Yanus Varoufakis on the Inappropriateness of Seeing Economics as Applied Math

Some great bits of history and social commentary here. Very much concerned about the folly of quantifying economics and and obsession with measuring things. He draws out some of the implications toward the end which include helping capitalism avoid criticism from dominant classes thereby benefiting the capitalists.

https://www.youtube.com/watch?v=ptGsHxdhgYo

How I invest--step by step

So you’ve never invested before. And you want to start, but don’t know how. That’s where I come in.  You also don’t want to lose all your money, so you don’t trust the brokers or the banks. And you don’t trust financial advisers. Well, I’m not a financial advisor. *

Assuming that you’re going to take a leap of faith with me, here is what you’ll need to do to become a first-time investor in Canada and how to avoid some common pitfalls. Basically, your goal should be to get good investment returns, while managing your risk. Part of the way you get good returns is by minimizing your costs of investing. Many investment options can be done cheaply. However, there is a very profitable industry out there trying to take your money (through high fees) and promising you superior returns. This is what most Canadians do through their pension funds. But you can do it yourself! And your bank may just help you to set it up. They can be very helpful if you know what you want.

1) I opened a brokerage account.

Canada has more than 10 brokerages, many of them online. Even if not fully online, one can set up an account in person and manage it online. To set up an account, one needs a bank account, an address to send statements to (this can be done by e-mail) and some form of government issued ID--a driver’s license or passport will do. Take your documents to your chosen broker, and they will create your account.

2) I provided seed money to my account.

This will typically involve making a bank transfer from an online account to the brokerage account. It’s as simple as making a bank transfer to a friend. Simply choose the account you want to transfer from, and then transfer to your brokerage account. Some brokerage accounts provide discounts for having a minimum amount in the brokerage account. I happen to use Scotiabank, so I’ll provide screenshots of how I do it.

A) Selecting the bank account (e.g. Basic Banking)

 B) Choosing the amount to transfer.

You’ll probably want more than $20, if you are buying more than 1 stock. I’ve just chosen $20 at random.

C) Confirming the transfer. 

Now you have money in your brokerage account and you’re ready to buy stocks!

If you’re not comfortable with online banking, you can also pay your broker to essentially do the same thing for you, but it will cost you an extra $50 per trade. I chose to keep that $50 for myself. The transaction only takes a couple of minutes.

3) I decided what product I wanted.

Uh-oh! What do you want? How do you decide? Life is so complicated! To keep it simple, the main asset categories are stocks and bonds. Stocks represent a partial ownership of companies, and as such, are the main driving force of the market. Bonds are essentially loans made to companies as well as various government bodies. Stocks, on average, earn more, but are more risky. Bonds earn little (much more than your bank account, typically) but have fairly stable prices.

4) But which stocks? Which bonds?

If you don’t know which ones to buy, you might consider buying all of them, or a very large selection of them. This is called buying an index fund. You could buy a piece of 60 of the largest Canadian companies all at once, as I do. The ticker is HXT, and you will see my purchase of that below. If you want to buy a piece of all the others, order the XMD fund. Similarly, a large Canadian bond index containing 320 different bonds, both government and corporate can be purchased in the same manner, using the ticker XQB. An added bonus of buying these funds through Scotiabank’s I-shares: there is no commission fee!

There are plenty of different funds to buy that aren’t restricted to Canadian stocks and bonds. More on that in a later post.

5) I bought the product I wanted

The simplest way to do this is to execute a market order. That means you will buy the stock or bond (fund) at whatever price the market is selling for. This changes throughout the day, but normally not very much. Markets close down if the index loses 7%, which is considered extremely volatile. If you make a market order, then you agree to buy your asset for the highest price that people are currently offering to sell. As you see from the screenshots, the most recent market price for HXT was $24.57, so at the time, I expected to be able to buy at a price similar to that. For 10 shares, I expect to—but might not be able to—pay $245.70.

