# Why ETF?



## harry (Jan 7, 2010)

I have been investing in Stocks, Commodities and Real Estate for last 10 years. So far my returns are more than 55% in Stock Market. My way of investing buying indvidual divindend paying stocks. Some how I didn't pick up (I don't like) ETF and Options in my portfolio. I don't understand why pepole choose ETF where you loose true value of indvidual stocks and Dividend. Is any ETF or option guru who knows pros and cons of these?

Thanks,

Harry


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## andrewf (Mar 1, 2010)

There's plenty of evidence that the average stock picker doesn't do any better than the market over time. So, rather than to try to beat the market, you can match it or very nearly match its performance with an index ETF. Stock picking may be working for you so far, but very few people consistently beat the market, and if you do, you should start a hedge fund.


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## Soils4Peace (Mar 14, 2010)

I have been investing in stocks, commodities and real estate for twenty five years. So far my weighted annual returns are about 8% in mutual funds and the stock market, so I don't know everything yet.

Recently I (fired my CFP and mutual fund managers and) began to use Modern Portfolio Theory to design my portfolio. By diversifying and taking on uncorrelated risk, I increase the potential for stable, reasonably high returns. An Efficient Portfolio is one that has good returns, but lower risk than if you held only one security or one closely related basket of same.

For my taste I get a good combination of potential returns and risk reduction by investing in value, in smaller caps, in different countries and in different types of securities. 

Like you I prefer to own the actual security because as long as I hold it there is no management fee.

I can't fill all the 'style boxes' on my own, so I use ETFs and low cost mutual funds to fill the gaps. For instance, I have one ETF that specializes in value-mid cap-ex US. According to MorningStar the P:B is 0.9 and the P:E is 14. I dislike the annual fee but there is no way I could buy even one of these stocks individually, and smaller caps on other continents correlate poorly  with stocks in my own country.


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## FrugalTrader (Oct 13, 2008)

Did you return 55% over the 10 years, or 55% per year? If it was over the entire 10 years, then your compounded annual rate of return is 4.48%.


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## Cal (Jun 17, 2009)

FT, what is the site or formula that you used to calculate that?


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## Soils4Peace (Mar 14, 2010)

Cal said:


> FT, what is the site or formula that you used to calculate that?


MS Excel. Pick a cell and type
=1.55^(1/10)


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## FrugalTrader (Oct 13, 2008)

I googled CAGR calculator and came up with a site from money chimp: http://www.moneychimp.com/calculator/discount_rate_calculator.htm


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## harry (Jan 7, 2010)

Solis,

I have similar strategy but only difference is my investment is in large dividend paying company across 4 countries (Canada, USA,China and India) Only


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## harry (Jan 7, 2010)

I am active trader and maintan my portfolio yearly basis. My current return is on this year


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## FrugalTrader (Oct 13, 2008)

If you are making those kinds of return on an annual basis, then indexing is probably not for you.


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## Soils4Peace (Mar 14, 2010)

So you are buying ADRs for China and India? Good choices. I think these countries would correlate very little with Canada and USA. TRE is my second largest stock holding, bought at the market bottom last year.


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## andrewf (Mar 1, 2010)

FrugalTrader said:


> If you are making those kinds of return on an annual basis, then indexing is probably not for you.


He's not. Or rather, if he is, he should start a hedge fund. People will line up to pay him millions of dollars to invest their money.

I don't doubt that there are some who made 55% in the past year. It's hardly an achievement considering what the markets have done.


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## harry (Jan 7, 2010)

I would like to share my portfolio with you guys. I have created my 3-4 portfolio in google finance and also in word doc. Any idea how I can share?


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## FrugalTrader (Oct 13, 2008)

Does it look ok if you copy and paste?


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## financeguru (Jan 18, 2010)

Harry
I'm intrigued. I'd love to see your portfolio if you care to share, i have shared mine on this website. As Frugal mentioned it is not clear if you have 55% year to date (amazing) or over the past year (april 09-april 10) (average). Id like to follow your stocks to see if you can replicate your performance moving forward.

The very best of hedge fund managers don't make 30% year over year, in my case i'd be very happy if i can get a 2-3% premium over market returns, which i think is still very challenging, so i'm using financial leverage to amplify my returns, although it has more downside potential.


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## harry (Jan 7, 2010)

Here is one of my portfolio. I have 3 more small portfolio. Total investment more than $500K. 

