Investment Research - Getting Organized

The summer sailing season has ended.  We have just completed a trip to England - something that we do every spring and fall where we make it a point to stay in places managed by The Landmark Trust or The National Trust.

Those memories will carry over for a long time.

Time to Focus on Investment Research

Over the past six months, my investment activity has been confined largely to reducing exposure to equities and preparing for a potential significant market correction.  It has been addressed in previous posts.

In this regard, I have been influenced by a remarkable book: Mastering the Market Cycle : getting the odds on your side by Howard Marks, one of my favourite authors on things financial.

The other reason for trimming positions is that I lost touch with the market as my efforts were focused elsewhere.  Further, I felt that there was no harm in taking profits and trimming some losers in the face of an uncertain market climate.

I have allocated several months for intensive research: to identify companies that have the potential to rebound quickly once the market corrects; to identify investments which should be relatively resilient in the event of a major market correction.

In earlier posts, I have identified the process I use to identify promising investments.

Information and Data Management

It is critical to document the course of one's research: to identify and document sources in a way that they are ready to hand when the need arises, to organize the material in a way which is complementary to your thinking processes, and to do all of this in an organized system.

Information management for me is not always to be equated with "neatness".  Nor is it to be conflated with a "one system fits all" model which some software developers promise will solve all of your problems e.g. Evernote etc.

To my mind, Al Gore has a fine system.  Actually, it is a "system of systems".

Note the following:

• a bookcase for references which are used occasionally: not too many - my bet is that it is a collection of "the best of the best" for his purposes
• a flip chart in order to "draw" ideas - something that I do when I build systems models for industry segments to direct my research
• multiple computer screens to allow for quick comparisons and to consolidate information quickly 
• a dedicated computer for non-investment purposes such as e-mail, photo storage and editing etc. 
• stacks of paper documents organized into piles: the "stratigraphic" approach to document mining is surprisingly effective
• large waste basket
• printer
• windows to provide eye relief and a view for day dreaming
• good lighting 
• a comfortable seat (I think) and a set-up which facilitates quick access to a variety of working surfaces 
• note the relative absence of binders ... horrible inventions ... ditto for filing drawers which are good only for long-term record storage e.g. tax returns

Also note that his room appears to be dedicated to the work at hand.  This important psychologically.  Everything is organized for a purpose - the business of getting work done with a minimum of distractions - the proverbial work room.  So ... it's not only how you work ... it's also where you work.

Rejigging My System

I decided to develop a comprehensive system for managing my research findings.  Before focusing on one component (e.g. the ideal browser), I felt that it was important to start by integrating the individual components of my activity into a coherent system that was complementary to my way of thinking:

• I do a lot of parallel thinking and often go off in tangents in my search for new ideas
• I like to focus intently on topics of interest, sometimes to a ridiculous degree: the point where you cease to hear any background music and your attention is focused to the point of no return (my wife opines that I'm often in my own world during these periods)
• I read voraciously, an activity that involves hold-in-hand printed material and a variety of electronic media
• I like to have a system which accommodates a variety of thinking processes:  sometimes I draw out ideas, sometimes I do extensive cross-referencing from a wide range of sources; sometimes I consolidate, and so on.  
• I am fortunate to have the space for a dedicated office for things financial.  

The "Gore System" is the one that works for me. Seeing that picture was the final catalyst.

The Browser

After trying a many browsers over the years, I have decided on Vivaldi.  It fits my thinking processes.  It's strength is that it can be customized to a great degree.  

I use this browser ONLY for financial research.  By dedicating it to this purpose I have conditioned myself to use it for the financial work.  In  doing so, I have lessened the temptation to get distracted by the siren calls of things such as YouTube travel and DIY boating items.  

There are many reviews of this product.  I will not elaborate on them further as they are readily available through internet searches.  This aside, the only way to see if it is suitable is to try it out in practice.  

Depending on my purpose, I use other browsers: FireFox, Chrome.  

