Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.

Concerning derivatives trading, (derivatives are puts and calls) the Monday Morning Millionaire Program (15.5% annual return since 2012) recommends that members just sell and never buy derivatives. Moreover, the program recommends that members sell derivatives in their fun portfolio only.

Investors always make and never lose money writing (selling) puts and calls. However, when writing calls, they give up the opportunity of making even more money if the underlying security rises above the selected strike price.

Overall, investors can lose money if the underlying security drops to a greater extent than the premium received. Been there, done that with AbbVie (symbol ABBV) in my “fun” portfolio. Wasn’t fun.

So again, the Monday Morning Program recommends that members sell derivatives in their fun portfolio only.

But not always!!

Passive investing, as promoted by the Monday Morning Millionaire Program (15.5% annual return since 2012), does not need or use economic indicators. While proponents of both passive investing and active investing can produce studies to support their position, there is no question about their respective time requirements. 82% of Monday Morning members spend an average of one hour per week or less on their portfolios. By way of contrast, a few years ago, Goldman Sachs reduced (that says “reduced”) interns’ maximum working time to 17 hours per day!

However, many do enjoy active investing. We recommend that they expose a small part of their portfolios to active investing and call it their “fun” portfolios. My “fun” portfolio adds up to 5% of my holdings. It constantly validates passive investing.

Active investors use a large number of economic indicators to predict market movements and we will explore these in the coming weeks.

Today, we will look at Warren Buffett’s favorite, the total stock market capitalization of all U.S. stocks divided by the U.S.  gross domestic product. In other words, SMC divided by GDP = market valuation.

Continue reading “ECONOMIC INDICATORS. Buffett’s favorite”

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About half of The Monday Morning Millionaire Program members are Canadians. We recommend that they keep their investments, cash and near-cash in US dollars. The chart above shows the US dollar to Canadian dollar relationship over the last decade. Investors following our recommendations are ahead.  If we go back to two decades, there were two brief periods when the Canadian dollar was stronger. Two brief periods!

Will the US dollar continue to be stronger? The correct answer to most questions about the future is “I don’t know.” Nevertheless, the continued strength of the US dollar is highly likely.

However, we need to accept inevitable currency fluctuations many of which will have an impact on our portfolios.

The chart above shows the US dollar to Canadian dollar relationship over the last week. There was a one-cent drop from the highest to the lowest point. A one-cent drop is a $10,000 drop for every million dollars invested by Canadians.  Such a drop could produce a portfolio value decrease in a rising market! That is exactly what happened on February 12.

Conversely, a one-cent rise is a $10,000 rise for every million dollars invested and could produce a portfolio value increase in a falling market.

We are talking here about the Foreign Exchange market known as FOREX. It is about six times bigger than the stock markets of the world and legitimately involves investment banks and central banks. Individual investors can get involved also. They can control large amounts of money by leveraging small sums.

Individual investors trading on FOREX lose nearly always.

A recent article in Investopedia is titled Ten Ways to Avoid Losing Money on Forex.

Without a doubt, the best way to “Avoid Losing Money on Forex” is not to get involved in the first place.

The best low-risk way to invest and grow rich is the Monday Morning Millionaire Program. If it is good enough for Warren Buffett’s estate, it is good enough for any of us.

Our Feb 10, 2020 blog was titled “Cash is trash or cash is king?”.

Some Monday Morning Millionaire Program members did not receive it!

Ray Dalio recommends being fully invested (cash is trash) while Warren Buffett holds $190 billion in cash (cash is king). Dalio and Buffett are highly respected investors and rightly so.

Timothy Brown, CEO of ROI Corp. found the blog in his Junk mail folder. Timothy thinks that, alarmed by the word “cash” in the title, the blog was sent to Junk mail by his system.

For some “cash” is a four-letter word.

Both Ray Dalio and Warren Buffett are highly respected investors. Dalio is on record stating that cash is trash and that investors should be buying this market, rather than seeking safety in cash. Buffett is on record stating that cash is king — “some day in the next 100 years when the world stops again, we will be ready.”

Who is right? Could they both be right?

Basically, Dalio and Buffett come from different perspectives.

Assuming a sound currency,  cash in a portfolio is safe but it drags the performance. Historically, being fully invested has significantly outperformed holding cash and is very likely to do so in the future. So, over the long term, Dalio is correct for the retail investor. However, the downside of being fully invested arises from the major fluctuations that are a part of the market. Investors should never put themselves in a position to need to sell when markets are down. The Monday Morning Millionaire Program prevents that by encouraging an asset allocation with a high percentage in cash.

Buffett, on the other hand, is waiting for a deal in the billions. During the financial crisis of 2008 Buffett made about $1.75 billion in cash and about $1.35 billion in stock by investing in troubled Goldman Sachs — a 62% return on a five-year investment.

Buffett is looking for another opportunity like that one.

Both Dalio and Buffett are correct but they come from different perspectives.

We Monday Morning Millionaire Program members don’t need to concern ourselves with issues like these. We are happy when markets drop and present us with bargains. We are happy when markets rise and allow us to take profits.