Apple Inc. AAPL 239.95 -0.65 (-0.27%) 135.00 $17,752.50 $32,393.25 +$14,640.75 +82.47% -$87.75 82.47% 
Barrick Gold Corp. ABX 41.10* +0.22 (0.54%) 240.00 9,004.80 9,864.00 +859.20 +9.54% +52.80 9.54% 
Agrium Inc. AGU 68.57* +0.04 (0.06%) 250.00 11,442.50 17,142.50 +5,700.00 +49.81% +10.00 49.81% 
Bank of Montreal BMO 61.11* -0.21 (-0.34%) 303.00 10,053.84 18,516.33 +8,462.49 +84.17% -63.63 84.17% 
Cisco Systems, Inc. CSCO 26.28 -0.06 (-0.23%) 225.00 $3,867.08 $5,913.00 +$2,045.92 +52.91% -$13.50 52.91% 
Goldman Sachs Group... GS 179.50 +3.14 (1.78%) 130.00 $15,171.00 $23,335.00 +$8,164.00 +53.81% +$408.20 53.81% 
The Home Depot, Inc. HD 32.97 +0.36 (1.10%) 200.00 $3,667.00 $6,594.00 +$2,927.00 +79.82% +$72.00 79.82% 
HDFC Bank Limited (ADR) HDB 144.38 +0.13 (0.09%) 20.00 $2,402.12 $2,887.60 +$485.48 +20.21% +$2.60 20.21% 
Hewlett-Packard Company HPQ 53.63 +0.34 (0.64%) 250.00 $8,811.75 $13,407.50 +$4,595.75 +52.15% +$85.00 52.15% 
ICICI Bank Limited (ADR) IBN 44.05 -0.47 (-1.06%) 400.00 $7,272.80 $17,620.00 +$10,347.20 +142.27% -$188.00 142.27% 
Infosys Tech. Ltd. (ADR) INFY 60.31 +0.45 (0.75%) 215.00 $5,951.20 $12,966.65 +$7,015.45 +117.88% +$96.75 117.88% 
Intel Corporation INTC 22.31 -0.14 (-0.62%) 528.00 $8,120.64 $11,779.68 +$3,659.04 +45.06% -$73.92 45.06% 
Johnson & Johnson JNJ 64.93 -0.29 (-0.44%) 241.00 $13,235.72 $15,648.13 +$2,412.41 +18.23% -$69.89 18.23% 
The Coca-Cola Company KO 53.76 -0.06 (-0.11%) 230.00 $10,598.40 $12,364.80 +$1,766.40 +16.67% -$13.80 16.67% 
MasterCard Incorporated MA 256.88 +1.22 (0.48%) 105.00 $19,619.98 $26,972.40 +$7,352.42 +37.47% +$128.10 37.47% 
Microsoft Corporation MSFT 29.91 +0.56 (1.91%) 275.00 $6,182.00 $8,225.25 +$2,043.25 +33.05% +$154.00 33.05% 
Potash Corp./Saskatchewa... POT 114.90* +0.89 (0.78%) 180.00 19,458.00 20,682.00 +1,224.00 +6.29% +160.20 6.29% 
Rogers Communications... RCI.B 33.81* -0.12 (-0.35%) 378.00 11,305.98 12,780.18 +1,474.20 +13.04% -45.36 13.04% 
Research In Motion... RIM 69.80* -0.25 (-0.36%) 180.00 13,077.00 12,564.00 -513.00 -3.92% -45.00 -3.92% 
Royal Bank of Canada RY 58.94* +0.10 (0.17%) 202.00 9,009.00 11,905.88 +2,896.88 +32.16% +20.20 32.16% 
Sterlite Industries... SLT 19.49 +0.34 (1.78%) 475.00 $4,388.05 $9,257.75 +$4,869.70 +110.98% +$161.50 110.98% 
Suncor Energy Inc. SU 35.33* +0.74 (2.14%) 250.00 7,722.50 8,832.50 +1,110.00 +14.37% +185.00 14.37% 
Talisman Energy Inc. TLM 17.62* +0.22 (1.26%) 250.00 3,991.50 4,405.00 +413.50 +10.36% +55.00 10.36% 
Tata Motors Limited... TTM 18.74 -0.29 (-1.52%) 500.00 $1,446.00 $9,370.00 +$7,924.00 +547.99% -$145.00 547.99% 
Visa Inc. V 91.49 +0.78 (0.86%) 200.00 $11,181.00 $18,298.00 +$7,117.00 +63.65% +$156.00 63.65% 
Wipro Limited (ADR) WIT 23.36 -0.07 (-0.30%) 325.00 $3,857.75 $7,592.00 +$3,734.25 +96.80% -$22.75 96.80%


