You Are Smarter Than Your Advisor!

1. You Are Smarter Than 90% of Mutual Fund Managers!

2. Index Funds Will Beat Managed Funds 90% of the Time.

3. This Means that You Have a 90% Chance of Beating Every Financial Advisor in the World!

If this is true, why do we spend so much time and money on the search for the alpha of mutual funds for our investments? Because we all want to be Warren Buffets? Or because we are too scared to imagine going it alone?

I think the average Canadian investor feels the stock market is far too complicated for mere mortals to understand. To imagine we could do better on our own in the Bay or Wall Street Jungles is simply preposterous!

What Does The Millionaire Teacher Say?

In his financial blog of March 13th, Andrew Hallman,  author of The Millionaire Teacher, reports cashing in $700,000 of individual stocks and reinvesting this cash into index funds. He admits to beating the indexes with his stock picks consistently over the past 10 years, yet his research brought him to this grand decision.

The Enemy of Good is Better

"No matter what happens, going forward, my investments will be in the 90th percentile, in terms of performance", says Hallman. He goes on to write, "the enemy of the great plan is the perfect plan".

" Reaching for that perfect plan (at least in the world of investing) is like reaching over the edge of a ravine to pluck a pretty flower.  You might fall.  Do it enough times, and you surely will.  I’d rather have 90% of the cliff’s flowers brought to me each morning, rather than trying to collect all of them by venturing precariously over a railing".

I can't wait to read his book The Millionaire Teacher.

Meet "Harry"

Hallman reports on a retired friend, who in 2008, fired his financial advisor and opened an account of Index ETF's which he says make the actively managed mutual funds "look silly". "Harry", not his real name, keeps 40% of his portfolio in bonds, rebalances his portfolio occasionally (three times in a couple of years or so), doesn't bother watching the thing daily and owned the following as of October, 2010: XDV, XSB, XBB, XIN, XSP, and XIC. See details here.

 "Harry's Rules" as listed by Hallman include:

1. Keep costs and taxes low by purchasing index or exchange traded funds.

2. Diversify your eggs across a variety of baskets instead of gambling on individual stocks or sectors--and hold, don't trade.

3. Be greedy when others are fearful and fearful when others are greedy. Stick to your set portfolio allocation no matter how smart everyone else appears.

"I'm Smart Enough to Understand the Odds"

Hallman writes that 70% of his personal investments lie in index funds. He says: " I’ve never bought a lottery ticket in my life, and I haven’t wasted so much as a dime at a casino, yet I have immensely enjoyed giving the indexes a beating over the past decade.  That said, I keep track of every dollar I have invested.  And if the market indexes catch me, I’m going to sell the stocks that I own, and run with an investment portfolio that is 100% indexes. I may not be a genius, but I’m smart enough to understand odds".

See Andrew Hallman's Blog and Complete Story HERE.

What Would Warren Buffet Say

As usual, I must run this information through my Buffet-O-Matic Screener. And I find that Hallman isn't the only alpha investor touting index funds. Guru Warren Buffet in his 2004 letter to Berkshire Hathaway Investors writes:

"Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous."

So Now What...Back to the Couch Potatoe?

Yawn. I've been trying to find a nice sleepy-ish portfolio that covers the indexes in a way in which would be unique and interesting and manageable to some degree in spite of all the advice to "buy and forget".

I like looking at the markets. I like trading. It's fun. So forgive me for wanting to be part of the action.

I love watching the news and tying it to the markets, making predictions and watching the reveals, plotting charts and finding winners, then eating crow or basking in the glow of my screen at the end of the day.

I'm not a day trader. But I check my portfolio every evening to see the proportion of green to red and fret for a bit, or pay myself on the back. It's fun!

Argh! is what I say to Hallman and Buffett

...and guru x, y and z... knowing they are right, but wondering where to draw the risk/return line for myself.

I admit that the majority of my investments lies in unmanaged index funds through ING Direct and TD.

And I admit to having a small graveyard of dead penny-once-pound stocks haunting my broker account from the early 2000 tech bubble that for some reason won't go away no matter how many times I zero out the book value!

So what is the perfect balance for me? What will keep me interested in the markets, involved in the day to day bells and chimes, yet invested well enough to ensure a healthy and happy retirement in 20 years or so?

Answers anyone?

