Hardy would have us believe their fates were intertwined with their characters but in speculating on grain prices, the efficient market theorists of today would say both men cast their lot to the random winds of chance. One, Farfrae, got lucky while the other, Henchard, did not. Needless to say, in both cases, today’s adherents to the school of buy-and-hold, passive investing would be appalled by their endeavors in this realm.

In the early going, Farfrae was Henchard’s right-hand man in a thriving grain-dealing business that had made Henchard one of the wealthiest men in Casterbridge as well as its mayor. But Henchard was, as Hardy wrote, a person, “…who might not inaptly be described as Faust has been described – as a vehement gloomy being who had quitted the ways of vulgar men without light to guide him on a better way.”

Jealous of Farfrae’s growing popularity in the town, Henchard dismisses him from his employ, whereupon Farfrae sets up shop in the same trade and shortly emerges as a rival. His commercial aggrandizement seems largely based on an active, short-term trading approach in grain markets. In Farfrae’s own words (speaking to Lucetta):

“Yet I’ve done very well this year. O yes,” he went on with ingenuous enthusiasm. “You see that man with the drab kerseymere coat? I bought largely of him in the autumn when wheat was down, and then afterwards when it rose a little I sold off all I had! It brought only a small profit to me; while the farmers kept theirs, expecting higher figures– yes, though the rats were gnawing the ricks hollow. Just when I sold the markets went lower, and I bought up the corn of those who had been holding back at less price than my first purchases. And then,” cried Farfrae impetuously, his face alight, “I sold it a few weeks after, when it happened to go up again! And so, by contenting mysel’ with small profits frequently repeated, I soon made five hundred pounds–yes!”– (bringing down his hand upon the table, and quite forgetting where he was)–”while the others by keeping theirs in hand made nothing at all!”

When Lucetta spurns Henchard for Farfrae, it’s the final straw. Henchard sets out to ruin Farfrae financially by outsmarting him in the grain speculation business. He says to his new foreman, Jopp:

“I sometimes think,” he added, “that he [Farfrae] must have some glass that he sees next year in. He has such a knack of making everything bring him fortune.”

“He’s deep beyond all honest men’s discerning, but we must make him shallower. We’ll undersell him, and over-buy him, and so snuff him out” ….

The season’s weather seemed to favour their scheme. The time was in the years … when … the wheat quotations from month to month depended entirely upon the home harvest. A bad harvest, or the prospect of one, would double the price of corn in a few weeks; and the promise of a good yield would lower it as rapidly ….

It was June, and the weather was very unfavourable. Casterbridge, being as it were the bell-board on which all the adjacent hamlets and villages sounded their notes, was decidedly dull.

Henchard, supported by Jopp, “read a disastrous garnering [harvest], and resolved to base his strategy against Farfrae upon that reading.” But before acting, he sought confirmation from a weather prophet. After paying him a crown, Henchard hears the following prediction:

“By the sun, moon, and stars, by the clouds, the winds, the trees, and grass, the candle-flame and swallows, the smell of the herbs; likewise by the cats’ eyes, the ravens, the leeches, the spiders, and the dungmixen, the last fortnight in August will be–rain and tempest.”

The last part was just what Henchard wanted to hear.

“The next Saturday Henchard bought grain to such an enormous extent …. When his granaries were full to choking all the weather-cocks of Casterbridge creaked and set their faces in another direction …. The temperament of the welkin passed from the phlegmatic to the sanguine; an excellent harvest was almost a certainty; and as a consequence prices rushed down ….

Henchard had backed bad weather, and apparently lost. He had mistaken the turn of the flood for the turn of the ebb. His dealings had been so extensive that settlement could not long be postponed, and to settle he was obliged to sell off corn that he had bought only a few weeks before at figures higher by many shillings a quarter….

But he had to enter the Casterbridge Bank that day for reasons which had never before sent him there …. It was rumoured soon after that much real property as well as vast stores of produce, which had stood in Henchard’s name in the town and neighbourhood, was actually the possession of his bankers.

Product integrity

The ETF vs. mutual-fund debate often overlooks important side issues, notably the stability of the products. After an investor purchases a mutual fund or ETF, it may change in various ways. But the changes for ETFs appear to be on a much smaller scale compared to mutual funds. Examples of the changes affecting mutual funds  include:

• turnover in portfolio managers – many investors may buy into a fund because of a well-regarded manager only to see the star later jump ship for another fund, leaving unitholders faced with the decision to stay with a less skilled manager or redeem and pay a rear-end load fee as high as 5%

• changes in the manager’s investing style (style drift) – portfolio managers may stay put but then start trying investment approaches different from what unitholders expected, increasing, for example, the proportion of risky securities in an attempt to juice returns

• termination or merging of a fund with another fund – which again presents unitholders with a disruption in their investing plans

Tax efficiency

While some ETFs may distribute taxable capital gains to unitholders, the incidences are more the exception to rule. Mutual funds, on the other hand, tend to distribute capital gains as a rule rather than the exception. At least that is what the averages would seem to indicate: for example, David Swensen’s book Unconventional Success shows that the average annual distribution of S&P 500 index mutual funds was 1.8% of assets from 1993 to 2002, compared to 0.01% for the SPDR S&P 500 (SPY)

Flexibility

The more one can tailor an investment vehicle to their needs, the more one can maximize their utility; having extra options is a valuable trait to many investors. Some examples:

• ETFs can be bought and sold at a known price throughout the trading day while mutual funds are bought and sold at the price prevailing at the end of the day.