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## humble_pie (Jun 7, 2009)

this appears to be a 12-month snapshot, on a rolling forward basis, from march 2009 to march 2010, of a fairly conservative list of north american traded stocks that includes some indian adrs. I don't see any chinese adrs.

just about any well-managed portfolio, submitted to the same 12-month scope, will show the claimed return or better. Taking this exact list and moving the rolling scope back 3 months, to cover the 12-month period from december 2008 to december 2009, will drop the return. Move it back another 3 months to september 2008 to september 2009, and she drops again. Worse, move it back another 3 months, to cover the 12-month period june 2008 to june 2009, and she's in negative territory. And if you want to see a truly ugly collapse, move it back another 3 months to cover march 2008 to march 2009.

at the end of the day, all this futile exercise proves is that markets go up and markets go down. Harry isn't better off by 55%, although it obviously pleases him to think so. Put another way, harry likes to think that his recent 55% rolling 12-month improvement has everything to do with his genius and nothing to do with the huge rise - in many cases a 100% rise - in the underlying markets during the same time frame, but it just ain't so. In reality, all that harry is better off by is whatever notional or paper gain he has enjoyed since he bought each stock, that is, since cost base. Which event could have been many years ago.

and let's not have any nonsense about a claim that somebody jumped from zero invested to 100% invested in stocks in march 2009 for the first time, like athena springing fully grown from the brow of zeus. Even muriel siebert doesn't claim that timing. Even danielle park & corey venable don't claim that timing. Even rickson didn't claim that timing.


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## harry (Jan 7, 2010)

Humble and All: May be you misunderstood my point or I didn't calrify this earlier. Yes, this is 12 months snap shots after book my profits from the stocks which return more than 50%. This is also true that I was down 33% during March 2007 to March 2008. I am active trader and always belive to book prift rather paper money. 

Sir, I didn't claimed myself as "genius" or "smarter than professionals". I am just a long term investor with calculated risk. Anyway, I think we are going away from our original topic "Why ETF?" I shared my portfolio not to prove myself "Genius investor" instead to discuss why we need ETF in your portfolio when you are diversify in different sector and geographically. 

So please hold your guns for my rate of return!!!


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## andrewf (Mar 1, 2010)

I am extremely skeptical that your risk-adjusted returns are better than a well-diversified basket of index ETFs. So, if they're not, the answer to the question: "Why ETFs?" is "Why not?" If you're not going to beat the market, don't try. Spend 30 minutes a quarter looking after your portfolio and enjoy your life.


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## harry (Jan 7, 2010)

what do you mean risk-adjusted returns? As I mentioned earlier that I am not fully invested in stocks only. I am also in Commodities (lind waldock), Bonds and Real estate market. 
What else index ETF includes to cover risk-adjustment? Can you please be specific? Thanks for your comments in advance.


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## andrewf (Mar 1, 2010)

Investopedia can give you a better explanation of risk adjusted returns than I could hope to. Essentially, the idea is that a making 5% speculating on AIG stock over the course of a year (let's say) is not better than earning 3.75% on government of Canada bonds, since the return, after risk is taken into account is better on the bonds than speculating on highly volatile/risky AIG. But still, please check out some online resources for a more rigorous explanation.


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## harry (Jan 7, 2010)

Andrew, Thanks but no thanks. When I started my stock investment 10 years ago I have read the investment books as well investopedia too. I am aware of five principal risk measures: alpha, beta, r-squared, standard deviation and the Sharpe ratio.

Again you are going away from key subject. Index ETF or fund doesn't includes any bond, GIC and money market fund. Even if they includes than percentage is very very less or in the form of money market or debt fund. 
Majority of index ETF includes stocks, moneymarket, debt fund and cash only. Unless sector specific or bond specific. Look at any index ETF portfolio and you will not find anything new or risk coverage. When you build your portfolio which includes dividend and growth related stocks plus bond, commodities and real estate portion which includes pretty much every thing. 

My view is ETF is smaller version of Mutual Fund in which you loose true value of indvidual stock value plus you are paying fees to ETF companies for no reason. Do you know how these ETF companies making money?


