I hope you understand why we prefer to keep our specific fund managers confidential. They do exist, however. For example, our core Canadian equity fund manager has earned a cumulative return of 240% this decade vs. only 67% for the TSX60 TR.

It’s standard deviation (risk measure) is 20% lower than the index as well.

Most of their methods are known, but still not followed. For example, Warren Buffett noted 20 years ago that most of the top investors are value investors, but there still is no move toward value investing. If anything, value investing is becoming less popular today, as many investors are focusing more on short term trading and following trends. This is true even though most top investors don’t use graphs or active trading models.

People seem to prefer overly-simplified methods, such as looking at a graph and making an easy (but dumb) trade. Value investing takes work to do properly – but has a much higher chance of long term success.

The long term success of many value investors is well documented. Why isn’t everyone doing it?

Why would the indexes rise because someone is a better stock-picker? Most top investors have portfolios significantly different than the indexes.

You do seem to still really believe the Efficient Market Hypothesis. In recent years, academics have found more and more flaws in it to the point that it is generally believed to be only somewhat true. It seems there are all kinds of documented inefficiencies and ways to beat the indexes.

Robert Shiller from Yale says the EMH “represents one of the most remarkable errors in the history of economic thought.”

Ed

“All-star fund managers” are a myth. I have trouble undertsanding how you can publicly claim to be able to identify them without any proof. If it was so clear, you would certainly be able to give a list?

If they “can tell you why they beat the indexes”, certainly everyone would be able to do the same? Wouldn’t the indexes themselves rise as all these companies started doing so much better?

Much of your advice is very strong so it really suprises me when you pull this out. Is this because getting people to invest with fund managers is how you get paid?

I love leveraging and anything even remotely associated with the discussion of it. There should be more information out there about leveraging as a tool. Its interesting how you mention Talbot Steven…I just ordered a used book by him through Amazon just this past week for $2.95 and looking forward to the read.

Regarding your article, I did not read it to attempt to make a debate out of it; I took it for what it was and the spirit of what leveraging CAN do for an individual’s personal finances and/or business.

Good job in my view. It highlights the reality just how leveraging can be used to one’s advantage and hence ’shave off time’ for reaching one’s end-goals.

Cheers,
The Rat
P.S. Hit me up on my new site if you get a chance and let me know what you think or post a comment to a post

I’ve continued to enhance my calculator originally created to help me understand the Smith Manoeuvre. I’ve attempted to add a checkbox for the Rempel Maximum. But, I’ve run into a conundrum.

If I use typical scenarios where the LOC interest rate is > than the mortgage rate, and if you borrow up to an amount dictated by the principle paydown of the 1st mortgage payment, you quickly run into a negative cash flow impact – in other words, you have to come up with additional money. I’ve also tried it a different scenario where you borrow an amount that requires absolutely no additional cash flow through the entire process and is timed to balance the LOC interest costs with the original mortgage payment.
I’ve put in your numbers using the example above and the cash flow turned negative at the end of the 10th month and grew to require an additional $173 per month once the mortgage was retired.
Of course, one could dip into the anticipated tax refund to help fund the additional cash required.
I’d like to hear from you, the inventor of the process, so that I can properly adjust my calculator.

I am not saying I know everything but if you can comfortably utilize leveraging to your advantage without causing the great ship to sink then this is something you might want to consider growing your assets.

It is about the evils of leveraging and CC’s argument goes like this:

I am sorry but I think this argument is a bunch of baloney. Millions of people start businesses and don’t end up on the Forbes 400 list. In fact, most start-ups fail miserably. Warren Buffett, one of the most successful businessmen/investor ever and #3 on the list has this to say about leverage:

“The most dramatic way we protect ourselves is we don’t use leverage. We believe almost anything can happen in financial markets… [so] even smart people can get clobbered with leverage. It’s the one thing that can prevent you from playing out your hand.”

Well, I looked up Warren Buffet’s consolidated balance sheet and found that in 1998 they borrowed $2,385,000,000 for investment purposes.
This is the address:
http://www.berkshirehathaway.com/1998ar/statements.html

In the year 2000 the same liability was $2,663,000,000.
(http://sec.edgar-online.com/2001/03/30/0000950150-01-000114/Section14.asp)

Which means to me that they not only refused to practice what he preaches, but also they increased their borrowing by 278 million in two years.
Admittedly, in view of the company’s success this debt is just a pittance, but they surely wouldn’t have borrowed if the reason were not there. But it was there, they found it reasonable to borrow.

Sandor

don’t know about Vancover but I visited Toronto 2 yrs ago and it definitely did not seem cheap!

Timberwolf is a timber company which owns substantial amounts of vancouver island. i might be a buyer of that stock on pullbacks.

Wish I can say the same with the Vancouver real estate. When is it going to crash? Hmm… Maybe I’ll write an article on that.

I totally agree with you. which is why I sold it and now rent that same condo back from the new “investor”.

unfortunately for my landlord, in the past 2 years, the condo lost 70k of its value, bringing it close to what I paid for it!

however, on another note, if you buy a property with 100% financing, you shouldn’t expect it to cashflow.

The next step to leverage is use other people’s money to invest and take a cut of that. just like the hedge fund managers do. they’re amongst the most highly paid people on the planet.

