Tag Archives: seeking

A Critic Of Valuation-Informed Indexing Offers A Concise Case For Why Buy And Hold Is Superior

By Rob Bennett There’s only one difference between Buy and Hold and Valuation-Informed Indexing. Both are numbers-based strategies rooted in peer-reviewed research. The difference is that Valuation-Informed Indexers always make adjustments for valuation levels (believing, as Shiller showed in 1981, that valuations affect long-term returns) while Buy and Holders never do (believing that the market is efficient and that, thus, the market can never be overpriced or underpriced). I thought that this week I would present here a concise and clear and simple and sincere case for Buy and Hold that one of my critics posted as a comment at my site. Then I’ll offer my response to his words. To me, as a self-described ACTUAL Buy-n-holder, it’s this simple: Markets tend to go up over time. Ownership of common stocks have proven to be the best way for an average person to participate in, and profit from this ongoing economic growth. It has proven impossible to determine which particular stocks will outperform, or when they might do so. Buying, and then holding a market basket of ALL stocks that constitute the market, on a regular and recurring basis, without respect to ‘timing’, removes the uncertainty of guessing which particular stocks will be best, or which is the best time to purchase them. That’s it. People can refine, add gimmicks, accessories, etc., or even purposefully misconstrue (AHEM, looking at YOU, Rob!) but to me, THIS is the essence of buying and holding. So, for you to go on a decades long intense daily public jihad against those principles, and the people who espouse, and apply them, seems frankly… well, insane. You are free to use whatever market timing scheme, or other method you chose to invest, or course. But for you to characterize the above technique as “Get Rich Quick,” just to irk people and to hopefully draw attention to yourself, shows how both intellectually feeble, and also morally challenged you are. (I dare you to publish this.) Is it a “gimmick” to consider valuations when making decisions as to what stock allocation to go with at a particular time? I don’t think so. The research shows that the long-term return earned by an investor changes with changes in valuations. That means that stock investing risk is variable rather than constant. It follows that an investor seeking to keep his risk profile roughly constant MUST change his stock allocation in response to big valuation shifts. Why do the Buy-and-Holders have such a hard time with this idea? It’s because they start with an assumption that the market is efficient. That’s another way of saying that the investors who set the market price are rational. Is it? Are they? I don’t think so. I have engaged in discussions with tens of thousands of investors over the years. I certainly have seen many rational arguments advanced. But I have also seen many emotional arguments advanced. If investors are as emotional when making decisions as to their stock allocations as they are when presenting arguments on internet discussion boards, I think it would be fair to say that it would be dangerous to assume that the stock market is priced rationally. That said, I believe that the market in the long term really does set prices properly. It has to. The purpose of a market is to get prices right. In the long term, the stock market is like all other markets. But in the short term, it is not. That makes all the difference. Take a look at the disparity between the irrational price that applies today and the rational price that applies in the long term and you know in which direction prices will be headed over the next 10 years or so. It always works. We have 145 years of stock market history available to us. For that entire time period, investors have been able to effectively predict the price that will apply in 10 years by looking at the price that applies today. That’s amazing. That changes our understanding of how stock investing works in a far-reaching way. It means that, when prices go up by more than the 6.5 percent gain justified by the economic realities, we are collectively borrowing from our future selves to fool ourselves into thinking that we are richer than we really are today. That causes devastating problems down the line. Investors cannot plan their financial futures effectively if they believe numbers on their portfolio statements that do not reflect the long-term realities. And the bear market that must follow a bull market causes an economic crisis as trillions of dollars in pretend wealth disappears, causing hundreds of thousands of businesses to fail and millions of workers to lose their jobs. For numbers-based strategies to work, it is critical that we get the numbers right. And, if Shiller is right that valuations affect long-term returns, it is impossible for Buy-and-Holders – who do not make adjustments for valuations – to get any of the numbers right. The valuations factor is not a small factor. It is huge. A regression analysis of the historical data shows that the most likely annualized 10-year return in 1982 was 15 percent real but that the same number was a negative 1 percent in 2000. Yowsa! The bad news is that it is very hard for Buy-and-Holders to accept these realities. They have staked their lives on the old understanding of how stock investing works. The good news is that Shiller’s “revolutionary” (his word) findings change things in a highly positive way. If we can effectively predict long-term stock returns, stocks are not nearly as risky an asset class as we have long believed them to be. Perhaps I am wrong. But, if I am right, the future of stock investing will be a lot better for all of us than anything that we have seen or even dared to hope for in the past. Disclosure: None.