It All Boils Down to Diversification

Just as I diversify my index investments between markets, I think I'll diversify my time between investment styles. I need 80% low stress, 10% moderate stress and 10% roller coaster. Don't we all?

My Diversified Investment Style Portfolio

Low Stress (80%): Index Investing:

                ING Streetwise Funds (automatic monthly contributions)
                TD e-series funds (Can Index, US DJ Index, International Index--I have enough bond exposure through ING)

Mod Stress (10%)
                 My ETF portfolio of sector related indexes to watch regularly incorporating buy/sell signal analysis, guru intervention (my doityourselfinvesting.com friends) and other sources of information such as world events and sector news.

Rollercoaster Stress (10%)
                My Canadian Venture Exchange! I enjoy these little prospector gems where news and technical analysis combine to thrill or chill those who dare to enter.

Find your own balance, but be smart--smarter than 90% of the Financial Gurus out there and invest in the indexes!

Happy Investing!

One side of Couch Potatoe and A Barrel of Crude to Go Please!

I have a connundrum. I am perplexed at what style of trader I should be. Although I enjoy the thrill of the daily chase in the markets and individual stocks, I am not sure my personality can handle the ups and downs, anxiety and panic, and momentary thrills cut short by the sudden gap downs in stocks I was certain would be winners (ie. RGEN).

Too Much Noise!

I have been listening to too much noise. "I have an awesome mutual fund, check it out." "My ETF investments weathered through 2009." "My grandfather made his fortune in penny stocks." "Diversify, don't put your eggs in one basket." What does all of this mean? Do I diversify and invest in everything?

Then I'll just order one couch potatoe portfolio to go please, with a side of gold bars and a barrel of crude!

I have some money. I want to invest it. It is currently burning a hole in my trading account. I bought some stuff. The stuff hasn't moved. I made some profits on a couple of small tech plays and one mining venture. Then I bought some ING mutual funds, some index ETF's and although I have green on my screen, there are small bits of red that bug me and plague my mind with fear of failure.

I want to automate my investing to a comfortable level of regular contributions to some basic things like mutual funds and broad market ETF's. But I also want to enjoy the ride of trends, the thrill of the venture pops and the occasional volatile day trade. Am I crazy?

Is this bipolar psychotic trading?

What I've decided to do is hedge my bets. I picked some funds with 4 to 5 star performance over three years to focus one half of my investments on a regular basis with a 33% bonds, 33% Canadian Equities, and 33% Other (mostly US Equities) split. Of the remaining 50% of my savings, I decided to allow the market and a couple of my favorite gurus drive these decisions. So half of my investing is a no-brainer process that I will try to rebalance semi annually and use cost averaging to help weather any falls in the market.

The other 50% is the fun part. I can't seem to decide if the penny stock world, the sector trend investing, or value investing is the way for me to go. I have a moderate to high risk tolerance for this 50% that I would otherwise probably spend on stupidities anyhow. So I am going to create a program for myself. Not a computer program, but a set of regular activities, analysis and predefined reactions to execute my plan.

Pick Some Pros to Do The Work

I've nailed my Gurus to 3: Tony Turner, whose club I have decided to join; Ron of the Doityourselfinvesting.com duo, whose newsletter/club I recently subscribed to; and The Motley Fools who are just plain cool and whom I want to invite to dinner!

I'd love to get in on all those penny stock millions, but honestly, I don't have time to sit and watch my screen on intraday charts, sweat bullets or cry in my soup. Kudos to those warriors with the constitution for that, but I will pass.

So, feeling confident with my decisions and plan, ING will run my RRSP and TFSA with their Streetwise Funds; I have some small bits of this and that over at TD in the e-series funds for my youngest daughter's college days which are still a far way off; and as for the rest--it's time to get cracking and figure out what to buy and when.

The Fun Part: shopping!

Stop Jumping In and Out of Success!

Why jump in and out of stocks at the wrong time and lose money? Whether you are making investment decisions based on your own analysis or using the expertise of others to guide and direct your investments, it's important to examine your past performance to see if your style and plan are actually working. Many financial "advisors" suggest buying and selling various managed funds, while other "experts" tout the snatch and sell on the run method. A common complaint in messages boards and blogs across the net is that of "missing out" on a trend, catching it on the wrong side of a peak or valley, or simply always being one step behind the action--playing the bench instead of enjoying the profits of a trend. Do it yourself investing can be a frustrating path to financial gain if your purchases are disjointed, incoherent or irrational.

