Investorial

I’ve been participating in a comment thread with Canadian Capitalist about alternative investments. I mentioned an aversion towards ETFs because to what I understand, ETF’s are sort of like derivatives? Though I was hard pressed to find such a definition online.

Investopedia defines Exchange Traded Funds (ETFs) as:

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

Because it trades like a stock whose price fluctuates daily, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.

Great, now we know what the public knows. Here’s what I don’t know. My question is “What’s the asset backing the ETF’s?” Are there underlying stock? And how can there be such frequent trading and movement of money in and out without triggering (more…)

One of the topics I’m constantly asked to explain is the concept of dividends, ex-dividends and other similar questions; often by people who think getting into a stock simply for the special dividends and getting out right away is a good idea. You’re only doing yourself the favour of turning your principle into a taxable liability.

I thought about doing more to debunk dividend myths, but why lift a finger when The Motley Fool has already done a 2 part story to debunk 7 common dividend myths. I’ll summarize them here.

1. Stock prices do not adjust downward when dividends are paid.
2. Only the stock price is adjusted.
3. All dividends are taxed at the special lower rate.
4. Everything is reported to you correctly on the 1099-DIV form.
5. Everything called a dividend is really a dividend.
6. Stock splits are not dividends.
7. I can buy just before the ex-dividend date, catch the drop in price, and record a capital loss.

Be sure to read part 1 and part 2 for the full details and explanations! A note to Canadian readers that some of these facts are geared towards American investors. But there are still tidbits well worth your time, especially if a large portion of your dividend companies are American!

If you’re wondering, the above title is a lame pun on the famous phrase “Who Watches The Watchmen?“. If you’re a regular reader of personal finance blogs, you should be familiar with the term “passive investing“. For the uninitiated, it means that you are investing in an index fund - a mutual fund that follows a well-known index such as the Russell 2000, or the most famous index of all, the S&P 500. The S&P 500 is the top 500 companies as determined by Standard & Poors to represent the stock market at large.

So What’s My Beef?
I have long contended that there is nothing passive about investing in index funds. Simply put, you’re paying a fund manager a little less than 1% management fee to enjoy having your portfolio actively managed by somebody else! Who’s that somebody else? The index of course! It’s no secret that indexes frequently add or drop companies from their list. How is this different from regular mutual fund turnovers? In the example of S&P 500 index funds, the only advantage achieved are (more…)

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

We’re starting off with this quote to remind us that we should not follow opinions, but rely on our ability to reason and gather facts. Easier said than done, what are facts? Everybody has a way to interpret numbers, figures. One analyst can recommend a stock while another is downgrading it. There can be no consensus in the market for the buyer / seller principle to work - one’s man junk is another man’s treasure.

I am going to look at this post using some numbers; some publicly disclosed, some calculated. But rest assured only to the level that I can understand. Being a Bachelor of Mathematics doesn’t mean anything when it comes to analyzing financial numbers. I’ll only refer to common sense numbers, hopefully nothing beyond comprehension! I’ll also use Canadian dollars for convenience!

The IPO Story
To recap, Wendy’s decided to spin off 15% of its ownership of Tim Hortons in a public IPO. In total, 29 million shares will be made available at C$25 to C$27 per share. Here’s the press release that explains that the preliminary filing prospectus showed an initial target range of C$21 to C$23 per share. The stock IPO has garnered national attention, appearing in newspapers, television, radio, blogs and virtually any media out there! There is a mania going on and that’s why this is a story for Investorial!

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Blogs have tremendously revolutionize the way news and information are distributed. No longer do you need to be a traditionally trained journalist to get your words heard. Bloggers and blogs are obtaining scoops, exclusives just like their old media counterpart. Services are popping up like NowPublic.com that have fueled the citizen journalism movement.

However, from a financial perspective, the Web 2.0 has brought in some interesting applications that may point to a brave new world in the future. Prosper.com wants to become the online marketplace for people-to-people lending. Borrowers can shop for attractive from fellow lenders. These lenders are ordinary people like you and me, who can set their own rate. Members can also borrow and lend as a group! It seems like Prosper has put in place a lot of security features to prevent abuse of the system. However, the service network currently does not extend beyond the United States. It’d be interesting to see when someone from Canada will be borrowing from a lender in China!

