Normally, I tend to avoid actively managed funds, but Steadyhand is trying to break away from the industry mold and add value. To keep fees down, the firm doesn’t pay trailers to financial planners and brokers; instead the funds are sold directly to consumers. Accordingly, the MER is 0.65% on the money-market fund, 1% on the bond fund, 1.35% on the equity fund, and 1.7% on both the global and small-cap funds. That’s pretty good for Canada.

Second, Steadyhand aims to go back to the days when mutual funds didn’t track the indexes and build up assets through marketing campaigns and trailer fees. Their money managers are non-benchmark oriented and run concentrated portfolios with low turnover. In other words, they aren’t constrained to buying market portfolios and being closet indexers.

One thing that makes Steadyhand interesting is Bradley himself. He is the former CEO of Phillips, Hager & North Ltd. and played a key role in building up that low-fee, direct-to-consumer mutual-fund franchise. PH&N has been good to its clients over the years and has top offerings in bond and dividend funds.

Bradley reports Steadyhand has about 750 accounts with $90 million in assets under administration. He says his funds did manage to grow assets during the recent bear market but the increase was not as great as hoped for.

“It been a tough slog,” Bradley adds. “Our timing [launching the funds on the eve of the bear market] was not great.” So he intends to keep plugging away at building awareness and growing the client base until there is sufficient critical mass.

The equity fund is trailing the market but this is where active management may actually be a positive. The funds’ holdings are focused on a more diversified and higher quality group of companies (consistently generate cash and moat-like) than the resource- and financial-laden TSX. “Rather than loading up on these more economically-sensitive stocks to match the index, [the fund] focuses on the best that Canada has to offer and looks outside our borders to add more growth and balance to the portfolio [rise in loonie has offset gains on U.S. holdings],” notes commentary from the fund managers.

The Little Book of Safe Money
Jason Zweig

“The keys to investing are simple: diversify, keep costs low, buy and hold.”

“Like dieting, investing is simple but not easy.”

“It is absolutely mandatory for you to keep a reservoir of liquidity in your portfolio at all times.”

“No matter how valuable an investment may be or appear to be, it’s of no practical value to you unless it’s liquid when you need to cash out.”

“The biggest single holding in your portfolio is you: the income that your career will generate over the rest of your life.”

“Anyone whose human capital is vulnerable to the escalating cost of living should consider investing heavily in TIPS.”

“Wall Street is forever inventing another newfangled way to promise higher yield at low risk.”

“In Japan at the end of 1989, the leading Nikkei 225 stock index was at 38,915.87; two decades later, it languishes below 10,000.”

“Invest as if stocks are likely-but not certain-to beat all other assets. Keep some money in bonds, cash, and real estate just in case they do better.”

“Stocks are not certain to outperform bonds and cash no matter how long you hold on.”

“Men should make a special point of having their wives review any choices the husbands regard as a sure thing.”

“It is irresponsible for a husband to keep such tight control of the family’s investments that his wife will find them completely unfamiliar after he is gone.”

“In the stock market, much of what seems to be patterns is, in fact, just random noise.”

“You should never act on an investing idea the same day you get it.”

“Never invest in anything on the recommendation of a friend or family member alone.”

“Commit to a dollar-cost averaging or automatic investment plan that require you to add a little bit of money every month.”

“If you are investing for retirement 30 years away, buy a total stock-market index fund and hold it continuously for the next three decades.”

The Millionaire in You
Michael LeBoeuf

“Money should be invested passively. Passive investing means buying and holding no-load, low-cost index mutual fund with performances reflecting that of entire markets.”

“Don’t waste your time playing the market. Own the Market, live your life and enjoy the journey.”

“Taylor Larimore–summarized the index advantage best: “Index funds offer much more than superior returns. They also provide maximum diversification, no overlap, no style drift, no manager changes, lower turnover, lower expenses, lower taxes, greater simplicity and peace of mind.”

“The master key to wealth can be summed up in just one word: Simplicity.”

“The main reason index investing is so successful is because fewer people have their hands in your pocket.”

“Timing the market is for losers. Time IN the market will get you to the winner’s circle, and you’ll sleep a lot better at night.”

The Only Guide to Alternative Investments
Larry Swedroe and Jared Kizer

“Some investment products are so complex in design that it is very difficult, if not impossible, for the average investor to fully understand the risks entailed and the costs incurred.”

“When considering an asset class for inclusion in a portfolio, — investors need to consider the diversification benefit of the investment.”

“Recency is the tendency to give too much weight to recent experience, while ignoring the lessons of long-term historical evidence.”

“The evidence from academic studies demonstrates that equity REITs, both domestic and international, offer an attractive risk/return trade-off” and provide meaningful diversification benefits to portfolios.”

 ”The bottom line is that investors should consider devoting at least some significant portion of their fixed-income allocation to inflation-protected securities.”

” “Only informed and disciplined investors should consider including commodities in their portfolio.” 

“Unless they are highly risk-averse, investors should probably not buy an immediate fixed annuity until approaching age eighty.”

“Despite its low correlation with other portfolio assets, high-yield debt provides almost no unique benefit in terms of portfolio diversification.”

“In times of crisis, the markets for illiquid assets can virtually dry up.”

“For most investors the only way to obtain sufficient diversification of the risks of investing in speculative securities is through a mutual fund.”

“After ten years the survival rate of private firms was only about 34%.” (2002 study)

“Private equity investors forgo the benefits of liquidity, transparency, broad diversification, and the access to daily pricing that mutual fund investors enjoy.”

