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Personal Finance

Illusionary Competency

There’s an old parable about 4 blind Indian mystics trying to describe an elephant. The first, running his hand along the elephant’s side says “elephants are rough and wrinkled”. The second mystic, touching the elephant’s tusks declares “no they aren’t, they’re hard and smooth”. The third, feeling the trunk, argues “well, at least we can agree that elephants are a thick tube with an opening at the end” to which the fourth, holding the tail responds “they are a tube, but they’re a thin tube and there’s no opening on the end”.

I ran into this recently when an administrative assistant at the school did some work using Latex (a popular piece of software for creating documents with a precise layout, often used for journal articles and thesis preparation). She had been given some citations to put into bibtex format (a tool for managing references often used with Latex) along with some citations already in bibtex format to use as a template. She saw me in the hall and said “I put some citations into Latex and it was very easy. Why does everyone talk about Latex as if it’s complicated? I found it very easy!”

Beyond mistakes she made in the part she did (which was understandable, she didn’t know how to compile or cross link the documents so she wouldn’t be able to test if it was right or not), there are a massive number of capabilities that Latex has that she wasn’t even aware of. I was at a lose loss how to politely answer her and try to correct her limited view of a mature, sophisticated tool.

I think this is common when people start exploring a new area. They learn something and mistakenly believe they have achieved knowledge or mastery of the entire field (since, like the blind Indian mystics, they are unable to see the field as a whole). Gambling might be the most obvious example. I’ve linked before to Roger William’s “A Casino Odyssey” where he makes the observation that often people’s early experiences gambling will determine their life-long perspective on it (if they win the first few times they’ll get addicted, if they lose the first few times they won’t have any interest in it again). Stock investing can be a similar experience. If people happen to start investing in a bear market, after a couple months (or years) experience they’ll start thinking they’re the next Warren Buffett. Then the market turns on them and they realize (hopefully) how little they understood what they were doing. Conversely, I’ve known people who put a big chunk of money into the market recklessly, lost big, then sworn off stocks for life. The market isn’t as dangerous as they believe it is, but they’re unwilling to learn more about it or try again.

Even when someone starts feeling that they’ve mastered a complex area of human knowledge or skill, it can be difficult to assess their actual expertise. It can be even harder to assess this ourselves. The Beardstown Ladies, among others, show us that publishing a book (and having Japanese investors making a pilgrimage to meet you) doesn’t prove that you understand the basics (even concepts such as rate of return).

As much as I’d love to finish this post with a simple way you can actually assess your competence, I’ve got nothing. Standardized tests and certification can be easily gamed (Q: What do you call the guy who graduates at the bottom of his medical school class? A: Doctor). Having other people assess you is often unreliable and can be easily influenced by factors about you other than your ability in that area. Plus, how do you ensure that they’re competent *TO* assess you? Similarly, in the workplace or other fields where proficiency is judged, many other elements in addition to the person’s skill in a particular area affect their performance (such as their work ethic, how personable they are, how well they get along with team mates, etc).

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Personal Finance

Stock Market Relapse Because Of China?

spring roll

Intelligent Speculator is a blog about investing, news and comments about the markets and the relevant news. It also supplies users with free stock picks that will hopefully help you get ahead. You can visit the blog at IntelligentSpeculator.net and subscribe to the RSS feed here.

It was mid-November, the market had reached new lows with the S&P 500 closing under 800 points and the economic news was not looking good. Then, something very odd happened as the markets started to rebound. Sure, there had been some positive news such as the end of uncertainty of a new US government and more information about the massive stimulus plan of the US government.  But economic numbers related to demand, consumer confidence and especially employment looked depressed.

However, the markets seemed to shrug off (ignore?) those negative factors very easily as they shot up 25% in a few weeks.  The market rebound hardly seemed justified .  Then the stock markets started dropping because of more bad economic news, the now famous Madoff fraud and more dire economic   news. So markets went back on their road towards new bottoms, with even the new year not being able to stop much of that momentum.

And just last week, with the S&P500 now on a losing streak and standing at 850, some very bleak predictions were released from French Bank SocGen. They have been gathering information from one country that has not received that much coverage given its importance; China. Say what you want about the communist state, it has been gaining importance in the global picture over the past few decades. In fact, as it has rapidly gained its spot in the biggest world economies, China generated much of the world growth over the past decade with growth over 10% year after year.