A) Clicking on “Make a Trade”

 

B) Entering the symbol of the stock or bond you want (e.g. HXT).

 

C) Clicking on “preview order.”

 

Uh-oh! I-trade doesn’t think this is a smart purchase at this time. 

Nice of the bank to warn us of volatile prices. So alternatively, you may decide to make a limit purchase, as indeed the brokerage automatically has suggested. If you want to be sure that you are not paying more than, say $24, for the HXT fund, enter $24 as your limit price. On the one hand, you don’t face the risk of paying too high a price. On the other, if no one wants to sell HXT below $24, you won’t be able to buy it.

Under order type switch from “market” to “limit” and type the maximum price you are willing to pay today for the stock. Then preview the order to make sure that you’re not trying to buy 1000 stocks when you mean to buy 10.

 

10 stocks at $24 each for $240 total. That seems right. So enter your access code and submit the order, if that’s what you want.

Incidentally, the market didn’t go low enough for me to get to purchase the stock. Maybe next time.

5) I Hold!

The popular notion of how to make money in the market is by buying at low prices, selling at high prices, and banking the difference. This is basically correct; however, that doesn’t mean that you should wait for low prices and buy then; wait until the market is at a high and sell then. Why not? Because you don’t know where the highs and lows are! No one knows. If you buy now perhaps the price is not as low as it could be, but it will very likely be much, much higher in the future. In the immortal words of the great Jack Bogle, “Stay the course.”

6) I Sell (eventually)

After you’ve held your assets for a long time and allowed the miracle of compound interest to build your wealth, you may be ready to sell. Perhaps this is when you are retiring. Perhaps you are buying a house. In any case, if you’ve held your money in stocks, and your luck matched the average luck of the market over the last 100 years, you’ve earned 6.9%, after inflation, per year. That is, after every 10 years of holding your investment, is has probably doubled in value. (strictly speaking, increased 94%). Selling is as simple as buying. Login to your brokerage account, select the asset that you want to sell and how (again, a market order is the simplest). After someone buys your asset, their money will be deposited into your account. You can then transfer that money to a regular bank account online and enjoy the $94 on every $100 invested which you earned for nothing!

Too good to be true?

Maybe. Stocks have some risk associated with them. In particular, if you decide to buy a stock and then you panic and sell when the price drops, you are quite likely to lose money by investing. This is a good argument for holding some bonds as well as stocks. Bad markets won’t seem quite as bad. If you think that you can figure out when the best times for buying and selling are and try to use your keen senses to make superior returns, you will almost certainly fail. (Sharpe and Modigliani have Nobel prizes in economics for showing that YOU can’t beat the market reliably.) Of course, no one knows the future. The past 200 years have been very good for investments, and stocks in particular. That does not guarantee the future will be successful, but it is not an unreasonable bet. There are ways to decrease risks, however. Rather than try to time the market, dollar cost average. Rather than buying individual stocks, buy index funds. Don’t forget about bonds.

Every investor needs to keep in mind that investing is inherently risky; but taking that risk is precisely how people manage to grow rich. On average, the market has grown considerably, in spite of major crises. The market failed catastrophically during the Great Depression and the Great Recession of 2007-09. We had a major World War. Inflation ate away earnings during massive inflation of the 1970s. But even if we include those events, 6.9% is the average return, per year. From my perspective, a 6.9% compound return is a really expensive opportunity to give up.

*This is not financial advice, since dispensing financial advice entails a host of certifications, and membership cards which I do not possess. However, I do possess a couple of economics degrees, teach the subject and do invest myself. But there are certainly no guarantees of financial success from me. Just what I think are good principles.

**Disclaimer: I invest with Scotiabank and buy iTrade products. I'm quite happy with the products but they don't pay me to advertise them. I hear good things about other brokerages as well.

