Enterprising Investor Forum

It’s not a bailout! Friday, September 26, 2008

Why does everyone keep talking about a bailout? People seem to forget that the government would actually be purchasing assets and not dishing out handouts!

As usual, it’s just politics getting in the way of things getting done. Naturally, we feel that markets should take care of themselves and that they ultimately would but since the politicians are not prepared to let things play out – quite rightly due to the critical situation that would ensue – then they should act in a swift and determined manner.

Why not take advantage of the situation to try and make the taxpayers some money on this deal?

Our take: a solution will be found, markets will rally and then realize that there are still a lot of problems out there and we will go back to volatility. This crisis will take a lot of time to play out … there is still a lot of deleveraging that needs to take place…

We still advise extreme caution.

That’s it, going back up? Tuesday, August 12, 2008

It looks like the rally continues but we remain increasingly worried about the recent euphoria. We do not want to be negative but do you really think that this is it? That what most people labeled as possibly the most serious financial crisis we have experienced will just go away after a relatively mild bear market?

Again, not to be pessimistic but:

• we still have to understand what the banks have on their books and how this will effect their long-term capital position
• the leveraged business model has to change and we have to accept that returns will not be the same as before
• consumers continue to live ‘above their means’ using credit to larger and larger extents
• the housing bubble still hasn’t stabilized
• economic indicators are not really improving
• etc…

Naturally we hope that we are moving towards solving these issues and get back on track but chances are things will still have to get worse before they get better…..

Investing is not a game Friday, June 6, 2008

Time for a little rant. Ok, the e*trade video is nothing new and actually quite amusing but what kind of a message is it sending out? No wonder the average ‘person’ and note we are not calling them investors gets killed in the markets!

All these companies keep on promoting how easy it is to buy stocks and people end up thinking that they are investing instead of just gambling!

E*Trade video link: here.

If the average fund manager doesn’t manage to beat the street what are the chances someone signing up to e*trade after seeing this commercial will? But then again, since financial institutions make their money on activity, no one cares what the outcome is!

Enjoy the weekend.

Rant on Investor Expectations Tuesday, October 23, 2007

Time for another rant, we just couldn’t resist! We were watching a financial network show and they have a lunch time program where investors can call and ask questions to the ‘experts’ they have on the show.

As usual with these kind of shows, the kind of questions vary but this particular investor called to ask the following:

• “Please recommend a low risk share with a 50% short term potential.”

Naturally, the ‘experts’ said that if they knew of shares like that, they wouldn’t have to work for a living! The issue we would like to ‘rant’ about is the fact that most investors do not take the time to understand what investing is all about and they simply see the stock market as some kind of game or easy way to make some fast-money.

As a general reminder: ‘easy money doesn’t exist’, at least not consistently and legally…. take the time to understand and learn what investing is about and what an interesting, challenging and potentially rewarding endeavor it is. If you just want fun and excitement, you can always head to Vegas!

Shouldn’t it only be about performance? Friday, July 20, 2007

The weekend is just around the corner and we thought that it was time for one of our rants…..

Wouldn’t it be nice to have a professional money manager offering a solution whereby he would be paid according to how much money he would make for you? Why are they always charging commission and extra fees when most of them can’t even manage to beat the market?

If you stop and think about it, the whole industry is actually quite amazing…. seeing that there are numerous studies that prove than over 80% of the professionals fail to beat the market, it is really surprising that they get any business at all when an investor could simply invest in a total market ETF and pay under 0,50% commission!

Why is the industry thriving? Consumers lack the confidence to accept that they could do it themselves? People still believe that the ‘professionals’ offer better returns? From a psychological point of view, investors feel less responsible for bad performance if they can blame someone else? People always want to ‘hit a home run’ and don’t believe an ETF will alow them to do so?

We feel that it is high time for two things to happen:

• Private investors should ‘wake-up’ and start managing their own money through a balanced and diversified ETF portfolio. Depending on their profile, they can use ETFs for more aggressive sector plays or even to take ‘short’ positions. Furthermore, the Enterprising Investor can decide to allocate a percentage of his portfolio to individual stock plays.

• Professional money managers should stop using complex and obscure fee structures and commissions. If you think that you are good enough to manage money for someone else, then this would imply that you can deliver better return and therefore beat the market or benchmark index. Therefore, show us how confident you are in your money management capabilities and only charge when you have managed to beat the market. Assuming you can do this, you could even charge 50% of the profits!

We are well aware that even our great grandchildren will never see the latter point happen but it would be refreshing to see a bit more of the former starting. And who knows, if private investors start to change their ways, there might be some money managers out there that may start to move in the right direction too!

Rant on Timing the Market Thursday, June 28, 2007

Can anyone call the top or bottom of the market? Well, for a true value investor, the answer is quite clear: No. Naturally, some people do make the right call but can they do it consistently? Probably not.

You’ll always come across someone who tells you that the market is going to crash or about to hit new highs but how do they know? What do they base their assumption on? Anyway, if you keep on saying “up” or “down” for long enough, you’re bound to be right sooner or later. Furthermore, be wary of people who tell you that their methodology would have worked in the past… anyone can be a master stock-picker with the benefit of hindsight or that they have back-tested their module (as George Stigler wrote: “Theories that are right only 50% of the time are less economical than coin-flipping”).

An academic study conducted at the University of Calgary shows that – as a longterm strategy – staying invested in the market instead of trying to move in and out produces better returns. Your gains during the bull markets would far outweigh the losses in bear markets. They conclude that if a market timer wanted to outperform an investor with a buy and hold strategy, he/she would have to make correct calls 70% of the time. Moreover, we are sure than you have all seen the statistics showing that, the most active accounts held at internet brokerage firms tend to underperform the ones with the least activity.

As usual, we favor an approach consisting in research, due diligence and a buy and hold strategy. Of course, you are free to trade as activly as you like … we wish you the best of luck … we are sure your brokers thank you for all the commissions!