Consider An Automated Plan

You've heard this before: set your goals, make a plan, stick to the plan, reassess the plan, rebalance. That's all fine--but it still requires you to do the research, analysis, make the selections and execute them. Financial advisors can do this for you. Fund managers are supposed to this for investors. And there are several online services that provide similar input into your investing activities to take the guesswork out of what to buy, sell, and when.

Single Instrument Investing

There are thousands of mutual funds--either passively managed using indexes, or more actively managed with specific equity allocations--which allow you to invest in a diverse collection of stocks and/or bonds and let your money sit and grow. The problem with many mutual funds is that over 80% of them don't tend to beat the various indexes in which they invest, and often come with significant management fees (MERs) that can chew up 2 to 3% or more of your annual profits. Other companies have designed pure index funds requiring low maintenance and thus lower MERs. ING Direct Canada, for example, offers a selection of Streetwise Funds which aim to replicate Canadian indexes in various proportions of bonds and stocks depending on your investment needs. The company suggests we "invest early, invest often and stay invested", using cost averaging to spread out the cost per unit of the fund and spread the risk of investing over the entire market with low management fees of around 1%.

A variety of exchange traded funds are also available with broad market diversity which serve to expose investors to various markets, various sectors and with optional amounts of bonds and equities, all which can be traded directly on the market like a stock. Some examples of these ETF's which can be purchased individually to replace a diversified mutual fund include these two iShares funds:
XCR: Conservative Core Portfolio Builder seeks to provide a combination of income with the potential for long-term capital growth.
XGR: Growth Core Portfolio Builder seeks to provide long-term capital growth by investing primarily in equity securities and to one or more alternative asset classes, with the balance invested in those that provide exposure to fixed income securities.
Claymore, Horizons and BMO offer similarly diversified ETF's.

Sleepy Portfolio Options

The original Couch Potato Portfolio was designed for investors who want to expend the least amount of energy into their investments by choosing a collection of index mutual or exchange traded funds and rebalancing them from time to time, but at least annually. Find the couch potato portfolio options here.

Memberships in Managed Automated Portfolios

Folio Investing is an American company that offers a portfolio of stocks, ETF's and mutual funds which can be traded in a single transaction. They offer multiple investment strategies based on collections of instruments and even allow you to customize within an strategy if you chose to exclude certain sectors or companies for personal or political reasons. For example, you can elect to delete any companies from a certain group of equities that might be involved in alcohol, tobacco, gambling, weapons, genocide or nuclear power. I really dig their website for its simplicity and attractiveness and functionality. They have a cool questionnaire tool that helps you determine what portfolio to buy based on risk, investment objective, time to retirement and sector interests. Check it out here.

Membership in Self-Directed Do It Yourself Investing Groups

One of my absolute favorite finds of the last few weeks has been doityourselfinvesting.com. The monthly membership service costs $10 at the writing of this blog which gives you a newsletter, regular portfolio updates and any alert notices that you'll need to take action on should urgent buy or sell signals present for equities or ETF's in the core portfolios suggested. They offer 4 portfolios currently: an equities portfolio for the US and one for Canada, and 2 similar ETF portfolios for the Canada and US. They publish their stats, previous holdings, performance and some back issues of newletters which are quite interesting and educational. I was most impressed with their performance during the last flash-crash which far outweighed that of any index fund, most mutual funds and the majority of single ETF's or equities. I highly recommend taking a look here.

Happy Investing!

Disclosure: the author owns shares in ING Streetwise Mutual Funds, is a new member of Do It Yourself Investing, invests in a couch potato portfolio using TD e-series funds, owns shares in XCS - S&P/TSX SmallCap Index Fund and does not own shares of XCR or XGR.

Hooray! for Financial Bloggers!

Search Google for financial advice and you'll navigate through hundreds of sites proclaiming the gospel solution to your investment needs. If you can manage to get to the bottom of this information without having to sign up for endless spam mail or pay through the nose for bulletins and reports, you might come out with a few disjointed tidbits and a whole lot of noise.

Filtering Through The Noise

After spending weeks and weeks bouncing from the large general bodies of information such as the Toronto Stock Market website, TD Canada Trust Investing, The Financial Post and Globe and Mail, I discovered the Financial Blogger.