The High Cost of Low-risk Investing

The Globe and Mail has yet another doozy of a weird finance article. I have previously used their articles for a game I play with my high school students called “Spot the Nonsense.” In their latest piece, they profile David Trahair, a chartered accountant, who owns his own accounting firm, who has authored 5 personal finance books, who gives advice on stocks and who apparently hires someone to give him financial advice. How does that work, exactly?

“Virtually Risk-free Portfolio”

A risk-free portfolio is not obvious nonsense to everyone, so we’ll break it down. What does Trahair do with his finances? He is an ultra-conservative, to the point of eccentricity--the financial equivalent of people who build fallout shelters, or buy zombie repellant. He invests completely in GICs (guaranteed investment certificates), on which he claims make more than 2% and a “high-interest savings account,” which appears to currently pay a paltry rate of either 0.75% or 1%. Given that he has allocated about 50% to each, his rate of return is likely to be close to 1.5%. That rate would have just beaten inflation last year, failed the year before, beat it in 2013 and failed in 2012. So this strategy has some risk of losing purchasing power, over time.

But more to the point, this strategy would have missed out on the stock market gains of the past. The Canadian stock market (TSX) has historically gained 6.1% per year, trouncing these returns. If you don’t own productive resources, you miss out on the gains they provide. When you buy a guaranteed investment certificate or put your money in a so-called “high-interest” blah, blah, blah, what happens to your money? The institutions that you lend to buy productive assets (stocks) or lend it out to businesses (bonds). The banks take the risk because they believe that they will earn more than they pay you. So employing this strategy has a high risk that you will be a sucker.

Not rejecting stocks

The claim of not rejecting stocks sounds alright. But what is written here seems really odd to me.

“Mr. Trahair does not categorically reject stocks. He is okay with gaining exposure when risk is low – that is, when optimism is at an ebb.”

I guess that makes sense in principle; but he isn’t invested in stocks, according to the earlier part of the article. He also says that “more than half of the portfolio” is cash, which seems a bit odd. Technically, 100% is more than half, but still, an odd way to express the fact.

The next part is a bit more troubling. He consults with his advisor (!) about buying more stocks if there is a market crash. There was a market crash! Canadian stocks dropped 30% relative to highs, at which point I wrote about the discount on stocks, as did others. I guess he and his advisor missed that. I don’t have a big readership just yet. I’m new.

But setting aside that oversight, there is a problem with the whole concept of buying stocks when risk is low. No one has any idea when such a time would be. It is true that I thought earlier this year to be a smart time to buy, because stock prices had gone down. But I would never call that low-risk. The market can always keep falling. It is very unclear what magnitude of financial catastrophe Trahair is waiting for.  

“His worst move”

“Critics may say staying out of the stock market is a bad move, Mr. Trahair notes. But he finds they often have an association with the financial industry and “make their living selling stocks and mutual funds.”

I believe a healthy dose of scepticism is important and investors should be vigilant. But it is truly bizarre that he, an advisor, would be critical of financial advisors. And particularly so, given that the article is there, in part, to advertise Manulife, where he gets his high-interest savings account. I have no qualm with Manulife but I find it very odd that they would be placed above scrutiny, unlike stock brokers. One should be very careful when making large financial decisions, such as how to handle a retirement portfolio. But that doesn’t imply that stocks are inappropriate.

The Sense

The end of the piece has a breath of fresh sanity. Trahair recommends that people keep their stock allocation to 100% minus their age. This is a well-know and sensible formula, if mildly conservative for some tastes. Many Bogleheads have a similar investing principle, and they maintain a fantastic resource on how to choose what kind of assets (stocks, bonds, GICs, cash) to invest in. They have a very data- and thought-based analysis of what your likely risks are as well as your likely returns, although they do focus on the US market. If you want to go a bit deeper, you can even consult their investment philosophy; again a very sober and sound account. Their sister site is the Financial Wisdom Forum which gets into the same information with a Canadian focus.