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## financeguru (Jan 18, 2010)

Harry
Thanks for sharing your portfolio, when i look at yours and mine, i see generally you are invested in the same kind of sectors and we see some common shares (Apple, Barrick, RIM, Royal etc.)

You say that your year to date gains are 55% because you have already booked some of your paper profits. I find this very hard to to believe. Your stock picks suggest you go for large cap and established companies and i just don't see that you could have traded in and out of these large caps to make the gains you mention. Certainly you haven't gained 55% ytd just holding onto the stocks you mention.


I agree with some of the points humble_pie has raised. If anyone wants to make the gains you have mentioned, i would suggest one has to either i. go with options , ii pick high risk penny stocks or iii. short specific stocks. Going Long on large cap companies won't get you there. All of the above are risky alternatives. Yes you might get lucky but you may also lose your shirt and certainly impossible to repeat year over year.

As for your question as to why people go with ETFs, i believe not everyone has the tenacity or interest to pick stocks or take risks. Personally i enjoy stock picking, researching companies and finding out about the latest trends - i'm sure others would find this really boring - so as Andrew mentions if you can spend half a few hours a quarter picking an ETF and not having to deal with the volatility that come with picking individual stocks then why not? I'm not saying that investors can't beat the market, many do , but its also true that many others dont. ETFs are great for peple who want to diversify risk, be reasonably comfortable they are going to get market returns and not have to spend significant time researching companies or predicting where the market is heading.


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## humble_pie (Jun 7, 2009)

harry i certainly understood your point. I understood it so well that i saw, even through that page of gobbledygook that you posted, that you were claiming a rolling 12-month notional increase even though this was entirely due to abnormal market surge during the pinpointed period and even though this was not a gain or a return as we would normally claim one, this latter being a notional or paper gain from cost base.

i don't believe it's right to strut a distorted and manipulated figure on this forum. As it happens, using your methodology i myself had a better 12-month pop - because part of my portfolio contains complex option structures and leverage did serve immensely to open these during that same 12-month abnormal stock surge - but it would never occur to me to boast that this was, or is, my true return. In my experience, such abnormal surges and crashes only occur once or at best twice in a decade.

i do agree with you that a well-managed portfolio can and frequently does outperform indexes, which after all are only composite figures. This positive phenomenon is usually accomplished through skilled market timing, which i cannot practice, or skilled pairs short trading, which i cannot practice, or skilled option trading, which i do practice. If you could lighten up about your successes, it would be nice to talk to you.


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## harry (Jan 7, 2010)

Guru,

I have been enjoying research, analysis picking stock and trading. Buy and hold not working in each stocks. In my trading portfolio always keep 30 to 35 shares and keep changing the percentage of portfolio. For last 10 years I keep on eye for these scripts only. If you look at the indvidual stock all stocks are not trading stocks. But in 8- 10 stocks such as (Apple, RIM, Potash, Master Card, ICICI Bank, Visa, Goldman Sachs etc..) are very active and fast moving stock in which major movement happen in weekly basis. Give you my strategy exmple. Let's pick up Apple. My minimum inventory for this scripts is 200 stocks. Any point of time I want to keep 200 stocks in my portfolio. Last from Januray I bought Apple $ 80 and sold $ 105. Bought again at $110 and sold $116 Similar to this This year in Feb bought 192 and sold in march $ 217. 

Same way my bottom price were for BMO is $ 28 RY $30 Tata motors $3 Goldman Sachs $ 105 ICICI bank $ 10. I have been keep trading on day to day, weekly on Monthly basis. On an average I do 3-5 transaction per day.


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## financeguru (Jan 18, 2010)

Humble_Pie

Can you tell me of a good book/website to read up on options trading? I know the basics but have never really tried it and want to start off by taking a few baby steps.

I think Harry should be complimented on his ability to stay invested and perhaps add to his holdings in times of extreme fear. His portfolio also is reasonably diversified with some great sector leaders. As Humble mentions great opportunities come around once or twice every ten years (whether in the stock market, real estate or through personal connections etc.) and when they happen, you have to have the balls to take advantage and the resources to benefit (i.e. not be up to your eyeballs in debt). Back in April, i certainly wasn't ready to deploy all my money but i had been investing gradually from Oct till that time. People who say that they got it right at the time the market reached its lows are full of it.