Financial Bloggers range from the self-taught do-it-yourself-investor to the financial advice professional and everything inbetween: retired CEO's, economics students, stay-at-home mommies and active daytrading techy gurus. And like many internet-based personalities, you might not even know who these people really are huddled behind their computer screens late at night pecking out anals of wisdom and uploading them to cyberworld.

Testing Success

I love to read a Blogger who submits regularly and shows transparency. "Here is what I do. Here is my portfolio. This is what I made. This is what I lost. This is what I did right. See how I screwed up over here."

I want to see the wisdom behind their investments, the reasons for their choices, the analysis they performed, the gut-feeling that moved them, the psychology behind their choices and the results.

Blogs I Like to Read

The Canadian Capitalist Ram Balakrishnan is an Ottawa based software developer with a gradiate degree in Electrical Engineering with over 1000 posts and 1 million subscribers.

The Globe's Market Blog David Berman has been writing about business and investing since 1995. He began his career at Canadian Business magazine, where he wrote full-length features on a range of topics, from goose slaughterers to broadcasters. Later, he moved to MoneySense magazine, where his emphasis turned to investing. More recently, he worked at the Financial Post as an investing writer and daily columnist. He has a bachelor of arts degree from the University of Toronto and studied journalism at Ryerson University.

The Post's Wealthy Boomer Jonathan Chevreau joined the Financial Post in 1993 and has been the personal finance columnist since 1996. He has authored or coauthored eight financial books, including The Wealthy Boomer and a financial novel, Findependence Day. His column runs in the Post on Saturdays and Wednesdays and he blogs most days at wealthyboomer.ca.

Canadian Business' Larry MacDonald Larry MacDonald is a former economist who now manages his own portfolio and writes on investment topics. He is the author of several business books, including corporate biographies of Nortel and Bombardier.

The Canadian Couch Potatoe Dan Bortolotti is a journalist who has written about personal finance for many Canadian magazines, including MoneySense, Financial Post, More, Chatelaine and Today’s Parent.

Invest in the Markets "I work full time, provide for my family, and don’t have a lot of spare time… I was taught at an early age to invest in mutual funds, GICs, Government Savings Bonds, and other forms of “safe” investments. 20 years later, my interest in the markets has developed through education, trial and error, reading and research, and even a couple years as an investment advisor for one of Canada’s major banks."

Money Smarts Blog Mike Holman has worked in the Canadian financial industry for almost two decades.

Million Dollar Journey "Clearly written, accurate, informative, not over-selling an idea, just telling you what you need to know. You shouldn’t take this as comprehensive advice, just as information on high interest rate accounts...this is one personal finance blog that is worthwhile for the average person…"

Beating the Index Mich, the author, works in software, lives in Montreal, has a young family, and is a do-it-yourself-investor with the goal to retire by 64.

Canadian Financial DIY The author describes himself as a late-50s Canadian who has been managing own investments for about fifteen years in taxable accounts. RRSPs, RESPs, LIRAs, trust accounts. Personal finance blogger since early 2007. Former career in government and corporations with a long-ago MBA.

The Earning Curve "Sharing the experiences, knowledge, and challenges of a beginning Canadian investor. My goal is to become educated and effective at maintaining healthy personal finance habits, with a focus on eventual wealth building. The goal of this page is to offer up my investing ideas, issues, and my portfolio, and allow the reader to learn from them, evaluate them, and hopefully discuss them."


Other Investor Resources Online

Business Week   The online version of the magazine, provides a porwerful stock screener.

Globeinvestor   Stocks, investing and financial news from a Canadian perspective.

MoneySense   Canadian all-around personal finance web site.

Ratio Capital   Professional Portfolio Management for Individual and Institutional Investors.

StockCharts   Charts, tools and technical analysis education.

Happy Investing!

Playing The Volatility Game

Investing strategies are as diverse as the people who use them. From the long-term investors who annually buy a handful of sleepy blue chip stocks, bonds or managed funds to the adrenaline junky active day trader who plays the minute swings in market volatility, there is something for just about anyone with a few bucks to throw at the market.

