Category: Investing

Recently I got an email from Ian who is a reader of the blog. One of the questions he asked about was whether he would be better off buying BMO (Bank of Montreal) on a Canadian exchange with Cdn$ or a US stock exchange using US$. He has cash in US$ and wants to buy the shares in an RRSP.

This brings up two interesting points:

1) When you buy stock in a company it doesn’t matter which exchange or currency you buy it in.

If you buy shares of a company on different exchanges in different currencies you are still buying the same portion of that company so it doesn’t matter where you buy it. The difference in price is the currency exchange rate.

As an example if we consider two investors, investor A and B both have $10,000 Cdn$ in cash. Investor A buys $10,000 of BMO on the Toronto stock exchange and investor B converts his $10,000 (with no fee) to US$ and then buys BMO on the NYSE. After four weeks they sell their positions and investor B converts his US$ proceeds back to Cdn$ (with no fees). Which investor does better?

I’ll use data from Jan 1 for the buy. Stock prices are from yahoo financial and exchange rates are from Bank of Canada site.

Buy side

On Jan 3, 2007 Investor A buys 144.3 shares of BMO.to at $69.29 Cdn$ and Investor B buys 144.5 shares of BMO (NYSE) at $59.60 US$.

Sell Side

On Nov 10, 2007 Investor A sells his shares at $60.22 Cdn$ to get $8691.00 Cdn$ and Investor B sells at $59.60 US$ to get $8636 Cdn$. The exchange rate is one Cdn$ = 0.9898 US$ (all values are at noon EST).

In my example investor B does slightly better however that is due to the fact that my stock prices are closing prices on Jan 3 whereas the exchange rate is at noon. The point is that the fact that the currency exchange rate had a huge swing this year did not affect the choice of buying the stock in either currency.

2) You can’t have US$ cash in a brokerage RRSP.

I’m really hoping this post gets outdated soon when all the brokerages start allowing US$ in their accounts but until then….

If you have US$ and you want to contribute to your RRSP then you will have to convert it to Cdn$ and pay an exchange fee. If you want to buy US$ securities with that money in the RRSP then you have to convert it to US$ once again (and pay another fee) to buy the stock. Unfortunately there is not much you can do about the currency exchange fees but in Ian’s case he should convert the US$ to Cdn$ and just buy the Canadian version of BMO in his RRSP.

I recently had a funny experience. In late October, financial stocks took another dive (at one point my BMO and NA were down about 10% from my average purchase price). The yield kept climbing, and I just couldn’t believe Canadian banks were going to go out of business, so I was tempted to buy more. Speaking with a friend, I quickly talked myself out of this (I’m not working right now, so the purchase would have come from a LOC, which probably isn’t the smartest idea).

Fast forward a week, and the stocks have almost gone back up to my average purchase cost (NA was $50.50 on October 23rd, and its $54.20 and climbing as I write this on Oct. 31st). I’m looking back, seeing that my feeling was correct, and that I missed out on some rapid increases over 8 days.

So next time, I’ll trust my gut and buy? No I won’t.

Humans has a remarkable pattern matching ability that helps us figure out what’s happening in our environment, and predict what will happen in the future. In many areas this is very helpful, but in a few it can cause weird behaviours or hurt us. Optical illusions play on our pattern matching to confuse us. Gambling preys on this pattern matching where we think we’ve figured out what’s going to happen (and trust the feeling as we lose all our money).

If NA had been guaranteed to make a speedy recovery and shoot up in value, institutions and other investors would have been buying it while it was dropping and would have never let it go as low as it did (they wouldn’t leave money on the table). There was some risk that it would drop further, or it would have stayed at its lower value for an extended period. Its price reflected all these possible future outcomes.

I was interested in my own reaction when it went up, because first I thought “I should have bought”, then I thought “I should buy in a similar situtation in the future (since I was right this time)”, then I thought “wait a second, this is the *EXACT* feeling that gets people into trouble!”.

Unpredictable things are unpredictable. Once you start feeling that you have an intuitive instinct about what’s going to happen (or worse, some arcane technical analysis formula that will predict it) you’re turning into a dangerous gambler. Beware that siren’s call, as it could lead you to your doom.

Now that I’m living off of savings, I expect at some point I’m going to have to dip into my line of credit. Since its always better for debt to be deductible (save you money on your taxes), rather than non-deductible, my plan is to start borrowing money to pay for my condo expenses.

How this will work is, I pay $126 every week for the mortgage payment (principal and interest) and $500 a month for condo fees. On the day the expense are paid, I’ll transfer an equivalent amount from my line of credit into my checking account (where these expense are drawn from).

This will put about $1000 / month (plus interest) on my LOC, while I should be able to live off of the $1300 / month that my condo is bringing in in income. I have a few thousand in savings which I’ll use for any unexpected expenses. Once I start my PhD (or bring in some coin from contract work), I’ll start paying down the LOC.

The benefit of doing this will be that I’ll get a tax deduction on the 9% interest I’ll be paying on this every month (since I’m using it to pay for investment related expenses). If I waited until I ran out of savings then started borrowing from the LOC for personal spending, it wouldn’t be deductible.

I’ve ran this past a couple of friends and I’m pretty sure that its valid. If anyone knows if this isn’t allowed (or can warn me of any potential pitfalls), I’d be very interested.

Recently, Rob Carrick of the Globe and Mail wrote an article in which he compares Canadian equity mutual funds to the iShares Canadian Composite Index Fund (XIC) in terms of performance over the last five years. He discovered that only five mutual funds out of about 100 beat the ETF.

Funds which beat XIC in the last five years:

1. Acuity All Cap 30 Canadian Equity
2. imaxx Canadian Equity Growth
3. Altafund Investment Corp.
4. TD Canadian Equity
5. TD Canadian Equity-A

While I would argue that you really need a longer time period and varying conditions (ie bear market) to determine if ETFs are superior to mutual funds, this study raises some interesting questions. If you have an investment advisor who tells you that they can pick top performing mutual fund managers then I would suggest you take a look this list of Canadian equity funds and if you don’t see anything familiar then maybe you should ask your advisor why they didn’t pick one of the top funds. Another good question to ask yourself is why you even need an advisor if you can pick a standard ETF and get better performance.

One of the big benefits of Exchange Traded Funds (ETFs) are the lower management costs which are typically less than 0.5% when compared to mutual funds which normally charge anywhere from about 1.3% to 3% for equity funds. Books such as Four Pillars of Investing and Random Walk Down Wall Street emphasize the fact that these lower costs result in better returns for ETF. Only a minority of mutual funds will beat their index in any given year and the problem is that very few of those funds can continue to beat the index for any length of time. Over time, broad market ETFs will beat the vast majority of mutual funds which makes it very difficult to pick the rare fund that does better than an ETF.

The problem we have as consumers is that we never see any advertising which promote ETFs (since they are low cost after all) but we get bombarded with ads from financial companies which always boast about one or two of their funds which have had superior performance in a recent time period. What you need to figure out is how many funds those companies manage and how many are they advertising? It’s usually a small percentage.