Farmers Business Network - Great Source of Information from people with muddy boots

In previous posts, I provided a few sources that I visit periodically in order to take the pulse of the agricultural community:

• trade magazines
• government departments (including some of the Federal Reserve Banks located in agricultural areas)
• regional/local newspapers

Recently, I came across a real gem while reading this article:

FARMERS BUSINESS NETWORK IS DISRUPTING HOW SEED IS LABELED AND SOLD

It led me to explore further:

Farmers Business Network

The FBN Network came about when farmers wanted to develop an independent, unbiased, and objective farmer-driven information source — no marketing fluff, just the facts on raw performance. They knew that if they could share their agronomic precision data with one another, they could all make better decisions on seeds and agronomics.  ...

What started as the dream of a handful of farmers in 2014 spread to a network of thousands of America’s best farmers managing over 8 million acres in just two years. As each new farmer joins the FBN Network, every member’s seed information, agronomic analytics, and buying power gets stronger. When farmers connect, farmers win - and the services, technology, and network keep growing.

Click on the above-noted link to learn more.  Among other things, the FBN provides farmers with a way to buy fertilizer in a transparent way and at good prices.  By harnessing the wisdom of the crowd, the FBN also decodes seed genetics to enable farmers to buy seed knowledgeably: many branded seed types sell at different prices even when the genetic varieties are the same.  Collectively, seed companies to date have been reluctant to provide a greater degree of transparency about their varieties in order to allow farmers to make meaningful comparisons.  So ... the FBN stepped into the breech.  

It's akin to a farmers' co-operative, but driven by the power of the Internet ... and very much in tune with the way of doing business in today's farming community.  All in all, a very interesting business model which I'll follow with great interest. 

It is well worth exploring the site in detail.  I have subscribed to the FBN blog.

Emergence

It provides a "real world" view from the field - not the blandishments of equipment manufacturers and the like.  In this sense it is invaluable, especially for leads on investing.

If you subscribe to the blog you can download some special reports.  One of them, The Voice of the Farmer, provides a very sobering perspective on the realities of farming in the United States - also applicable to Canada with the exception that Canadian farmers are not burdened by health care expenses to the same extent as in the U.S.

It's just about THE BEST overview I have encountered to date.  

Airline Travel - Seating Tips

Why Pay for Allocated Seating?

This post was stimulated by an article in The Guardian.  

UK air travellers waste £175m a year on allocated seating, report finds

Almost half (45%) of people who pay to sit with their companions would be seated together anyway, according to an investigation by the Civil Aviation Authority (CAA)....

This is the chance of being separated from your companions if you do not pay for allocated seats on nine major airlines serving the UK, according to CAA research:

Ryanair 35%

Emirates 22%

Virgin Atlantic 18%

Jet2 16% 

British Airways, easyJet, Thomas Cook 15%

Flybe, TUI Airways 12%

The article mentions that airlines prefer to seat children with their parents for safety reasons: it's easier to evacuate an aircraft when kids are with their parents.  Also, and unwritten, airlines know how passengers would react if seated with unattended and unruly children. 

If you are on short haul flights, it makes better sense to run the risk of being seated separately from your travel companion(s).  And if it does happen, you can always spend your savings difference at a bar as a consolation prize.   

If You Do Pay, Where to Sit?

There are some airline seats which should be restricted to convicted criminals serving hard time.  In order to avoid these torture devices. it's best to consult one or two web sites which specialize in rating seats by airline companies and the planes in their fleets.

SeatGuru
skytrax

These sites also provide a wealth of other information, including:

• airline reviews
• airport reviews

By visiting these sites, you can get a pretty good idea of what lies in store for you before you buy a ticket.  For flights longer than four hours, I feel that it's always well worth reserving a seat in order to get more legroom and a better measure of peace and quiet (relative term) e.g. away from the galley and washroom traffic.  For transatlantic flights, I've found that business class or club class (or its equivalent) is not really worth the added cost, provided that you have pre-selected your seat in steerage wisely.  I would rather spend my money on things other than being "pampered" in an aluminum tube. 

