We are all business owners/professionals and are well into our middle age. We all four travel for work and pleasure and have the strain of road meals and restaurants to worry about. Each of us is physically active and perhaps better-than-average recreational athletes… back in the day.

The contest was announced before the holidays so, at least in my case, I had a very guilt-free season of parties and dinners. This year over-indulging didn’t matter, and perhaps was a slight positive for the competition if I added a little to my starting weight total. So the answer to “would you like another helping?” was …absolutely! And why not add some chocolates to the top of that gravy… I added about 8 pounds in two weeks.

My mental accounting is that I weigh about 200 lbs but if that were true then I would weigh less than that at some point during the year and it has been more than five years since I have seen a number that starts with 1. Calories have never been a consideration; traditionally I have eaten for taste and enjoyment. At home we eat well, generally avoiding processed foods and preparing from scratch where possible. My wife is very good about the quality of our food and we eat mostly organic, but my weakness appears to be quantity; I am perhaps living to eat rather than eating to live.

Where to begin?  I am an analyst so I started with some research. “Diet”, “Calories” are very attractive search titles and my browser provided an endless array of web sites that wanted to solve my problems by selling me something. There are also very good discussions from credible sources about reasonable approaches to eating. I needed to understand the variables to separate what matters from the noise of the commerce of food. I found several, but one in particular that helped me put it all together;

http://web.mit.edu/athletics/sportsmedicine/wcrwtloss.html

To lose weight for a significant period you need to restrict calories in a sensible manner. The quality of the food is important since it provides the essential nutrients for health but if you don’t burn more fuel than you are taking in then there is no progress.  Right-sizing the calories and getting the ratio of protein to carbohydrates and fat is the total package.

I also needed to be aware of what I eat. The free app Calorie Counter by Arawella Corporation seems to have this covered off. I am able to track my net caloric intake as well as the composition of the calories. I also found that I could enter my current position and my May 1^st weight goal and a daily total calorie target was provided. In my case I am trying to get to 180 pounds in 17 weeks. Apparently if I consume 1900 net calories per day I will get there. Furthermore, total caloric intake is offset by exercise. In my case a half hour walk at a reasonable pace equates to about 100 calories, whereas 30 minutes of weight training offsets 250 calories. I like using an app to track because it provides constant feedback on the food and exercise choices I am making. It seems to me that eventually the choices will be automatic and I will not need the software though it is fun to use and does all the math for me.

My wife also discovered that one of the tech reporters she follows on Twitter, Mike Wendland, has decided to lose weight and embrace healthy life choices and he is tracking his progress on social media – on his blog, twitter, Facebook etc. She purchased his book and is following his updates on twitter as he seems to be doing much the same type of regime as me. His website has a lot of good information. http://superhealthyme.com/

The goals are ambitious and calorie counting will only get me so far. Exercise and building up muscle mass will be essential if I am to sustain weight loss for the full period. In addition, if my more muscular body is burning more calories the likelihood of maintaining a healthier size is greatly improved.

To date after 5 days I have lost my chocolate – gravy and extra wine weight and am tipping the scales at 211. So far so good, but this is more like a marathon than a sprint and there is a long way to go.

For the next 16 weeks I expect to write about our (my) progress and welcome any comments. I encourage you to consider joining us and doing this for yourself. If you do jump on board for the ride please let me know.

Patrick

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

The volatility and pressure in world stock markets is regrettable. Risk has manifested in providing little if any return for the past decade. It seems to me that this current downturn has been triggered by the perception of a lack of effective leadership on the part of governments around the globe.

Of the three main players in the economy – individuals, corporations and governments – the investment markets are concerned primarily with corporations. At this point, North American corporations as a group are much better off – as measured by balance sheet financial strength – than previous median levels. Companies have less debt and more cash than we expect them to have. This is a good thing that should be a source of investor confidence. On the other hand, many of the world governments are bankrupt: Iceland, Greece and Ireland come to mind.

Investment markets are concerned with predicting the future. In the bond markets, payback (yield) for investing in 10 Year Government of Canada Bonds is about two and a half percent. The same is true of 10 year U.S. treasuries.  Investors buying these yields are willing to take a return, after inflation, of less than zero for 10 years. That number looks worse after taxes. It is worth noting that in the case of Canada and the U.S., investors in government debt appear unconcerned about default.

