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2011
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The Stingy News Weekly (02/02/01)

The Markets This Week

  DOW 30: 10,864.10 +1.91% to a P/E of 26.6
  TSE 300: 9,224.05 +0.72% to a P/E of 23.9

The markets were up this week with the help of a half point rate cut from the U.S. federal reserve. There is nothing like a shot of money to help the system. Nor a touch of moral hazzard for it to all end horribly.

Stingy Spotlight

We all know that trading can be damaging to one's wealth. However, if you thought choosing the winners was hard, it's time to look at taxes.

Let's consider two simple cases. Case A describes an investor who buys, and holds for 20 years. Case B describes a trader who switches stocks each year. Both investors start with $1,000, gain 10% each year, and pay 25% of gains to the tax man. Their investment history would look like:

Year       Case A  Case B
0          $1,000  $1,000 
5          $1,611  $1,436 
10         $2,594  $2,061 
15         $4,177  $2,959 
20         $6,727  $4,248 
After Tax  $5,295  $4,248
At the end of 20 years the buy-and-hold investor has $1047 more than the trader (after tax). That's about 24% more, and we haven't included trading costs. Keep this in mind the next time you have the urge to trade.

Stingy Links

Managing for the Slowdown
It turns out that very few large companies manage to achieve earnings growth over 15% for long periods of time. This is an interesting article that is about CEOs setting unrealistic expectations.

Investment Pornography
or how to expand your hot portfolio from 6% to 12% ...

Lies, Damned Lies and Managed Earnings
Nothing like BBQing the books to make them look good. Lots of fun fraud is revealed in this article.

Analysts Engage in Fuzzy Math
It seems that some analysts are getting a little carried away with year-over-year comparisons. Those wacky guys.

The Calculator
With the OSC's MER calculator you can find out just how much you really pay for your mutual funds.

Stingy Books

Dumb Money: Adventures of a Day Trader
A surprisingly good read about a failed day trader. The book is witty, wise and well written. It's also rather short. So, I'd suggest sitting at a Chapters for an afternoon and soaking it in.

Market Trivia

The trivia questions this week are:
  1. What is Buffett's first rule of investing?
  2. And what is his second rule?
  3. Who co-manages Berkshire with Warren Buffett?
The trivia questions and answers from last week are:
  1. What was the total return of Buffett's original partnership?
  2. How often did Buffett report performance to his partners?
  3. Buffett's style was formed by taking the best of which two authors?
  1. 1,156% vs 122.9% for the DOW.
  2. Once a year.
  3. Benjamin Graham and Philip Fisher

New @ StingyInvestor.com

My latest MoneySaver article is all about U.S. stock screening and Graham's approach for the defensive investor. http://www.stingyinvestor.com/SI/articles/0201.shtml

The Winter Warmth Contest

Inspired by Hersh Shefrin's book "Beyond Greed and Fear" I'm starting a contest similar to one that was run by the Financial Times in 1997. Hersh's description of that contest is:

"Readers were told to choose a whole number 
between 0 and 100.  The winning entry would be 
the one closest to two-thirds of the average entry.

The Financial Times provided the following short 
example to help readers understand the contest: 
Suppose five people enter the contest and they 
choose 10, 20, 30, 40, and 50.  In this case, the 
average is 30, two-thirds of which is 20.  The 
person who chose to enter 20 would be the winner.

What is the point of this pick-a-number game?  
The point is that if you are playing to win, you 
need to understand how the other players are thinking.  
Suppose you think everyone who enters the contest will
choose 20, since that is the winning choice in the 
example.  In that case, you should choose the integer 
closest to two-thirds of 20 or 14.

But you might reflect on this for a moment, and wonder 
whether most other entrants would also be thinking 
along these lines, and therefore all be planning to 
choose 14.  In that case, your best choice would be
10.  And if you kept rethinking your choice, you would 
eventually come down to choosing 1.  And if everyone 
thinks along these lines, then the winning entry will 
indeed be 1.

But in a group of normal, even well-educated, people, 
the winning entry will not be 1.  In the Financial 
Times contest the winning choice was 13. [...]  The 
real point of this game is that playing sensibly 
requires you to have a sense of the magnitude of the 
other players' errors.

The pick-a-number game illustrates two of the three 
themes of behavioural finance.  People commit errors 
in the course of making decisions; and these errors 
cause the prices of securities to be different from 
what they would have been in an error-free 
environment."

The rules of the Winter Warmth Contest are similar to those mentioned above. This time contestants are asked to pick a number between 0 and 1,000 (no decimals or fractions). The winner will be the one who is closest to 3/4 of the average entry with ties resolved by random draw.

The winner will receive a bottle of Dave's Insanity Sauce. I've found it most pleasing when added to a bowl of chili.

To enter the contest you must be a current subscriber to the Stingy News and email your choice of number, before February 14 2001, to:

Contest@stingyinvestor.com

Only one entry per person. Good luck!


Bullishly Yours,
Norman Rothery



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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...