Saturday, April 27, 2013

Investing scams and myths:

The four top investment myths and scams are stop loss orders, share buybacks, covered call writing and these currency hedged ETFs.

Don’t use stop loss orders. Last Tuesday a group hacked into the Associated Press’s official Twitter account, reporting that an attack on the White House had injured President Barack Obama. The news was erroneous but the Dow Jones industrial average dropped about 150 points in less than a minute. Last year we had the Flash Crash of 2010, which sent the S&P 500 down over 8.6% in minutes and in the process triggering many stop loss orders which were not reversed. There will be more of these mini crashes and so the lesson here is to ignore those business TV experts and do not place top loss orders onto your investment / trading platform. When trading on-line those mouse clicks can get you in trouble so consider using an advisor who can explain and serve up sober second thought.

The corporate share buy-back is attractive to yield chasers because it may appear to be the act of a cash rich company retuning cash to shareholders. The theory here is when a public corporation uses cash to buy and cancel shares the smaller share float becomes more valuable because the earnings are now shared by fewer shares.

Several issues here – when a company reduces the outstanding shares it gets smaller and in the long run companies do not shrink their way to greatness. The other issue is the company’s claim that buying back shares is the best use of their cash. That could mean less cash for expansion in the form of acquisition, capital spending and research and development. Two serial share buy back companies are Business Machines Corporation (IBM) and Exxon Mobil Corporation (XOM) – both relative under performers over the past year and a half.

Last Wednesday Apple Inc, (AAPL) announced that its Board of Directors has authorized a significant increase to the company’s program to return capital to shareholders. This “return capital to shareholders” statement involves increasing its share repurchase authorization to $60 billion from the $10 billion level announced last year. I guess the idea of using the cash to grow the business is not in the best interest of the shareholders.

Covered call writing can be best described to provide some income along with the opportunity to give away a rising stock and the opportunity to hold on to a losing stock. Also forget about those steady income streams – TSX listed HEX Horizons Enhanced Income Equity ETF first payout following inception at March 17, 2011 was $0.1787 and the last payout posted was $0.0354. Over the same period the unit price has declined from $10.00 to $6.91.

Currency hedging is expensive nonsense. The new iShares S&P Global Industrials Index Fund (CAD-Hedged (XGI) is supposed to clone the performance of the S&P Global 1200 Industrial sector. Canadian investors may want the exposure but currency hedging can get in the way. If a Canadian buys a property in the U.S. for an investment are they going to apply a currency hedge?

The pure U.S. $ play would be the NYSE listed Industrial Select Sector SPDR (XLI) but then a Canadian investor has the expense of round trip dollar exchange fees. Canadian ETFs are supposed to solve problems – not create them. The chart of the long term performance of the Canadian dollar vs. the U.S. $ displays the short 2003 to 2008 window where currency hedging worked. Currency hedging is for the investment sheep because they forget foreign investments should offer diversification, by location and by currency.


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