Friday, October 2, 2015

What Is Disciplined Investing?

At High Rock we consider ourselves to be "Disciplined" with our investment process and while I often refer to various concepts for our approach in this blog, I thought it might be worthwhile to  review the philosophy behind those concepts. 

This is a philosophy garnered from experience of more than 30 (55, if you include our joint efforts) years of formal education, investing, trading and helping others to achieve their goals.

1) Investing is for the long-term.

  • It is about creating a strategy to achieve our financial goals and objectives over the course of our lifetime (and perhaps beyond if we wish to leave something to a beneficiary).
  • We cannot have an investing strategy if we do not know what we are trying to accomplish.
  • Make a plan and stick to it: do not get caught up in the day to day "noise" of the market.
  • Periods of market insanity never last forever, whether it is extreme optimism or pessimism, markets will return to the mean over time: periods of out-performance will be followed by periods of under-performance.
  • Everything has a cycle: different asset classes will perform differently at various times throughout the cycle and a balanced and well-diversified portfolio which contains many different asset classes will have significantly less volatility (and better risk-adjusted returns) than one that is skewed to a single asset class.
  • Otherwise, we are gambling. Gambling is not investing.

2) When there is new cash to invest we need to be aware of where we are in the longer-term cycle.

  • We need to fully understand the economic fundamentals upon which the current market is based and the probabilities of what it may lead to next.
  • We have to gage the "psychology" of the market: the general public buys most at the top because the positive "noise" (media, etc.) is loudest and sells at the bottom because the negative noise is loudest and the pain is the greatest. Human beings are conditioned to avoid pain.
  • Human emotion is the greatest enemy of successful investing: fear and greed are stronger than long-term resolve.
  • We need to be independent thinkers and not be afraid to be contrarian: when all the "experts" agree, something else is going to happen.
  • With all this considered we can then pick the appropriate price points for making new asset purchases.

3) Regular re-balancing takes the "guess-work" out of the timing for buying and selling:

  • As I stated earlier: different assets perform differently through the course of the economic or investment cycle.
  • An out-performing asset will become "over-weight" (as a percentage of the total portfolio) which tells you when to sell what is the excess to return to the strategic weight.
  • An under-performing asset will become "under-weight" and the "profit" from the sale of the over-weight asset can be used to purchase the necessary amount of the under-weight asset.
  • Over time, this adds significant value by further compounding growth.

4)  The costs for investing can detract from the growth over time.

  • The difference between paying 2.6% (all in) and 1.3% could cost well over $1,000,000 over 30 years (on a $1,000,000 portfolio now).
  • Transparency of all costs must be available, at all times.
  • Not just the fee, but the other "embedded" costs.

5) There can be no conflict of interest.

  • In other words, any interests (be they financial or personal) cannot be put in front of the investor/client interests. That is the fiduciary duty that holds a portfolio manager / advisor accountable.

Next blog:
How has discipline been good for us this year?

Wednesday, September 30, 2015

Perspective: Blue Jays Magic = 1

Today is the end of the month and the 3rd Quarter and there is lots of volatility in financial markets.

However, we all need to take a deep breath because, for those of us who care (and I must admit that I jumped on the band wagon in early August), we are about to enter one of those very exciting times that don't come around too often.

From 1993 (October 23 to be exact), I have the greatest memory of sitting in the basement of my home in Port Washington, NY (north shore of Long Island and commuting distance to Manhattan) and watching Joe Carter leap around the bases after hitting the home run that gave the Blue Jays the second of back to back World Series titles. I yelled so loud that the new little puppy retriever watching with me yelped and left a wet spot on the carpet (my 3 daughters, 4, 6 and 8 were asleep, as it was a "school night").

The following day Jean Chretien and the Liberals took over the reigns of Canadian government from the long-ruling PC party with an elected majority.

Paul Martin took the helm of Canada's finances, which at the time had the highest debt to GDP ratio of the G7.

The Canadian economy collapsed as he set about to balance the budget.