“Understanding the difficulty of identifying superior hedge-fund, venture-capital, and leveraged-buyout investments leads to the conclusion that hurdles for casual investors stand insurmountably high.”

“While preferred stocks offer relatively high yields, in general, they possess enough negative attributes to make them inappropriate choices for individual investors.” 

“One of the rules of prudent investing is to avoid complex securities because the complexity is likely to favor the issuer.”

“The bottom line on hedge funds is this: They are ’sinkholes’ for investors.”

“Variable annuities are products that are sold, not bought.”

“Variable annuities (VA) convert what would otherwise be long-term capital gains into ordinary income.”

“Education, or a good fee-only advisor who is not influenced by commission-based compensation, can be the armor that protects investors.”

To be continued …

“Forty-four percent of American new media users are searching for, sharing or discussing information about corporate responsibility (CR) efforts and programs…”

“Sixty-two percent of users polled believe they can influence business decisions by voicing opinions via new media channels. ”

While the findings about how much consumers are using new media are important, what strikes me most is the priority that Americans (and presumably Canadians) are placing on corporate responsibility and that so many people are interested in having an impact on what business is doing. In this context, it’s important for corporations to be doing the right thing and creating opportunities for their stakeholders to have a voice and to make a difference – increasingly this will be through new media.

Yesterday, I wrote about Yvon Chouinard’s book Let My People Go Surfing. Here’s another nugget from Chouinard: “People still need an ethical center, a sense of their role in society. A company can help fill that void if it shows its employees and its customers that it understands its own ethical responsibilities and then can help them respond to their own.”

The Investor’s Manifesto
William Bernstein

 ”Wall Street is littered with the bones of those who know just what to do, but could not bring themselves to do it.”

“Very high returns are almost always made by those brave enough to invest when the sky is blackest.”

“Many investors lean heavily on past returns to gauge future ones. This is a mistake.”

“No risk matters more to investors than that of running out of assets before they die.”

“The most spectacular example of luck masquerading as skill was the recent case of William Miller, skipper of the Legg Mason Value Trust.”

“Mr. Buffett is not so much a money manager as a businessman.”

“The Morningstar database suffers from so-called ’survivorship bias,’ meaning that hundreds of poorly performing funds have disappeared from their fund universe, all of which would have underperformed the index funds.”

“Over the long haul, the differences in the amount of wealth provided by different stock asset classes can vary enormously, and owning all of them helps minimize your chance of dying poor.”

“The investor should forget trying to pick stocks and mutual funds or to time the market. The best the investor can do is to maximize returns by minimizing expenses.”

“Age is the first factor determining the overall stock/bond allocation. Investor risk tolerance is the second.”

“The most important asset allocation decision is the overall stock/bond mix. Start with the “age=bond allocation’ rule of thumb.”

“Be highly skeptical of sophisticated ‘black box’ methods of asset allocation.”

“China as had one of the world’s highest economic growth rates, yet between 1993 and 2008 its stock market has lost 3.31 percent per year.”

“Nations with the most rapidly growing economics quite often have the lowest stock returns.”

“Nothing last forever: more often than not, recent extraordinary economic and financial events tend to reverse.”

“The sooner you turn off CNBDC, get out into the bright sunshine, and take a walk, the sooner you’ll feel better about your investments.”

“You’re not going to impress the crowd at your country club by telling them you own shares of an index fund. Let them laugh; the joke’s on them.”

“If you’ve never been tested before, I strongly urge that you encounter your first bear market conservatively invested.”

“The most important investment ability of all is emotional discipline.”

“Do not invest with any mutual fund family that is owned by a publicly traded parent company.”

“Most retirees should purchase ‘longevity insurance’ by postponing Social Security until age 70, and perhaps by adding a commercial immediate fixed annuity as well.”

“In general, variable annuities come wrapped in enormous fees and are offered by insurance companies, that as a group constitute some of the worst players in the financial business.”

“Rebalance your portfolio approximately once every few years.”

The Lazy Person’s Guide to Investing
Paul Farrell

Investing really is very simple stuff. You can do it yourself.”

“Lazy portfolios are keep-it-simple, no-hassel, low-stress, time-saving, low-maintenance portfolios–so you can get on with the business of everyday life.”

“The only solution is to be in the market all the time and stop jumping in and out.”

“In a study of 66,400 Merrill Lynch investors, professors Odean and Barber discovered that buy and hold investors actually beat the more active investors by a fairly sizeable margin, 18.5% to ll.4% over a six-year period.”

“You don’t need to complicate your life–just stick to the basic Scott Burns Couch Potato Portfolio (50% S&P/50% Total Bond Market) with no stress, except your little ten-minute annual rebalancing efforts.”

“Taxes, Time, and Psychology favor the laziest portfolios.”

“A penny saved is a dollar earned, thanks to compounding.”

“Charles Schwab says that for every five years you wait to start saving for retirement, you’ll have to double your annual savings.”

“Kahneman was asked by a CNBC anchorman the day afer his Nobel was announced what investment tips he had for viewers. He responded, ‘Buy and hold.’”

“Experience has taught me that the relentless noise from breaking news sources, like CNN and CNBC, easily distracts most investors from what really works in the long run.”

“Where does Fama invest his retirement money? In index funds. Mostly the Wilshire 5000–.”

“Perhaps the most amazing insight I got out of this review of the investment habits of Nobel laureates is the simplicity of their investing strategies.”

The Little Book of Common Sense Investing
John C. Bogle

“Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”

“Common sense tells us–and history confirms-that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost.”

