Okay, I’ll take Crosby, Malkin, Thornton, Lidstrom, Pronger & Luongo, and you can take an index of the average of all hockey players. How much would you like to bet?

How many levels of successful choices did that take?

Oh, I love a good debate about the efficiency of the market, Aolis.

Most people have no trouble believing they can recognize superior talent in sports players and that these superior sports players will likely continue to be superior. Why is it hard to assume the same thing with super-investors?

Buffett’s answer to you was specifically assuming you would not have time to invest and following your question ending with requests about which “specific sectors and percentages.” Could he have just been saying that you should buy a broad-based investment and “get back to work”?

If Buffett actually thought that, then why does he not buy index funds? He really believes in the “Super-investors of Graham-and-Doddsville”. As he said in his debate at Columbia: “I think that you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small village that could be called Graham-and-Doddsville.”

You are right that one outlier does not prove anything, but it is faulty logic to assume that just because luck could explain someone’s success, it proves that all are luck.

What about all the other investors in Buffett’s classic article that all massacred the index over long periods of time? Note that the ones that are still active continued to massacre the market since the article was published. What would possibly make you think they would suddenly lose it?

Tell me, would you really prefer an index fund to having Warren Buffett himself manage your money?

Ed

I just noticed your post. You need 20% down to be able to get any of the readvanceable mortgages. So, FT is right that I would suggest to try to pay your mortgage down that far.

You may be able to finance this in a different way, such as with an unsecured credit line or some creative strategy to get a much larger tax refund to pay down your mortgage (such as a larger RRSP loan). If you have no other debt and 2 good jobs, you should qualify for a good sized unsecured credit line.

I would recommend to stick with a 1-year mortgage – whether or not you can get 20% down by January. We call 5-year mortgages the “5-year fixed mortgage trap”. Rates are almost always much higher. Based on a study, taking five 1-year mortgages instead of one 5-year mortgage would have saved you money 100% of the time since 1950. This has held true whether rates are rising or falling.

We are getting 2.05% on a 1-year fixed now. If you take a 5-year fixed at 3.75%, then you would be paying more unless 1-year rates average 4.3% or more for years 2-5, which is quite unlikely.

Staying short has added advantages, especially for people doing the SM, since it allows you to restructure your mortgage every year if anything changes in your life. This also allows you to negotiate extra goodies every year – free appraisal, unsecured credit line, etc.

Since you are both teachers, the SM may be particularly well suited, because you get hardly any RRSP room. The SM gives you an alternative way of getting tax deductions and investing.

Ed

I just noticed your post. Yes, it is the tax refund from the investment loan that reduces your mortgage amortization.

Your mortgage may be gone in 5.25 years, but you have a NON-deductible investment loan at B2B at a higher rate than your mortgage. What do you plan to do with that?

I would suggest that whatever your strategy, if you reinvest the distributions instead of paying them out, then your expected benefit is higher – and you can avoid all the “4 Meaningless Transactions”.

Ed

It is interesting that you mention hockey players. We have a pool at my work where we put togther our ideal team of NHL players and the team with the best stats wins the pool. No one pretends that it is anything other than gambling.

You have three levels of betting going on. The actual company managers have to make the right business choices. The fund managers have to pick the right companies. And then the advisor has to pick the right fund managers. Index funds cut out the latter two levels and then invest in many companies to average out the first one.

Warren Buffet also benefits from the “survivorship” bias. Finding one outlier “superinvestor” (or three) does not show anything. There is no way for you to demonstrate that he will do well in the future or that you can pick others like him. The worst part is that you will still charge me two to three percent each year just for trying.

I’m not aiming to get the best returns possible compared to average returns. I’m want to avoid getting the worst returns. The one thing that I have the most control over is my investment costs so I’m going to focus on getting those as low as possible.

Also, I asked Warren Buffett for advice and he told me to invest in low-cost index funds. If he is indeed a “Superinvestor”, then shouldn’t we follow his advice?

http://www.fourhourworkweek.com/blog/2008/06/11/061108-picking-warren-buffetts-brain-notes-from-a-novice/

Also, some banks will allow you to move to a re-advancable product with minimum charge if you maintain your current mortgage within the new product. We only had to pay the Notary fees to register the HELOC against the house.

DAvid

Unfortuately my term is coming due in January and I really want to lock into a five year fixed term for 3.75 – 4.00 %. Is it possible to make a deal with a bank to start a readvanceable mortgage a couple of years into my term?

Adam

My wife and myself are both teachers and we’re at the top of our pay scale… we have no debt except for the mortgage and we have no major expenses in the next five years… everything major has been done to our house in the last two years… ie. bathrooms, roof, boiler, decks… I would love to start the Smith Manoeuvre but we don’t have 20% payed off of our mortgage… is there anyway to get a readvanceable mortgage or will we just have to wait for a couple more years and pay down the mortgage and have the value of the house increase???

Thanks for your help!

Adam

Thanks for your response. You’re right, to say my mortgage will be paid off is misleading, the mortgage will be converted to an investment loan of the same amount in that time period. We’re using some new numbers now to consolidate some debt and do some house renos. We’re looking at a new mortgage of 187,00, converted in 5.25 years and a projected 15 year benefit of 725,458. It’s my understanding that the interest on the loan with B2B is tax deductible but only on the ACB. And as the ACB goes down over time and the interest deductibility is reduced, the balance on the LOC converted debt from the mortgage goes up and therefore so does the interest deductibility on it. Or am I not understanding something properly here? For the Rempel Maximum, I’m unclear how the 60,000 investment loan gets used to reduce the amortization on the mortgage. How does that all work?