From its founding in 1817 and going right up to 1943, no women worked on the  New York Stock Exchange. Because of a shortage of men during World War II, in 1943, women were allowed to work on the trading floor for the first time.

Unbelievably, in 1947, women were again banned from the trading floor!

Where was the women’s movement?

In 1965, Muriel Siebert was able to buy a seat on the Exchange and remained the only woman working there for a decade.

Women are making some progress in this, traditionally men’s world now. In 1917, Lauren Simmons earned the right to be an NYSE floor trader and the Exchange recently appointed Stacey Cunningham as its first female president.

We are experiencing the longest bull market in history. It will revert; it always does even though no one knows when. Market declines are seen as buying opportunities by Monday Morning Millionaire Program members.

History shows the following:

• Declines of 5% to 10% usually require a month to recover.
• Declines of 10-20% usually take four months to recover.
• Declines of 20-40% usually take 15 months to recover.
• Declines of more than 40% usually last 22 months and take 58 months to recover. That is nearly five years.

Money that we will need in 5 years or less does not belong in the market. That way, we can avoid needing to sell securities for less for than we paid and take advantage of the bargains that market declines offer.

Working with a financial advisor from a major Canadian bank, one of our members is looking after his father’s upper six-digit portfolio.

What follows in black letters below is an email from the adviser in response to our member’s wish to change his father’s portfolio to one that parallels what Warren Buffett wants for his own estate. The Monday Morning Millionaire Program comments to our member are in red.

Changes to Investments

You want us to sell your dad’s existing holdings and put 90% of the money into VOO-US, (a US$ stock) which is an S&P 500 EFT that is operated by Vanguard.

The portfolio is currently generating a dividend yield of 5.14%. Switching over to the VOO will reduce the dividend yield to 1.8% (in US$).

One of the best-performing stocks over the last fifty years has been Berkshire Hathaway (BRK) which has never paid a dividend.  BRK investors simply sell some of their shares (say 5.14%) each year to live on. Their portfolio just keeps on growing; the stock has averaged much more than 5.14%.

All advisers need to be aware of my standing $100,000 bet payable by the loser to the winner’s favorite charity, claiming that an investment in VOO will beat any other investment over the course of the next decade. (There will be a few investments that will do better than VOO but we can only see them with hindsight.)

We currently have a very defensive asset allocation of 81% Cash/ Fixed Income (low or no risk)

Like many large banks, this one is a bank as well as a security firm. Your dad’s cash earns him very little. The bank lends it out to borrowers for a lot more. That is why they can afford to charge $0.00 commissions on stock transactions. That is why they will make every effort to keep as much of your dad’s portfolio in cash as they can.

and 19% Equities (higher risk). Once we make the changes you have requested we will have an Asset Allocation that is 10% Cash (no risk) and 90% Equities (higher risk). We will be buying an ETF made up of 500 stocks, so the portfolio will be quite diversified in the sense of holding a wide variety of companies, but it will be very heavily weighted to stocks. While this ETF has done very well, there is always the risk that global stock markets, including the US market, could pull back sharply, resulting in a significant loss to the value of the portfolio.

When global stock markets pull back, and they certainly will someday, Canadian markets will be included, guaranteed. Being in the Canadian markets and not in the US markets offers absolutely no protection from portfolio losses during market pullbacks. None, whatsoever.

We discussed this risk and you are prepared to accept it. Not only do you think the VOO ETF will do well over time (although you acknowledge a short-term pullback is possible), but you also want the simplicity of having the portfolio reduced to a single holding for ease of management purposes, both for your dad now and then after he passes and the holdings are moved to the estate.

The 81% Cash/Fixed Income and 19% Equity asset allocation is appropriate for a man of your dad’s age. However, a less conservative asset allocation would be better for his estate. Your dad’s portfolio will outlast him.

The upper line on the chart above shows how VOO has done over the last decade. The lower line shows the Toronto Stock exchange.

VOO growth over the last decade has significantly exceeded the dividend yield of your dad’s RBC-structured portfolio.

Does anyone want to bet on the next decade? Your dad’s estate will be around.

 Timing

We will start the process now by selling the holdings now and then spread the buying of the VOO over a few different days to see if we can get a lower average price.

Coming from a financial adviser, the above statement is unbelievable!

There is a 50% likelihood that the market and VOO with it, will go either up or down “over a few different days”.

There is a 50% likelihood that your adviser will either get a lower or a higher average price on any given day.

Please confirm that you are in agreement with the above. Please let me know if you have any other thoughts and questions.

All the best

RBC financial adviser

Forgot to mention that VOO is traded in US $.  Are you ok with that?

Over the last 50 years, the US dollar has been stronger than the Canadian dollar the whole time except for two brief periods. Drug money, black market money, dirty money, honest money,  all want to be in the US$. That is what makes it so strong.

The average financial advisor salary in Canada is $60,000 per year while experienced advisors make up to $102,000 per year. Is this adviser worth that kind of money?

Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.