“The brokers, the investment bankers, the money managers, the marketers, the lawyers, the accountants, the operations departments of our financial system are the only sure winners in the game of investing.”

“The lower the costs that investors as a group incur, the higher rewards that they reap.”

“Common sense tells us the obvious; while owning the stock market over the long term is a winner’s game, beating the stock market is a loser’s game.”

“We investors as a group get precisely what we don’t pay for. So if we pay nothing, we get everything.”

“It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

“Investment of $10,000, 1980-2005:

Index Fund….Managed Fund
$179,200…….$179,200…….Gross Return
$170,800………$98,200…….Pre-Tax Return
$149,000………$61,700…….After-Tax Return
$65,000………..$23,100…….After Inflation Return”

“Don’t look for the needle–buy the haystack”

“The average fund portfolio manager lasts just five years.”

“Of the 355 equity funds in 1970, fully 233 of those funds–almost two thirds–have gone out of business. Only 24 outpaced the market by more than one percentage point a year–one out of every 14. Let’s face it: These are terrible odds!.”

“A mutual fund portfolio continuously adjusted to hold only Morningstar’s five-star funds earned an annual return of just 6.9% between 1994 and 2004, nearly 40 percent below the 11.0% return of the Total Stock Market Index.”

“Of the 35 newsletters (tracked by Hulbert) that existed in 1980, only 13 are still in business today. Only 3 outperformed the market.”

“Index funds endure, while most advisers and funds do not.”

To be continued …. here.

- Make sure employees use your products and services and that they genuinely believe they are of the highest quality

- Embrace constant change – don’t wait for something that is negatively impacting your business

- Make work fun – employees are much more productive and more innovative when they enjoy what they do, who they work with, and where they work

- Embed social and environmental considerations in your products and services – don’t sideline these things, they’re now absolutely central to business performance.

Read the book – you’ll learn lots more.

You can calculate how much HST you’ll be paying with this calculator on the National Citizens Coalition website

On Nov. 12, the Ontario Government announced exemptions for prepared food and beverages sold for $4.00 or less and print newspapers

The Premier says the exemptions granted Nov. 12 will be the last.

Over time, the HST on mutual fund annual MERs can add up to a large sum. “… if you invest $10,000 every year for 25 years, assuming a management expense ratio of 2.6% and an annual rate of return of 6%, you will end up paying a total of $9,100 more in [HST] …”

Mutual-fund companies fear investors will switch to ETFs because the HST burden will be much lighter on their substantially lower MERs.

Mutual fund companies not headquartered in a province charging the HST (e.g. Investors Group in Winnipeg and Mawer in Calgary) will escape the HST and thus have a competitive advantage because of the HST.

HST a disincentive to saving for retirement.

A recent report by Jack Mintz projects the HST and other tax cuts in the 2009 provincial budget would create $47 billion in new investment in Ontario and 591,000 jobs over 10 years (the bill will “introduce sweeping corporate tax cuts that will reduce taxes on new investment to 23.7% in 2010 from 33.6% one year earlier. That rate will fall even further, to 18.5 %, by 2018).”

Summing up:

1. Many groups and academics laud the HST as good for the economy. The PST is a bad tax, they say, because it falls on business inputs and cuts into capital investment and jobs. But hasn’t anyone thought of eliminating the PST on business inputs by instead cutting out some of the wasteful and unnecessary spending in the government? According to an international study, 25% of government spending falls into the wasteful category. Wow – lower taxes without a material reduction in public services – wouldn’t that be much more of a boost to the economy?

2. Opposition leaders and various citizen groups have condemned the HST. But where were they before? The HST just makes visible the provincial sales tax that was hidden in the inputs purchased by businesses (and passed onto consumers). Shouldn’t they have been hammering away at the tax before (when it was, to a large extent, hidden)? Yes, but it appears Canadians are so dumb  that they’ll gladly pay taxes as long as they don’t see them (like the goose whose feathers are getting plucked).

3. The HST on mutual funds and ETFs doesn’t seem to make sense given the administrative and compliance problems: i) funds have an inventive to shift headquarters to provinces not charging HST, and ii) charging HST on mutual-fund investors living in non-HST provinces is a challenge.

Appendix:

The Investment Funds Institute of Canada raises more problems with applying the HST to mutual funds.

“Ontario and B.C. will be the first provinces to levy a sales tax on mutual and other types of funds (8% and 7% respectively) as all Canada’s currently harmonized provinces provide rebates or equivalents to funds.”

“Canada is an outlier compared to other jurisdictions: European countries, as well as Australia and New Zealand, treat management and advisory services much more favourably than in Canada, whether through sales tax exemption or credits.”

“Discriminatory level of tax levied on funds: Under the GST and HST, the issue is not that mutual fund services are taxed; it’s that they are taxed at effectively four to five times the rate that guaranteed investment certificates (GICs), equities, bonds, term deposits and other non-fund financial vehicles are.”

“Some pension plans pay no sales tax at all and Canadians who have access to private-sector defined benefit plans also pay less tax than Canadians who save in an individual retirement savings plan. At the end of 2007, Canadians had $739 billion invested in individual retirement savings plans, such as RRSPs and RRIFs, which means that holders of at least 41% of all retirement savings in Canada were at a relative disadvantage to holders of other Canadians saving for and in retirement.”