It is not really correct to say your mortgage is paid off with the Smith/Snyder, because it is replaced by a NON-deductible investment loan of the same amount – at a higher rate.

I put your figures into our calculator. First, your mortgage has 18.4 years left, but you can refinance it now at 2.4%. That will reduce your amortization to 14.25 years.

Then you can invest your available equity and do the SM. That would reduce your amortization to 12.3 years. More importantly, the projected net benefit of this strategy over 15 years is $568,000 (assuming 10% return and interest rates 1% higher than today).

If you do the Rempel Maximum, your existing mortgage payment would cover the cost of an additional investment loan of $60,000. Investing that would reduce your amortization to 11.8 years and increase the projected net benefit to $681,000 after 15 years.

At that point, all your debt would be tax deductible and you will not have touched your investments – just left them to compound.

There is probably a better strategy by combining your entire financial picture, such as combining other debt, possibly redirecting RRSP contributions, etc.

You should also project whether this strategy, plus what you are doing already, will be enough to give you the retirement that you want.

Ed

I have recently met with Rob Smith as well and have been run through the same scenario as Dunk. It all seemed fairly logical to me as well but now that I have read your explanation of the other side of that strategy I have begun to question its effectiveness also. I must admit I have read your Rempel Maximum a few times trying to wrap my head around it (as I have with so many components of the SM) and am still trying to grasp the concept. If I understand correctly, rather than go through the extra steps that Rob has suggested, it would be easier to just use a readvanceable LOC, maximizing my available equity initially rather than grow it gradually as my regular mortgage decreases. This way I get full advantage of the investment loan tax breaks immediately, and the benefits of compounding interest on the investment sooner. Correct? The one think I’m not sure of is with the Smith/Snyder method my mortgage will be paid off in 4 years, what would it take with the Rempel Maximum? House 420,000, mortgage $150,000 at $1040 month 4.99% with 15 years left on amort. Thoughts, recommendations? I’ve got around 20 years until I want to retire.

Thanks,

JJ

That’s a good question. The question of all-stars applies to any field of human endeavor. There are always some people that are superior, some below average and most are average.

If you randomly take 100 hockey players, some will have better stats. Was that luck or skill?

The statistics are a clue, but won’t on their own tell you. It takes a lot of research to figure this out. You need to watch them play, analyze their various skills, see how they play on a team, and see how good their “hockey sense” is.

Persnally, I would rather have a team with Crosby, Malkin, Ovechkin on offense, Lidstrom and Pronger on defense, and Brodeur in goal – than an average of all NHL hockey players – wouldn’t you? They won’t win all their games, but I do believe these players have signficantly more skill than the average NHL hockey player, so this team should have a higher chance of winning.

Each year, between 20-45% of fund managers beat the index, depending on which year and which index. This is considerably lower over many years, but there are always some that beat it even over many years.

The stats are also misleading. Actively managed funds look better because of “survivorship” bias, but worse because most fund managers don’t even try to beat the index (Most are just salaried employees trying to keep their job )and because the stats always include index funds when comparing mutual funds to indexes. Of course 100% of index funds make less than the index, but the comarisons never exclude index funds or “closet index funds”.

The best indication that there are superior investors is the classic Warren Buffett article. First of all, I don’t think anyone would doubt that Warren himself has superior skill. He has beaten his index by 11%/year compounded for 33 years – even when you take his return after tax and the S&P before tax.

In his classic article, he wrote about a bunch of guys he bumped into that all massacred their index over decades – all by at least 5%/year compounded after all fees, and some by more than 15%/year compounded.

His article was written in 1984, but the 3 managers he mentions that are still active today have all continued to massacre their index (2 of them are Warren and his partner.)

This article is about value investors, who take advantage of a systematic inefficiency in stock markets – the tendency to misprice companies, especially those that are out of favour. This inefficiency still exists. In fact, the markets are more manic today than they were decades ago.

Here is the link:

http://www.edrempel.com/pdfs/superinvestors.pdf

After you read it, tell me would you rather have an index fund or have any of these guys as your fund manager?

Ed

Sorry, I don’t know anyone doing this in Quebec. I’m not aware of anyone at all doing it, but there probably is someone. The SM does not work quite as well in Quebec either, because of the difference in tax rules.

There is different licensing, as well, so at this point, Quebec is the only province in which we are not accepting clients. It is possible that we would sit down and figure this out some time if there was enough demand.

Ed

“Investing with all-stars easily beats the average mutual fund. I’ve been studying them and get to meet them – and they are much smarter than me.”

You suggest that you know who the all-stars are. Exactly how do we know that you are an all-star picker of managers?

Finding funds that have done well in the past is very misleading. If take a hundred random fund managers, one of them will have done very well and one of them very poorly. Is that all-star power or random luck?

The only thing we have any control over is the MER we pay and thus we should pay as little as possible, leading to index funds. This is especially true in Canada where the fees are ridiculously high. Pride in my fund manager’s salary doesn’t even enter into it.

Thank you,

Sam

Thank you.

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