The housing market in Canada was already well into a significant correction and this continued.

At the time things looked pretty grim.

But the budget got balanced, the economy recovered and markets continued to cycle up and cycle down (especially through the 2008-2009 period). 

Cycles happen and we do the best in the short-run to take advantage of the opportunities that they present. In the long-run, however, what remains are the memories and the cycles continue.

So make a plan, stick to the plan, tweak it as necessary along the way (happy to help you out in this department, by the way) and build up your good memories and don't get hung-up on what is happening yesterday, today and tomorrow in financial markets, because in the long run you are not likely to remember it.

But if the Blue Jays are successful (and that is important to you), that you will remember!

Tuesday, September 29, 2015

Preferred Share Anomaly

From time to time, things happening in financial markets just don't make much sense.

There is a reasonably large seller in the market of a Canadian preferred share ETF, likely because the ETF is now holding a greater amount of the Fixed-Rate Reset Preferred Shares and with the current level of low interest rates, when the rate on these types of preferred shares are reset, they are reset at lower levels paying a lower dividend as a result and making the issue less attractive. 

Preferred share markets are not as actively traded as common share (equity) markets and therefore there is somewhat less liquidity. As a result, a large seller can move the market price lower without much trading volume.

However, when the ETF basket is sold, all of the preferred shares in the basket are sold, including the Perpetual Preferred Shares with fixed dividends. Naturally this pushes the prices of these perpetual preferred shares lower and as a result of the fixed dividend, pushes the dividend yield higher (and this is what does not make sense): higher returns (dividend yield) in a low return environment.

What are the risks of owning Perpetual Preferred Shares ?

  • The "Credit Risk" otherwise known as the ability of the issuer of the shares to pay the dividend (usually quarterly) and of course redeem the preferred share at its maturity (which is usually when, after a specific date, the issuer wishes to mature the outstanding preferred shares) at its issue price or better.
  • The rating agencies, Dominion Bond Rating Service (DBRS) and Standard and Poors (S&P) usually rate the "investment grade" or good quality issues:  most Canadian Bank Perpetual Preferred Shares are rated "Pfd-2h (high)" (DBRS) or P-2 (S&P). Canadian Insurers have a slightly higher rating (the reasons for this difference are detailed and a little more than the scope of this blog, but I am always happy to discuss it in more detail off-line).
  • Importantly, if you can pick up a good quality Perpetual Preferred Share at a discount to its par value (usually $25) and the issuer can only call it at its issue price or better, there is potential for a capital gain.
  • If you can get a dividend yield at or better than 5.5% (which you can at the moment), you are going to get a better after-tax return than you would on a bond with the same yield because of the dividend tax credit.
  • You have to be prepared to hold these issues until the issuer decides to mature them to realize the capital gain and there is a risk that in this time period interest rates may go higher, so there is "Interest Rate Risk" involved.
  • As I mentioned earlier, there is also less liquidity in these issues, so they may be more difficult to sell, but there is usually always a market maker who will make a reasonable price, especially in the good quality issues.

At the moment, some of the good quality issuers' Perpetual Preferred Shares look very reasonably priced, relative to the bond market and this may be a good opportunity to add these income producing assets to a portfolio if you have room to do so in your diversified, balanced portfolio.

Determining whether you have room is a more complex decision and should be done in conjunction with professional assistance.

It is Webinar Day at High Rock, so feel free to tune in to our latest thoughts on the global economy, financial markets and wealth management strategy (recorded version) after 5pm at

Monday, September 28, 2015

3 Quarters Into 2015: 
Still Plenty Of Uncertainty 

When I began writing this blog in January, I set out a number of "key" themes that I suggested would be significant for 2015.

The overiding theme was to "Expect The Unexpected".

Well there has been lots of surprises for 2015 thus far, as we look back over the last 3 quarters, but the forward looking prognosis remains elusive:

The US Federal Reserve wants to begin the process of normalizing interest rates (and so does the Bank of England).

The "wild card" at the moment is the direction for inflation.