My perception of a typical daytrader comes from movies like Wall Street and news clips from 1999 where images of high rolling super-traders driving Ferrari's, flying in private jets and living the American Dream ran rampant. In reality, most day or "active" traders sit buried at their desk in front of 2 or more screens running chart analyses, checking intraday technical events and watching the news all while managing their tweets, facebook entries and video games for the entire trading day pre- to post-market.

Swing traders are defined as semi-active traders who hold positions from a few days to a few weeks and ride a trend. This, to me, is the kinder, gentler form of active trading as it allows people like me who work day jobs to participate in the market in the evenings and weekends using predetermined limits and stops to buy and sell short term positions. A friend of mine refers to this kind of trading as "stealth" trading, since we seem to be invisible during market hours with our presence only felt in the automatic stops and starts we factor into our trades.

Stocks Defined as Instruments

I find it funny that certain technical programs refer to stocks as instruments. But I get the analogy. A stock is an instrument we use to gain exposure to (or play) world financial markets and hopefully reap some rewards in the process. But as with any instrument, the output is only as good as the input. A violin sounds unrecognizable in the hands of a hack. But a highly trained musician makes beautiful music.

Matching the instrument to the player is key. A well trained guitarist does not automatically excel at playing the saxophone. A sleepy portfolio annual investor does not necessarily make a successful swing trader.

Pick Your Poison

So what instrument do you choose? Ah, the one big question. We can't really expect to day-trade sideways trading sleeping giants like Coca Cola or the current version of Microsoft with any big gains over the short term unless you have thousands of dollars to invest in order to see a portion of a percentage point in profit. And we can't be purchasing options and futures and sit on them expecting any kinds of long term gain by ignoring the market and expecting growth. That would be like buying a treadmill and hoping you get fit by simply owning it.

If you have time to sit in front of multiple computer screens, study and analyze charts, read news feeds and trade on a moment's notice, perhaps active trading is for you. However, if you don't have access to this kind of study time, or the psychological constitution that goes along with this riskier kind of style, swing trading or longer term investing is more likely the way to go.

I've heard some day traders boast about not caring what the company does, how good the product is or what the industry of that company is up to. They don't scan the news since they are only interested in the technicals and charts. They trade the probability of rises and falls in instrument prices based on purely the personality of a stock, future, option or index and specific indicators that signal a buy or sell. Other traders factor in wider market trends and probabilities based on world events, financial milestones, company characteristics and the environmental impact on the market. Still others choose to incorporate a combination of multiple factors to determine their buy and sell signals for a certain type of investment and narrow their collection of instruments down from the entire orchestra of market offerings to a smaller ensemble of selections.

Volatility is the key to active trading. Enter, rise, exit....and fast--over several days, hours, or even minutes. Some stocks bounce up and down with great swings each day--highly volatile. Others trek along at a barely audible pace pulling in or letting go mere fractions of a percentage point in any given day.

Cashing in on Volatility

So if you don't want to spend weeks and months studying individual stock charts for consistent patterns of volatility, how about trading trend volatility--like the cost of gold, oil, natural gas, silver, and even the VIX (Chicago Board of Exchange Volatility Index) itself. Having chosen to add a bit of spice and adrenaline to your investing style, there are a few ways to play some of these bouncy market favorites without the confusion or chaos of entering into options and futures and all the rather complicated instruments available in that particular concert hall.

ETF's are now offered by various companies that allow you to win when the market falls, or invest in futures and even the VIX quite easily. An ETF is a basket of stocks, futures, covered calls, or whatever an ETF company can imagine to include. Learn more about ETF's here. Exchange-traded fund companies listing ETF's on the Canadian market include Horizons, Claymore, iShares and BMO.

For example, Horizons offers some ETF's that offer a bull and bear version for various things like gold, oil, natural gas and even the VIX. You can purchase a bear ETF and invest in dropping gold prices, or the bull counter part if you feel gold is on the rise. If you want to invest in crude oil futures--such as during the current oil unrest in the middle east, Horizons has a crude oil bull and the inverse bear ETF in their repetoire.

I find it somewhat less confusing to peruse the various ETF's available than to navigate through loads of managed mutual funds or try to enter into the options, futures and stock-shorting game. The advantages to ETF's are many but for me, the fact that I can trade them like stocks and the MER's are typical much lower than mutual funds, makes them attractive. Add to the mix these inverse ETF's and new plays on volatility, and you don't have to go very far to find your little band of players.

