Mutual fund companies should be ashamed of themselves

Alternate title: Why I'm an idiot

Prepare yourself, gentle reader, for a shock. I'm about to show you the performance chart of what, for all intents and purposes, is the worst mutual fund in the history of the known universe:



That blood-curdling scream you just heard was me, after I realized I own this turkey and subsequently jammed a spoon into my eye. See the massive spike in 1999? I missed that. See the parabolic peak in 2000? That's when I bought. See the widowmaking ski-hill slope that was the year 2001? I got all of that, and then some. Astute readers will note the complete and absence of activity in either direction since then.

Perhaps a little back story is in order. This particular affront to wealth management was a gift from my dear old dad. He put $1000 into an RRSP in my name before I was wise enough to care about such things, and he decided to put the lot into something called an "e-business specialty fund". I can't remember the specific time frame, but as far as I can tell, this chain of events was set in motion about 14 seconds before the tech bubble burst in 2000.

But wait, there's more. Not only is my $1000 now worth something in the neighbourhood of $180, but thanks to a fat 3% MER, I'm actually paying the fund company more than five bucks a year for the privilege. My favourite part? The company describes the fund as "extremely volatile" which amuses me to no end -- I mean, it not volatile. It was volatile for about two years. But it's been a model of consistency since about 2003. Consistently flat, that is.

I can already hear your howls of protest about why holding on to an expensive, underperforming mutual fund like this goes against everything I stand for. But honestly? I can't bring myself to sell it. I mean, how do you even cash out $180 worth of mutual funds? From where I stand, I can actually see an advantage to keeping it -- forcing the fund company to spend money to send me quarterly reports until the end of time seems like a suitable punishment for their crimes.

All jokes aside, I do plan on divesting the fund as soon as I can get around to it. But I might just hold on to it and conduct some sort of perverse psychological experiment, where I can open up my portfolio statement in 50 years time and see that my $1000 investment is finally worth $800 again. Just don't you dare mention the word "inflation" to me.

Damned if you do...

A few lessons in the madness of the stock market for me this morning.

I can't deny it -- the bitter side of me got a little bit bigger when I heard CanWest announce their plans to buy back their newspaper income trust for $9 a unit today.

I wrote earlier about my experiences with CanWest MediaWorks Income Fund.

I bought my units at the IPO price of $10, watched them sag below $8 and finally pulled the trigger and divested the lot at a little over $7.50 a unit -- only a few weeks before CanWest announced they were considering being gracious enough to buy back the assets for less than they sold them for.

Hopefully now I can pull the whole episode behind me, learn my lesson and move on.

After all, it could be worse. I could be a Royal Bank shareholder. Canada's largest bank posted quarterly earnings today, and despite the fact that profit was up, the stock got hammered. It's down nearly 3%.

Apparently 14% profit growth pales in comparison to TD's and BMO's numbers, posted earlier this week.

Talk about a tough act to follow. Some people are just really hard to please... :)

Hold the phone

I generally keep things investing-flavoured around here, but another side of my personal finances is on my mind at the moment.

My cellphone has died. Being a man, I'm apparently genetically predisposed to fall for all manner of technological doo-dads, but I really must say, when it comes to souped-up cellphones with cameras, colous, Internet access and ringtones, I could honestly care less. It's a purely utilitarian device for me: If I can use it to talk to people I want to talk to and it doesn’t cost me very much, it's my kind of cellphone. Anything else, and it's not.

You'd think it would be possible to get a no-bones cellphone in this country, but it's not. Canada's cellphone oligarchy has milked the country to full effect, working the system to the point where you have to sign up for long-term contracts and all sorts of bells and whistles you're unlikely to ever use, much less need.

Wireless number portability was a step in the right direction (indeed, it was a step the rest of the free world had already taken) but the fact of the matter is still that Canadians pay the highest cellphone rates in the world.

I'm actually not too put off by the monthly plan that I have, but I'm amazed by the headaches I'm undergoing trying to get a basic replacement unit. The carrier I've been with for more than three years is pushing me to sign up for another multiyear contract, so I'm tempted to switch carriers out of spite. My job has a better-than-average chance of relocation to a new city every once in a while, and the last thing I need to to have to pay Ted Rogers $30 a month for the privilege of having a useless cellphone.

I'm narrowing down my choices and it's looking like, thanks to Fido, this whole debacle won't actually end up costing me very much. But if anyone has any suggestions for a bare-bones, no contract cellphone plan in Toronto for around $30 a month, I'm all ears.

