Friday, May 28, 2010

Jim Parker's New Book

Jim Parker, VP at Dimensional, has just published his new book, Outside the Flags 3: Discovering the Value of Good Advice.

In this book, the third collection of articles from his web column Outside the Flags, Jim Parker uses these topical issues to highlight the value of good advice:
  • Crises come and crises go, but lunches are still not free, return rarely comes without risk and patience remains an under-rated virtue.
  • If you are worried about bad news, chances are it is already in the price. Investing is about what comes next. We don’t know that so we diversify.
  • You don’t need luck to be a good investor. More useful are patience, discipline, a focus on costs, a willingness to diversify and a decision to take only those risks that come with a long-term reward.
  • The media builds neat narratives from messy reality. While often interesting, these are not something to base an investment strategy on.
  • Investors grappling with market turmoil often question the value of financial advice. Better to ponder the cost of bad advice.
 Please contact me directly if you would like a copy of Jim's new book.

Wednesday, May 26, 2010

Marco Pantani - 'Il Pirata' (the pirate)

Marco Pantani Jan 13, 1970–Feb 14, 2004 (died at age 34)
Italian road racing cyclist, one of the best climbers in professional road bicycle racing. He won the Tour de France and the Giro d'Italia in 1998... His career was beset by drug abuse allegations after a failed blood test in the 1999 Giro d'Italia. He died after a cocaine overdose in 2004...
Miguel Indurain, five-times Tour de France winner, paid tribute by saying:
"He got people hooked on the sport. There may be riders who have achieved more than him, but they never succeeded in drawing in the fans like he did."[13]

Friday, May 14, 2010

Fausto Coppi - "Campionissimo"

Angelo Fausto Coppi, 15 September 1919 - 2 January 1960 (died at age 40)
Comparing riders from different eras is a risky business subject to the prejudices of the judge. But if Coppi isn't the greatest rider of all time, then he is second only to Eddy Merckx. One can't judge his accomplishments by his list of wins because world war two interrupted his career just as world war one interrupted that of Philippe Thys. Coppi won it all: the world hour record, the world championships, the grands tours, classics as well as time trials. The great French cycling journalist, Pierre Chany says that between 1946 and 1954, once Coppi had broken away from the peloton, the peloton never saw him again. Can this be said of any other racer? Informed observers who saw both ride agree that Coppi was the more elegant rider who won by dint of his physical gifts as opposed to Merckx who drove himself and hammered his competition relentlessly by being the very embodiment of pure will.[14]
Coppi broke the world hour record on the track in Milan on 7 November 1942. He rode a 93.6 inch (2.43 metre) gear and pedaled with an average cadence of   103.3rpm.[15] 
The record stood until it was beaten by Jacques Anquetil in 1956.[9]

Thursday, May 13, 2010

Working in a Coal Mine

A recent media article hyped resource stocks, just a day before the Australian government slapped a big new tax on mining. Chalk it up as another reason not to stake your investment strategy on a single sector.

The illustration in The Australian Financial Review1 showed a miner's pickaxe breaking the dirt, showering sparks and diamonds. The accompanying text proclaimed that investors couldn't afford to ignore mining stocks.

Citing the extraordinary demand from China for raw materials, the newspaper said its own analysis showed the 100 best performing materials shares over the past five years had posted a median annual gain of 33 per cent.

The upshot, said the paper, was that investors needed to improve their knowledge of mining stocks to sort the speculative commodity plays in the equity market from the tried and trusted resource houses.

This all sounded very sensible…at least until the federal government the very next day unveiled a major tax reform package that had as its centrepiece a 40 per cent tax on the profits of mining companies.

Shares in global miners BHP Billiton and Rio Tinto lost 5.5 per cent and 7.5 per cent of their market value respectively over a couple of days. One broker estimated the tax, which takes effect in 2012, could reduce the companies' earnings by 17 and 21 per cent respectively in the first year.2

Of course, such companies as BHP and Rio are influenced by more than a single government's tax regime. Their market performance also came at a time of mounting concerns over Europe's debt crisis and its impact on global growth, a major determinant of commodity prices.

But this episode is yet another demonstration of why people should not seek to build their investment
strategies around a single idea or industry sector. There may well be a "commodity super cycle" underway, as some economists say, but investing this way introduces sector-specific and stock-specific risks that can be diversified away.

Dimensional breaks down equity portfolios not into mining stocks and banking stocks and healthcare stocks, but into broad asset class categories where the risk is related to an expected return.

This means a properly diversified portfolio will include large stocks and small stocks, growth and value stocks, domestic and international stocks and emerging market stocks. The exact mix will be determined by the needs and risk appetites of the individual investor.

It should be said that some of these portfolios may well include BHP and RIO, particularly if the investor chooses a dollop of large cap stocks. But the important point is that the portfolio is not built around a view about the mining industry or its prospects.

Ultimately, successful investing is not only about successfully capturing risks that offer an expected return, but reducing risks that do not. That means limiting one's exposure to random forces and not falling into the temptation of basing an investment strategy on an economic forecast.

Otherwise, it is like working in a coal mine—dark, dirty and dangerous.

1'Your Guide to Mining Stocks', The Australian Financial Review, May 1-2, 2010
2'Rudd Tells Australian Miners He'll Pursue Tax Plan', Bloomberg News, May 5, 2010

Wednesday, May 05, 2010

Esther Duflo’s TED talk

Esther Duflo - Short Bio

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from @SocialMedia411 ...

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Tuesday, May 04, 2010

Talking About a Revolution

Jim Parker, Vice President, DFA Australia Limited

Australia's financial advice and retirement savings industries are about to undergo a revolution aimed at protecting investors, curbing conflicts of interest, lowering costs and improving transparency.

At the centre of reforms, unveiled by the federal government recently, is a ban on commissions paid by fund managers to financial advisors and on any other conflicted remuneration structures. The ban applies from July 1, 2012.

The reforms came out of an inquiry called by the government after a series of scandals in which investors were shoehorned into inappropriate investments by advisors compromised by sales incentives.

Alongside the ban on commissions, the government plans to introduce a statutory fiduciary duty requiring advisors to act in the best interests of their clients and to put their clients' interests ahead of their own.

The reforms have received almost universal approval from industry bodies, including the Investment and Financial Services Association, the Association of Superannuation Funds of Australia and, in a more qualified way, by the Financial Planning Association.

A separate inquiry, meanwhile, is seeking to simplify and make more efficient Australia's system of compulsory superannuation, or retirement savings. A preliminary proposal is for the creation of a single, low-cost, simplified and diversified investment strategy for the vast bulk of Australians who do not want to exercise choice in superannuation.
Taken together, the reforms are seen likely to strengthen advisory businesses that already employ fee-for-service models and which are not compromised by compensation provided by fund managers.

This is close to the new model of advice long promoted by Dimensional — one in which the interests of the client are paramount. In the old model, a product manufacturer paid commissions to an advisor (in reality, a facilitator), who in turn sold proprietary products to a customer. In the new model, the pyramid is reversed so the advisor's interests are aligned with those of the client.

In this view of the world, clients are much more inclined to stay the course and meet their financial goals. They get what they really want — help in making wise financial decisions. Advisors become true fee-based professionals, focusing on the needs of their clients and freed from having to "sell product".

The other aspect of the reforms — creating a more efficient retirement savings system — also ties in with Dimensional's long-established message. That message says that investors should focus more on things within their control, like keeping costs down and reducing taxes, and less about factors outside their control, like market volatility and media noise.

It truly is a revolution. And it has been a long time coming.