China is now encountering some severe structural problems that are slowing its economy in a way that will impact the world economy, especially with China’s importance in world trade. In fact, the OECD (Organisation for Economic Co-Operation and Development) has released some economic indicators that look very depressing and could signal an important slowdown. The Chinese authorities could devalue their currency. “It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan” wrote Albert Edwards of Societe Generale

What would be the consequence of such a change? In fact, Societe Generale spoke of the increasing risk of a global recession and in their opinion, this could mean another 40% drop in the major stock market levels.  Perhaps it seems like a very negative perspective but I am fearful of buying until the market lows of November are tested or until economic data starts to improve, there is just not much positive and no reason really for the stock market to improve at this moment. There is always a risk of missing a positive move but for now, I’m ready to remain on the sidelines or do as I have in recent weeks, do some long-short trading which should not be as affected by a market downward move….

What do you think – is China going to drag the stock markets down further or has it’s problems already been factored in?

Photo credit – taiyofj’s photostream.


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Personal Finance

John Bogle: “The stock market is a giant distraction.”

This guest post is written by Mike from the The Oblivious Investor.   This blog has been around for a few months and is very investment oriented (but not too techy) so I would recommend you check it out (I’m a regular reader).

For me, the above quote was enough to make Bogle’s Little Book of Common Sense Investing worth the read.

In just 7 words, Bogle manages to:

•    Provide an insightful piece of investing wisdom.
•    Make you question your assumptions.
•    Offend an entire industry.

So what is Bogle saying here? I think he’s making two distinct points. First, he’s making a statement about intelligent investing. Second, he’s offering a rather pointed criticism of the financial services industry.

Passive investing is a good thing

As to investment strategy, Bogle (as usual) is suggesting a system of passive investing. We can’t predict whether the market is about to go up or about to go down, and attempting to do so will only harm our performance. Similarly, attempting to pick individual stocks is unlikely to prove successful.

So if we stand to gain nothing by timing the market or picking stocks, what’s the point in watching the market? There is no point. All it can do it tempt us toward poor decisions. Better to ignore it.

Financial service is expensive

Bogle’s second point is one about the financial services industry in general, and it’s a bit less obvious. At their most fundamental level, financial markets exist to connect providers of capital (investors) with users of capital (businesses). Without a doubt, this is a valuable service.

However, in recent decades, the financial services industry has convinced us that it performs another service as well: Enhancement of investment returns. This is, however, impossible by definition.

There’s no way that investors—as a group—can earn more than the total earnings of the businesses in which they invest. The total return earned by investors must be equal to the return earned by the businesses in our economy, minus the costs of investing.

We can therefore conclude that, rather than enhancing investor returns, the financial services industry must in fact be reducing investor returns by the sum total of all the fees that they charge us. Sadly, these costs of investing—mutual fund sales loads, fund operating expenses, brokerage fees, etc.—now total in the hundreds of billions of dollars per year.

Conclusion – ignore the market

I think Bogle’s reference to the stock market as a “giant distraction” is his way of telling the reader precisely how much value he sees in the services offered by most firms in the industry.

Takeaway lessons for us:
1.    Turn off BNN and CNBC, and
2.    Do your best to minimize the investment costs you pay.

About the Author:
Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more.

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Personal Finance

Happy New Year and Stock Picks For 2009

Happy New Year to all our readers – last year was a tough one in the markets but I can’t complain.  My financial situation is better now than it was last year thanks to some aggressive mortgage paydown.  In other areas of my life – our son is a year older and is healthy, happy (most of the time) and doing very well.  We also celebrated the birth of our daughter in March who is also healthy, happy (most of the time) and progressing quite well.

I also started a new site called ABCs of Investing which deals with very basic investment terms and concepts using 2 short posts per week.  A sample post explains exactly what the top down investing method is.  Alternatively, a bottoms up investing style might be more to your liking.

A special thanks goes out to Mr. Cheap who bought both my son and daughter a share of BMO each and created a DRIP.  A very generous gift and very time consuming as well to set the DRIP up.

So even with the crappy markets – 2008 was a great year!

Stock picks

I entered into a stock picking contest with some other bloggers – who shall rue the day they decided to do battle with Four Pillars!  🙂

Traditionally, the only way to do well with stock picking contests is to swing for the fences and hope for the best.  With that in mind I picked 4 small Canadian oil stocks which have been beaten down quite a bit.  If oil rebounds next year then these stocks should perform quite well.  There are probably better plays on the price of oil but this is the best I could do on 3 minutes of research.  Keep in mind these are pretty much random selections – do not consider this a recommendation or any kind of advice!

BCF.to – Bronco Energy $1.27.  I started watching this stock a few months ago when it was trading at $10 (it’s now less than $1.50).  My Dad saw some analyst recommending it on BNN – great call – down 85%!

