More ETF Risk


There are pros and cons to investing in ETFs.

After almost 50 years of tracking global investments and currencies, I was fed up with the process of finding good investments.  I had made some small fortunes, yes.  And I had some disasters too, but I was pretty good at it.  I was pretty good at the process.  Investors all around the world depended on my decisions.  I had even managed a portfolio of millions for a European bank.

Some facts, however, had become clear.  First, I realized I was spending too much of my time sitting in front of a computer analyzing numbers.  Second, the process was no longer fulfilling, satisfying or fun. Third, the process took a lot of time.

When those who reach 70, time becomes more valuable.  At least that is how it seems.

I started looking for a better way to look after my savings and wealth and came to the conclusion that investing in Country ETFs in stock markets that were undervalued gave me as good a chance of making profit as anything, but took far less time and cost much less in fees.

That’s when I created the Purposeful investing Course (Pi).  I approached three colleagues, who were brilliant mathematicians and equity and market analysts.  They had passed the test of time and proven their investing skills.  I asked them for help putting together a course that would help me and others gain diversification and extra profit potential without spending too much time in the process.

The course is built around the idea that Country ETFs can be the core of a portfolio because they offer an easy way to diversify in good value markets.  Little management and less guesswork is required.  The expense ratios for most ETFs is lower than those of the average mutual funds.  Plus a single country ETF provides diversification equal to investing in dozens, even hundreds of shares.

We have had good response to this course but recently a Pi subscriber sent this note.

There is a potential ETF risk and a subscriber of Pi sent this question.

“Gary, Here’s another newsletter which may be of interest.  The author has recently been writing about his concern regarding ETF’s and “passive investing”.  Would be interested to hear your thoughts.”

That other newsletter said.  “When ETFs sell, who will buy?”  The ETFs of the world may quickly begin trading below their actual net asset values (NAV).  This is called price discovery, and the arbitrageurs will not be slow to take advantage of that difference.  This means the indexes will drop much faster than they have gone up.

Here is my reply:  First, we should look at a slightly bigger picture.  All mutual funds face a couple of problems in collapsing markets.  In fact, regular mutual funds have more problems than ETFs.

The first problem is liquidity.  Typical mutual funds must redeem shares from their own cash reserves or the sale of investments.  If a market crashes and a mutual fund is hit with overwhelming redemptions, they either have adequate cash, must borrow to redeem or must sell shares.   If a manager is any good, he or she will normally not want to sell assets during a panic crash.  Market dips are the time when value investors buy not sell!

In other words, a normal mutual fund’s ability to invest may be inhibited at the very time it’s best to buy.

ETFs are not open ended funds so they do not have to redeem shares during bad times.  The shares are bought and sold on the stock market.  This means that ETFs normally have greater liquidity than normal mutual funds in the most difficult times.  They can be sold anytime the market is working.  Plus the fund managers have more ability to invest in bad times because they simply track the related index, whether it is falling or not.

ETFs, like all shares sold on a market, are likely to drop in a market collapse, especially if the correction is systemic.

However, I personally stick to ETFs as my equity of choice because they are so easy and so diversified.  This allows me to spend my time doing other things I enjoy to have a more fulfilled life.

My experience of investing from London many decades ago, suggests that the theory behind this ETF problem does not prove out in reality.

Long before the words ETF or the idea ETF were even thought, the English have had Closed-end Mutual Funds (called unit trusts).  These funds are remarkably similar to ETFs as they have a fixed number of issued shares traded on an exchange.  They generally do not issue new shares after the close of the subscription period.

Because the supply of shares is limited, the traded price of the closed-end fund will rise and fall depending on supply and demand, just like shares of other companies traded on an exchange.  Closed-end funds often trade at a discount to their Net Asset Value.  Other times they trade at a premium.

Value investors look for these trusts that trade at a discount.  Warren Buffet explained the reason when he compared the difference in a market’s reaction to what consumers do when McDonalds lowers the price of its burgers.  Consumers buy more good value burgers.  Yet when stock markets lower the price of  good shares, the market panics and sells.

Here is what almost always happens when closed end unit trusts sell at too great a discount.  Value investors step in and buy the closed ended fund, either in recognition of the extra value or to wind it up and sell the assets for a profit.

The question we should ask is not whether ETFs will remain stable in difficult times.  No share remains immune to crashing prices if a market is fearful enough.

The more important question is how do we regulate our investments so we are liquid enough to invest, not sell, when markets are down.  If we have prepared our positions correctly the question of getting a good price during a downturn never comes up because we will be buying, not selling.

The best time to invest is when shares or a market are in trouble.  Here are some quotes by Warren Buffet that address this issue:

“The best time to buy a company is when it’s in trouble. – The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”

“Be greedy when others are fearful.  – Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

“Stocks have always come out of crises. – Over the long term, the stock market news will be good.  In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

We should be aware of the pros and cons of our investments, but it is more important to create resilience in our portfolios and investing habits so we can hang on and even increase positions in down times.