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## humble_pie (Jun 7, 2009)

guru the best short little book on options is a freebie from the montreal exchange.

http://www.m-x.ca/publi_guides_strat_en.php

since i myself hesitate to click on strangers' links (viruses etc) here's how to navigate to this well-hidden 50-page little gem.

website m-x.ca
publications
guides & strategies
scroll down left column to "equity options reference manual"

it'll take you from baby steps to the greeks & beyond.

the biggest teacher of all will be Experience. I have a feeling you'll learn fast.

hint: one does not want to be assigned, if for no other reason than that one wants to control the tax consequences of assignment very carefully. Furthermore broker commish for assignments are higher than closing one's positions online. So a beginning option trader who's starting with covered writes would sell a call option that's respectably out of the money, ideally at a time when he expects the stock to plateau. Low beta stocks will have low premiums, but as i recall your stock picks are much higher beta, so you will be able to find out of the money options to sell that fetch a decent premium.


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## financeguru (Jan 18, 2010)

Harry
Your strategy of trading in and out has been tested and compared to buy and hold by numerous experts. Buy and Hold always comes out on top. In the examples you have mentioned you are missing out on better gains by selling too soon. Trading is not rooted in any fundamentals and is just gambling. It is just as easy for some of these companies to fall a bit more, once you have bought than for them to gain. I dont believe anyone who claims they have consistently made money this way. What makes you sell Apple at 217, do you buy again now? Why not hold it with all the great things this company has going for it?

I have tried this strategy and used it with mixed results in 2009, averaging in and out of stocks, where the market was volatile enough for me to do swing trades. One particular stock i used it on was RIM, where it worked out well, i bought at 45 sold at 60, it fell and i bought at 53 sold at 77 etc. One stock it didn't work out well for was Google, which i bought at 318 sold too soon at 360 and bought again at 420. So the strategy seems to average out. For example i would humbly suggest if you have been trading in and out of apple which has experienced nothing but robust stock appreciation from 100 to 240 then you made a huge mistake and foregoed on some robust gains. 

Not to say that i don't gamble myself, I sometimes try trading stocks which i think are trading in a range, even then its not perfect....for example oil had been trading in range of $75 -82 which it has broken out of recently. Examples of stocks i have been using to take advantage of range bound oil were Suncor and HNU. 


The other thing i would point out is you are doing 3-5 trades a day, i don't know of the technicalities behind this but you have to be careful as CRA might consider you as a trader and tax your gains on stocks as income rather than capital gains. Such income will be taxed at your marginal tax rate. And as you know capital gains at half your marginal tax rate.


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## harry (Jan 7, 2010)

Humble and Guru, First of all thanks for your advice and option information. I respect both of you. 

Humble: I never ever played options and it's grey area for me. My return is not paper money. I have already booked my profit and invested in Condo. I always booked profit once it reach 50% and take half of my position out once it reach 100%. My overhaul return from last 10 years on average will be 10 to 12%.

Coming back to portfolio and trading strategies. I am 100% with you guys that buy and Hold always outperfom. All big investors are succefull due to this. No argument on this. I always try to going along with market flow. I don't you guys were invested in dot com burst or last recession (2000-2001). I was scared too and sitting on sideline but missed the opportunity. I learned lesson from that time period and utilize once in a life time opportunity. I am firm beliver that between Oct 2008 to March 2009 period was once in a life time opportunity to play around and make money.

Guru: As you know no one knows the bottom and high level of the market. I have to keep in the game to make profit. If you buy and hold what you do wait and watch volitility in the market. Sitting on sideline and wait to come back the market up? By the time you re-enter miss 10 to 20% profits. You missing my points earlier that looking at size of my portfolio I always keep 200 apple shares. After doing all these kinds of trading my average price of AAPL still $125. I am not loosing the upside of APPLE. It will be more dangouros for me If i keep 400 shares of APPLE (more than 20% share of my portfolio). I think is will be oveweight in my portfolio.

I am not saying my stratigies are best and excellent. This is the way I doing and it's working fine for me. I always buy 2 stocks from each sector such as Tech/telco- AAPL and RIM Agriculture- Potash and Agrium Finance- BMO and RY and MA and V one stock I use for trading purpose and second for long term. As you know each stock 50% based on sector performance and 50% based indvidual technical. Overhaul I like to do buy and hold but same time can't sit on sideline to watch my portfolio going through volitility.


