Friday, July 23, 2010

Conrad Black

Conrad Black is still a star. The media still love him. Newspapers and electronic media report everything that happens to him with great enthusiasm and in great detail. But let’s face it: Lord Black is a has-been. His days of power and influence are over. We don’t see sports reporters following the lives of Bobby Orr or Wayne Gretzky. We don’t see Parliamentary reporters telling us detailed stories of Brian Mulroney or Jean Chr├ętien. So why do editors and journalist still love to tell us about Conrad Black?

Perhaps it’s because he was once a media baron; he’s one of them. He’s a member of the club ― their club. Maybe that’s why they love to tell us every little thing about his Lordship’s up-and-down career. Maybe they actually do have a sincere affection for this man, even though he has been convicted of several serious criminal offenses. They are experts on Conrad Black. But I wonder what good their expertise can do. Just because they know him and love him and report all the details of his life, are we obliged to pay attention? Or would our time be better spent following the story of someone we love, someone who is interesting to us, someone who is a member of our club.

In Beyond the Bull, my book on investing, I discuss the importance of paying attention to the news. In the investment world, we need to pay attention to news that affects our investments ― and to ignore news that is irrelevant. Part of learning to become a better investor is learning what’s important for us and what’s important for someone else. The endless stories about Lord Black’s adventures in crime and their consequences seem to be important for someone else.

I wish investing were always this simple. But the financial world is a perverse place. Sometimes what seems important is useless and what seems useless is important. In a way, stock market news is a bit like Conrad Black news: interesting, but not important to investors.

The investment firm Gluskin Sheff released a study on the long-term profitability to Americans of certain investments over the past ten years. Of the asset classes they studied, the US stock market was the poorest performer at -2.3% (annual return for 10 years). The best performing asset class over the past ten years was gold at +33%. US government bonds rang in at +11%. You’d think that prudent investors would naturally have their investment in the better-performing bonds and gold, and not in the poorer-performing stock market.

Yet day after day, we see an endless stream of news about the stock market ― and hardly ever do we see news about gold or bonds. The financial media seems hooked on the under performing but glamorous stock market and uninterested in bonds and gold: the investments that are leading the pack. It’s like sports writers filling the dailies with Orr and Gretzky ― or Parliamentary writers following Mulroney and Chr├ętien . . . or Conrad, Lord Black. Interesting, but not important.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tuesday, July 20, 2010

The Zen of Real Estate

Some of the most hard working and well-paid realtors in Canada sincerely believe that real estate prices can only go up over the years. It’s the safest investment in Canada. Until only a few years ago, American realtors felt the same. They talk about bricks and mortar and say it’s “real.” They’ll say things like: “Land – they’re not making any more of it!” The inference is that land, bricks, and mortar are somehow “real” and stock market investments are not.

In the 1970s I was a real estate appraiser. Since I became a stock broker, I have met many real estate agents who smugly compared real estate investing to stock market investing. They always conclude that real estate is safer and more profitable. The vagaries of market psychology and economic turmoil can move stock prices up and down wildly. Canada’s biggest bluest chip company, The Royal Bank, for example, went from $60 a share in 2007 to $26 in 2009 and back over $62 in 2010. They claim that real estate is much more stable: you can bank on your real estate investment being there when you retire – whereas you don’t know what to expect from your stock market investments. And that’s because real estate is real and the stock market is not so real.

Half of that statement is true: “the stock market is not so real.” The only part of the stock market that’s real is your month-end statement of your portfolio’s value; that’s what you could have sold your portfolio for on that date. And if they printed another statement the next day, the value would be different. That’s the real part. All that opinion about what the market will do in the future, all that analysis, all that economic information – that’s just bull. That’s the part that’s not so real.

In my book, Beyond the Bull, I explain how investors should behave in the “not so real” world of the stock market. We can succeed in stock market investing because we understand it’s not real. We know it changes every day. We know about unforeseen events and we understand risk. That’s what stock market investing is all about. And that’s the Canadian realtors’ blind spot.

Japanese realtors can see what North American realtors cannot. In Japan they understand the concepts of Ken and Zen. In Japanese culture, Ken is the concrete world of atoms and molecules, logic, science, cause and effect. In real estate, the world of Ken refers to the bricks and mortar, lot size, location, the physical attributes of a property. Then there’s the world of Zen, the mysteries of your mind. The Zen of Real Estate refers to the trendy-ness of a neighbourhood; the kind of people who are moving in; the best way to generate a bidding war; the credit-worthiness of the buyers; the willingness of banks to mortgage a property; all those mysterious human forces that blend together to create the value of a home. In Canada, we understand The Ken of Real Estate; but we are babes in the woods in the world of Zen. The only Real Estate Zen Canadians ever think of is how much money we’re going to make and how high mortgage rates could go.

