Thursday Tidbits

Cullen Roche said "I have been one of those prudent savers who now feels punished. But here I am learning that prudence is for losers." That second sentence might be a little tongue in cheek but the first sentence is interesting. Are people who are savers being punished, should they feel like they are being punished? This point has been raised a few times during this time of bailouts or as Cullen says capitalism without losers.

As someone who is a saver (I think) this is more about what is going happening on your own mat (yoga term whereby you don't worry about what person next to you is doing in yoga class). There is a lot of psychic value in saving. One, there can be a little charge from watching balances go up from actually moving the money and two, there is a lot of value in having less to worry about financially. Having no debt or very little debt and a healthy emergency fund is not about being rich but more about a healthy margin for error and should reduce the number of things people might worry about financially.

Olly Ludwig from IndexUniverse shared a very interesting quote/joke from the Inside ETF Conference; Somebody told me last night, in strict confidence, as we shared cocktails aboard one of those yachts at events like this that never leaves its moorings, that if the mutual fund industry had managed to sink that yacht, it might have succeeded in obliterating the ETF industry.

This speaks to how small the industry is and maybe speaks to it's potential, hopefully in a good way.

Guggenheim has filed for a couple of very interesting funds for investors not very comfortable with narrowly focused ETFs. One is the Guggenheim ABC High Dividend ETF which will own Australia, Brazil and Canada. The other is the Guggenheim BMAC Commodity Producers ETF. The idea of building funds that focus on equities from countries with similar attributes, in this instance commodity based, is interesting and allows for foreign investing, without picking individual countries but still bypassing Japan and the big countries in Western Europe.

Many of the existing broad foreign funds and the narrower sector ones are already heavy in Europe. Another area that this concept could target could be technology based economies. Taiwan and Israel come immediately to mind and there probably are a couple of countries that could be added in as well.

A combination of ABC High Dividend, Global X Andean ETF and a tech country fund would offer better diversification in my opinion than EFA or some similar fund.

One last item from the Inside ETF Conference. Early Tuesday morning there was a session with Rob Arnott, Bill Bernstein and another guy I've never heard of who is a law professor who wrote a book about an outlandish investment theory that you may have heard before but either way lacks an understanding and appreciation for so many real world things as to make the concept laughable in my opinion.

The basic idea is that young people should borrow money to invest in the stock market as a means of discounting future savings. He talked about doubling up on margin with whatever your initial investment that can be made. Another example he gave, if you know you are going to inherit money you should borrow that amount to get it invested.

Among other things he relies on stocks becoming less risky over time. If you are unfamiliar with this idea basically it means that the longer the time horizon the more likely that a large drawdown is to be recovered. I don't think this was refuted too often before 2000. I've read several articles in the last few months or so that question the validity in a compelling fashion. Obviously in writing a book and coming to speak about this he naturally had stats to back his assertion.

The specifics, rationale and logistics for this are wildly flawed. People in their twenties not in the business already rarely have enough financial awareness to understand buying on margin (not that the couldn't learn but they too frequently lack the interest to learn about any investing). Obviously anyone implementing this idea in October 2007 would have been faced a negative equity situation come March 2009 (actually there would have been selling along the way via margin calls).

One element of this calls for a young person correctly assessing his future income prospects. How realistic do you think that is? Anecdotally I would say this is not realistic at all. As far as investing money (that you don't have) that you will inherit he had a slide that actually side that said (Dis)count your chickens before they hatch. Do you see any folly with investing money that you should get in the future?