The Dominant Theme:

I recall many years ago when I asked an audio engineer to explain the technology behind his acoustic filter which today is found in most automobile sound systems he replied, “ why would I tell anyone in 10-minutes something that took me 10-years to learn?” I replied, “not to worry when secrets are exposed, they get distorted when broadcasted.” When it comes to successful investing if I knew the one sure thing that would generate better more consistent returns than anything else and shared it with 1000 investors – only two would stick to the strategy. Let me first begin with does not work (It took me 25-years to learn this)

Market timing: A bad idea because if you sell good stocks because of some “signal” and you are wrong – you never get back on board and the investment opportunity is lost for good. Show me a market timer and I show you a guy with the ass out of his pants

Don’t be cynical about the stock market: We are often told that advisors are salesmen that lie to you: Not so, in fact today’s advisors must endure rigorous industry training and are required to continually up-date their skill sets – today’s advisors also know that their interests best are served when they serve the client’s best interests

Stop engaging in sheep-like behaviour: Avoid bullish and bearish stampedes in and out of stocks that are often encouraged by the business media. I recall on January 22, 2008 (I saved the papers) full front pages in the Globe and the National Post, “MARKETS PLUMMET” and “U.S. recession fears spark global selloff” – and “fear around the globe” and “the market is finally waking up to realities”. Six weeks latter The Bank of Nova Scotia (now $55.00) bottomed at $24 and the Bank of Montreal (now ($60) also bottomed at $24. I know for a fact that many investors bailed out of Canadian bank stocks in February 2009 in spite of advice from their advisors not to do so.

Don't Over-Trade: Be careful with On-Line Brokers. Keep in mind they have no duty to you – you can engage in high risk behaviour and over-trade your way to zero – but at least the commissions were cheap.

In the long run you’re better off seeking out the Dominant Theme and staying with it for as long as it takes to unfold. The dominant theme is a group of related stocks that emerges from obscurity during a crisis to assume a leadership role for several years. Investors who identify the dominant theme early can buy and hold their way to investment greatness. For example the last modern Dominant Theme was the 1st “New Economy” technology boom of the 1980’s and 1990’s. In that 20-year period the tech laden NASDAQ advanced non stop over 3000% grinding out an annualized returns of over 20%. At this time I see two new Dominant Themes unfolding - should I continue or just sell-in-May and go away which has only worked once in the last 8-years.?

Economists Should Never Manage Portfolios (2)

I see David Rosenberg is still arguing with the equity markets.

In his latest bearish masterpiece entitled Globe & Mail - An unbelievable recovery is just that, Rosenberg admits the "bulls now have the upper hand" and "the bulls are missing the possibility the economy will weaken".

I love this guy because he is such an easy target - the bulls NOW have the upper hand? Where has this guy been over the past 18-months? The average bank stock is up 50% - some at new 52-week highs - Scotia and T-D are close to all-time highs. The metals and mining complex is at all-time highs. The small cap indices in the U.S. and Canada are on a tear. How about those transports with CNR and UPS trading close to all-time highs. Another question, why is Rosenberg so hyper-focused on the U.S. economy? Does the term "Global Economy" mean anything to this guy? According to research by McKinsey & Co there are two billion middle-class non-English speaking consumers in the world who wish to live like we here in North America. Do you recognize this important reversal pattern in the monthly iShares MSCI Pacific ex-Japan (EPP) ETF?

The Best ETF Ever?

I see the new BetaPro Management Inc. BetaPro S&P/TSX 60 ETF (TSX-HXT) traded about 9 million shares at the close September 30, 2010. The big cap industry leader the iShares S&P/TSX 60 Index Fund (TSX-XIU) traded about 15 million shares. So how come a new S&P/TSX 60 ETF that is only 12-days old can draw so much capital away from the long established iShares S&P/TSX 60 Index Fund?

Please don’t tell me it is all about the Management Expense Ratio (MER) of just 0.07% undercutting the 0.17% of the iShares S&P/TSX 60 Index Fund (XIU). I refuse to believe the street is that stupid. Surely any reasonable advisor knows the “cheap” MER is not permanent – and there is counterparty risk because the money invested in the ETF goes into cash which is pledged as collateral to the swap so the counterparty bank (currently National Bank) is obligated to give the total return of the index. In other words – financial engineering. Pile on the questions on tax treatment as gains in derivatives are treated as income, not capital gains. An important investment rule – if your don’t understand an investment product – walk away.

Of course you could take a breath and look at the big picture – you see the S&P/TSX 60 Index is a bad idea because here in Canada we do not have enough big diverse names to create a big cap index. Remember the better predecessor was Canada’s original ETF (the original TIPs35). Currently the S&P/TSX 60 is loaded with repetition and small cap issuers that are in survival mode. Why do we need six banks – the DOW has two. Why do we need six gold stocks? Why two railroads and two potash companies? Why are there five income trusts when we know they will convert and change their business models? Why are there three telecom companies? The Dow has two. I could easily eliminate 15 issuers from this blotted repetitious beast

Our chart is that of the iShares S&P/TSX SmallCap Index Fund (XCS) plotted above the iShares S&P/TSX 60 Index Fund (XIU) and one can clearly see the smaller cap product outperform vs. the larger cap product. Let us name this chart Growth vs. Stagnation.