Our American cousins are much more sophisticated about the nebulous nature of Zen Real Estate. Their home prices have fallen in a steaming heap of sub prime mortgages and unconscious credit underwriting. They’ve seen home-owners dropping off the keys to their houses at the mortgage company and driving off. They’ve seen the dark side of Real Estate Zen.

The interesting part of the Zen-Ken Japanese approach to real estate is how they turn Zen into Ken.

Imagine that you bought a house for $250,000 in the year 2000. You put $100,000 down and took a mortgage of $150,000. And now someone tells you your house worth $350,000. The Ken of Real Estate is the actual house and land you bought. In addition, it’s the new roof you installed, the shrubs you planted and the new sink in the bathroom. It’s the real part of real estate. The Zen of your Real Estate is the $350,000 someone told you your house was worth. It’s the floating rate mortgage you put on it when you bought it and the secured line of credit you picked up 5 years ago. It’s the re-zoning application for those vacant lots on the next block. Our question is: “How can we turn mysterious imaginary Real Estate Zen into concrete Real Estate Ken?” Here’s one way: sell your house for $350,000 and redeploy your equity by buying two “fixer-upper” houses for $300,000 each, with $100,000 down and a $200,000 mortgage on each. Now you have two houses, one for your family and one for rent: Ken Real Estate. The real part of real estate.

But the part that most Canadian real estate fans do not really understand is: when you change the Ken of Real Estate, you change the Zen too. The Zen of Real Estate is inseparable from the Ken.

Imagine that you were able to do it again: you sold your two houses and reinvested and re-mortgaged again. Now you would have four properties in the concrete world of Ken Real Estate. And, of course, you have the accompanying Zen Real Estate risks – more mortgage debt and more rental vacancy risk. Let’s let our imaginations continue until your inevitable death. Now your heirs own those properties. You have physically left the Ken part of your world. You are 100% Zen now. But your Ken Real Estate still exists. AND the Zen of those houses still exists too: the mortgage risk, the trendy-ness of the neighbourhood, the willingness or ability of the banks to mortgage it. The Ken and the Zen of those houses still exits, even though you have personally moved into the world of Zen. (That’s the estate part of real estate.)

Because of Zen, real estate has more in common with the stock market than Canadian realtors would like to admit. Because of Zen, house prices don’t always go up. Because of Zen, real estate investors have to manage risk too.



To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Tuesday, July 13, 2010

Prophets of Doom, Prophets of Profits

July 7, 2010

The stock market can be confusing at times.

For example, eminent market timer and financial astrologer, Arch Crawford, has been writing about a catastrophic event that will occur at the end of this month. Before you balk at the notion of a financial astrologer, understand that Crawford is one of the few investment advisers who correctly predicted the 1987 stock market crash and has received the prestigious stock market Timer of the Year award on several occasions. He is warning of an historic tragic event at the end of July, beginning of August 2010.

On the other hand, we see our G8 economic leaders cautiously, optimistically telling us everything is OK… the 2008-9 banking crises are over and the economy is struggling ahead. The danger has passed.


Arch Crawford is using objective planetary alignment as the basis of his advice. But, other astrologers are observing the same data and coming to other conclusions. Because of his stellar track record, many of Crawford’s followers have sold all their stocks.

And, of course, the G8 economic leaders are using objective economic data to formulate their Don’t Worry, Be Happy hypothesis. And because of the prestige and authority accorded to theses elite officials, many business owners and managers are forging ahead with their investments.

What should we do?

In my investment book, Beyond the Bull, I warn investors not to be bamboozled by economic bullmanship. Don’t react to some salesman’s persuasive economic forecast. By its very nature, investment advice is biased. The giver of the advice is always trying to persuade you to do something. Arch Crawford is urging his subscribers to sell out of the stock market. The G8 leaders are telling us it’s OK to borrow and spend again. And because it’s persuasive, financial advice can never be totally objective. This truth is at the very core of what the stock market is: it’s about thousands of salesmen trying to persuade millions of customers to buy or sell something. Stock market advice is never objective data: it’s all persuasive.

This fact, once thoroughly understood, will make the difference between your long term success or failure as an investor.

Most investors like to stay informed about the financial world and formulate a plan based on the advice of those they trust. This is not a correct way for you to manage your financial affairs. It results in confusion and low long term financial returns.

There are good investment advisers and there are bad ones. Even the best don’t get it right every time. It’s a percentage business: a certain percentage of the advice will work and a certain percentage will not work. Our problem as individual investors is knowing whose advice to follow and when to follow it.