Personally, I have been enjoying my plays with HOU and am no longer scared of an advancing bear market with all of the inverse and bull ETF's available for me to play with.

Happy Trading!

Market Top or Mid Market Madness?

If you fell asleep in the summer of 2000 and woke up this morning, you wouldn't think much has changed from a financial point of view. Perhaps the Canadian dollar's a whole lot better, perhaps the world markets are a bit misaligned by comparison. There may be some fancier websites--and what's this Google thing?...where is AltaVista? What happened to Ford, Microsoft and Yahoo!? Hey--look at Apple! But all in all, the market overall produced little RipVanWinkle effect from then to now. Bulls seem to be stomping uphill and the bears are off hibernating--or are they?

What Goes Up Eventually Goes Back Up

My first exposure to market investing was in 1999. The internet bubble was rising high and everyone I knew jumped into the day trading biz. I was enamored with the web, having riden the wave of affiliate sales before the majority of home-office net-hounds jumped into the game. By the time I joined the stock trading hype and signed up with an online broker, the markets had already begun to crash and my few purchases amounted to penny stocks, some of which still lie in tiny graves in my brokerage account as shadows of the giants they once were. I traded in my affiliate status with Linkshare for an application to university and moved my focus from the internet to the library for the next few years.

Enter 2004. Having stockpiled student loan debt amounting to well over 80,000, thoughts of investing, let alone saving money were abandonned for the more pressing issues of paying down debt, aquiring a mortgage, and a new profession. Saving money was at the bottom of the to-do list.

Then one day, out of the blue, I turned 45. Hellish and horrid day that was, not because I felt old, nor because I looked old, but because I suddenly realized that in 20 rather short years I was supposed to be able to retire. And for the first time in my rather penny-poor life, it dawned on me that I had better make a plan.

Missed the Bottom--Again?

And enter 2011. I missed investing in the last market bottom--not for lack of awareness. My colleagues were all lamenting their shrinking portfolios. My parents weren't certain retirement was in the near future after all. Companies that were once giants were suddenly exposed for the lack of value their stocks actually held--yet again. I watched as the market climbed and then paid off the last of my high interest debt this past fall. Now what? Do I enter and invest? Do I sit on cash? Do I wait for another bottom that won't come or invest in a raging bull that's about to crash?

Are We Topping Out or Just Getting Rolling?

In my search for an answer there appear to be four somewhat contrary schools of thought on this Winter 2011 Market:

1. We are beginning a Secular Bull Market that will go on for years to come with a few dips and alot of highs as the world money mongers try to avoid a deep dark depression in a wounded and post-recession world economy.

2. We are in the middle of a Secular Bear Market that actually started back in January 2000 with a few highs on the way down, down, down.

3. We are reaching the top of the market and it will soon glide slowly down to the Spring 2009 low.

4. We are half way up a bull cycle and other than a few corrections here and there, the next big swing won't occur until 2014.

And this from the "experts"?

Why is it that no one can predict the market? -- Because no one can predict the future with any great certainty.

One can speculate based on the past and add a few variables here and there for spice and flavor, but in the end, human sentiment drives the market stronger than news and value--which would intuitively have us lean toward the "past repeats itself" model of human nature as a more reliable predictor of what's to come.

Why is Market Direction Such a Mystery?

Market Cycle Patterns
According to Walter Bressert in a February, 2011 article on newmonster.org, the order of the universe is cyclical and markets over time do in fact move in similar cycles. He notes a 4 year cycle in the US stock market that dates back to 1789. It averages 49 months from low to low and 36 months from high to high, leaning to the right in bull markets and to the left in bear markets.


Market Top or Minor Pullback?
In a February 25th, 2011 article at seekingalpha.com, Cam Hui feels that the current market weakness is a minor pullback and correction to be bought rather than an intermediate term top. Although Mr. Hui feels the top will develop later in the year, his technical indicators using a inflation-deflation timer model remain bullish and his secondary indicators are still trending toward "risk-on" trading. Hui believes that current market weakness is based on the effect of fears of Libyan oil flow barriers on a still fragile global economy.


