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A couple of weeks ago, a study by two university professors was circulating in Warren Buffett land that buying whatever the ol’ man buys makes you money.

Egads, you don’t say!

Okay, I’ll turn off the sarcasm because it really is an interesting read. The new study is entitled, “Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway“.

Berkshire Hathaway had bested the market an incredible 28 out of 31 years. From 1976 to 2006, Berkshire outperformed the S&P 500 index by 14.65%. The study investigated if this achievement is due to luck, portfolio risk, or a “Buffett effect”.

The Efficient Market Theory suggests that given enough investors, a few people would surely beat the market all 31 years by sheer dumb luck. The professors showed that with Berkshire, this was due to skill.

What I took away was this nugget of information:

Efficient Market Theory does not claim that stock prices are correct at all times, it only states that stock prices are correct on average. At any point in time, stocks may be mispriced but one does not know whether they are underpriced or overpriced.

Also, we presume that Berkshire’s investment style is not risky since Buffett is a noted value investor. However, this study made a case that Berkshire is really a large-cap growth investor.

Finally, there’s the “Buffett effect” that given his name and reputation, whatever Buffett touches turns to gold. Well, would you believe that investors under-react to Berkshire investment disclosures?

The market also appears to under-react to the news of a Berkshire stock investment since a hypothetical portfolio that mimics Berkshire investments created the month after they are publicly disclosed earns positive abnormal returns of 14.26% per year.

A recent example would be the fact that when it was disclosed Berkshire had bought a stake in CarMax, the share price rose 7.5%, or $1.62 to $23.09 on Thursday, November 15. A little more than a week later, it closed this past Friday at $20.65.

It was later found that it wasn’t Buffett doing the buying but rather Berkshire subsidiary GEICO’s Lou Simpson (chief investment officer and no slouch himself). However, the study made note that it was the collective investment skill of Warren Buffett, Charles Munger, and Lou Simpson that made Berkshire a success.

Overall, it was a good read and I learned a lot from the report’s surprising discoveries. It will be interesting to know if other academics will dispute the number crunching.

Still, given Berkshire’s track record, buying whatever it discloses a month later might not be a bad idea.

In the news, Investing, Warren Buffett :: 4 Comments »

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This week, Moolanomy held the #127 Carnival of Personal Finance in which I had submitted my post of 6 Lessons learned in my brief stock portfolio history.

What caught my eye this week was My Retirement Blog’s post about the Aging Brain More Tolerant to Risk.

This really goes against my perception of frugal grannies and grandpas. The post links to an article in Money that explains that as the brain ages, the fear and anger center (amygdala) shrinks - making seniors more tolerant of risks.

And I always thought my mom was just wacky.

My mom is a very brave person. I’ve talked about how we immigrated to Canada and how she raised 3 children by herself as a widow. She made smart real estate investments and now she’s enjoying the fruits of her labour.

But she’s still going at it! My mom has dumped numerous investment advisors because they would always tell that due to her age, she should be more conservative.

The standard financial spiel.

She’d always argue with them no, she can handle the risks. She got fed up with each of them and found one that would actually listen to her - one who really knows her client profile.

While I grumble about the fees she pays, it’s her money. And her aggressiveness works for her. It’s me that’s the wimp with my index funds and my defensive stock picks.

Go figure!

Investing :: 9 Comments »

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I have found my ticket to retirement.

Forget about learning to be a better investor or maximizing other sources of income; a Nigerian doctor sent me an email offering to transfer millions of dollars to my bank account! I need to act on this now and all I have to do is give him my personal banking information!

Yippee!

…

Seriously, do people actually fall for this?

But if crooks weren’t making money in these schemes, we wouldn’t be spammed to oblivion, n’est pas?

I recently talked to someone who works in the area of fraud; while you think you won’t fall for something as “transparent” as a Nigerian letter scam, there are many other flavors of “advanced fee” scams.

Advanced fee scams usually involve a business proposition, a lottery/inheritance windfall, or job/loan offers. They all require some sort of advanced “processing fee” to unlock whatever carrot they are dangling.

Sounds simple enough, eh? But I was surprised when I read the list of common scams and tactics found on the Phonebusters website. Scammers prey not only on the get rich quick dreamers but also on the kind-hearted people as well.