Question: How can we obtain objective investment advice?
Answer: Look for it.

Most investors are not looking for investment information. Most are passively tuned in to the never-ending stories of profit and doom in the financial world. Most are simply being entertained by the financial press. If only we would exchange our love of financial news stories for a need for objective data; we would change our investment world. We would go from the world of salesman’s stories to the world of the financial survivor.

It’s like the difference between the mother who listens to all the breakfast cereal ads on kids’ television and buys a box of brightly colored candy-cereal and the health-conscious mother who studies nutrition and helps her children make their breakfast from scratch. It’s a different way of looking at your world. It takes work to live in a different world.

What world do you want to live in? A recently published study was released by the Canadian investment firm, Gluskin Sheff: it ranked the best and worst performing American investment assets over the past 10 years. Gold was the best performer at 33%. Bonds were 11%. The American stock market lost money over the past ten years; -2.3%. The higher the percentage of gold in your portfolio, the better your ten year performance. The higher the percentage of stocks, the worse ten year performance. The study also ranked investment real estate, corporate debentures and cash. Most of us would have wanted to own the top performers and not the bottom. Why didn’t we? Because we chose the entertaining world of the stock market. Because we have a trusting relationship with someone who also lives in the world of the stock market. We mimicked the mother who watched kids-TV and bought the candy-cereal.

Even if there is no catastrophic event this summer, we should follow Arch Crawford’s advice anyway. Maybe we should just sell our stocks and re-plan our approach to the investment paradigm. Maybe it’s time to look for another way to think about investing.

And to those readers who have good exposure to the bond market and to gold, congratulations: welcome to my world.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

G8 Mop-up

July 2, 2010

It’s all over but the whining. The super expensive security program that commanded the media’s focus before last week’s world economic summit continues to command their attention. Notwithstanding the criticism, it did work. The international leaders who visited Canada for those few days all returned home safely. Congratulations to the security forces who succeeded in keeping our visitors safe.

Those visiting dignitaries all issued their summary statements at the end of the conference, as they usually do: reassuring words designed to give us the impression that the worlds banking and economic system is still safe. We are economically safe – that’s been the continuing theme of the G8 conferences since the crisis of 2008.

Pretty boring stuff. No wonder the media focused on the one-day riot where so-called protesters got violent, vandalized police vehicles and smashed windows. It was the only juicy bit in the whole conference.

And now the media has taken the usual tack: the police over-did it. I saw a photo in the Toronto Sun: police had seized a quiver of arrows with huge cloth-filled bags on the tips. Apparently these arrows looked like they were designed to be soaked in gasoline and lit on fire. Imagine the effect of flaming arrows coming down on police lines? Naturally, those carrying these potential weapons were arrested and held for questioning. After the conference was over and peace returned, the Robin-Hood protester claimed the arrows were part of some theatrical group’s props. In other words, Robin Hood came up with a great alibi. I’m sure the guys they caught with tire irons were merely going to help people who had flat tires. And the ones they caught with baseball bats were only trying to help out by trying to organize a friendly game of softball. Why would those mean old police arrest people who were only trying to help out?

In my investment book, Beyond the Bull, I wrote about what it takes to become a successful investor. One of the keys is to not be distracted by the juicy stories. Last week’s conference was a total bore except for the juicy security stories. But it’s the boring part that’s interesting to investors. Those of us who are planning our retirement or managing our family’s finances need to know those boring bits. Two years ago the Canadian and US stock markets dropped in half in nine months. People’s savings were devastated. Can this happen again? The lesson we all learned was that we can be punished for other people’s crimes. In the time leading up to 2007-8, certain bankers became outrageously reckless: when their greed–crazed lending practices blew up, it was our RRSPs that lost 30%+. Governments rushed in to bail out these monster failures and the system survived. Did the governments bail out your RRSP? Will the government bail you out if another wave of bank failures starts? Not a chance! We have to bail ourselves out.

For investors, the G8 conference was not a “bread and circuses” entertainment event: we really need to know whether another 2008-9 stock market crash is possible. We really would like to know so we can make adjustments to our investments to protect ourselves from further loss. And we don’t want to hear the governments’ “Don’t Worry – Be Happy” rhetoric. [Bobby McFerrin’s 1988 reggae song]. We need to know about risk: did this G8 economic summit increase or decrease the risk of my losing my shirt in the stock market again? The real G8 security story is – did all those important politicians and economists make my world safer? Or do I have to make my own financial world safer?

Our Advice: make your own world safer. Reduce your exposure to risky assets and increase your holdings of safe investments. This is a time to focus on not losing your money. There are no super expensive security forces keeping your investments safe. You have to do that yourself.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.