There are two interesting aspects to this debate. The first is the cross-party battles taking place across the country. In Ontario you have provincial Liberals walking hand in hand with federal Conservatives, while the provincial Conservatives are fighting back. In B.C., where the HST is also expected to pass, a former right wing premier has teamed up with the NDP leader to plan protests against the tax. It’s a little weird, and while some of this is just plain politics, the unusual alliances also show just how divisive this tax is. I wrote more about this in a Canadian Business story — you can read it here.

I’ve written about this other issue in the past, but MoneySense magazine does a great job covering what the HST will mean to investors. There’s been some talk that the Liberals will make investments HST exempt, but so far that hasn’t happened. Read more about this here.

There are a number of other interesting HST-related issues — hopefully I can get through some of them in the weeks ahead.

The Intelligent Investor (Rev Ed)
Benjamin Graham and Jason Zweig

“It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits.”

“Allocating at least 10% of your retirement assets to TIPS is intelligent.”

“The worse the future looks, the better it usually turns out to be.”

“The primary cause of failure is that investors pay too much attention to what the stock market is doing currently.”

“The key to rebalancing is having a predictable schedule”

“For most investors, intermediate bonds are the simplest choice, since they enable you to get out of the game of guessing what interest rates will do.”

“For most investors, bond funds beat individual bonds hands down.”

“If you had invested $1 in U.S. stocks in 1900 and spent all your dividends, your portfolio would have grown to $198 by 2000. But if you had reinvested all your dividends, your portfolio would have been worth $16,797.” (Stock indexes do not include dividends.)

“It is essential that (the intelligent investor) entrust himself only to firms of the highest reputation.”

If you find yourself trading more than twice a year–or spending more than an hour or two per month on your investments–then something has gone badly wrong.”

“If you started investing $100/month in September 1929, your money would have grown to $15,571 by August 1939. That’s the power of disciplined buying–even in the worst bear market of all time.”

“The knowledge of how little you can know about the future, coupled with the acceptance of your ignorance, is an investor’s most powerful weapon.”

“Alan Greenspan said on January 7, 1973: “It’s very rare that you can be as unqualifiedly bullish as you can now.” (1973 and 1974 turned out to be the worst years for the stock market since the Great Depression.)”

“A great company is not a great investment if you pay too much for the stock.”

The Intelligent Portfolio
Christopher Jones

“Sadly, our educational system has been woefully behind the curve in preparing people for the heavy new financial responsibilities of a self-directed investment world.”

“Be careful of how your advisor gets paid. Conflicts of interest can yield advice that is not in your best interest.”

“There are many ways to measure risk other than looking at just the volatility of returns.”

“A study of investor behavior by the research firm DALBAR found that market timers in stock mutual funds lost -3.29% per year on average relative to investors who pursued a consistent strategy.”

“Unlike a mutual fund, it is quite possible for a single stock to lose all its value by going bankrupt.”

“Never make the critical mistake of being too concentrated in your employer’s stock.”

“Fund expenses are like termites. They can quietly eat away at the returns of your investment without you even realizing there is a problem.”

“From the analysis of 22,472 mutual funds–only about one quarter of mutual funds were able to demonstrate performance that exceeded what you could achieve with a low-cost index fund.”

“Evaluate diversification at the household level, not at the individual account level.”

“If you own a home already, you probably have enough real estate in your household portfolio.”

“Asset allocation explains more than 90% of the variation in returns for most mutual funds.”

“You are virtually guaranteed to outperform more than two-thirds of the actively managed funds with low-cost index funds.”

“It is very expensive to guarantee that you will have a certain amount of money in the future, but if you can tolerate some uncertainty, you can likely fund your future goal with significantly less savings.”

“The only way to be more confident of reaching a financial goal is to invest more conservatively and save more.”

“All other things held equal, it will cost a woman more to fund her retirement than a man of the same age due to her longer expected lifespan.”

“As an investor, you want to be cautious about investing in a fund just prior to it making a distribution to shareholders.”

The Individual Guide to the Top Mutual Funds
American Association of Individual Investors

“The most important factor when diversifying a portfolio is selecting investments whose returns are not highly correlated.”

“Bond mutual funds are attractive to investors because they provide diversification and liquidity, which is not as readily attainable in direct bond investments.”

“The higher the turnover, the greater the brokerage costs incurred by the fund.”

“The market risk measure used for common stocks is beta; for bond funds, average maturity is used.”

“Dollar-cost averaging works especially well with more volatile portfolios.”

“Top Performance lists are dangerous.”

“The classic response of funds that focus on small stocks is to migrate investments to mid-cap and large stocks when they start to achieve a large asset base.”

“Don’t forget that almost all fund performance data is reported without adjusting for front-end or back-end loads.”

“One reason beyond low expense ratios that make index funds are tough to beat is that they are always 100% invested in the market.”

To be continued …. here.

The Great Mutual Fund Trap
Greg Baer & Gary Gensler

“You cannot improve your returns by spending more time or money trying to pick funds or stocks. You can, however, significantly improve your returns by choosing vehicles that offer the lowest possible costs and the greatest tax efficiency.”

“With returns corrected for survivorship bias, the average actively managed funds trail the market by about 3 percentage points a year.”

“In October 2001, less than two months before Enron declared bankruptcy, 19 of the 22 analysts who covered the stock rated it a “buy.”

“Every study we have ever seen on the subject shows that the more frequently individual investors trade, the worse they perform.”

“The only way for an investor to earn predictably higher returns over time is by taking on more risk.”

“The basic thrust of efficient market theory, is relatively simple and extremely important: Information currently known about a company is reflected in the prices for its bonds and stock.”

“Accept the fact that you are unlikely to beat a market where prices are set by the consensus of thousands of professionals and where you have to pay a steep price for every attempt.”