Central banks (generally) want to see a 2% rate of "core" inflation (which extracts the more volatile components like food and energy).

Global economic conditions have been putting downward pressure on commodity prices and at the moment this does not look like it is about to change anytime soon.

The US Federal Reserve remains optimistic about the improvement in the US economy, however admits that there are global factors that have given them cause for concern.

A stronger $US, reduces global demand for US goods and services (exports) and simultaneously allows lower foreign import prices which in turn puts downward pressure on core US prices (in essence the US is importing deflationary pressures).

Certainly there is a corelation between commodity prices and core PCE inflation.

The real question, then, becomes whether or not the US Fed is being too optimistic about its views for the US economy.

It's track record suggests that, in the past, it has erred to the side of being overly optimistic, so there is a credibility issue at stake.

The worry amongst the economic "thinkers" is that if a recession should occur in the US over the next year or two, the Fed will have little room to act in order to lower interest rates to further stimulate economic activity (because interest rates are at 0%).

On the demand side of the equation, consumer activity in the US has picked up, a little. Todays data for August showed a little better than expected uptick in activity:

However, the trend looks to have peaked and most of the consumer spending recently has been on automobiles, rent and restaurants, financed at low interest rates.

The Fed is counting on employment growth to drive consumer spending and in turn, drive the economy. Hence, their optimism.

Next up: 3rd Quarter earnings: expectations are for further declines in S&P 500 company earnings of approximately 4%. If this is the case, it will be the first back to back, quarterly decline in earnings since 2009.

This has been driving another of our 2015 themes, that stocks were / are still, expensive. The 12 month forward price to earnings ratio at 15.2 compares to the 10 year average of 14.1. However, it is down from a level of 17 in May (when equity prices peaked).

It would not surprise us to see the S&P 500 back at the 1750 level , down from the current level of 1900 and the highs at 2135.

This, among other factors, have us calling for a "low return environment" for investment asset growth for the next while.

There will be opportunities to put money to work at better levels / prices down the road, but it will benefit those who are patient.

Thursday, September 24, 2015

It's Never Too Early To Think About Education Funding

There may not be much inflation in the broader economy at the moment, however post-secondary education is an exception.

According to Statistics Canada, Canadian full-time students in  undergraduate programs paid 3.2% more on average in tuition fees for the 2015/16 academic year this fall than they did the previous year.

The increase in tuition costs in 2014/15 was 3.3% higher than tuition costs for 2013/14.

On average, undergraduate students paid $6,191 in tuition fees in 2015/16 vs. $5,998 a year earlier.

Undergraduate students in Ontario paid the most: $7,868.

(click on the table to enlarge it)

And that is just tuition.

There will be food and shelter, books, computers, activities and possibly travel costs to add on.

So parents (and grandparents) who might want to think about this in advance, if your "youngin'" is going to want a post-secondary education (and hopefully we all wish for this to be the case), then it is going to get significantly more expensive in the future.

The RESP is an excellent vehicle for building education saving for the long-term, but do not fall into the trap of getting caught in an expensive managed plan (and there are lots of salespeople out there who will be trying to take advantage of you, even your local bank branch). Anything managed is going to have a cost to it, so be extremely careful to check the fees, commissions and other costs associated with setting it up.

New parents, the best time to start is right away. You will need a social insurance number for your newborn to open an RESP account.

Best part of it, the Canadian government (and in some cases, your provincial government) will top-up your contribution.

The Canadian Education Savings Grant will give you an additional 20% to a maximum of $500 of what you put in.

So to maximize the grant, put in $2,500 each year (per child) and it will turn into $3,000. You cannot beat this "risk-free" return.

If you miss a year of contribution, you can make it up.

If your child is 5 and you are just staring now, you can "catch-up" 1 missed year, each year: so for the next 4 years you can "double up": $5000 each year and the grant will give you $1,000.

When the government is going to give you money, you should take it. It also beats inflation handily.