Individuals in North America have more debt than usual and the unemployment rate remains relatively high. The recent recession has been a difficult and persistent one for consumers.

The agreement to extend US Government debt was essential in that all financial interests were served and every investor would have experienced losses if it had not been confirmed. The US Government is too big to fail. Essentially, all countries in the G10 are too big to fail.

Sellers in the stock market will see much slower growth in the future. In terms of national accounts, aggregate demand is a function of buying power. The pessimistic view is that individual consumers and governments are tapped out. Companies who might otherwise be expanding are reluctant to do so if, in the future, there are fewer customers willing to buy their products. The thinking is that with fewer customers there is no growth. This is an important assumption that may prove to be incorrect.

In my view, predictions of future corporate earnings are a poor guide to investment decisions. This poor predictive power holds true for those that use so-called top down (aggregate economy based) analysis or bottom up (individual company) focus. Professional analyst predictions are frequently wrong and show little persistence when they do get it right. I think the balance of investment return for appropriate risk assumed will re-establish. Stocks will outperform bonds in the future, just as they have in the past. Good companies will innovate to find new customers and are already doing so.

We will re-balance our allocations once things settle down and we can confirm how this recent decline has impacted the plans for your portfolio. We re-balance when we have the evidence to do so and avoid the trap of attempting to generate investment returns by predicting short term outcomes.

Thank you for being our client and please pass this along to any friends or colleagues who could use a little reassurance and understanding.

Best Regards,

Patrick

To make a tax deductible contribution, the contribution must be made within 60 days after December 31^st.  That means, contributions to be deducted against 2010 income will have to be made by Tuesday, March 1^st, 2011.

For the calendar year 2010, you can contribute up to 18% of your earned income to a maximum of $22,450, minus any pension adjustment.  To determine your personal deduction limit, it is best to refer to your most recent Notice of Assessment, which was returned by CRA with your most recent tax return.

Many of our clients are taking advantage of the simple and convenient method of making online deposits to their accounts at Richardson GMP using their online banking site.

Here is how it works:

1. Log into your online banking service

2. Follow your financial institutions instructions to set up a new Payee in the bill payment area

3. To setup a new Payee, search for GMP

4. The results page should return GMP Securities L.P. – please accept this

5. You will then be prompted for an account number (enter one of your Richardson GMP account numbers)

6. Once accepted, you’re done!

Please feel free to contact our team if you need any assistance in deciding the amount of your RRSP contributions or making an RRSP contribution deposit.

Lisa

From an investor viewpoint, net worth can be checked against previous levels to hopefully see some progress. Improvement often means more money to draw on, as more is better when it come to supporting future lifestyle choices.

Let’s assume a primary financial goal is increased retirement income. Do your actions support your goals?  Future retirement income is positively affected by savings and growth on those savings. So an important policy to support your new financial success is to create some savings, or perhaps spend less.

I have found discussing spending habits to be something of a buzz kill.  Some people tell me that they are better at making more money than budgeting. Making more money can work, but there still has to be some savings, and spending cuts are more predictable that earnings growth.

Once you have some savings, and are in the habit of creating an ongoing supply, it’s time to consider money growth strategy.

Investment management fees and expenses do not support the goal of growing your savings. On the other hand, properly constructed portfolios do a better job of wealth creation than throwing money at the markets and hoping and praying. Some fees pay for experience and judgment. Some fees end up paying for other people’s entertainment.  You should have a policy of supporting investment advice and minimizing entertainment expenses.

As a guideline, the Canadian Pension Plan Investment Board pays about three quarters of one percent per year in fees and expenses to manage their 120 billion dollar fund. For most of us it is reasonable to expect to pay a little more to have our money managed. Your policy should be to pay a right amount and yes, lower fees are better.

Your growth expectations should be supported by the investments you hold. For example, if the long term return to equities is 12 percent, expecting 20 plus percent return is bad policy. You may indeed have periods when you achieve the big number, but there is no sense being disappointed at what is a highly probable outcome. If you expect to achieve more return than is available, you should have a policy of investing in assets that provide higher return than stock markets.