HOC.to – Holly Corp  $3.65

TOG.to – TriStar Oil and Gas  $11.41

CLL.to – Connacher Oil Gas  $0.74





The other competitors (click to see their picks)

The Wild Investor stock picks

Zack Stocks stock picks

Dividend Growth Investor stock picks

My Traders Journal stock picks

Where Does All My Money Go stock picks

Intelligent Speculator stock picks

The Financial Blogger stock picks

Million Dollar Journey stock picks


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Personal Finance

First Margin Call

This post was originally published on Mr. Cheap’s original blog.  When he brought over all his posts – some of them didn’t make it so I’m planning to publish a few of them over time.

I recently got my first margin call from E*Trade for about $3K. It scared the hell out of me, not because I could pay (I had the money sitting in a cash account and just transferred it over), but the call was unexpected and I was worried that I misunderstood the system to the degree that I had triggered it.

The day after the call, I got on the phone to E*Trade and admitted that I’d had a margin call, told them that it was no problem paying it (and I’d already transferred the funds), but that I didn’t understand what had put me into a margin call situation. The man on the phone didn’t apologise, but it turns out that the problem was on E*Trades end and they considered a bunch of “safe” stocks (which they’ll loan 70% of the stock value on) as “riskier” stocks (which they’ll loan 50% on). He told me the call wouldn’t be enforced, and after checking my account assured me I was fine (even if I hadn’t transferred the cash in).

I used the situation to get more details about margin calls and what would have happened if it had been a real call. Apparently the speed on which they’ll sell your stocks depends how far over the line you are (he said they’ll give you 3 or 4 days if you’re just a little over, bit will sell immediately if you’re significantly past your limit). I asked him for good customers with a conservative portfolio if they ever will waive a margin call or increase their loaned %, and it turns out that its actually a law how much they can allow people to buy on credit (so short answer, no).

In the end I was happy to have my understanding of the margin account challenged (and happy that it was a problem on their end and not in my understanding). I learned some new things about my account, which is always a good thing.

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Personal Finance

Merry Christmas and Happy Holidays from Mike and Mr. Cheap!

We hope everyone out there has a great holiday and a Happy New Year.

Just to let you know, the posting will be somewhere between non-existent to sporadic until Jan 5.   A few items will be up but they might be old posts.

If you didn’t check out Mr. Cheap’s very funny Last Minute Cheap Gift Guide then please do so. I suspect that some of you probably thought they were real suggestions (from the title). It’s worth a read.

Another great post of Mr. Cheap’s called Christian Owner has seen a lot of good comments – feel free to check out or join the conversation.

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Personal Finance

Dream Wedding

Weddings can be pricey. They’re also all so generic! Years ago I came up with my dream wedding.

For starters, the invitation will specify a strict dress code: BLUE jeans and a t-shirt. The groom (Mr. Cheap himself) will be in BLACK jeans, and wearing a tuxedo t-shirt. The bride will be in white jeans and a white blouse (so she’ll look all frilly and nice compared to everyone else – who says Mr. Cheap doesn’t understand a woman’s needs!?!?).

On the invitation RSVP guests will check off which McDonald’s extra value meal they want (and we’ll super size the wedding party’s and close family’s meals). For drinks I’ll get a vat of that McDonald’s orange drink and we’ll spike it with Al-cool.

I’m hopeful that McDonald’s might throw in a Grimace costume for the person officiating the ceremony to wear (since I’m buying so much from them already)…

We’ll hold the ceremony and reception in someone’s back yard probably. I’m figuring a budget of $300-$400 should cover it the whole thing.

I know this is a great idea, so I’ll answer your first question right now: no, I won’t be offended if you steal my idea and get married in a similar fashion (I’ll be flattered!). And I’ve anticipated your first comment too: yes, the woman who gets a lasso around Mr. Cheap will be a very lucky lady indeed!

Wooly Woman inspired me to write this up. She had a taco bar at her wedding, which is uber-cool (I might blow the budget and add one of those to mine!).

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Personal Finance

Friday Mini-Post RBC 1% Deal, TSX and a couple o’links

For those of you who took advantage of the 1% deal with RBC – we got a phone call and letter this week indicating that we will be getting the bonus next year. If you didn’t get a letter then give them a call to find out why.

The Amateur Asset Allocator (a great blog) wrote a pretty good post called What’s the problem with Detroit? Referring of course to the car companies.

Strange week in the markets – on Wednesday the TSX shut down and couldn’t get going again.  I can accept that something broke but I would have thought their backup systems would be better.

Here is a good article from the New York Times about bonuses paid out in various investment banks.  One of the problems with big bonuses is that they encourage short term behaviour at the expense of the long term.