“The most likely way for a fund manager to generate a high ranking is to take on additional risk.”

“If you simply buy and hold — you don’t need to read investing magazines, watch financial news networks, subscribe to newsletters, or pay a broker to execute new trades.”

“Hulbert’s data show more than 84% of newsletters underperform the market over 5-years. Over 10-years, that number rises to 90%.”

Kahneman/Tversy Study: “A loss of $1 is approximately twice as painful to investors as a gain of $1 is pleasant.”

“The financial services industry spends billions in advertising to keep investors excited about the prospect of better returns around the corner.”

Daniel Kahneman, winner of the 2001 Nobel Prize in Economic Science: “Asked how he invested his money, he said that he favors index funds.”

How a Second Grader Beats Wall Street
Allan Roth

“Investing isn’t rocket science. Wall Street experts want you to believe that it is.”

“Kevin’s magic portfolio: Vanguard Total Stock Market Index Fund; Vanguard Total International Stock Index Fund; Vanguard Total Bond Market Index Fund.”

“We strongly resist thinking of ourselves as average.”

“There is one way, and only one way, to build a stock portfolio that is guaranteed to beat the average dollar invested. For the U.S stock market, that one way is to buy the entire market in proportion to the value of each company.”

“With only three index mutual funds, we can own many thousands of securities that own the whole world.”

“Cramer is a human cartoon character who rants about buying and selling and encourages others to engage in foolishness.”

“Lehman Brothers was the most admired securities firm in 2007 according to Fortune magazine. In 2008 it filed for bankruptcy.”

“A recent study found that funds sold by advisors underperformed those that were bought directly by the consumer.”

“We all know that most mutual funds greatly underperform the appropriate index, but did you know that the average investor underperforms the average mutual fund by another 1.5% percent per year?”

“The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlatons, Sharpe ratios, and the like.”

“Never buy an instrument that has a fancy name like Enhanced collateralized debt obligation investment unit trust.”

“Investing is much more than maximizing our wealth. It also involves minimizing the chances we will run out of money.”

“Our willingness to take risk isn’t easy to quantify because it is difficult to measure and very unstable.”

“Remember that staying with your asset allocation is every bit as important as choosing the right one in the first place.”

“Make it a rule never to buy a financial investment you couldn’t describe to an average second grader.”

“If the Wall Street brokerage firms were really so good at giving investment advice and managing risk, why did it take taxpayers to bail them out?

Index Your Way to Investment Success
Walter R. Good and Roy W. Hermansen

For most individual investors, the benefits of indexing remain a well-kept secret because brokers, mutual funds, and other familiar sources of investment information routinely focus on products that offer substantially higher commissions or fees.”

“Expenses and other deductions from returns are extremely important, but other considerations, such as services and access to other funds provided by the same fund family, may also influence your choices.”

“This time is different is a message that resurfaces in every bear market.”

“The index fund advantage consists of lower costs, deferral of capital gain taxes, and control of risk through more complete diversification.”

“Index funds save on management and marketing expenses, reduce transaction costs, defer capital gain, and control risk–and, in the process, beat the vast majority of actively managed mutual funds!”

The Informed Investor
Frank Armstrong

“Each brokerage house or investment manager wants the public to believe that somewhere in the back office is a genius who can make you rich.”

“If we don’t establish the discipline to live on less than we make — no amount of investment advice will help.”

“Market risk means that sometimes your equities will go down. It is only a function of when, and we can’t know that. — If you can’t get used to the idea, don’t go into the market.”

“Risk and returns will be driven far more by asset allocation than stock selection or market timing.”

“Investors must understand that a superior portfolio will underperform from time to time. If they are prepared for this disconcerting reality, they are less likely to find themselves abandoning their superior portfolio in favor of Wall Street’s deal of the day.”

“My view is that, properly practiced, investing should be reasonably boring.”

“Rating services such as Morningstar’s star awards or the ‘Forbes’ honor roll attest to the futility of applying past performance to tomorrow. If these two organizations can’t make useful predictions with all their resources, how can the rest of us hope to?”

“Do the right thing: In every asset class where they are available, index!”

“Mutual fund independent directors lack any discernible backbone and appear to be born with rubber stamps attached to their hands.”

“Discipline is the key to success for the long-term investor. He or she must not fall into the trap of managing holdings by newspaper headline, sound bites, mindless prediction, gut feelings, or the last time period’s results.”

“The primary cause of investor failure is the behavior of the investors themselves.”

“The ‘buy and hold’ strategy outperforms the average investor by more than three to one after ten years.”

To be continued ….

When were the good times? Well July with an average gain of 1.6% was on top, however, December with a slightly lower gain of 1.5% had positive performances in 62 years compared with 54 years for July. The five best ever months for making money in the market were all in the 1930s. April 1933 saw a 41% gain . Number five was June 1931 with an increase of 17%. The best performance in this century was October 2002 with an 11% rise.

If you are interested in more information, email me at phil.froats@canadianbusiness.rogers.com. I’ll send you spreadsheets with a summary of each each month’s averages and largest gains and losses in points and percentages.

Enough
John C Bogle

“Not knowing what enough is, subverts our professional values. It makes salespersons of those who should be fiduciaries of the investments entrusted to them.”

“In 2007 alone, the 50 highest-paid hedge fund manager together earned $29 billion (yes, billion). If you didn’t make $360 million in that single year, you didn’t even crack the top 25.”