There are plenty of strategies for growing this money and the tax on the growth will be deferred until it is withdrawn. When it comes time to utilize it, it is taxed in the hands of the beneficiary (your child). In most cases they will have little if any taxable income, so they will likely not be paying any (or significantly less than you would) tax on the withdrawals.

There are also lots of strategies for withdrawing the money as well, but I would have to defer to my star wealth forecaster and CFP (Bianca) for those!!

Tuesday, September 22, 2015

The Sh!# That We See (And Can't Believe)

Our normal process when we sign up new clients involves a pretty in-depth analysis of their goals and objectives, their current financial situation and their current investment holdings.

When we look at the statements that they put in front of us (from their previous advisor), it is often jaw-dropping.


Why would anyone put a client into a large bank (no load) balance fund (approx. 60% equity) with a 5 year return of 5.65% (10 year return of 3.75%) and an MER (management expense ratio) of 2.36%? 

Do the math on this: the manager gets paid, the advisor gets paid (trailer fee) and what about the client? There is not much left over for them.

And yet this balance fund has over $6B in assets under management!


That is just the tip of the iceberg.

I can't name names (oh I wish that I could) because I would so like to out some of the "bad" advisors out there.

They are not bad because they are breaking the rules, they are bad because they do not have the client's needs in mind (that is "skirting" the rules). The only thing that they want is to get paid (their fee/commission/trailer)!

New Issues:

We see these "orphan's" all the time when we look at new clients old statements: be they stock IPO's (so many junior resource companies worth next to nothing now), closed-end funds, structured funds.

Why were they put into the client portfolio in the first place?

Selling fees paid to the the advisor (so that the issuing institution can also make their fees). Often when these purchases turn into "dogs", there is no liquidity available to move them out of the portfolio. When there is liquidity, the advisor will often use it to "flip" it out to make room for the next new issue and get paid once again (a commission on the sale and on the next new issue).

Then there is the complete lack of diversification and risk levels that are off of the charts.

Certainly some advisors just do not have their client's best interests in mind, but the client needs to pay attention too.

Here is some good reading on that:

Wake up, Canadians - you need to start asking more about investment feesROB CARRICK

It's webinar Tuesday at 

A recorded version will be available after 5pm.

If you happen to have a question or wish to provide any feedback (which is always enormously appreciated):

Monday, September 21, 2015

What Now Oil?

In March of 2008, Goldman Sacks called for $200 Oil prices.

A week and a half ago, they called for $20 Oil prices.

In 2008 it was all about demand. In 2015 it is all about supply.

That is economics at its finest: supply and demand will determine price.

As it is in any cycle, eventually supply and demand will find equilibrium and settle in a narrower price range. Until that time "price discovery" and the various participants involved in the process (analysts, economists, traders, speculators, end-buyers, end-sellers, etc.) will "place their bets" as to what the next move might be.

As prices have fallen, higher cost producers have reduced production, but the impact takes time to develop.

The International Energy Agency (IEA) predicts that US production will significantly decrease in 2016.

Falling Supply:

But, of course this all takes time to filter through the global economy and in the interim, there will be lots of "noise" about all the different inputs into the equation.

And of course, there is the "politics" of oil.

For those "developing" economies (and other producing nations) that are dependant on oil, there is plenty to worry about, especially the debt burden that is tied to growing their economic development.

Economic uncertainty can and may create political instability.

So the caution being exhibited by the US Federal Open Market Committee in their latest analysis of the global economic environment is warranted. As will always be the case there are opinions on whether they should have started the interest rate "normalization" process sooner, rather than later, however (as this blog has been suggesting since the beginning of the year):

Central banks do not like volatility, because it creates uncertainty and undermines economic confidence. Without confidence, consumers will not consume and businesses will not invest in increased production.

An overly optimistic central bank risks credibility. So it might be a good thing that the FOMC proceeded with caution.

Oil supply and demand will give us a good reading on the state of the global economy and its current status is indeed a cause for concern. The cycle will unfold as it always does, but the timing of the adjustments will be what we need to prepare ourselves for.