But I tend to agree with you, leverage really does boost your investing performance.

I bought a house for rental purposes. I borrowing 100% and paid $5k in closing costs. I was negative $100/mo for 12 months before I sold it. I was in it for $5k + $1200 = $6.2k.

I made a profit of $75k on it in about 12 months. Try turning $5k into $75k in a year without leverage. Its next to impossible.

Of course, leverage cuts both ways. A wrong financial decisions can destroy wealth just as fast.

[...] A discussion over at MillionDollarJourney prompted me to do a little digging into Market Growth GICs offered by Canadian banks. Many investors are risk-adverse, while not wanting to relinquish the growth potential of the stock market. This is why Market Growth GICs are so seductive. Investors’ original principal is guaranteed regardless of what the market is doing, while the performance is linked to the market indices tracked by the products. Being a cynic, I’ve investigated and uncovered the following five gremlins of Market Growth GICs: [...]

Ed, I surely agree with you on this. Guarantee worths nothing. However, you and I believe in this just because we took the trouble to analyze the historical return of major indexes. For the average person, like my Dad, the guarantee means quite a lot to them.

Talking about seg funds, I remember what my investment advisor told me when I asked about it. He said, for a relative conservative fund like the TSX 60 index, bank index or Canadian dividends fund, the premium of 1% to 3% of the seg funds is just a waste of money. For an aggressive fund, like high tech and pharmaceutical, the premium will burn you. After the tech bubble of 2000, a lot of seg tech fund raise the premium to above 10% to cover the loss. That totally defeat the purpose of a seg fund.

EZ

I just want to make sure my point here is clear. The super-rich made it by leveraging heavily (including Warren Buffett) usually into one business. For the average person, the main road to moderate wealth is by leveraging, but usually into a bunch of businesses – which is an equity portfolio or mutual funds. This is the easiest road and almost the ONLY road to moderate wealth.

Leveraging into 1 business and leveraging into a bunch of businesses are obviously similar strategies.

The main difference is that leveraging into mutual funds (a bunch of businesses) is clearly far less risky than into just 1 business.

I’m NOT saying everyone that does leverage becomes wealthy. In fact, most invest badly or their business goes under.

I’m also NOT saying leveraging is for everyone. Most people don’t really want to do what it would take to be wealthy. Most Canadians are happy with a middle class lifestyle and don’t want to be worried about financial strategies or work hard in a business.

However, if you do want to become wealthy, you need to do what the moderately wealthy do – which is to leverage into equities (either 1 or a bunch of businesses).

Moderate wealth can be in several categories:

-2-4 million: Beer and pretzels millionaires (can live comfortably on beer and pretzels for life).
- 4-10 million: Champagne & cavear millionaires.
- Over 10 million: Butler & chauffeur millionaires.

Accumulating $1 million over 20 years with a moderate amount of leverage is relatively easy – if the investments are effective. Higher amounts require more leverage or more time.

Ed

I guess my biggest issue here is that I rarely consider guarantees to be worth anything at all. With these products, the only reason anyone would use them is because of the guarantee.

Seg funds don’t limit your upside at all and guarantee your principal after 10 years, but again I don’t see any benefit in the guarantee.

The markets are rarely down for long periods of time. Since 1940, the S&P500 has been down over 5 years only 2 times and never down over 10 years. The fund managers we use in leverage portfoliios are more consistent and have never had even a 3-year negative period.

Also, if you are looking for a guarantee, you aren’t looking for the “all-star fund managers” that beat the markets by wide margins over long periods of time.

From my perspective, the guarantee is worth zero. So why even consider a market-linked GIC that limits the market upside and where we lose all the tax benefits of investing in equities?

Ed

FJ, actually, the product is called Market Growth GIC by that bank.

FinancialJungle: “Regarding the use of GIC as collateral, why would anyone lend money to the bank and only to borrow it back at a higher rate? Moreover, your GIC income is taxable, while your interest expense is not tax-deductible if it’s for personal use.”

Even for personal use, there is advantage to this strategy. When the interest rate yield curve is normal, that is, the long term interest rate is higher than the short term interest rate, this strategy save you money.

Now, the interest yield curve is inverted, this strategy has only limited used. One can only use it to get rid of the checking account. Plus the non-interest earning minimum balance or the service charge that come with a checking account.

EZ

Ed, the one my Dad get into is better than most of the index-linked GIC in the market. It has no return gaurantee, but the maturity price will be calculated by the closing price of the index on the previous settlement date. There will be no price averaging rip off. The principal gaurantee is for real too. Think about it, you don’t collect the stock dividends, so the bank pick up that 2% to 3% dividends. That is enough to cover the seg fund premium.

The real turn-off is the tax reporting part, one has to report the earning as interest and pay twice amount of tax. It stings. On top of that, one has to report all the earning for 5-year on the maturity year. This double stings.

But, they protect your principal.

Someone has to research the holdings inside this index-linked product to get a realistic anticipated return.

Excluding taxes (inside RRSP?), you can allocation 80% to a 5-yr 4.46% GIC, and the remaining 20% to a TSX index fund. Here you have your custom made index-linked GIC that guarantees your principal, and the performance is linked to the market.