“Today, if fund managers can claim to be wizards at anything, it is in extracting money from investors. In 2007, the direct costs of the mutual fund system totaled more than $100 billion year after year paid by the investors themselves.”

“It is essential that we demand that the financial sector function far more effectively in the public interest and in the interest of investors than it does today.”

“The 2003 failure of Arthur Anderson, and the earlier bankruptcy of its client Enron, was but one dramatic example of the consequences of this conflict-riddled relationship.”

“In 1980 the compensation of the average chief executive officer was 42 time that of the average worker. Since then it has risen to 520 times.”

“Until we pay CEOs on the basis of corporate performance rather than on the basis of corporate peers, CEO pay will, almost inevitably continue on its upward path.”

“Nearly 2,800 of the 6,126 mutual fund that existed in 2001 are already dead and gone.”

The ETF Book : All You Need to Know About Exchange-Traded Funds
Rick Ferri

“It is prudent to dig deep into the indexing methodology so that you can make an informed investment decision about the ETFs you are interested in.”

“There are four methods of capitalization weighting used by index providers: full cap, free-float, constrained, and liquidity.”

“Beating the market is not just achieving a higher return — risk adjusted returns are a more sophisticated approach to measuring the performance of a portfolio or fund.”

“To be a successful passive investor, you need to have an unwavering belief that the strategy will work in the long-term.”

“The correlation between asset classes change, sometimes frequently and suddenly.”

“During a time of crisis, the correlation between major asset classes increase, for example, global stocks.”

“If an investor wants to take more risk and explore other options, a core and explore strategy is a good compromise between passive and active management.”

“The key component for starting to accumulate wealth is savings consistency. Ideally, a young person will start a savings plan at the same time he lands his first job.”

“If done successfully, tax loss harvesting will increase an investor’s after-tax returns.”

The Four Pillars of Investing
William Bernstein

“Anyone promising high returns with low risk is guilty of fraud.”

“Stock picking and market timing are expensive, risky, and ultimately futile exercises.”

“A prudent course is to make the broad market and a lesser amount of small U.S. and large foreign stocks your core stock holdings.”

“Financial history provides us with invaluable wisdom about the nature of the capital markets and of returns on securities.”

“The message to the average investor is brutally clear: expect at least one, and perhaps two, very severe bear markets during your investment career.”

“Most investors are simply not capable of withstanding the vicissitudes of an all-stock investment strategy.”

“A young person saving for retirement should get down on his knees and pray for a market crash, so that he can purchase his nest egg at fire sale prices.”

To be continued … here.

The Bogleheads’ Guide to Retirement Planning
Taylor Larimore, Mel Lindauer, Rick Ferri & Laura Dogu

“Early retirement planning should begin when you have your first full-time job.”

“No matter what your risk tolerance is, your asset allocation should become more conservative as you approach retirement age.”

“Joint accounts are a great option for ensuring that assets are immediately available to a surviving spouse, child, or partner.”

“Count yourself lucky if you still have a defined benefit plan, but also keep in mind that it may go away in the future.”

“Variable annuities or equity-indexed annuities are products to be avoided.”

“Rather than rebalancing by the calendar, many people make changes only when their portfolio allocations are off by a certain percentage.”

“Each time you need to withdraw money from your investments, simply look at your asset percentages and take the money out of the one that is overweight.”

“Reverse mortgages should be a last resort for providing income.”

Your greatest asset is your ability to earn a living for yourself and your family.”

For younger breadwinners, term insurance is the only practical way to provide needed protection at affordable costs.”

“The more complex the product, the worse it is for you, and the better it is for the adviser.”

“Certain assets, such as life insurance … pass to designated beneficiaries if you die. A divorce decree will not change the designations.”

“In the real world, people lose jobs, good health turns bad, more than half of marriages end in divorce, and other setbacks occur that can ruin a good retirement plan.”

The Coffeehouse Investor
Bill Schultheis

“The investor who starts saving and investing $300 monthly at 8% in a retirement account at age 25 instead of age 35–ends up with an additional $604,195 in her portfolio at age 65.”

“When fear and greed aren’t controlled, buying and selling individual stocks can quickly become a miserable experience.”

“As long as Wall Street has a vested interest in lots of transactions and busy portfolios, investors will continue to latch on to the hype and hysteria of Wall Street, perpetuating the misconception that by carefully reviewing market trends, diligently studying mutual fund tables, religiously researching global economies and closely watching interest rates, anyone and everyone can own a successful portfolio.”

“Let go of the mistaken belief that the secret to a successful portfolio is to accurately forecast bull and bear markets.”

“The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market.”

“The top 35 mutual funds from 1978 to 1987 cumulatively under-performed the stock market average by 7% annually during the next ten years.”

“The most important factor when diversifying is to adhere to your asset allocation strategy, because when you stick to your strategy and rebalance your asset at year-end, buy and sell decisions are no longer arbitrary.”

Common Sense on Mutual Funds
John C Bogle

“To invest with success, you must be a long term investor.”

“Suppress the temptation to add redundant layers of diversification.”

“After nearly 50 years in this business, I do not know of anybody who as done it (market timing) successfully and consistently.”

“When stock prices are high, investors want to jump on the bandwagon; when stocks are on the bargain counter, it is difficult to give them away.”

“The key to fund selection is to focus, not on future return–which the investor cannot control–but on risk, cost, and time–which the investor can control.”

“Backtesting, of course, should always be viewed with skepticism.”

“Choose a balance of stocks and bonds according to your unique circumstances–your investment objectives, your time horizon, your level of comfort with risk, and your financial resources.”

