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!

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!