There are puppy scams and charity scams which I can readily see people falling for in the spirit of giving during the holiday season.

So, how do we protect ourselves from these crooks? Arm yourself with knowledge by visiting the links below. Learn to recognize the scams and report ‘em!

Canada:

Phonebusters - Telemarketing scams
Royal Canadian Mounted Police - Fraud

U.S.:

Federal Bureau of Investigation - Fraud
Internet Crime Complaint Center - Telemarketing fraud
LookstooGoodtobeTrue - Online or mail fraud

U.K:

Metropolitan Police - Fraud

Charity, Holidays :: 6 Comments »

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An interesting article appeared in the print edition of the Economist dated Nov 15th 2007, with the heading “Dizzy in Boomtown”. It takes a look at the boom in the emerging markets.

New investors (moi) usually only hear of the BRIC countries (Brazil, Russia, India, China) but these economies might not be providing the soundest value in terms of risks/rewards.

The p/e for Chinese shares that foreigners can buy is a more modest 22, well below the 40 reached in 2000. In contrast, Indian shares, also with a p/e of 22, have never been so overvalued. And while p/e ratios of 11-12 in Russia and Brazil seem like a screaming buy, relative to their historical averages of 7-8 they look generous.

Fair enough. But compared to the extremes of the dot com era, these ratios look pretty tame.

At the other extreme, Thailand, Malaysia, Taiwan and South Korea have not only the lowest risk ratings, but also share prices that look less overvalued than elsewhere. In Thailand, Malaysia and Taiwan price/earnings (p/e) ratios are still below their 20-year average.

And maybe that’s why Warren Buffett likes South Korea.

Vanguard and Barclays ishares each offer an emerging market ETF (VWO or EEM) but the latter also offers ETT Taiwan, EWM Malaysia, EWY South Korea; I couldn’t find one for Thailand.

If you’re worried that the BRIC is a bubble, then perhaps these lesser known cousins are worth a look?

Investing :: 3 Comments »

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Visitors to my website may have noticed that I’ve added a new widget on my blog at the top right hand corner.

The widget is an Entrecard, or in today’s parlance, your free web 2.0 business card.

This is the latest project of Graham Langdon of the Million Dollar Wiki. And while the MDW had issues with the governance of spam content, this new initiative might have legs to go far.

Think of this as a blend of promised Blogrush traffic, MyBlogLog with the cute avatars, the discovery of new sites à la StumbleUpon, and a credit system as used by TXN.Net.

The idea is to drop your business card into another user’s widget. You receive a credit for the drop and the recipient also receives a credit.

I think this is a solid, non-obtrusive way to introduce yourself to big bloggers that you would otherwise be too intimidated to approach. And let’s face it: it preys on blogger vanity to see who is checking out your blog (and all without commenting).

So, I’m dropping my card off in blogs and others are doing the same for me generating traffic and credits. With these credits, I can sell it to other users or buy actual ad space for my 125×125 logo for a 24-hour period. For example, you will notice someone else’s blog in my widget.

The price to purchase the space is based on the average of credits the publisher receives over the span of 5-days x 2. However, the publisher receives only 25% of the credits while the remainder is cleared from the system to maintain balance in the economy. More credit tweaks are foreseen in the future as the network gets bigger.

Entrecard is still in soft launch mode so it has kinks and there isn’t a lot of users yet. However, Shoemoney runs the widget on his blog but his queue is always full

There are only 4 blogs in the Finance and Investing domain so I’m publishing cards and running campaigns from other niches. All cards require the publisher’s approval.

Here are samples of Entrecards with branding (can’t get more branded than someone’s face), one with an Entrecard template, and also mine:

Neil Duckett	Paul Hartrick	Money Relations

For being such a new player in the blog marketing arena, I’m impressed with the results. Who knows if it will have cracks in the system once it is popular or if it will have to deal with cheaters in the future. I just know I’m getting traffic now with card drops and also click-throughs for my 24-hour campaigns. Let’s put it this way, more than I ever got from Blogrush.

I don’t know if they stay around long enough to read anything but that’s my issue.  At least they got here.

Blogging :: 3 Comments »

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