“Asset allocation is critically important; but cost is critically important, too. — All other factors pale into insignificance.”

“Most of all, beware of wrap accounts–packages of mutual funds assembled within a ‘wrapper’ for which an additional fee is paid.”

“The ‘Equity Risk Premium’ is the extra return required by investors to compensate them for taking the extra risk of owning common stocks rather than risk-free U.S. Treasury bonds. The average since 1802 has been 3.5%”

“The simplest of all approaches is to invest solely in a single balanced market index fund–just one fund. And it works.”

To be continued …. here.

Going over the quotes, newbies can get a feel for the passive indexing approach without the time-consuming task of reading each book (although some of them must be read by the serious student). As for experienced passive index investors, they can get a good refresher plus a reinforcement of their discipline.

I’ve been going through the quotes myself and filtering them down into a more manageable list that still conveys the essential themes in each book. My original idea was to create a reference for myself but others might find it useful too. Here is what I have compiled so far (with more to come).

All About Index Funds (2002)
Rick Ferri

“When you are finished choosing a bond index fund, a total U.S. stock market index fund, and a broad international index fund, you will have a very simple, yet complete portfolio. This approach offers broad diversification, low fees, tax efficiency, and ease of maintenance”

“John Bogle, founder of the Vanguard Group, is one of those who believe in the one-fund concept. If you take Bogle’s advice, you will buy one bond index fund, and one total U.S. stock market index fund. There is absolutely nothing wrong with this approach.”

“Adding bond index funds to a portfolio of stock index funds lowers investment risk without significantly lowering returns.”

“Quote from Allan Greenspan: ‘This decade is strewn with examples of bright people who thought they built a better mousetrap that could consistently extract abnormal returns from the financial markets. Some succeed for a time. But while there may occasionally be mis-configurations among market prices that allow abnormal returns, they do not persist.’”

All About Asset Allocation (2005)
Rick Ferri

“Successful investing hinges on three steps: the development of a prudent investment plan, the implementation of that plan, and a commitment to follow the plan in good times and bad.”

Asset allocation is the cornerstone of a prudent investment plan and is the single most important decision that an investor will make in regard to a portfolio.”

“Simply stated, asset allocation is a means of spreading your investment risk across many different types of securities, thus reducing overall portfolio risk and subsequently increasing portfolio return.”

“Asset allocation eliminates the need to predict the future direction of the markets and eliminates the risk of being in the wrong market at the wrong time.”

“The starting point of a portfolio is its equity and fixed-income mix.”

“If you are going to add only one additional U.S. common stock mutual fund to a core position in a U.S. stock market fund, I recommend placing about 30% in a small-cap value index fund.”

The Bogleheads’ Guide to Investing (2005)
Michael LeBoeuf, Mel Lindauer & Taylor Larimore

“Knowing nothing about investing might be a benefit. You won’t have to unlearn many popular beliefs propagated by Wall Street and the media that aren’t true.”

“Index investing is an investment strategy that Walter Mitty would love. It takes very little investment knowledge, no skill, practically no time or effort–and outperforms about 80 percent of all investors.”

“The most important key to successful investing can be summed up in just two words–asset allocation.”

“An asset allocation plan is based on your personal circumstances, goals, time-horizon, and need and willingness to take risk.”

“It’s important for you to understand that stock and bonds go up–and they go down. You need to be comfortable with that fact.”

“We know that by simply changing our allocation between stocks and bonds, we can lessen the amount of volatility in our portfolio until we reach our comfortable sleep level.”

“A Financial Research Corporation study determined that the expense ratio is the only reliable predictor of future mutual fund performance.”

To be continued… see  Part II.

• much shorter and more to the point than Four Pillars
• readers of Bogle, Swedroe, Swenson, etc. may not find too much new
• one reader called it 4 Pillars for Dummies
• more emphasis on simpler index portfolios
• e.g. portfolios based on three broad-market funds
• tilt toward small cap/value indexing not as prominent
• seems more concerned about implementation risk and burden
• “More complex portfolios, particularly those with value and small stock emphasis, may have higher returns, but come at the cost of time and effort.”
• if young with less than $250k, recommends All World, Total Stock and Total Bond ETF; once older and richer, then slice and dice
• less emphasis on short-term bonds, more open to total bond market 
• “A perfectly simple and serviceable portfolio [for U.S. investors] might be: 42% US Total Stock Market; 18% Total Foreign Market, 40% Total Bond Market. That’s it.“
• Bernstein’s distaste for financial services industry as strong as ever: “If rigorous precautions are not taken, the financial services industry will strip investors of their wealth faster than they can say ‘Bernie Madoff …The average stock broker services his clients in the same way that Baby Face Nelson serviced banks … Unlike your doctor, lawyer, or accountant, your broker is not a ‘fiduciary’: that is, he is under no legal obligation to place your interest above his … Don’t come anywhere near a stock broker or brokerage firm; sooner rather than later you will get fleeced … Do not invest with any mutual fund family that is owned by a publicly traded parent company.”

Commissions have been one of the few drawbacks to ETFs because they can chew up accounts of investors who prefer to invest through dollar-cost averaging. This was once an area where mutual funds had an edge, but no more at Schwab and other brokerages who may follow suit (Preet wonders if this is what the Bank of Montreal — BMO — has in mind with its ETFs). So mutual-fund executives could be on the Maalox now. And so too might executives at ETF companies with no brokerage arms.