What if You Are Booking Group Tickets?

Sometimes I buy tickets for family trips.  A few things that I discovered:

• When I bought tickets on one major Canadian airline, I received airline travel points (exclusive of credit card points) only for my ticket.  
• Seat prices varied depending on how many tickets I bought.  It was generally much cheaper to buy them by two's than in bulk.  
• I generally asked family couples to purchase their tickets and then reimbursed them immediately thereafter = lower prices and an opportunity for them to earn points (another gift) and get the insurance benefits provided by their credit cards.  

To learn more, click on the following link:

Tips For Buying Tickets for Groups

Know Your Rights

Travellers in the EU have more protection than flyers in the Americas.  Click on the following link to learn more about EU flyer rights regarding:

• delays
• cancellations
• downgrades
• being bumped
• misssed connections

Civil Aviation Authority (UK) Passenger Rights

Sadly, regulations are not as traveller friendly in the Americas.  In Canada, where I live, there is a wonderful site maintained by passenger advocate, Gabor Luckacs.  In 2013, the Consumers' Association of Canada awarded Gábor its Order of Merit for singlehandedly initiating legal action resulting in the revision of Air Canada's unfair practices regarding overbooking. His advocacy in the public interest and expertise in the area of air passenger rights have also been recognized by both the Federal Court of Appeal and the legal profession.

The site is a gold mine of information about everything from lost or damaged baggage to denied boarding.  

Air Passenger Rights

Gold - Long Term Performance - Abitibi Royalties

Gold has been disparaged as an investment, especially by North American financial commentators.  Why?

• Some contend that investing in gold is nothing more than speculation.  To that I say, this remark applies to all investment activity.  Gold speculators employ metrics which differ from say, investors in equities. 
• Some commentators are associated with organizations that don't make much in the way of commissions from dealing in gold (ALWAYS check their affiliations as part of your due diligence).
• Many contend that gold does not pay interest or dividends (this is changing as some mining companies now pay slight dividends).
• Some say that gold has no inherent "store of value" and is only subject to the whims of the market ... so what?
• Some say that gold is very volatile ... so this is bad?
• Others scoff at the "survivalist" arguments and the ardor of some "gold bugs" who promote gold as an investment (many of them are a bit over the top) ... there is merit to this.  
• Other cite examples where investors have been scammed in fraudulent mining schemes ... it's not restricted to the mining sector but always remember that mining promoters always try to guild their reports

The truth is that gold is like most other investments:

• subject to the whims of the market place
• very liquid as it is traded very widely via a number of vehicles

A more considered perspective is warranted.  For example, take a look at the long term performance of gold.  

Consider also, that North American commentators have never experienced a melt down in the social and economic fabrics of their societies.  This is at variance with the experience of most other people in the world.  Many have been subject to major dislocations and discovered that gold was one of the few vehicles that could see them through the night.  Consider that many people live in countries with rampant corruption, rigged banking systems, and volatile economies.  With growing economic prosperity, much of the world now has the wherewithall  to purchase gold.

Further, it could be argued that we are reaching "peak gold" - that the rate of new economic discoveries is declining and that the cost of replacing depleted resources is increasing significantly.

In a few weeks, I will provide an update of the Financial Log Book.  I have gone largely to cash while retaining a few stalwart performers - well managed companies with little debt and resilient markets.  A significant part of the portfolio is also invested in precious metals:  Abitibi Royalties, Silver Wheaton, a bullion fund and a few small gold mining companies that are in production.

