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Cheering for Daniel-san to crane-kick the FAANG stocks

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Figure 1: Share Price Performance, YTD 2018

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

FAANG. What an acronym. A FAANG stock, cobra logo on its uniform, is like the antagonist in the classic 1984 movie The Karate Kid.

The FAANG (Facebook, Apple, Amazon, Netflix and Google-parent Alphabet) is unstoppable as he sweeps the leg and kicks the proverbial “value stock,” Daniel-san, in his broken ribs. No mercy. Miyagi, Daniel-san’s mentor, cannot help him.

At least that was the situation until a few months ago, when both Apple and Amazon reached valuations north of $1 trillion.

When I wrote about the top-heaviness of FAANG stocks in market capitalization-weighted indexes earlier this year, these five stocks alone accounted for about one-eighth of the U.S. stock market. Since then they have been cracked, with Facebook and Netflix taking the hardest hits.

Not many of us have issues with Netflix as an organization. But the other four FAANGs’ public reputations are on tenterhooks.

Amazon gives millions of small businesses sleepless nights, while its employees complain of poor working conditions. Want to talk about business risk? Wake up one morning to President Trump doing a Teddy Roosevelt trust-buster impersonation. You’re unstoppable until Daniel-san gets into the crane position.

Or look at the half-dozen reasons that reasonable people hate Facebook. One of them is probably our collective inability to prevent hundreds of images of our children from being plastered on its site, even if we are not “on Facebook.” If you don’t like it, tough luck. The BBC cites an Ofcom study finding that 70% of people do not think it is OK to share images of others without permission. It’s that other 30% that the rest of us have to worry about.

But there’s so much more.

Facebook is beset by accusations about “fake news” and political biases.  Also, how about your high schooler’s shrinking attention span and growing self-doubt as friends post solely their life’s highlights?

Stock market sentiment is a fragile thing: $408 billion is a lot to pay for a company that you and your next-door neighbour dislike.

And while we’re talking about aiding and abetting our society’s mass experiment with device-addicted zombie scatterbrains, there’s Apple. It sells the pipe to the smoker.

There is no shortage of people itching for Daniel-san to kick some of these companies in the face, in the interest of civil society. Our industry wants to talk about environmental, social and governance (ESG) screens. Great. Let’s talk candidates.

Google cannot be forgotten. The internet was supposed to be a utopia of free discourse.  Free discourse, unless the Chinese Communist Party’s censors give you heat.

When a company like Sears or Woolworth’s rolls over, most of us feel bad, nostalgic even. But there is something unsettling when the top of the S&P 500 is populated by companies that are dinner table pariahs.

If Daniel-san is doing that awesome crane pose and kicking some of these FAANGs across the face, there are value-investing “Miyagis” out there watching from the sidelines, giving a slow nod of approval.

Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.

 

FP: Enhanced CPP too late for Boomers but a boon for younger generations

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CPP enhancement will occur in two phases: fin.gc.ca

My latest Financial Post column has just been published, both online and on page FP6 of the Friday paper. You can click on the full piece by clicking on the highlighted headline: Everything you need to know about the enhanced CPP — from how much you’ll pay to how much you’ll get.

It summarizes the new enhanced Canada Pension Plan regime, which has (as of this month) started to show itself in slightly higher payroll deductions for both employers and employees.

Won’t fully kick in for 45 years

But as the piece explains, the enhanced CPP won’t fully kick in until 45 years from now, and most Baby Boomers will be retired before feeling any benefits beyond that of the normal practice of delaying CPP till age 70. And as one source explains, even the expanded CPP still isn’t as generous as Social Security is in the United States. Not only do they pay slightly higher payroll premiums to fund Social Security, but they also pay based on a much higher level of income.

U.S. Social Security still more generous

US contributions are up to US$132,900 in income, compared to about half that in Canada: a Year’s Maximum Pensionable Earnings limit (YMPE) of $57,400 in effect in 2019. CPP was originally designed to “replace” about 25% of the average worker’s income but the enhanced CPP will take that up to about 33.3% once it’s fully implemented. Gradually, the limit will rise to $65,400 (rounded down, 2019 dollars.)

While the full payout is 45 years away, benefits start edging up this year. Until now, the maximum CPP benefit at the traditional retirement age of 65 was $1,154.58 assuming earnings at or beyond the YMPE, according to Doug Runchey, of Vancouver Island-based DR Pensions Consulting.

The maximum benefit will be $1,207.83 in 2026, and eventually reach $1,753.78 by 2065. That’s a whopping $21,045 a year!

Too late for the Boomers

Still, Runchey says, “if you’re thinking of applying for your CPP earlier than 2025, the enhanced CPP will be of little value for you.”

As I said at the outset, that’s unlikely to be helpful for Baby Boomers at or on the cusp of retirement. Even so, the combination of an enhanced CPP and the decade-old Tax-free Savings Accounts (TFSAs) is something most Boomers wish they had when they were young!