But how is it possible for Schwab to charge no commissions and MERs as low as 0.08%? In a previous post, I thought it would be possible for ETFs to get their MER costs down lower, even all the way to 0%, by using fees earned from lending out securities to cover operating costs. This seemed less fanciful a speculation when a few months later, as Preet noted in a blog post, some ETFs had emerged in Europe with 0% MERs.

So that would be my guess in this case. Schwab is diverting the revenues from its securities lending operations to cover off its operating costs. With sufficient volumes of business, they could still turn a profit while giving investors big breaks on fees.  This is what Tom Lydons of ETF Trends thinks it might be too.

Indeed, it’s conceivable, as competition heats up, for MERs on ETFs such as Schwab’s to move to the 0% mark. It may not happen overnight or not at all, but there is a potential. Also, one wonders if established ETF families like Barclays Global, which currently pocket 50% or more of the securities-lending fees for themselves, might now feel pressured to switch their cut toward lowering MERs. Could they even possibly pay investors to buy their ETFs — or otherwise reimburse their trading commissions?

And it wasn’t really a recommendation: it was more of a reporting piece that observed BNI seemed to be Buffett’s “one best idea” judging from how big his recent acquisition of shares had been. Indeed, anytime I personally recommend a stock, you best run in the opposite direction, or at least view it with a healthy dose of skepticism — remember those past posts on Nortel Networks anyone?

Anyway, with Buffett now approaching 80, there may not be too many more “one best ideas” to cull from Berkshire Hathaway’s regulatory filings, regrettably. The days of riding Buffett’s coattails would seem to be near their end.

Then again, Buffett’s bold move could signal he is intent on deploying the mountain of cash in Berkshire Hathaway’s coffers before he leaves the helm. Rather than just leave it sitting there for his successors to possibly fritter away, he may be thinking he can do it better (and leave his life’s work on a more secure foundation).

The Burlington Northern deal will claim close to 60% of Berkshire Hathaway’s cash hoard — leaving $9 billion (U.S.) on the balance sheet (using figures from Richard Beale of breakingviews.com). So there could be a few more ideas flying out those regulatory filings over the next few quarters (with the third-quarter report due out mid-Nov.).

As he points out in today’s Breakfast with Dave: Market Musings & Data Deciphering, Australia has a great deal more exposure to accelerating growth in China. Only 3% of Canadian exports go to China while 24% of Australian exports go there. Furthermore, Canada has much greater exposure to the moribund U.S. consumer: 75% of its exports go to the U.S versus 6% for Australia.

Yet, interestingly, the Aussie dollar lost ground after the central bank’s latest rate hike in a “sell-the-news-buy-the-rumor” kind of move. Bank of Canada Governor Carney no doubt noticed that response and might accordingly be less fearful a rate hike would strengthen the loonie (as happens most of the time due to capital inflows). And no doubt he would love to raise rates to head off the bubble-like conditions fermenting in the housing market – especially if the loonie remains well behaved and doesn’t inflict any more pain on the already hard-hit export sector.

A good financial planner or book on personal finances could have set them straight. Roy Miller, the wealthy barber in David Chilton’s classic book, initially had the same problem. “There was nothing left at the end of the month …. I had tried budgeting and it hadn’t worked,” he tells David, Tom and Cathy.

Then old Mr. White told the barber: “Pay yourself first.” That is, have 10% taken off your paycheck and put into a bank account or investment fund before you get your hands on it. Budgeting may work for a business because the owner wants to keep costs down but budgeting for a person is hard because wants tend to evolve into needs.”

You won’t notice it, the wealthy barber says of the automatic deduction: “I never did miss that money. My lifestyle didn’t change at all.”

I support these student-sponsored initiatives and also have a practical suggestion for ensuring that employees of corporations, governments, and non-profits act more responsibly: get HR onside.

HR executives and managers have control over six opportunities to really entrench CSR at an operational level: job descriptions, recruitment, on-boarding, training, performance evaluation and compensation, exit interviews.

If corporate responsibility was integrated in each of these areas it would go a long way to ensuring that people who take MBA oaths actually live up to what they’ve promised,

Plus, because these are all ongoing initiatives, integrating CSR could be done for viryually no incremental cost!

Seven teams of MBA students presented their ideas about the best ways for a company operating in the oil sands area to improve their CSR initiatives. Needless to say this is very difficult territory – it’s clear that the impacts of oil sands operations are under scrutiny from advocacy groups around the world, the situation is extremely complex, and that there are no easy answers.

However, the judges were very impressed by the degree to which the teams understood the still-emerging discipline of corporate social responsibility, recognized the challenges for corporations with oil sands operations, and had developed creative approaches to help mitigate environmental impact and maximize business value.

The presentations also made me think about a simple framework for effective CSR planning:

1. Establish clear business and social/environmental objectives

2. Identify and prioritize the stakeholders that matter most (often very difficult to do due because of the many key groups that are involved including: employees, regulators, media, suppliers, customers, local communities, advocacy groups, etc.)

3.  Establish internal credibility at an executive level by focusing on areas where success can be demonstrated early and where the risks are lowest.

4.  Develop a communications plan to reach and influence the stakeholders that have been selected as priorities in a way that seen as authentic/genuine.

5. Make sure that you have built in an effective evaluation process. This is essential for internal credibility and continuous improvement

I think all the judges would agree with me that the students understood the situation extremely well and that each team’s presentation was remarkable.

I left feeling really inspired to know that the next generation of business leader will be placing such a high priority on doing the right thing.

Congratulations to Prof. Tina Dacin, Mandy Daniel, and especially to the Queen’s MBA students who did such a great job.