A short note about Abitibi Royalties.  The company will be listed on the NASDAQ on October 11, 2018.  In contrast to many gold mining enterprises, this company has maintained its share price .... a reflection of market sentiment about the quality of management and the relevance of its business model in the current business environment faced by the mining industry.  To my mind, the company is well positioned:

• has no debt
• has cash available to exploit opportunities
• earns a steady income flow from smelter royalties and other sources (see company financials) with minimal production risk
• has interests in a series of properties surrounding large mines ... if companies such as Canadian Malartic expand their operations, Abitibi will gain new sources of income for a very low outlay  
• if gold rises in price, Abitibi will profit nicely as well  

Investment Decision Marking in the Face of Uncertainty

My research continues.  In the course of my reading, I have encountered a plethora of articles and books by academics.  Methinks that some of them, by necessity, develop rather closed constructs which do not fully reflect the actualities of decision making in times of uncertainty (if even one is alert to the possibility of untoward events).  This is why you see numerous behavioural experiments structured around "tight problems" with few dimensions using university students as experimental animals ... hardly a reflection of life lived by the vast majority of "deplorables".  Further, academics tend to delight in making things more complex than needed: how else would they find fodder to satisfy the publish or perish syndrome?

To my mind, the art of decision making starts by selecting the appropriate "thinking process" that is suited to the nature of the problem ... and that is a major task that I will start researching over the next few months.

When starting this research, I came across an interesting article by Justin Fox in the Harvard Business Review: Instinct Can Beat Analytical Thinking.

The lead-in reads as follows:

Researchers have confronted us in recent years with example after example of how we humans get things wrong when it comes to making decisions. We misunderstand probability, we’re myopic, we pay attention to the wrong things, and we just generally mess up. This popular triumph of the “heuristics and biases” literature pioneered by psychologists Daniel Kahneman and Amos Tversky has made us aware of flaws that economics long glossed over, and led to interesting innovations in retirement planning and government policy.

It is not, however, the only lens through which to view decision making. Psychologist Gerd Gigerenzer has spent his career focusing on the ways in which we get things right, or could at least learn to. In Gigerenzer’s view, using heuristics, rules of thumb, and other shortcuts often leads to better decisions than the models of “rational” decision-making developed by mathematicians and statisticians. 

Here are a few take-aways from the article:

• very simple heuristics often outperform complex statistical decision-making models in complex situations 
• there is a very lively debate about "System 1" which is fast, instinctive and emotional; and, "System 2" which is slower, more deliberative, and more logical. 
• heuristics can be used intentionally as opposed to subconsciously (gut feel approach)
• The problem of the heuristics and biases people, including much of behavioral economics, is they keep the standard models normative, and think whenever someone does something different, it must be a sign of cognitive limitations. That’s a big error. Because in a world of uncertainty, these models are not normative. I mean, everyone should be able to understand that.
• I hope that at some point, the economists turn around and realize that their models are good for one class of situations, but not for another. And also, that psychologists and also economists realize that there’s a mathematical study of heuristics.

The Harvard Business Review has a treasure trove of articles about risk and managing uncertainty.  I've only begun to sift through them.  I find that these short articles are especially useful in presenting general concepts concisely and providing leads for more detailed investigation.

Gradually, I will refine my thinking.  To date, the two best articles I have read about decision making are:

Howard Marks: Investing in an Unknowable Future

I especially like this as it comes from the pen of a very smart man with great experience in the investment world. 

 Investing in the Unknown and the Unknowable

An especially fine mind and an ability to provide a broad perspective. 

Parking Your Cash - Guaranteed Investment Certificates

Preface

I have reduced my exposure to the stock market in recent months for reasons noted in earlier posts.  My actions have been guided by two of Herr Buffet's cardinal rules of investing:

Be fearful when others are greedy, and be greedy when others are fearful

I have the sense that a market correction is in the offing - that the possibility is greater than in years previous.  By several measures, the stock market is entering dangerous territory.  For example,  investors (both retail and institutional) are taking on greater risk in the search for higher yields and the contagion from unexpected events could spread through the financial system in unanticipated ways.  There will be a correction at some point and a climate where equities may be out of favour.  Better to have some resources ready to hand in order to exploit investment opportunities which may arise.

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1

Accumulated gains in recent years have been appreciable and I don't want to place them at risk.  We have enough to meet our needs for the foreseeable future.