Leverage doesn’t increase only the positive return; you get more of the bad as well. A leveraged portfolio expected return has a broader range of possible outcomes. If you are paying incentive fees, like many hedge fund models, then the most probable outcome is a lower number than if no leverage is applied. Your investment policy should consider the math of your approach and check to see that the incentives support your goals.

We are focused on our goal of building the finest platform for investment advice. I am convinced we are on the right track with policies that directly support the goals of our clients. Let’s chat about your investment policies. This is the year, now is the time.

Patrick

The opinions expressed in these articles are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.

Diversification improved the outcome. A dollar invested into the US S&P 500 total return index is worth about 66 cents after currency adjustment. Not really compelling, but 66 cents beats 41 cents. A dollar invested globally in MS EAFE in 2000 would be worth about 65 cents, currency adjusted. A dollar invested in Canada, as represented by the S&P TSX60 total return would have actually grown to about $1.72 in 10 years. Bonds as represented by DEX Universe Canadian Bond index, increased from a dollar to $1.62 in 10 years.

A common benchmark for pension return of 7% would have seen a dollar grow to $1.97 in 10 years. Inflation, as represented by core CPI, represents a change of 20 cents from 2000 to the end of 2009.  For pension managers, the benchmark return is the rate of investment return that will balance cash inflows with cash outflow and cover for the effects of inflation. As the above statistics indicate, this has been a very challenging period for investors and investment professionals.  Many pension plans are now underfunded and similarly, retirement accounts are not achieving the growth that was expected to fund retirement spending. Those most acutely affected include those investors who retired at the beginning of the decade. Many now have to choose between lower spending and/or adding back some sort of employment income. Some will of course follow the path of chasing higher returns and tolerating much higher levels of risk. It is likely that this final choice will be too difficult a path to follow over any meaningful period of time.

Last week Mullins Capital Management hosted a luncheon with the head of BGI Canada, Heather Pelant, as our speaker. You may know many of their products as “i shares” or exchange traded funds (ETF). Ms Pelant’s presentation reviewed the reasons for owning ETFs instead of actively-managed mutual funds. She pointed out that market exposure explained more than 90 percent of investor return. In addition, she discussed how few active managers deliver returns greater than the market. There is a good body of academic research backing up her views. So, a real problem exists for investors trying to find persistent out-performance for their investment portfolios. Return is further challenged when fees and expenses are considered.

Short term stock market performance is not predictable.  The risk of “not knowing” is rewarded by investment return for fully diversified portfolios. This investment identity explains some of the under-performance of active management. To paraphrase Heather Pelant, active managers get it wrong by focusing on the seven percent of total investment returns attributed to market timing and stock selection. The math adds up like this: the average investor can beat more than 90% of professional managers by simply achieving the returns provided by the common indexes representing various stock markets. Most pension managers can be considered active managers. The overwhelming majority of mutual funds offered to individual investors are actively managed. Exchange traded funds are designed to track specific reference markets. Their “tracking error” is usually quite small and mostly attributed to the fees they charge to manage the effort. Perhaps somewhat surprisingly then, according to BGI, ETFs are represented in only 5 percent of investor portfolio’s in Canada.

While the attributes of ETFs are compelling, for our investment practice we think there are additional improvements we should and can make for investors in their fully diversified portfolios. For statistically relevant periods, we expect stocks to outperform bonds. We expect small capitalization stocks to outperform large capitalization stocks. We expect low price-to-book value stocks to outperform high price-to-book value stocks. These ideas are embodied in the three factor model of Fama and French and applied to the real investment world through Dimensional Funds. In our 10 year example a dollar invested in US large and small companies through Dimensional US large Value and US small value funds would have turned into about $1.60 or about $1.33 after currency conversion. This is a meaningful improvement when compared to the return of the S&P 500 total return index (a dollar to 66 cents) for the period.

The randomness of short term investment return adds a great deal of confusion to the choices investors must make. It is frustrating when properly diversified portfolios designed to achieve investment goals of clients and their families over a meaningful period simply fail to do so. If the under-performance is a random outcome we should stick to the approach. We assume the return for risk assumed will manifest. Similarly, if our performance is much better than expected based largely on randomness we should consider a change in approach. Like pension funds, individual investors should consider current assets and future savings along with their longer term income requirements to define the appropriate risk level they can assume. After the quantitative definition, an important second check is to determine how much risk you are willing to assume. Your game plan becomes clear if these two definitions are compatible. In addition, keeping costs lower by managing taxes and management fees will provide a permanent, sustainable improvement in the management of your assets.

