Happy birthday, Canada/America!

Another example of multi-tasking, this Canada/America birthday greeting is going out right between July 1 and July 4 to take care of both.

We who live in either of these two countries have won the lottery! Our prosperity opportunities are endless.

Tax-freedom day, the day that tax-payers begin to work for themselves instead of the government?

For Canadians, that is just about now. For Americans? Mid-April!

At the beginning of our grandparents’ lives? Before the end of January!

Happy birthday, Canada/America!

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The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 200 words, members can read our posts in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

 

 

 

 

 

Active or passive investing? Canada or the U.S.?

Respected studies [1,2,3,4,5,6] show that most investors, pros included, cannot beat a broad market index consistently. These support Habit 3 of The Six Habits of Monday Morning Millionaires.

Canadian members, please note that  adjusted for inflation and currency exchange, the Toronto Stock Exchange composite index lost money over the last decade while the S&P500 composite index more than doubled.

Why would future returns be much different? Wouldn’t investors be better off holding the S&P500 index via say, VOO or SPY or QQQ and sitting in their rocking chairs?

Honest professional money managers agree that a passive investment strategy will work well. One will never ‘beat’ the market with a market ETF, of course, and many investors feel that they can do better.

We are referencing Canada’s underperformance here because the majority of the Toronto Stock Exchange is in financials and resources.  If these sectors do not move as is happening now, then Canada will underperform the U.S. But, in inflationary times, a distant memory currently, Canadian markets will likely  outperform U.S. markets. That might occur over a decade from now.

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The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 400 words, members can read our posts in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

Bibliography
1. Fama, E. F. (1965). “The Behavior of Stock-Market Prices” The Journal of Business 38, No. 1, pp. 34-105 The University of Chicago Press
2. Fama, E. F.; French, K. R. (2012). “Size, value, and momentum in international stock returns” Journal of Financial Economics. 105 (3): 457, doi: 10.1016/j.jfineco.2012.05.011
3. Rompotis, Gerasimos Georgiou, “Active vs. Passive Management: New Evidence from Exchange Traded Funds” (February 4, 2009). Available at SSRN:https://ssrn.com/abstract=1337708 or http://dx.doi.org/10.2139/ssrn.1337708
4. Blake, C.R., Elton, E.J. and Gruber, M.J., 1993, “The Performance of Bond Mutual Funds”, Journal of Business 66 (3), pp. 371-403.
5. Malkiel, B.G., “Returns from Investing in Equity Mutual Funds 1971 to 1991”, Journal of Finance, 1995 50 (2), pp. 549-572.
6. Gruber, M.J., 1996, “Another Puzzle: The Growth in Actively Managed Mutual Funds”, Journal of Finance 51, pp. 783-810.

Update on parking money.

We wrote about parking money in some detail, previously. Since most of our members’ asset allocation has a large percentage in money or near-money, this is an important subject.

The primary objective of holding money or near-money is to have it available to buy bargains when the market drops. Nevertheless, it does pay to shop around for best returns. Our American members can do so by visiting:

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Caveat on our “good debt, no debt” post

 

We add an important caveat to our post of 6/21/2020 titled

To borrow or not to borrow; good debt, no debt.

Point 3 states that the interest on the debt should be tax-deductible. One of our subscribers rightly pointed out that in Canada, interest paid on such debt is not tax-deductible in tax-advantaged accounts. (It is, outside such accounts.)

Tax regulations vary among jurisdictions and at different times. For example, interest paid on a home mortgage is tax-deductible in the US but not in Canada. The tax codes in both countries add up to thousands of pages — more than the longest novel you ever saw. Accountants usually claim expertise only in their own jurisdictions.

Nevertheless, your accountant will be able to provide guidance on this point as well as other matters of taxation.

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The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 400 words, members can read our posts in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

 

Fundamentals of a tested growth strategy

Economics Nobel prize winner Paul Samuelson stated that investing should be like watching grass grow or paint dry. The Monday Morning Program recommends exactly that. Here it is in four simple steps.

  1. Starting early in life, save 10% of income.
  2. Dollar-cost average your savings by buying one of the few exchange-traded funds which mirror the S&P 500.
  3. Do so in tax-advantaged portfolios.
  4. In retirement, some 35 years into the future, withdraw 4% of portfolios to live on.

Only those who do not understand markets would argue these points.

The first of these points might well prove to be the most difficult for many investors.

Additionally, starting early in life would be a good time to look into individual stock investing for those interested in that approach.

Early in life? Why?

Each stock transaction has a buy and a sell side to it. Only one of them is right. Investing in individual stocks (stock picking) is wrong half the time. Doing so early in life allows for recovery.

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The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 400 words, members can read our posts in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

To borrow or not to borrow; good debt, no debt

The Federal Reserve is considering capping bond rates at very low levels. Interest rates on savings, certificates of deposit and money markets are at an all-time low.

The policymakers’ objective is to revive the post-COVID-19 economy by encouraging consumer spending.

Stated another way, the recovery will take place on the backs of the savers.`Saving used to be admired, borrowing was frowned on. In Aramaic, the language ancestral to today’s Semitic languages and used in the administration of empires, the word for “debt” and “sin” is the same.

How things have changed!

Almost every government, state and municipality borrows by issuing bonds and debentures. In the corporate world, borrowing is simply an aspect of doing business. Companies set up their obligations so as to maximize profits as well as financial resources.

Investors can borrow by setting up margin accounts with their broker. The Monday Morning Millionaire Program recommends against that because brokers can change margin requirements anytime. If an investor’s holdings drop below a certain level, brokers will sell them at a loss to the investor, to protect themselves.

