Juggling Dynamite

Investment marketing promotes nonsense much of the time. One major component of this surrounds expected income withdrawal rates and return expectations. Advisors or managers routinely promise too much and ill-informed or wilfully blind clients buy in, usually to their financial and emotional detriment, often repeatedly. I talked about this issue in Juggling Dynamite (chapter 3: The truth about asset allocations and return expectations).

I was discussing the topic with an engineer friend a few months ago. She runs a commercial construction company. “Its the same in the construction business” she told me, “the con artists and shoddy builders under-cut our quotes with ridiculous numbers to get the job. In the end they often go way over budget, miss their targets or blow up completely. Some of them even get arrested for fraud. Meanwhile us reputable firms who won’t lie, who deliver what we promise, miss out on good clients because we quote it honestly”.

It is a mathematical fact that properly managed for capital preservation, investors today should not try to withdraw more than 3-4% a year maximum from their portfolios unless they intend to consume capital each year in doing so. I tell this to people looking for financial guidance every week. Some understand the math, accept the facts and structure their plans accordingly.  Some do not.  Some go up the street to the broker/planner/banker/investment seller who assures them that they can withdraw 6, 8, 10%+ a year, “no problem” they say, “how much would you like, we’ll arrange to send it monthly to your bank account.” As time goes on, this plan is eventually revealed as capital-consuming (even devastating) but often the clients are surprised and mystified as to why their savings are faltering so badly.

This article from the Jon Heinzl at The Globe is insightful on point:

“Monthly income funds are a hit with investors, and it’s easy to see why: They provide a one-stop solution for folks seeking diversification, low fees and – most important – a juicy income stream.

No wonder Canadians have parked more than $25-billion in the Big Five banks’ monthly income funds, some of which sport yields that are higher – in some cases a lot higher – than they can get from individual stocks or bonds.

But here’s something they may not realize: In some cases, the reason yields are so high is that the funds are paying investors with their own money.

Let’s look at an example. The BMO Monthly Income Fund pays a fixed monthly distribution of 6 cents a unit, or 72 cents annually. Based on the fund’s Oct. 17 price of $7.57, that implies a yield of about 9.5 per cent.

Sounds pretty good – until you consider that the fund posted an average return of just 3.1 per cent for the five years ended Sept. 30. A skeptical investor might well ask how the fund can afford to pay such a hefty distribution. Answer: By giving investors their own money back.”

Read the whole article:  When fund yields are too good to be true. (hat tip Howie)

When I was growing up CBC television was the gold standard of Canadian journalism: professional, balanced, tolerant, intelligent discourse. When I first began appearing on CBC radio as a young lawyer discussing constitutional issues of our Charter of Rights I was proud to be part of the discussion. Later when I co-founded our present money management firm I was asked to do recurring segments on the CBC business news with Fred Langan talking about market news and how it impacted real life people. I was happy to contribute to a news program which had long been respected in the tradition of the BBC and PBS. That was then.

A few years ago the CBC, began gasping for ad dollars as the Canadian government pulled back funding. Suddenly the focus of CBC was no longer about professional journalism, the focus shifted to grabbing eyeballs from anywhere. I had several conversations about this new dynamic with some of the producers there at the time who I respected. All of them knew that the changes to their funding would change their journalism a lot, and for the worse. Bringing in Kevin O’Leary from BNN to lead the new business focus was a sad day for CBC.

I have met Kevin a couple of times. I know people who know the facts, rather than the PR spin about his business background. I appeared with him on a panel in Toronto in the fall of 2010 as he was promoting his new mutual fund company and firing off glib comments to an investor audience about why they should be happy that corporations are paying CEO’s 300 times the average worker as this was necessary to attract the best talent. When I pointed out those were the high paid CEO’s that had driven the world economy into the ditch over the past decade he became visibly heated. The exchange went on for about 30 minutes with O’Leary throwing out sound bite comments which were easy to refute with facts and grade-school commonsense. The feedback from audience members was that I made O’Leary look bad and that he did not like me. I replied that I did not make O’Leary look anything, his own comments spoke for himself.

I only appeared on the Lang and O’Leary show once after that panel. Kevin did not speak to me. Recently CBC has come under broad-based backlash regarding an embarrassing exchange that took place between Chris Hedges, a former New York Times foreign correspondent and Pulitzer Prize-winning author who was explaining why he sympathizes with the protesters camped on Wall Street. O’Leary tore into Hedges, whom he misidentified as a protest organizer, and denigrated the protesters with oft-repeated criticism that they’re unfocused and leaderless. “You sound like a left-wing nutbar,” O’Leary tells Hedges.

It’s a new low for the ongoing degradation of the CBC’s once respected institution.

Nassim Taleb, author of “The Black Swan” and a New York University professor, discusses recent bank earnings and their plague on the global economy as well as his concerns about the OWS movement.  Watch the Bloomberg interview here.

Banks are staging a mid-day rally today, this chart highlights near-term resistance.

Source:  Cory Venable CMT, Venable Park Investment Counsel Inc.