Finally, I fully expect the financial media to explore the returns to this past decade. In my opinion, there is little insight gained by assuming the past will equal the future in the investment markets. Measuring returns from a date like 2000 to 2010 is a good test but probably not very good roadmap. Good advisors have strategies that consider this when developing game plans for their clients.

In continuing the discussion of the concept of fairness, lets now look at lotteries. Lotteries are different; we don’t seem to demand fairness to participate. In a series of fair lotteries below the gross proceeds are evenly distributed among the participants. (For a review of my definition of fairness see my previous post).

Mean is the average payout: (total payout/ number of players). For all the three lotteries above the mean is 1, or your money back. Though this doesn’t describe what we see in the chart very well. For all lotteries above, mean returns look okay, no matter the payoff distribution or skew.

Median is the middle value of a series; the median is useful when distributions have extreme values which skew the mean value. In this example the median return for series 2 and 3 is zero. Median is a better approximate of the probable payout for those games.

Lottery payoffs are best represented by series 3 – one winner of all the money. It is unlikely that anyone would be motivated to play game 1, since simply getting you money back plus a little is not a very exciting proposition.

If we had our lottery promoter hat on, it is likely that we would prefer to sell tickets for lottery two or three rather than one. My take is that random large rewards are viewed as exciting.

In 2006, average proceeds for all US state lotteries were distributed as follows:

• approximately 65% in winnings payout
• 4% Sales General and Administrative expenses
• 31% retained by the state treasury.

Perhaps the old line “you can’t win if you don’t play” should be modified to “they can’t win if you don’t play.”

This is why economists refer to lotteries as a form of voluntary tax. In the case of all US State lotteries, initial government take of 35% compares favourably to regular income tax rates since most lottery participants pay less than 35% in average tax rates. In many instances, the proceeds are also taxed for an additional win for the sponsor state, when they receive essentially a double taxation dip of more than 50% of the bets.

So why do we suspend our sense of fairness to play these games? In the case of charity lotteries it is perhaps the excuse we need to give to a good cause. For regular lotteries, it appears that lottery operators are successful at building excitement by focusing on the mean and highlighting skewed results. This is how lottery tickets are sold. In our example more tickets will be sold for the next draw if a picture of player 10 appears in a newspaper advertisement with the proceeds check, smiling for the camera. The advertising campaigns are celebrations of non-probable random events. We don’t expect fairness in this type of game; we are satisfied with buying the excitement.

Unfortunately, we can draw many parallels to financial services from lottery marketing schemes. Instead of focusing on the plentiful returns available to market indexes, and building portfolios to capture those profits, financial service companies focus on the excitement of beating the averages. The incentives appear unbalanced. High fees paid to capture random large rewards don’t work in your investment accounts, though it may be more exciting.

Much of the recession fighting efforts by central bankers and global political administrations is focused on a forced expansion of credit. In 2007-2008, a ceasing of credit markets was crippling to economic activity. De-leveraging of global markets resulted in a sharp reduction in economic output and a pervasive global recession. The reaction by central bankers was to create conditions where bank-to-bank lending was possible again. To a great extent, and at incredible expense,  this has been accomplished. Indeed in the past few weeks we have seen credit market spreads expand. A positive indicator, since banks are probably using their own capital to lend to clients rather than simply passing on the fire hose of cash flow from the Fed.

While resumption of a normalized credit market is a precondition to ending this recession, the evidence suggests that credit expands only after the economy has rebounded. The effect is to further fuel an already expanding economy. In every recession since 1960 real bank credit didn’t peak until several quarters after the end of each recession. While this time may be different, it is likely that the same economic principles apply today as they have the past 50 years. Banks typically tighten credit as a result of loan losses. This is a reasonable response to limit losses and participate less to the downside of an economic cycle. These normal incentives operate to limit the expansion of credit prior to some clear evidence of economic expansion. When the economy begins to expand lenders expand their efforts to capture the growing market shares. It is unlikely that policy makers will be able to engineer conditions where lenders will lead a meaningful expansion in the economy. At some point incentives should switch in favour of the consumer and creating conditions for expanded demand to replace liquidity concerns as the primary focus of economic leaders.