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## humble_pie (Jun 7, 2009)

harry i think your list looks very good. As it happens i have 7 of the holdings myself, even including talisman which i am not too happy about. Overall my weighting in both canadian energy & canadian financials would be quite a bit heavier than yours, while i'm lighter on the US side. In part this is because i like those canadian dividend tax credits. My biggest positions would be barrick, crescent point energy, bmo, ry and td. Options everywhere, of course.

where you put us all to shame is with your fine south asian ADRs. No canadian could be a bigger long-time admirer of Ratan Tata than i am, so it still makes me wince, no make that cringe, to think that i hung out over TTM last march when it was in the 3s ... and i hung out ... and it rose ... and i still hung out ... and it rose ... and i never bought. I once even had a crush on ranbaxy labs ... but i never bought. But amazingly i did hold satyam computer, and sold it profitably, in the good old days before the scandal.

as for 2008/09 no one had ever seen anything like it in their lifetime. But i'm expecting, now, to see a few more of these, although probably nothing as apocalyptic. Why? Because the times are growing more extreme. Because speed is so much faster than it was even 15 years ago. And because indexation - the very strategy you are questioning, harry - will corral more and more money into the index stocks, thus building up pressure and volume for cataclysmic breakouts.


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## financeguru (Jan 18, 2010)

Harry

What you are talking about is something i believe in wholeheartedly, most gains for retail investors are dictated by market direction, observing macro economic trends and then investing. 2000-2001 was a good time to invest, those who missed out regretted it ( i wasnt investing at that time). 2008-2009 was a great time to invest, those who missed out regretted it. In 2010 returns are going to be more muted but the general direction will continue to be up with corrections in between (of course this is my read).

The second criterion after market direction, is stock selection i.e. picking good/quality stocks and sticking with them. Thirdly, i believe in sector rotation, and being overweight in sectors that i think are going to do well as i'm focused on growth. Currently these are IT, mining and oil and gas, and emerging world markets. For that reason most of my investments are in the same sectors. 

I also believe in taking your profits, i do the same but for me taking anything less than a 25% gain is probably not worth it in the current environment, if things get as crazy as 2009 again, i might have a different take , but in the lack of significant volatility, i'd rather stay invested in a good company than book my returns too early.


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## PMREdmonton (Apr 6, 2009)

The only problem with holding stocks individually instead of an index ETF is that it is difficult for an investor to have appropriate diversification both geographically and across different sectors. I think in Four Pillars Bernstein suggests that one would need to hold about 60 different stocks to avoid excessive volatility.

The other issue generally becomes re-balancing (difficult) and keeping track of how each company is doing. One has to be careful because it has to be accepted (more or less) that every company will eventually go bankrupt and you don't want to be holding dud stocks all the way down.


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## davext (Apr 11, 2010)

Seems to me that if Harry enjoys trading and does well, then there is no need for ETFS. I find ETFS more of a choice for when you don't know which company is a winner or if you are looking for something like a CDN dollar hedged or leveraged mechanism. Personally, I think Harry already knows why he doesn't use ETFs.


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## harry (Jan 7, 2010)

Humble,

I also don't like Talisman and Barrick gold. I am looking to book profit on these and replace with leader of these sectors. I am original from india. Prior to move in Canada 11 years ago I was doing trading and investment accounts in India. I also worked in Hongkong so I am familir with Indian and Chineese companies. In my other portfolios I have China Mobile, China petro, Biadu, Google and PBA from Brazil. 

TATA group is very well professionally manage group in India. When they bought Jaguar and Range rover from Ford every one knows that they bought wrong price and wrong time. They were beaten down due to North american auto industry. If you re-call those days when Satyam scam happened in India. Indian Govt. came forward and saved Satyam. My logic or way of thinking was that If Govt. can save Satyam which is much much smaller than TATA. In case If TATA will in trouble due to Jaguar or Nano problem they will save them plus TATA as whole group is very professional management. During that period of time I bought 500 shares of 2 blocks of TATA motors $3.25 and $3.75 and hold it till last month. More or less similar situation but different circumstances were with ICICI, Infosys and sterlite Ind. I bought aggressively last year and booked my profit this year.

Besides all these ADR's I have my trading accounts in India and Hongkong. After 4.00 pm when North American Market close I prepare myself of these markets. US market always give cue which I follow in asian market. Morning 5.30 am when Indian market closed by the time I know the Indian and Chineese stocks performance and make my day stratigies accordingly. I have around 15 Indian and 10 Asian blue chip companies those are not listed in North America in Local markets.

