Jim Leech "I think fear has just moved so far" (Globe and Mail -Derek DeCloet)

Derek DeCloet from the Globe and Mail interviews Jim Leech ("To the public, he may be best known as the private equity deal maker who snagged BCE last year, or perhaps as the new head of the Ontario Teachers' Pension Plan") who is saying that people might be overeacting to the current economical bad news.

I would tend to agree with him except for one thing: the current extent of the credit mess is not fully known yet and many more surprises might lurk ahead. It might be prudent to use these opinions as a starting point for resuming investing in the market (which a lot of people I know have stopped doing "until things get better") but buying by small chunks over a period of time. If the markets go up, then you will still profit and if they go down, then you have money left to buy stocks on sales ...

new federal budget: a huge gift for investors

Canadian Capitalist has the primer on the new federal budget windfall available in 2009:

Tax-Free Savings Account (TFSA)

His take on it:

My personal opinion is that the TFSA is a vast improvement over any half-baked scheme to defer capital gains.

My take on it? It's a great measure for investors with fresh money to invest. I'm not sure what it does for low income families. I'd be curious to see what measures in the budget were targeted for low-income families if any.

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Contrarian investing and the Manulife Investor Sentiment Index (good for your RRSP?)

In this time where you are thinking about investing in your RRSP as the market is sinking, you might wonder what strategy to use ... although there's no clear direction, I think there's something about contrarian investing that is appealing. Contrarian investing could simply be defined as buying when everybody is selling (panic in the market) and selling when everybody's buying (exuberance in the market). One tool to identify trends before they show up in stock prices (i.e. to help sell before everything tanks for example) might be using the Manulife Investors Sentiment Index. This is only a theory and use it at your own risk!

First of all, it is currently hard to figure out where to invest, so if you need to contribute to your RRSP, you can simply make cash contributions and wait for the good time to buy.

Here's a very rough and amateur timeline of the Investors Sentiment (IS) level compared to the value of XIU (simple low-fee index ETF to buy Canadian stocks):

• 2000, the index reaches 35 before the tech bubble crash and then goes to 11 after the crash (in December 2001) ... XIU was around 44$ in March 2002 just as the IS index was going back up close to 21.
  
• July 2007, the IS index is at a near record high (highest since 2000) of 31 and XIU is around 84
  
• September 2007, XIU is around 81 and the IS is pulling back at 20 from it's recent high of 31
• December 2007, the IS index goes back to 27 as XIU is still around 81
• Today XIU is at 74 (I couldn't find the IS index value since it's only released quarterly)

It's obviously very hard to draw conclusions from this. One conclusion I'd like to propose though is that when the Investor Sentiment Index is at an historic high ( close to the 35 of 2000 ) for some period of time, it's a clear sign that the crowds are over-excited about the market and it's an ideal time to sell. And when the IS index goes to a low (let's say close to the post tech crash of 11), then it might be a good time to buy. I'll update you on the index in March and we'll see if it might be a good time to jump in the market or if it's better to hold. Something to note as well, is that the press releases seem to lag the actual polling time which does not help tracking the current situation.

Disclaimer: this is only a personal theory and not an investment strategy. Market timing is risky and you could lose a lot of money by buying or selling any stocks based on this. If you are not already a seasoned investor, please ignore this post!

The new canadian reference for ETFs !

[updated links] Canadian Capitalist has a series of excellent posts on ETFs (the best is that it's not over yet!). He's already convinced me to switch to Vanguard Total Market (VTI) for the US. One of his reader also suggested Vanguard All World except US (VEU). VTI and VEU would give you an incredible diversity for a very low MER. I'm all for that. I'm still slightly worried about the fact that the Vanguard ETFs are in US currency (non-hedged) but CC has a good point that over the long term, currency fluctuations might even out. And a bonus is that the Canadian dollar is currently historically high.

Here are the posts so far from CC on ETFs:

A Tour of ETFs: Vanguard Emerging Markets ETF

A Tour of ETFs: iShares MSCI EAFE Index Fund

A Tour of ETFs: Vanguard Total Stock Market ETF

Improving the Sleepy Portfolio

More New ETFs

A Reader asks: What do I do Next?

Cool finance blog I found: The Zen of Investing

If found this new blog (the Zen of Investing) that seems very interesting from the two articles I've read so far (thanks to Investorial for the link):

1-Ten reasons why US dollar denominated bonds are not as safe as you think.

It gives a good idea of why the US economy will be under pressure.

Some interesting quotes:

At some point and time, the U.S. Federal Reserve will try to block global flight from the U.S. dollar by propping up interest rates, not cutting them. Here you suffer twice. Once from a loss of purchasing power and twice, from a devaluation of the face value

with U.S. President Bush poised to send more U.S. troops to Iraq in 2007, the war will have an even heavier toll on the U.S. economy in 2007.

2-How Understanding the Success of the Mixed Martial Arts Champions will Make You a Much Better Investor.

Being a martial arts practitioner myself, I enjoyed the parallel being made between mastering martial art styles and investment techniques.

Here's an awesome quote (I hope it's not too long of a quote!):

It is just not possible to master 10 completely different techniques brilliantly in even a span as long as ten years. In fact, many martial artists of legendary folklore status spent decades mastering just ONE technique which they would use to defeat opponents of all different styles. Miyamoto Musashi, widely heralded as the greatest swordsman ever, stated that he didn’t see the point of learning the many different sword techniques that existed, because after all, there are only a limited number of ways to deliver a fatal blow with a sword.

This very concept of keeping your strategies simple is one that large investment firms have mastered. For the last half of a century, investment houses all over the world have convinced tens of millions of people that diversification through Modern Portfolio Theory is the best, safest and only way to invest your money. This is rubbish.

Go visit this site as it is worth your time ...

Investors Sentiment near record level (Manulife indicator)

This latest poll from Manulife shows that investors interest in the market is very close to the all time high of the mid 2000. It's very good news for the stock investors in the short term. It raises a flag though if you remember that previous high preceded the spectacular crash of the tech bubble. Contrarian investors like to point out that when everybody is over-excited about a stock or the market as a whole, it might be time to sell. Here's an excellent quote from Canadian Business:

Because when sentiment becomes extremely positive on an asset, your risk of loss increases, since almost everyone who wants to buy has already done so. Cautious investors should step aside or reduce their exposure. On the other hand, extremely negative sentiment can be the precursor to a rebound in price. People are so down on the asset that even a small piece of good news can set off a wave of buying. Thus, bargain-hunting investors search for value among despised assets. Not every one of these assets will rebound of course, but some of them will do so spectacularly.

They also suggest looking at SentimenTrader.com to get a feel of the market sentiment.

So I advocate again for going into defensive mode. Sell your stocks that have risen a lot in the last year (mining stocks for example). Dividend paying stocks would be a good place to start to build a defensive portfolio. The Dividend Guy tells you all about those.

Bottom line, there is no perfect solution in this case, but even just rebalancing your portfolio would prevent the type of excess that sunk people who had too much in stocks like Nortel and JDS Uniphase back in 2000 (when it would have been a good time to adopt a defensive posture!).