Investors can set up a low-cost line of credit loan with their bank to use for investing. To benefit from such borrowing, the following four characteristics need to be in place:

  1. The debt should be low-cost.
  2. The borrowed money should be used to invest in tax-advantaged portfolios.
  3. The interest on the debt should be tax-deductible.
  4. The borrowed money should be used to invest in a potentially appreciating asset.

Borrowing at credit card interest rates to buy a car or a holiday or some consumable, does not meet any of the above requirements.

The first three points above are easy to ensure today. In the longer run, say five years or more, the fourth point is highly likely.

Many people would not be comfortable borrowing to invest. Based on history, over the long run, by investing in an exchange-traded fund which parallels the S&P 500, they will likely do well without borrowing.

However, younger investors should keep the magic of compound interest in mind.  Money invested early in life can grow significantly by  retirement time. By lowering investment contributions to pay down debt, people can get the satisfaction of retiring debt-free, but they can miss out on the prospect of larger gains resulting from many years of compounding.

The foregoing encourages borrowing to invest.

We recently interviewed a member with a $20 million portfolio who never borrowed. He is a dentist who graduated in 1985 and got his education through the Navy. For “education through the Navy, ” read “at no cost to him”. He worked as a Navy dentist for seven years then he associated for three more. Using the money that he saved from his income, he bought a 3-operatory practice. He kept expanding the practice from the savings obtained from his income.

He now runs a practice with his two dentist nephews, six hygienists and a team of fourteen — testimony to doing well without borrowing.

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The Monday Morning Millionaire Program contains compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 600 words, members can read our posts in less than five minutes. Following and studying the links imbedded in a post would take longer. How members manage a post depends on their level of interest and investing knowledge. 

 

 

Bitten by the Black Swan

A friend and investor who used to be an owner of a ski resort has prepared some comments that are worth reading by our members.

Bitten by the Black Swan

In early March 2020 I was scheduled to be on a cruise to South America and the Panama Canal.  Luckily, the trip was cancelled, and I avoided being marooned and infected on a vessel in the canal.

My travels had been made possible when our family sold our long-held ski resort to a larger company.  While no longer an owner, I kept an eye on the resort and wanted it to succeed.

Not realizing how serious the impact of Covid-19 would be, I thought that the resort, within easy driving distance of a major city, would flourish as people would cancel out of country trips and come to our area for short “staycations.”  It turned out that people came from the city to our area, but the ski operation had to be shut down, and rather than skiing, the families took shelter in their second homes and bought only food at local supermarkets and watched videos on Netflix.

Covid-19 destroyed or, at least, disrupted, a major theme that was popular with investors.  Growing demand for recreation, went the story, especially among newly enriched consumers in emerging market countries, would boost travel, airlines, theme parks and cruise ships.  This theme was turned on its head in the March meltdown.  Most notable was the plunge in airline shares, not helped by news of Warren Buffet’s total exit from the space.

What is the lesson?   Risk lurks in hidden corners.  When I was a resort-owner I thought the major threat to the business was climate change, and never envisioned a pandemic that would shut the resort down and turn it into a ghost village.

Investing in the S&P 500 index is not without risk, but the risk is reduced by avoiding the great damage possible by threats to an individual company or to a sector such as recreation and travel.

The renowned investor Benjamin Graham, mentor of Warren Buffet, was also a scholar of classical Greece and Rome.  From the Latin poet Horace, he chose a passage that supported his method for value investing.  “Many,” wrote Horace, “shall be restored that are now fallen and many shall fall that are now in honor.”  Graham was skilled at finding the companies that had fallen and would rise again.  I don’t have those skills and will not try to do what Graham did with so much success.  I will look to SPY or VOO to deal with the problem.

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The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 600 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

 

Our personal portfolios, June 9, 2020

Rocking chair investing

Paul Samuelson, the Economics Nobel laureate has stated: “Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or grass grow.”

We recently sent out a post about selling derivatives  and another about the effect of volatility on derivatives pricing.

Exciting stuff! Nothing like watching paint dry or grass grow. However, as we can see on the chart below, it is worthwhile only occasionally.

The high volatility which makes selling covered calls and cash-secured puts interesting, is now gone.

Last Friday, June 5, we were assigned in all portfolios. On Monday, June 8, we took a 50/50 position in all of them with half of them in an index exchange-traded fund (SPY) and the other half in a money market fund (TDB166). From here on, it is rocking chair investing for us until rebalancing time.

Based on history, this arrangement will outperform over 95% of portfolios over the course of the next decade. I frequently mention my $100,000 bet payable by the loser to the winner’s favourite charity challenging any investor/advisor to outperform the S&P 500 over the next decade.

Any takers?

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

 

 

 

Exploit the astonishing power of compounding

From a man who understood math: “Compound interest is the eighths wonder of the world.”

Earnings tend to grow and then level off with time.

Savings, on the other hand, even invested at the modest return rates, grow quickly with time. Compound interest at work! More extended growth periods produce more impressive results.

What are the practical implications?

The first one deals with debt reduction. Paying off debt as quickly as possible is appealing.  Once debt is paid off, the money that went to interest payments can be used for investing. But….

…Borrowers should consider putting excess cash into an investment which grows exponentially over a longer time period, the S&P 500, for example. Many would come out ahead if they paid off debt as agreed on and not faster.

The average compound annual growth rate (CAGR) of the S&P 500 has been  7.20%, with a standard deviation of 1.54%.  Based on history, we can expect an investment in the S&P 500  to return between 5.7% and 8.7% over a 30 year time period. Most debt caries lower interest payments and shorter time periods!

The second implication focuses on the time frame.

Our June 15 blog post will show how to leave a legacy, how to make your grandchildren into millionaires!

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