• ETFs can be purchased on margin, sold short, and combined with ETF options to create covered trades and other hedging strategies

Diversification

Mutual-fund defenders say Canadian equity ETFs i) expose investors to the risk of stocks growing to a large weighting in the index, (Nortel effect) and in the case of Canadian broad-market indexes, ii) leave investors weighted toward financial and resource stocks. Let’s deal with these two points in turn:

• as for the “Nortel effect,” Canadian ETFs are no longer exposed to such risk; the fundamental ETFs offered by Claymore in Canada are not market-cap weighted and ETF families using market-cap weighting now limit the weights of individual stocks so that none can have the influence Nortel once had.

• as for achieving a portfolio less weighted toward energy and financial stocks, that would seem to be an asset allocation choice perhaps better left to the individual investor (they can tailor exposures to their preferences better than an equity mutual fund can); ETF investors typically achieve their desired level of diversification through holding a portfolio of ETFs tracking a variety of asset classes such as small caps, U.S. stocks, and international stocks.

Performance

Mutual fund apologists say mutual funds: i) offer the potential to outperform the market, ii) show periods of outperformance, and iii) have relatively better performance in sectors like small caps and U.S. stocks. Let’s deal with these three points in turn.

• as for the potential to outperform indexes, some mutual funds may be able to do so (studies show less than 5% over the long run) — but identifying them ahead of time is hit and miss; odds are that the investor will end up an underperforming fund

• as for periods of outperformance, using more extensive time sampling and adjustments for survivorship and other biases, virtually all mutual-fund-performance studies published in peer-reviewed journals indicate “that mutual fund managers on average underperform their risk-adjusted benchmarks,” to quote Professor Richard Deaves in his book, What Kind of Investor are You? (Deaves own study of the Canadian stock market found that equity mutual funds on average fell short of their indexes by more than 1% a year over the period 1988 to 1998)

• as for relatively better performance in sectors like small caps and U.S. stocks, the odds of picking an outperforming fund may be higher but then again, it is hard to identify ahead of time which funds will do so (or at least avoid management changes, style drift, closure, etc.)

Among other things, you’ll learn that direct-access brokers give short-term traders an edge. Their trading platforms route orders to the market faster, quote real-time prices, and show standing buy and sell orders known as Level II quotes. Some also offer back testing of trading ideas, real-time charting, and demo accounts.

The Level II quotes are a particularly handy tool for the short-term trader. They can see if demand or supply is building in the order book to confirm price and volume signals and then trade the imbalance. But there are pitfalls. Large orders can be hidden by breaking them up. And some professionals may feint traders by putting large orders in the Level II quotes to give the appearance of demand or supply build-ups.

The book also advises rookies to: i) first learn with paper-trading accounts available at many brokerages, ii) back test purchased or self-developed trading systems under various conditions, iii) follow a pre-session routine for gathering information that puts you into the proper mindset, and iv) have back-up Internet connections, computer systems, etc.

In general, high volume, volatile stocks are preferred by traders. They offer the most potential to make gains and are easier to exit in a hurry. Within that framework, several trading strategies were referenced. They included:

• the day trader’s practice of “scalping,” which entails buying and selling a security simultaneously if the bid-ask spread is wide enough to cover costs

• the swing trader’s practice of playing one to five-day trends triggered by events such as earning announcements

• the position trader’s practice of riding longer trends tied to factors such as business cycles and phases

• taking contrarian positions to over-reactions in the market, e.g. short selling stocks inflated by news of a merger in their industry

• merger and acquisition arbitrage, which involves going long the company to be acquired and short the acquiring company (plus other arbitrage situations, such as pairs trading and discrepancies between securities such as options and stocks)

• fading stock gaps at the open, i.e. going long in anticipation of a bounce back on a stock that opened far below its previous closing price due to some negative overnight news – especially if volume was light on the gap down

• playing support and resistance levels at even numbers in prices

A variety of tools and techniques are covered, such as margin trading, trailing stop orders, moving averages, charting (head-and-shoulders, and cup-and-handle, etc. ), technical indicators (on-balance volume, stochastic oscillator, etc.), momentum indicators (rate-of-change plot, breakouts on volume, etc). Limit and market orders take up one chapter; market orders are cheaper but are subject to “slippage,” i.e. the market maker fills your buy order at $32.75 even though the price was $32.50 at the time the order was submitted.

Ken Little is a seasoned business writer with over a dozen investing and personal finance books to his credit. It shows. The writing was crisp and clear.

However, I thought the book could have been brought to life more with real-life stories of active traders. In addition, I thought that the section on technical indicators could have had more depth: in many instances, the descriptions are rather brief and the reader is referred to an appendix for sources with more information.

According to S&P’s research, just 38.9% of actively managed equity funds in Canada outpaced the S&P/TSX Capped Composite Index during the bear market from August 2000 to December 2002. In the U.S, only 29% outpaced the S&P 500.

True, actively managed funds can hold cash balances, shift into defensive stocks, etc. – so there is a presumption they would do better. In fact, the average return earned by active Canadian equity funds does exceed the index during bearish phases.

But this average return “reflects the strong performance of only a few funds,” declares Jasmit Bhandal, director of Standard & Poor’s Index Services. “The majority of Canadian Equity funds still underperformed their benchmark.”