If we have good value shares, the only time to sell is when we find better investments or need cash.

If you are spending too much of your time sitting in front of a computer and the process is no longer fulfilling, satisfying or fun, I recommend that you read below how to save time as you increase the safety of your investments as expand profit potential at the same time.

Gary

The Only 3 Reasons to Invest

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The stock market has always been the best place of places to protect and increase wealth over the long haul.   Yet it’s also been the worst place to lose money, a lot of it, quickly.

There are only three reasons why we should invest.  We invest for income.  We invest to resell our investments for more than we had invested.  We invest to make our world a better place.

The goal of investing should be to stabilize our security, bring feelings of comfort and elimination of stress!

We should not invest for fun, excitement or to get rich quickly. We should not divest in a panic due to market corrections.

This is why my core stock portfolio consists of 19 shares and this position has hardly changed in three years.  During this time we have been steadily accumulating the same 19 shares and have traded only three times.

A model portfolio that dates back to 1969 has dramatically outperformed almost every stock market in the world.

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A hundred US dollars invested in that portfolio in 1969 is now worth $44833 compared to $100 invested in an equity weighted world index being worth $11,548.

This portfolio is built around a strategy that’s taught in my Purposeful Investing Course (Pi).  I call these shares my Pifolio.

This portfolio more or less matched the S&P 500 until May 2018.  Then a stronger US dollar made the portfolio look like it was falling behind.   This currency illusion creates a special opportunity we’ll view in a moment.

This portfolio above is based on stock price to value analysis built around 91 years of stock market data.

The value analysis is used to create a portfolio of MSCI Country Benchmark Index ETFs that cover  stock markets that are undervalued.  I have combined my 50 years of investing experience with the study of the mathematical market value analysis of Michael Keppler, CEO of Keppler Asset Management.

In my opinion, Keppler is one of the best market statisticians in the world.  Numerous very large fund managers use his analysis to manage over $2.5 billion of funds.  However because Keppler’s roots are in Germany (though he lives and operates from New York) and most of his funds registered for the European Union, Americans cannot normally access his data.

I was lucky to have crossed paths with Michael about 25 years ago, so I am one of the few Americans who receive this data and you will not find his information readily available in the US.

In a moment you’ll see how to remedy this fact.

The Pifolio analysis begins with Keppler’s research that continually monitors 46 stock markets and compares their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.  Then Keppler takes market’s history into account.

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Michael Kepler CEO Keppler Asset Management.

Michael’s analysis is rational, mathematical and does not cause worry about short term ups and downs.  Keppler’s strategy is to diversify into an equally weighted portfolio of the MSCI Indices of each good value (BUY) market.

This is an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

A BUY rating for an index does NOT imply that any one stock in that country is an attractive investment.  This eliminates the need for hours of research aimed at picking specific shares.  It is not appropriate or enough to instruct a stockbroker to simply select stocks in the BUY rated countries.  Investing in the index is like investing in all the shares in the index.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pifolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2020.   There have been no changes since.

70% is diversified into Keppler’s good value (BUY rated) developed markets: China, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in Keppler’s good value (BUY rated) emerging markets: Brazil, Chile, Colombia, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the MSCI indicies of the good value BUY markets.

For example, the iShares MSCI Germany (symbol EWG) is a Country Index ETF  that tracks the investment results of the MSCI Germany Index. The fund is at all times invested at least 80% of its assets in the securities of its underlying index that primarily consists of all the large-and mid-capitalization companies traded on the Frankfurt Stock Exchange.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for every market in our Pifolio.

This year I celebrated my 52nd anniversary of writing about global investing. Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades. This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (PI).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You get this course when you enroll in our Purposeful Investing program (Pi) with a triple guarantee.

Triple Guarantee

Enroll in Pi.  Get the 130 page basic training, a 46 stock market value report, access to all the updates I have sent in the past three years, two more reports on investing (described below) and an online Value Investing Seminar right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the two reports and Value Investing Seminar as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Included in the basic training is an additional 120 page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.This year I celebrated my 51st anniversary of writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Stock and currency markets are cyclical.  These cycles create extra profit for value investors who invest when everyone else has the markets wrong.  One special seminar session looks at how to spot value from cycles.  Stocks rise from the cycle of war, productivity and demographics.  Cycles create recurring profits.  Economies and stock markets cycle up and down around every 15 to 20 years as shown in this graph.

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns can create war.

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The chart above shows the war – stock market cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WW III) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Save $102 If You Act Now

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Triple Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report, access to all the updates of the past two years,  right away. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know.

#2:  I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.

#3:  You can keep the reports as my thanks for trying.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197 and receive all the above.

Your subscription will be charged $99 a year from now, but you can cancel at any time.

Gary