Secular Bull or Bear?
Secular markets are basically described as those that "go on forever". According to a February 27th, 2011 article by USA Today reported on pittsburghlive.com, there are two types of bull markets--one that lasts a couple of years and mega-bull markets that go on for years. The current bull market which reportedly started in March 2009 will soon be 2 years old--the average lifespan of a cyclical short term bull market. The article quotes Tim Hayes of Ned Davis Research who believes that gains of late have occurred within the context of an ongoing long-term bear market that began in January 2000 when overpriced tech stocks crashed.

Thirty-four cyclical bull markets have occurred since 1900 with average gains of 86 percent. Four secular bull markets have occurred in the last 110 years that have lasted from 6 to 24 years. There have been 2 secular bear markets including 16 years between 1966 through 1989. According to Laszlo Birinyi, bull markets have 4 phases, including initial huge gains off the bottom, price consolidation, acceptance that the market will continue to rise, and finally exuberance that the gains will never end--which is when the top is reached and the market crashes. He sees the bull market in consolidation phase and forecasts a major uptrend ending in the middle of 2014.

Warning Shots for Market Correction?
Overextended Indexes: Sy Harding's February 25th, 2011 article at businessinsider.com points out global market corrections that occured in China, Brazil, India and Hong Kong in late 2010 due to rising inflation. As the North American market doesn't have an inflationary issue currently, markets are grinding along in the bull herd. The little spike from Libya's oil scare didn't make more than a blip on the Dow and SP500's long term charts. He considers this simply a warning shot. He feels that major market indexes are over extended above long-term 200 day moving averages and will take a 10 - 12% correction to retest support.

Oil Trading Over $96: Harding points out that the 2003-2007 bull market ended in October, 2007, when oil reached $96 a barrel and the recession began three months later. Oil traded around $97 at the end of last week.

Applications for mortgages and home sales at a 15 year low.

GDP for US came in lower at 2.8% than the expect 3.2%.


What Does This Mean for the New Investor

For me, I think I'll start researching ETF bears and how to short stocks over at my new discount brokerage, then consider the possibility of hanging out for a couple of weeks on the bench.

Or maybe I'll just keep buying Mr. Buffet! BRK.B:US

Who is Warren Buffet?

How in the heck am I going to ever retire? OK, so I'm in my 40's, big deal, who thinks about this stuff at my age anyhow? I come from a generation of spenders, borrowers, aquirers and deferrers. Saving money is for old people. RRSP's and TFSA's are something of a mystery. And all I know about the stock market is that it's down on Bay Street beside some of my favorite restaurants.

After spending the first 4 decades of my life investing in my education, kids, a sizeable mortgage and finally a medical practice after what seems like an eternity of university training, I realize that I only have 20 years left to aquire enough cash to retire comfortably. Although that may seem like ample time to some, I'm still facing the expense of educating and marrying off three daughters, paying off my sizeable mortgage and hopefully contributing to the bottom line of a few exotic airlines, hotel chains and eco-travel companies along the way. And did I mention I'm a single mom?

How Much Money Do I Really Need to Retire?
I'm perplexed by this dilemma. Apparantly, according to the TMX retirement calculator, in order to accumulate 35 years of retirement income, which assumes I will retire at 65 and live to 100, I will need to save 30% of my income annually from now. Impossible. First of all, I really don't see living to 100 as fun. Secondly, I simply can't save that kind of money. My bottom line doesn't seem to bounce that way. 42% of my annual net income is gobbled up by Mr. TaxMan. And trust me, I've looked at multiple ways to decrease that rather hefty contribution to the national social support scene here in Canada. Of the remaining 56%, I have about 10% which I would consider "extra"--meaning I can choose to spend it on various assorted stupidities, take a trip, pay down my hefty mortgage, update my car, or SAVE it.

So after calculating how to pay down my Scotiabank mortgage without being dinged with a "fee" or payback fine, I'm left with a small but manageable amount of dough to work with in my nest egg. And it's just not enough to get me anywhere just yet. It seems I really won't be able to truly start accumulating retirement savings until the mortgage is paid off and that leaves only the last decade of my working life to accomplish this.

Am I doomed to live a homeless retirement eating cat food and pushing a shopping cart along Bay Street? Or is there some way I can take the financial district elevators up a notch from street level?

Who Is Warren Buffet?