For more on the enhanced CPP, go to the Government of Canada’s website here.

 

Make Investing great again …. one day? Part 2

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By Aman Raina, Investment Coach, Sage Investors

Special to the Financial Independence Hub

In Part 1, I shared some thoughts on a recent report by the Ontario Securities Commission (OSC) outlining the challenges the financial services industry is having in getting Millennials to invest. The OSC report had a great opportunity to address those investing pain points, but like so many financial literacy initiatives, the messaging is not clear, consistent, and understandable. The report identifies solutions, yet they are separate and not integrated and use a lot of industry jargon that people just won’t connect with. They emphasize processes over results. What is the outcome we want Millennials to achieve with investing?

Another way?

In this post, I’d like to share from my experience as Investment Coach and as someone who works with people to develop their investing competencies, some approaches that I found have better motivated people and not just Millennials into becoming more engaged with investing. They address the pain points people have with expressed about investing which include; being scared of investing, feeling overwhelmed by the process, feeling paralyzed when trying to make a decision, and not knowing how to start and take that first step. These are my takes and perspectives. They are by no means the most definitive and all encompassing. 

The First Step: Define the investing path

The OSC report identified taking the first step in investing as a major pain point for people. For most people, after they have the epiphany that they should start growing their savings and invest, the most common series of events that occur include opening a brokerage account, buying some books or researching investing on the Internet or simply doing what their peers are doing. They buy a few stocks and some work out and some don’t and that’s where the fear pain point comes in.

The default for investing seems to be buying stocks, but does this really apply to everyone? In Part 1, I said that investing can be a very boring, repetitive, and time consuming process. Investing in stocks requires a major time commitment to analyze and evaluate stocks and managing the portfolio. For a lot of people, they really couldn’t be bothered to learn about investing because they have other more pressing priorities in their life … and that’s OK.

There are different investing paths we can take but ultimately we want to be on an investing path that compatible our life situation. If I don’t have the time to invest maybe I should consider working with a financial advisor, maybe use a robo-advisor service. Maybe buying a basket of Exchange Traded Funds (ETF’s) is a better path than buying individual stocks. 

Why are you investing?

It is critical that at the people define right away the appropriate investing path they want to travel. It begins with defining what the end of the path looks like (Why am investing?) as well how the road will be travelled. Will I travel it alone (Do-It-Yourself) or with someone else?

Once you’ve been able to answer these questions and defined a path, then you will have defined and reduced your scope of investments that you will use and begin work on building your investing competencies. Why learn about investing in stocks when you will be investing in ETFs?

The investment industry doesn’t really take the time to work with people on defining their investing path because they established a default that people that come to them want to invest in stocks when in reality they may have no interest or tolerance for it. The starting point is such a difficult pain point for many because once they begin to follow an investing path that was not compatible with their life and quickly they fell off it and into a ditch, it becomes harder to emotionally get back at it. These type of conversations need to happen before opening a broker account or signing up for an investing course.

Building investing competencies

I view financial literacy to be more about building competencies, more specifically investing competencies. From my experience, the people that have this investing thing pretty figured out possess three competencies. My role as an Investment Coach is to help people develop these investing competencies. 

Competency 1: Education – Principles versus Formulas

Once we have defined an investing path, we can target our learning to focus on developing our investing competencies in those areas. If we are committed to investing in individual stocks then we should focus our education on learning that area. Most investing education focuses on the mechanical aspects of investing and those mechanics which involve formulas, spreadsheets, and math trigger people’s pain points of finding investing overwhelming. Continue Reading…

Make Investing great again …. one day? Part 1

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By Aman Raina, Investment Coach, Sage Investors

Special to the Financial Independence Hub

My motivation in starting my own practice to teach and engage people on investing revolved around financial literacy. I thought that if I could improve someone’s financial literacy, they will have a better chance at becoming a successful investor. I was always a big supporter of financial literacy programs, especially in schools. It made sense and I thought it was the right thing to do.

The reality is over the years I’ve learned and witnessed first-hand that while noble and done with good intentions, financial literacy programs just don’t work. A revolving door of programs, a lot of them government and industry sponsored have been rolled out over the years, starting out with enthusiasm and then just petering away in obscurity.

Here in Canada, we even have a Financial Literacy Commissioner , which acts and cheers Canadians into becoming more financially literate but to no avail. We even have a Financial Literacy Month late every year: So much effort, again all with good intentions, will be put into improving financial literacy but it just doesn’t seem to stick. 

Millennials scared of investing

So queue the latest attempt at cracking the financial literacy daVinci Code. A 42-page report commissioned by the Ontario Securities Commission, prepared by a dream team of consultants and personal finance thought leaders. The report attempts to answer why people, specifically Millennials, are not investing and what financial institutions can do to get them to invest. 

The report does a good job of capturing the pain points of why Millennials are not investing. They’re scared of investing. They feel overwhelmed by the process. They often freeze when trying to make a decision. They don’t know how to start and take that first step. I hear these thoughts very often from people I’ve worked with, and not just Millennials. 