At present, I do not have any compelling investment ideas.  Other things in life have occupied my time.  As noted in previous posts, I have started to investigate anew, targets for future investment.  This will be a slow process.

As a result, I have looked for places to park my cash safely.  One of these safe havens is described below.


Guaranteed Investment Certificates (GIC)

A GIC is a fixed income vehicle offered by Canadian banks and trust companies.  It has a guaranteed fixed rate of return and it returns the amount of capital invested.  The terms vary from 30 days to 5 years.  Rates of return generally increase with increases in the terms.  GIC's must be held until the expiry of the term unless one is prepared to pay a penalty.  (There are redeemable GICs but they pay much lower rates.)

This is the best site with comprehensive information about GICs that I found during my research:
Compare My Rates - GIC Info Corner

A few observations:

Safety

Deposits up to $100,000 are guaranteed by Canadian Deposit Insurance Corporation, a federal Crown corporation that contributes to the stability of the Canadian financial system by providing deposit insurance against the loss of eligible deposits at member institutions in the event of failure.  

Click on the following link to see what the CDIC covers.
How Deposit Insurance Works

Read this article by Rob Carrick:
GICs

Rates

Rates generally increase with increases in the terms of GICs e.g. a 30 day GIC will have a lower rate than a 5 year GIC.  The selection of the term will depend on several considerations:

1. Need for cash:  It is possible to "ladder" the terms so that cash can be available in the future e.g. allow for short-term needs via shorter terms of 30 days and longer term needs via longer terms (up to 5 years).  
2. Expectations about future rates: It there is a strong possibility for future increases in interest rates, it may be advisable to select GICs with shorter terms and visa versa.  

This is one of the best sources of information about rates offered by Canadian banks and trust companies:

Cannex - Comparative Rates

Cannex also provides some very interesting White Papers and comparative rates for a wide variety of financial products ... well worth visiting.  

Purchasing GICs

GICs with the highest rates are made available on line.  Institutions such as the Tangerine Bank are well regarded and geared to providing a variety of on line services.  This is only one of many companies.  It is best to compare rates and to split your investments among several institutions if you plan to invest more than $100,000 of your cash in GICs - this in consideration of the $100k limit for the CIDC deposit insurance.  

Concluding Thoughts

Given the current trend for rising rates of inflation, you will be lucky indeed if your money keeps pace with inflation after tax, especially if you elect to buy GICs with shorter terms. Example


The main advantages of GICs are:

• safety
• flexibility as to term

I would consider GICs as useful tools for parking your stash of cash for short periods of time, particularly during times of uncertainty.  As in sport, winning investment strategies often entail going to the defensive mode.  

Financial Calculators - useful tools for financial planning

The Ontario Securities Commission offers several financial calculators:

• Net Worth
• Investment Recovery
• Mutual Fund Fees
• Net Worth
• Pay Down Debt or Invest
• Pay Off Credit Cards and Debt
• RESP Savings Calculator
• Retirement Budget Worksheet
• RRSP Savings Calculator
• TFSA

OSC Retirement Calculators

Retirement Planning

When combined with other calculators, they are powerful tools.  For example, the Retirement Budget Worksheet is a very flexible tool which helps you to identify expenses and income streams before retirement and to estimate them after retirement.  A spreadsheet allows you to compare them.  

If you need to expand your understanding of various investment categories such as TFSAs and RRSPs and RRIFs and Annuities you can refer to the Retirement Planning section of the OSC website.  It is excellent. 

If you are interested in developing a financial projection to ascertain your financial status as your retirement progresses, you can couple the information from the retirement budget worksheet with an interesting tool developed by Cascades Financial Solutions.  

Cascades is a Canadian company that developed software to assist professional financial planners to prepare retirement plans for their clients.  

Cascades is an intuitive retirement income questionnaire for financial advisors that once submitted, creates a report that demonstrates the value of planning advice by revealing the income tax savings of competing withdrawal strategies.