BMO throws another curve

Earnings season begins again for banks, and first up on the docket is the one I own. Bank of Montreal.

You remember BMO, don't you? They're the bank that announced, at the end of April, they expected to lose $450-million thanks to some dodgy natural gas trades. The stock got hammered. Then it turned into $680-million. The stock got hammered further still.

Today's number? $671-million. Only, that's not a commodities loss. That's a quarterly profit.

It seems the bank's other divisions did so well that they were more than able to shoulder BMO Capital Markets' loss, and actually increase quarterly profit by 17% overall.

The net result? BMO's stock goes from about $72 before the fiasco to under $70 today, despite the fact that quarterly profits turned out to be higher than they were when everyone thought they were a quiet, boring little risk-averse bank.

BMO essentially created their own headache, cleaned it up and took the hit in public perception, despite the fact that they actually ended up looking better, on paper, than they were before. There's a lesson in there somewhere about how efficient our market really is. But I'm not sure what.

Buy and hold -- to a point

My investing strategy, in general, is to buy solid companies with long-term growth potential, ideally at reduced prices after the market has temporarily punished them. I'm a long-term investor. But that's not to say I'm afraid of locking in some short-term gains if and when they present themselves.

Since I've become a more serious investor, I've amassed a portfolio that now holds a handful of different equities, and I have plans of adding new ones as soon as I can save up enough capital. But in that same time period of stock-buying, I've only actually made one stock sale -- my CanWest MediaWorks Income Fund holding, which I sold a while back because the business's fundamentals no longer looked attractive to me.

I guess that makes me a buy and hold investor. Which I guess is a fair description. Slow and steady, in my experience, is the best way to win the race in the end. But that's not to say I like every aspect of the concept. Taken to the extreme, you end up constantly buying stocks throughout your life, almost regardless of price or what happens to them after you buy, and then selling all your positions to finance your retirement.

Dollar-cost averaging via a DRIP into a solid equity like a Canadian bank would probably work well over the long term. But that's not to say I'd be averse to locking in gains and sitting on the sidelines for a while if I think a holding has had a particularly frothy run. While I'll always stay a long way away from things like day-trading, I don't think it's heretical to say it might be a wise idea to lock in unexpected gains when you come across them.

I know, I know -- this sounds suspiciously like market timing, which is a taboo subject for a lot of long-term investors. But honestly, the whole concept of a stock one should keep buying, no matter the price, seems a little antithetical. If we're supposed to be diligent investors and do our homework before jumping into any given stock, how is that achieved by doing something mindless like constantly pouring money into a holding, regardless of price?

Buying and holding is a sound investing rule in principle. But like any other rule, there are exceptions.

The end of an era

I'm in the process of transfering to a new high-interest savings account.

Netherlands-based ING Direct deserves credit for literally starting the high-interest savings account movement in Canada. When they set up shop a decade ago, Canadians really weren't very well-served by the Canadian banking oligarchy. Banks, to my teenaged eyes, were basically places where you could go to borrow money, or keep your hard-earned cash safe against things like theft and fire. But looking at my monthly statements every month (where the service charges for accessing the money outnumbered the interest payment I got at the end of the month) banks certainly didn't seem like a particularly useful tool to build wealth with.

For introducing the breakthrough concept that a bank should pay you somewhat-significant monthly sums for the privilege of holding your money, ING deserves accolades. Because in the 10 years since then, a host of other players have crowded into the market -- most notably, even the Big Five. (Although their offerings fall predictably short of the mark, in my opinion.) Won over by their no-nonsense, generic Scandinavian pitchman, I've kept whatever savings I could accumulate over the years in an ING account.

So I'm generally well disposed towards ING for getting the savings ball rolling -- the orange savings ball, as it were. But it really needs to be said: ING seems to be getting a little complacent, and away from what they do best -- offering a simple way to save with a great savings rate. All of the players, ING included, try to distract consumers with a bunch of flashy bells and whistles like same-day transfers, points, and temporarily-inflated rates to lure you in. But all these things distract from the central issue: which interest rate gives you the opportunity to grow your money the quickest. And maybe it's because they seem to spend more than the other players on marketing, but ING has simply fallen behind when it comes to offering the best savings rate.