Central Fund Of Canada: Gold & Silver At A ~10% Discount

Summary Many investors seek to allocate part of their portfolios to precious metals, given the prevalence of “money printing” by central banks around the globe. The Central Fund of Canada is one vehicle that is likely to deliver alpha in addition to metals exposure. It’s currently trading at a 10%+ discount to NAV, with building activist involvement. Background on Closed-End Funds For those that want exposure to a particular sector or asset class, closed-end funds sometimes represent a cheaper vehicle than alternatives like ETFs and traditional mutual funds. This is because ETFs and conventional mutual funds frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds. This is not the case for closed-end funds. Rather, the share price of closed-end funds is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a closed-end fund focuses becomes negative, causing some investors to sell irrespective of price. This is currently occurring in few segments of the closed-end fund universe, including fixed income, emerging markets, and commodities. I previously wrote about one such opportunity to obtain federal tax exempt muni bond exposure at a 10%+ discount and another to buy Asian bond exposure at a 15%+ discount. Here, I’ll cover an opportunity to buy gold/silver exposure at a discount. Central Fund of Canada Overview The Central Fund of Canada (NYSEMKT: CEF ) was established in 1961 by Philip Spicer as a means of providing investors with a safer, more cost effective way of holding gold and silver than individual ownership. In particular, the fund’s mandate is to invest at least 90% of its net assets in gold and silver bullion (today this figure is 99%+), which is stored in the highest security rated treasury vaults at a Canadian chartered bank. Investors are able to avoid the transactions fees and sales taxes that can accompany direct individual ownership of bullion, though the fund does have an annual expense ratio of approximately 0.3%. As shown below, at many times in its history (particularly when precious metals prices were appreciating and sentiment was strong), investors were willing to pay a material premium to net asset value for shares in the fund. Likewise, at several times (when sentiment was weaker) shares have traded at a meaningful discount to NAV. Today, with precious metals having been in persistent decline for the past few years, the shares trade at a ~10.3% discount, which is near its highest historical level. (click to enlarge) Source: CEFConnect Portfolio Composition The fund provides ongoing updated figures for its NAV per share as well as the composition of its portfolio via its website . Currently, 61.4% of the portfolio is in gold bullion, 38.4% is in silver bullion, and 0.2% is in cash and other net assets. Source: CEF NAV Report What will Cause the Discount to Decline? If/when sentiment in the precious metals sector stabilizes, it’s reasonable to expect the discount to decline given the tendency for this to occur many times in the past, as shown above. In the meantime, there’s also another notable potential catalyst. One of the fund’s large shareholders, Sprott Asset Management (including other investors they represent), holds about 5% of outstanding shares and has recently been taking steps to compel the fund’s management to consider actions to narrow the discount (e.g., through offering investors the option of improved redemption terms). For instance, in June they requested that the fund hold a meeting among A share investors to discuss these issues, though management has resisted. Sprott took a similar activist stance with another Central managed fund, Central Gold Trust (NYSEMKT: GTU ), which has been gaining some traction such that this fund’s discount has declined to under 3%. It’s somewhat more difficult for Sprott to unlock shareholder value for the Central Fund of Canada for a couple of reasons. First, this fund is much larger than Central Gold Trust. More importantly, Central Fund of Canada has a dual share class structure that is highly advantageous to management. In particular, the fund has a very small number of voting shares that are majority owned by insiders, whereas the vast majority of outstanding (class A) shares are non-voting and owned by the public. This effectively enables management to retain control without requiring them to maintain a commensurate economic stake in the fund. However, it’s important to note that despite this dual share class structure, the Board still has a legal fiduciary duty to act in the interests of all shareholders. Given this duty, over time Sprott may be successful in its agenda (or management may preemptively take steps to reduce the discount to appease investors). But even in the highly negative scenario where they are completely unsuccessful, management makes no positive changes, and precious metals sentiment languishes further, investors’ downside is constrained due to the fact that since 1989, A share holders have had the option on a quarterly basis to require the company to redeem their shares at 80% of NAV. Conclusion A number of renowned investors (e.g., hedge fund managers Paul Singer and Ray Dalio) espouse the benefits of holding a portion of one’s portfolio in precious metals, particularly given widespread monetary easing around the globe. For those that follow this path, the Central Fund of Canada is a vehicle worth considering given its current large discount to NAV and potential catalysts for convergence. However, U.S. investors should be aware that this fund is considered a Passive Foreign Investment Company or “PFIC.” The tax rules surrounding PFICs are complex, and can subject investors to burdensome reporting requirements particularly if they own more than $25,000 in PFIC securities outside of a qualified/tax-exempt account.