Enter google search "how to retire wealthy" . Once I sorted through the hundreds of ads for get-rich-quick schemes from penny stock tips to real estate scams and entered the lower level of google's less ad-laden content, one name kept popping up: Warren Buffet. An 80 year old guy who's lived through 5 wars, nearly every major stock market swing this past century, and is worth somewhere between 1 and 5 gazillion dollars.

After spending a few moments daydreaming about becoming his long-lost great-niece-in-law, I started looking at the man behind the fortune and found myself in very good company. It seems Mr. Buffet has been studied in more depth than the Amazon jungle and with more interest than the planet Mars. This legendary investor, "oracle of Omaha", has done everything from selling chewing gum door to door as a kid to buying up large corporations for his Berkshire Hathaway empire in a single gulp. He's currently the second richest man in the world next to Bill Gates having left the number one position in 2008 after donating billions of dollars to charity.

Currently worth an estimated 67 billion dollars, Mr. Buffet reportedly pulls a meagre 100,000 a year salary from his huge financial locomotive of a business.What?! How can that be? Well it seems that Mr. Buffet has been personally investing in some healthy dividend stocks throughout his life which apparantly net him somewhere in the area of 45 million bucks a year in dividends. Nice. Imagine the personal income tax he'd pay if he lived in Canada--even with the tax breaks on dividend income.

The Buffet "buffet"

So what philosphical pearls can one gleam from Mr. Buffet. Surely a man with his breadth and depth of market knowledge can leave me with a few ideas on how to turn cat food retirement plans into a decent strip loin!


So I ask, WWBD: "What Would Buffet Do?"Google search results: a 5 page article in Sydney Australia's Morning Herald written in February, 2010, What Would Warren Buffet Do, presents a 5 step approach to aquiring wealth in today's market.

1. Dismiss convential notions of blue chip stocks. Blue chip companies don't tend to deliver returns on equity. According to the article, Buffet tends to "buy companies with little or no debt and high rates of return on equity driven by a sustainable competitive advantage that allows them to charge more without affecting sales adversely".

2. Invest in companies with good growth prospects. "You need to pay below intrinsic value to give yourself a margin of safety and only buy businesses whose intrinsic value is rising over time".

3. Diversify--don't put all your eggs in the same basket. "If you pick a quality, diversified portfolio with a spread of companies across different industries and sizes, it boosts your chances of long-term success"

4. Smaller companies may leave more room to grow. "Small, well-managed companies with products and services that are in demand have a higher growth profile than larger companies. The trick is to assess the sustainability of the company's earnings with a steely eye and avoid being carried away by hype about blue sky and new paradigms".

In 10 Things I’ve Learned From Warren Buffet , by "John" a blogger at cashmoneylife.com, a list of buffetisms are offered for our consideration which include:

1 – “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”

2 – “Our favorite holding period is forever.”

3 – “Never Pay Retail”

4 – “Know When to Cut Your Losses”

5 – “If a business does well, the stock eventually follows.”

6 – “Wide diversification is only required when investors do not understand what they are doing.”

7 – “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

8 – “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

9 – “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

10 – “Risk comes from not knowing what you’re doing.”

Alright, so what is Warren Buffet investing in these days? Other than gobbling up companies for his whiz-kid Berkshire Hathaway and spouting 80 years worth of catch-phrases at us through his media followers, what does he hold in his private portfolio? According to George Traganidas of ThePracticalWay.com,

"These are your grandfather’s and great-grandfather’s stocks. Most of the equities Buffett personally invests in are large, recognizable multinational names representing basic and long-standing business categories like banks, health care, consumable goods, food, and retail. These are stocks with very wide moats, making it difficult to compete against them, and are, therefore, a favorite of Berkshire’s financier."

"As with his recent–and largest, acquisition of a railroad, Buffett continues to make an all-in wager on America with his private holdings."

Back to Bay Street
So what does a Canadian with no capital behind her and no war experience do to start eeking out a simple retirement plan based on the experience of Buffet and his contemporaries? Well, I can either throw my money at a financial adviser and hope he beats the Index with his choices, buy some Berkshire Hathaway Stock, contribute to a simple Index fund and watch it bounce around without my input, invest in the Couch Potato Philosophy and pick 4 ETF's to hold forever, or I can up the ante, add some personal input, get off the couch and swim the sharks.

I choose the shark swim understanding that I may need some stitches along the way!

My first purchase? I think I'll buy me some Buffet! BRK.B:US

Stay tuned!