Even a cursory look at the posted rates shows ING is lagging behind. I can count no fewer than a half-dozen no-fee places to park my money that have a better rate than ING's current 3.5% and are just as easy to access and transfer money online. That's why I'm saying sayonara to ING and moving over to PC Financial. Loblaws is my primary grocery store, so I'm seriously considering moving over my everyday chequing account and accumulating PC points while I'm at it.

Rest assured, if ING wakes up in the near future and offers me a rate better than the 4% PC Financial has offered, I'll welcome them back with open arms. But until then, I'm ignoring the smoke and mirrors. Banks have zero loyalty to me, so I don't really see why I should have any to them. It's one of the joys of living in a capitalist system.

Lenders can try to confuse me with semantics all they want. At the end of the day, it comes down to simple arithmetic: 4 > 3.5.

BRK.B -- My very own index fund

It's May. It's the advent of spring, a time when this young investor's fancy turns to Berkshire Hathaway's annual general meeting in Omaha, Nebraska.

I bought a single Baby Berk share a little over a year ago for about $3100 U.S. My reasons, at the time, were that I was looking for exposure to the U.S. market, but mainly, I'm such a fan of the Buffett investing philosophy, I thought having that share in my portfolio would be a good benchmark to hold myself up against. I still really like the way the Oracle of Omaha thinks about investing, but the more time goes by, the more I like my stake in it for new reasons.

I think of it as a sort of actively managed, diversified U.S. equity fund.

I know it's foolish to ignore U.S. equities and they've historically been the real driver of the global economy. But today, the negative job numbers, housing stats, growing federal debt and quagmire in Iraq make me really worried. Worried enough that part of me wants to get out altogether. To be sure, there will be winners and losers even in a down market as there always, are, but I'm rarely smart enough to predict which will be which, so I'd have to go with an index fund and buy the whole market. And that exposes me to the downside risk that I'm convinced is coming.

But via Berkshire, I'm basically getting a stake in a holding company that takes positions in large-cap U.S. companies it thinks will outperform over the long-term. And it's run by the best fund manager in the business. About 50% of Berkshire's revenues come from solid industries like insurance, but there's also a hefty stake in stalwarts like pharmaceuticals, utilities and manufacturers. Not to mention blue-chip retailers and consumer goods like Dairy Queen, Microsoft, Wal-mart and Coca-Cola. And the company has even started to invest internationally.

I guess what I'm saying is, when the bad times inevitably come to U.S. equities, I trust the companies Warren Buffett likes to outperform the market as a whole. It's not like he doesn't have a track record at this. The stock's up 3600% since 1987. That's six times better than the NYSE over the same period. The company's sitting on $46-billion in cash -- enough to buy Bank of Montreal outright and then some, for Pete's sake.

It's nice that the stock's up 17% since I bought it, but I never saw it as a short-term position. I'll be holding on to my stake in Berkshire Hathaway for a long, long time.

Exit strategies

Dubya could use one in Iraq right about now. And if you've ever put a buy order on a stock in your life, you'd be well served to give some thought to one yourself.

I'm talking about exit stategies. If you're anything like me, most of your investing thought process is dedicated to the buy side. Should I buy this stock? Why? At what price? If you've done your homework, chances are you won't end up buying far more stocks than you have an initial interest in -- because let's face it, there's no such thing as a good stock to buy at any price.

It strikes me that making money in the stock market is 50% due to buying the right stock at the right time. But what about the other side? Unless you sell it at the right price, all your hard work on the front end is wasted.

It's for that reason that for every stock I buy, I like to have a general guideline of at what point I'd consider selling the stake. I mean, if I buy a stock because I think it's undervalued, I'm doing so because I think at some point Mr. Market will fully value it. My exit strategy is all about finding out at what point that will happen, and what I'll do when it does.

That's why for most -- but not all -- of my holdings, I have a general target in mind of when I'd like to sell it. If I pull the trigger on an attractive stock at $10, but I think it's true value is somewhere closer to $15, then chances are if and when it hits that point, I'll get out.

Of course, a lot can happen that might change my projected exit strategy. The main one being when the underlying business's situation has changed. If I thought it was a $15 stock but two years later it's performance is even better, I'd consider holding it until it reaches $20, or whatever else. But If I bought it at $10, planned to hold it until it hits $15, but it's prospects take a turn for the worse when it's trading at, say, $11 or $12 (or $1 or $25, for that matter) you'd better believe I'll get out when the light turns yellow.

As with anything else, exit strategies aren't, and shouldn't be, written in stone. But it's sensible planning to give some thought to how and why you might divest your holdings every time you find yourself buying into a new position.