Now you know I am Crazy dude!!!


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## humble_pie (Jun 7, 2009)

here's an example of how plain vanilla etfs can be mediocre plain vanilla pudding. How adding options to the recipe can kick the spice up a notch.

about 9 months ago i began to buy xgd, paying between the high 18s and 20. I have other gold issues, including one or two highly volatile junior explorers. The role of xgd for me is defensive. For me, it's a bond proxy for the gold sector.

so far, xgd itself has barely cracked 21. This is where the plain vanilla holders would be.

however, so far in 2010, i've collected 1.60 in cash. Not through distributions, because xgd doesn't distribute. In january i sold 15 june 24 xgd call options for .85 each. Last week i sold 15 december 24 calls, having noticed that strong buying interest had appeared in recent days, and bought back the junes to close. This pair netted .75, for a total of 1.60 year-to-date.

in other words, so far in 2010 i have a cash return of about 8.30% on xgd, and the year is still young. I'll probably be able to repeat the rollover spread at least one more time this year.

lest someone point out that the underlying has risen from 19 to 21, let me point out that my stock has also risen from 19 to 21, so my combined return is (2 on paper + 1.60 cash) or 3.60. My xgd will not be compromised unless, and until, it passes 24. I would assign a low probability to its doing that. Even in such a case i will have a number of Escape keys to play to avoid assignment.

a more aggressive investor would have sold 22 calls and taken in twice as much cash. I've chosen a high strike price of 24 because of a complex encyclopedia of considerations that boil down to what might be called the gata/sprott theory. If you've read this far, you know the drill, so no need to explain. I don't necessarily subscribe to this theory myself, but many do, and there's a statistical possibility of merit to it, so in the gold sector i always select strike prices that are on the high side.

the foregoing is a simple example. There are other strategies, such as diagonal call spreads rather than covered writes, that utilize options to harvest returns that are, invariably, better than plain vanilla.


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## financeguru (Jan 18, 2010)

Interesting. I hope to read more thoroughly on options trading - starting with the link you gave me.


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## andrewf (Mar 1, 2010)

XGD are european options (can only assigned on last day of trading), too, right?


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## humble_pie (Jun 7, 2009)

xgd is an american type option, theoretically can be assigned at any time.

in this case, could not be assigned until price of underlying would climb past 24.

even then, would not be assigned early because there is no distribution.


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## andrewf (Mar 1, 2010)

Well, I could see in-the-money options being exercised early since options tend to be less liquid and have wider bid-ask spreads than the underlying.


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## humble_pie (Jun 7, 2009)

no, not really. The bid would have to be less than intrinsic value by an amount that would be greater than the carrying cost of exercise. This can happen with ditm call options when a looming dividend or distribution sweetens the deal. Otherwise it happens so extremely rarely that statistically such freak occurrences don't get counted.

there are formulas that calculate whether an in-the-money option is at risk of early assignment. Please notice the word "early." I use these formulas. They are quite simple, even for a humble little tart.


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## andrewf (Mar 1, 2010)

It really depends. Sometimes the spreads are quite large. That's why I don't tend to play with Canadian options. Even XIU is pretty illiquid except for a couple of strikes. Of course, one would expect the spreads to be no more than twice the cost of exercise, and I think we can observe spreads larger than that.


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## humble_pie (Jun 7, 2009)

no andrew it doesn't "really depend."

you are confusing the standard large bid/ask spread that characterizes montreal options with the exceedingly rare formula that might trigger early assignment in ditm options. Remember, the sub-topic here is what if anything could trigger early assignment. The answer is a looming dividend on a ditm option or a bid for a ditm option that is less than intrinsic value by an amount greater than carrying cost of exercise, which latter is a situation that almost never happens. The answer is not your message/post, which is a rambling complaint about large B/A montreal spreads. This is a separate topic.

your comments are significant, though, because they reveal that you do not understand options and probably do not trade them other than in a primitive fashion.


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## andrewf (Mar 1, 2010)

What was that about snark?

You're right, I don't trade options much besides covered calls or selling puts to enter an issue at a discount. I've done some research and come to the conclusion that more sophisticated strategies aren't really worth the risk or the attention required. I should point out that there are plenty of dumb retail investors that mean formulae don't always apply. Some people execute options even when it might be irrational to do so according to said formula.


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