP decline for several years, likely accompanied by moderate deflation. Unemployment will likely settle in the range of 10-14%, and stay there for several years.

Yes, the Confused Capitalist has officially recognized that the Greacession appears the most likely outcome of current circumstances.


Remember, you heard it here first ... "Greacession"


The Confused Capitalist