Here is  a related short essay by Kevin Kliessen, Economist with the  Federal Reserve Bank of St. Louis  http://research.stlouisfed.org/publications/mt/20090301/cover.pdf

U.S. President Barack Obama is visiting my cold and overcast city today. With this visit Canada becomes the first foreign destination for the new President. This has generally been the case for his predecessors as well. I understand that we won’t get to see him as he will be hidden from view for the 6 hours or so that he spends on Canadian soil. From a foreign policy perspective our hope is that this is the start of a friendly and mutually beneficial relationship between President Obama and Prime Minister Harper. Everyone needs someone they can confide in, especially when the challenges are many (to use Obamaspeak). This is just a meet and greet but if we could submit some questions…

For President Obama

1. Why stimulus? Are tax cuts simply a non starter?  The Regan-Thatcher years were a required response to big deficits and inflation problems of the 1970 and 80s.  Could we jump to a solution that actually worked?

2. How long do we hold the spigot open? Financials, Autos  … who is next?

3. Could we just give the auto workers the money and cut out the middleman? Would this cost less? Has anyone done the math?

4. What engineering superiority are we protecting by maintaining the auto industry as currently configured?

5. How does cutting salaries for Bank Presidents repair the economy?

For Prime Minister Harper

1.  What’s the plan for minimizing the environmental impact of the Alberta Tar Sands? How can we continue to supply this enormous quantity of oil at prices that we do not control without properly matching  all of the costs to the revenue stream?

2. Do you have a plan for Cap and Trade?

3. Do we believe in the gains from trade? What is the Canadian government doing to improve our position in emerging markets like India and China?

4. Now that the North American stock markets are down again this year, any more market timing suggestions you would like to share with us?

5. Who is going to win hockey’s  Stanley Cup this year?

However, if you choose to go it alone it is important that you choose to play a game you can win.  Opportunistically picking stocks by consistently finding mispriced securities that you, and only you, are able to recognise is a loosing game. It simply doesn’t work and brings in a high probability of dramatic under-performance. While random out-performance is possible, it is not probable.  Fortunately, there is a game you can win. It seems to me that a passive return to the markets in which you invest will outperform just about every other approach available to you. In his 2007 chairman’s letter to shareholders, (pg 19) Warren Buffet makes a similar point about “know nothings” winning. His conclusion is that the vast majority of investors would be much better off buying low cost index funds. I agree. If you want to improve your situation, that should be the starting point… the benchmark for other strategies that you are considering.

Rules For TFSA

Contributions are not tax deductible. You must be 18 years of age or older, a Canadian resident and be able to supply a valid social insurance number to participate. Initial contribution limits are $5,000.00 per year and will be indexed to inflation. Excess contributions will be taxed at 1% per month so this is something you really want to avoid. Unused contributions will be carried forward indefinitely. Contributions are not related to earned income. Any amounts withdrawn are added to the contribution room the following year.

Income and capital gain are not taxable while retained in a TFSA or when withdrawn. Income earned or amounts withdrawn will not be added to income tested benefits or credits delivered through the tax system. In addition these amounts will not effect OAS, GIS or Employment insurance benefits.

The qualified investments mirror RRSPs. Arms length entities such as stocks, bonds, mutual funds etc… . Small private shares may qualify subject to certain conditions. Interest on borrowed money to fund TFSA is not deductible., though a TSFA can be used as collateral for a loan.

No attribution rules apply so the TFSA will be used for income splitting purposes. The tax free status is lost at death though a tax free roll-over is possible if a spouse or common law partner is named as beneficiary.

Strategies

These flexible plans do not replace RSPs. They will be used most effectively in conjunction with pension type investments.  If you contribute a maximum to an RRSP and have savings outside that plan then the TFSA should be maximized.

Perhaps the best uses will be around family income splitting strategies. Parents or Grandparents can transfer up to $5,000. per year for each young adult or grandchild. Recipients can take the money out without tax and new room will be created for future savings.

This is also a welcome new vehicle for those who have high pension adjustments and have little use for RRSPs.

Other Notes

For young adults, a  tax return is required to build TFSA contribution room

Anti Avoidance rules apply to guard against transactions designed to shift taxable income to TSFA

This introduction will be supplemented by additional strategies in future posts.