Along the same lines is Fundable.org, which seeks to allow groups of people to pool money to make purchases and raise funds. Unique to its system is its ability to set fund raising goals and letting people pledge their contribution. Only when the goal is met will the pledges be binding.

Prosper.com and Fundable.org are 2 examples of the future in citizen banking, or citizen financing. No longer are consumers on the lowest end of the money game. Now, anyone can become a bank on both ends. Borrowers can scour for low interest loans to finance their investment activities, making the profit and paying little for the cost to use the money. Investors can charge high interest returns to people who are not looking to deal with banks. There are numerous applications possible in this realm. Will citizen CDs and term-deposits be far away?

I believe citizen banking is a offshoot of the micro-lending movement. It remains to be seen if this revolution will take off.

P.S. I wonder if the Pentagrams in both logos are trying to reference the conspiracy theories of a world bank or chosen to display connection between people. Just an observation, don’t read too much into it!

Let’s get one thing straight - Investorial does not seek to align itself with the mass media for the simple logic that you can’t criticize effectively what you are a part of! Surf quickly around the net, you will find various news, blogs, critiques of how the stock market abandoned Google and Yahoo. Shareholders rushing to sell because earnings per share missed by one penny. It’s utterly ridiculous for this media frenzy around the topic.

Yet, Investorial has stayed quietly on the sidelines. We were not the first to blog about the stock price rollercoasters of Yahoo, Google and we never will seek that title. What we like to do is find that article hidden within the mess which can expose the idiocy of the situation in such a simple way that it is a wonderous sight to behold!

What tickles us the most are articles that do not discuss numbers, do not talk about statistics but simply talks to a reader in plain English, and still achieves what all those analytical journalism could not. I’ll say again, Herb Greenberg is a genius!

So we are all looking forward to tax season right? (tongue-in-cheek) I wonder if Herb thought of this when he started writing about the Google speculators. Herb succintly leveraged this angle to put those speculators in their place; judging with common sense, and explaining his view so clearly to me that I couldn’t help cracking a smile at the end of those paragraphs.

I’ve deliberately left out the content because you should be the judge. I’m not sure if you’ll agree with me, but have a read for yourself. I also profiled Mr. Greenbereg in a previous post.

CBS MarketWatch: “Don’t Blame Google” by Herb Greenberg

I would like to get a series started about all the different RSP ads that are popping up for the season. What are the sales tactics of these mutual fund companies to get you to contribute to your retirement savings plans? How can we filter the truth from the marketing?

I’ll give you an example borrowed from Mark Cuban. Mark Cuban said that the smartest marketing that shampoo companies ingrained into the population was the slogan of “Rinse & Repeat”. It’s a genius way to get people to quickly use up your products and buy more! But no studies prove that rinsing and repeating will actually help versus just doing it once, and letting the shampoo bubbles work their magic!

I’m currently collecting any RSP ads in any media (internet, radio, television and print). When I have more spare time, I will examine these scrutinize these ads and I won’t hold back! For our American audience, I would also like to bring to light any type of marketing efforts you see in the Retirement plans, IRAs, 401Ks; whether it be internet articles, or advertising. Please submit to me, any advertising campaign that interests you, Canadian or American alike!

Much has been emphasized about the current existence of an inverted yield curve heralding the oncoming of a recession. Does it have merit? What are its counter-arguments?

I won’t pretend to be an expert on the subject matter, nor am I a historian to confirm the truth in the past. However, we always stated that “the past is not a certain indication of the future”. We have to learn to take media information on both sides of the argument with a grain of salt. Draw your own conclusions from what you’ve gathered!

First a definition:

“An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession. An inverted yield curve is sometimes referred to as a ‘negative yield curve’.”

The definition already included what most people are fearing. Historical correlations have much wisdom to offer, however are we comparing apples to apples? (more…)