The report outlines some broad solutions and strategies that financial institutions could adopt to better engage the Millennial cohort. The problem is the solutions are drowned out in consulting jargon and don’t effectively address those pain points that people are consistently complaining about. Often I’ve seen many programs rolled out that don’t articulate a clear, consistent message that speaks to the pain points. Here’s what OSC report came up with:

Make Investing a Priority

This is an attempt to address the pain point of establishing the first step into investing. The report believes that the first natural step to expose people to financial concepts is in the classroom. Teach the concepts early on, maybe high school and it plants a seed that will carry them into adulthood.

It seems like common sense. Ontario high schools have just started rolling out a financial literacy curriculum. The problem is it’s been done and it doesn’t work. A study published in the journal Management Science by John Lynch, a consumer psychologist at the University of Colorado’s Leeds School, compiled the results of more than 200 studies of financial literacy programs, adjusting for subjects’ family background and personality traits that had been ignored in the previous research. The study found that studying financial literacy has a “negligible” impact on future behavior and that within 20 months almost everyone who has taken a financial literacy class has forgotten what they learned.

Students don’t retain the information. The reality is the information during that period in our lives goes through one ear and out the other. It’s just not a priority…at that time. The report cites an excellent example by one of the participants, who said “at 15 years I’m thinking only 3 months ahead and when I got to 22 years, I was thinking years ahead”. Teaching financial literacy in high schools intuitively makes sense, but at that age, we’re not thinking about the future. The future for me at that age was thinking about what I was doing after school on Friday with my friends. I’m not a psychologist but I think Teenagers aren’t wired for it. Their brain is still developing. It’s only when people experience adversity (i.e. living on their own, managing their paycheque for now and the future) that motivations for improving their financial knowledge crystalize. 

Validation by Social Circle

The report suggests getting out to where Millennials are hanging out and engaging them about the importance of investing. The thinking is Millennials are more likely to follow what Continue Reading…

How small business owners can survive a security breach

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By Gloria Martinez

Special to the Financial Independence Hub

Photo by Markus Spiske on Unsplash

There are myriad reasons why a malevolent actor would want to breach your small business’ data and info and/or attempt to defraud your company. Money (holding business info or operations ransom) is a big one, but your business also holds plenty of useful, sensitive data on customers, clients, business partners, trade secrets, and finances. Whatever the reason, data breaches are becoming the norm — not the exception — for small businesses around the world, and the cost can be substantial. Here’s what to do if you’ve been hit.

Plug the leak and and figure out what happened

If you are a network security pro or have your own in-house team that can perform this task, that’s great. However, the majority of small business owners feel lost and adrift following a security breach. The smart first step is to hire digital forensic specialists. These experts can do most of the technical work for you, from plugging up the initial breach point, tracking down the responsible parties (which is key for any sort of legal action), and finally doing the necessary legwork to shore up your defenses (so it won’t happen again).

This is also the time to contact your service providers. It’s highly unlikely that your breach exists in a vacuum. We’re talking your point-of-sale software company, internet provider, credit card processor, and accounting firm, so it’s wise to take the appropriate actions.

Boost security and consider Legal Representation

Your next step is to do what you can on your end to improve your data security. Employ the obvious, FTC-recommended actions like changing company passwords, security codes, and physical locks (yes, data breaches can occur when unauthorized people have actual, physical access to your workspace). Then, as the FTC suggests, “you may consider hiring outside legal counsel with privacy and data security expertise. They can advise you on federal and state laws that may be implicated by a breach.” Legal representation is vital for two major avenues — either taking action against those responsible or defending your business from liability (compromised personal data can put you in a serious legal pickle).

Make changes to prevent future breaches

A few solid ways to protect your small business from future security issues include separating personal and business accounts, beefing up your security and data permissions, and retraining employees about proper security protocols. The sad fact is that many security breaches are due to employees — whether malicious or unintentional. That’s why it’s absolutely critical that you take the time to carefully screen your hires to make sure they are reliable and trustworthy. This means holding quality job interviews where you ask the right questions to get an accurate sense of the candidates you’re vetting.

Notify those affected

Legal considerations aside (notification of a data breach may be forced based on state laws), being honest and upfront with your customers, clients, and business partners is always a good idea. It builds trust, for one. It also allows them to shore up things on their end, as security breaches are rarely just limited to the primary target.

Small businesses are generally easy targets for malicious actors for a variety of reasons. For one, they simply do not believe they are big enough to be hacked or breached. They also don’t have the time, money, or resources to devote to major cybersecurity. Knowing that you are vulnerable is half the battle, and the other half is staying calm but decisive when something does happen. Take these steps so you can recover and move on from a security breach.

Gloria Martinez loves sharing her business expertise and hopes to inspire other women to start their own businesses. Her brainchild is Womenled.org. Gloria’s vision is to help all women advance in the workplace and celebrate their achievements.