While its primary mission is to serve financial planners, the company also offers services to individual investors (for $85). 

The reports present and compare three strategies managing one's financial affairs in retirement. 

Registered Funds First – This strategy involves creating retirement income from registered funds first, reducing the risk of leaving highly taxable investment accounts to an estate. The second priority is given to taxable non-registered accounts, leaving Tax Free Savings Accounts (TFSAs) last. 

Non-Registered Funds First – This strategy involves creating retirement income from non-registered funds first, deferring the income taxes payable on registered investments. The second priority is given to registered investments, leaving Tax Free Savings Accounts (TFSAs) last.

Tax Free Funds First – This strategy involves creating retirement income from non-registered funds first, and postpones the use of registered funds as long as possible. The second priority is given to Tax Free Savings Accounts (TFSAs), leaving registered funds last. 

Determining a Winning Strategy – With all other factors being equal, the winning strategy provides a client longevity and the highest estate value, net of taxes and fees, at life expectancy. The differences in the net estate value represent the income tax savings of the winning strategy.

Here is a sample report:  Report

Like all financial projections, it is important to examine carefully one's assumptions before setting out.  For example, estimating future rates of inflation and returns on investment vehicles is akin to witchcraft.  That is why it makes sense to proceed with rather pessimistic assumptions with the hope that you will be able to make it through dark and stormy nights during periods of financial market turmoil.  

The Cascades website also contains some really useful articles in their resources section. 

The Government of Canada also presents some really useful financial planning tools in Your Financial Toolkit.  

A comprehensive learning program that provides basic information and tools to help adults manage their personal finances and gain the confidence they need to make better financial decisions.

It is excellent.  

Banks and other financial institutions also provide financial calculators.  

It is useful to visit several sites and compare results.  Why?

• results may vary according to differences in jurisdictions (e.g. tax policy)
• there may be a built-in bias which favours the investment philosophy/approach of the provider
• comparing differences will contribute to a better understanding of the intricacies of financial planning 

Other Aspects of Financial Planning

I wish that I had access to many of the aforementioned tools when starting out in my investment planning.  For example, it took me a few years to appreciate the adverse impact of mutual fund fees.  For fun, you should run the OSC's mutual fund fees tool  to see how fees impair returns on your investment.  

In addition, most mutual funds fail to outperform benchmarks over prolonged periods of time.  And even then, the funds employ financial trickery to make their returns look good (talk about putting lipstick on a pig):

Take a look at these findings from The BAM Alliance in an article entitled Mutual Fund Benchmark Discrepancies Can Fool Investors: 

While most funds appear to have a risk-appropriate prospectus benchmark, we find that a substantial portion of funds have a prospectus benchmark that understates risk and, consequently, overstates relative performance. Further, we show that funds benefit from that overstatement, as investor flows respond to performance relative to the prospectus benchmark even when a fund has a benchmark discrepancy.”

Incidentally, The BAM Alliance is a very useful source of information on things financial.  Its mission is:

The BAM Alliance is built for you. It's a community of investors and advisors who've discovered a better way to take control of financial futures and achieve life's most important goals.

You can subscribe to its e-mail newsletter (free) to receive updates on new articles.  It's a great site.

There are many other great sites with a wealth of very useful planning tools.  The trick is to combine their power with other tools with a view to developing comprehensive financial strategies.  This is where professional financial planners can add real value.  As a DYI person, I prefer to do things on my own, but if things get a bit complicated, as for example, some aspects of tax planning, I will not hesitate to retain a professional.

Lastly, it will literally pay to read books.  Without doubt, the best book on financial planning that I've ever read is The Wealthy Barber by David Chilton.  The original edition is the best as it has a vitality which is lacking in later versions.  If you want to get your financial house in shape, there is no better way to start than by delving into this book.  Some of the details may be a bit outdated, but the general thrust of the book is timeless.  It's a real gem and a work that I have given to many of the people who are important in my life.