Financial Thinking

Any discussion of classes in society tends to be couched in the values of the speaker’s society. Recently, media have given much attention to the 1% that was the object of protests by the #occupy movement. The protesters sought to reduce the esteem that our society lends to the highest earners, since we generally equate success with accumulation of wealth. With Mitt Romney seeking the US presidency, the conflicting values of the Americans with regards to wealth (Romney is successful, evidenced by his wealth, but he also seems to be slightly ashamed of his disproportionate financial resources). We can also see the tensions created by people trying to move from the capitalist class to the political class.

How have different societies around the world and through time valued the merchant class in relation to other classes? I’m particularly interested in which activities were valued by different societies.

English society, like much of Europe, maintained a rigid class structure. At the bottom were labourers who worked strictly for wages. Above them were farmers or artisans who paid rent and farmers who owned some land. Merchants came above farmers, but below the gentry and nobility. Merchants facilitated trade by buying goods and reselling them for a profit, often travelling between markets. Above merchants were gentry who owned enough land to live off the rents and thus could afford to become well educated. Knights were usually landowners who provided military leadership or judicial authority. The nobility were large landowners who lived off their assets and held a position in government or a royal post. The clergy generally was populated by members of the upper classes.

In Ancient Rome, class was multi-faced, but generally had politicians at the top, followed by knights, citizens, non-citizens and slaves. Commerce was not practiced by the senatorial (political) class. Some of the equestrian class (knights) engaged in commerce, as well as free citizens. Some merchants accumulated wealth rivalling the nobles, but were regarded as nouveaux riches, still part of the lower class.

Aztec society was made up of a hierarchy from nobility to peasants and slaves. Merchants presumably fell between the nobility and the peasants, still working for their income, but able to travel and serving as spies.

Ancient Chinese class structure, which informs many Eastern cultures, ranked classes based on their perceived usefulness. Except the emperor, nobles were minimized under Confucian philosophy. Scholars were ranked highest because of their ability to create ideas that would lead to wise laws. Farmers, who produced food, and artisans, who created useful objects, were next in esteem. Merchants ranked last, even when they accumulated a large fortune, because they didn’t actually produce anything of value.

By contrast, North American society affords little esteem based on a class structure. At the time of the revolution, Americans rejected the idea of class, and Canada has gone so far as to outlaw the granting and accepting of titles. (Conrad Black is a recent example of the application of this law.) By default, then, people seem to gain esteem in relation to their accumulated wealth. This is ironic not only because it places undue emphasis on material gain, but also because North Americans are generally private with money-related information. Even though people judge my personal worth based on my net worth, they can only guess at my net worth based on my clothing, my car, my house and my habits.

In my experience, I like the traditional Chinese mentality that esteems people in relation to the value of their ideas or their production. I find that my life feels meaningful when I am productive, either creating ideas or teaching and volunteering in schools. The time I spend trading stocks is financially rewarding, but I don’t feel like it makes our society a better place.

I love that lucky feeling when a trade works out far better than expected. I haven’t placed any trades in my account for quite a while, and with the market starting to turn positive, some stocks are reacting sooner or to a greater degree than others. This creates opportunities to take profits and add to lagging positions in order to profit from inefficiencies.

In my accounts, I owned two REITs (real estate investment trusts): ARTIS (AX.UN) and Whiterock (WRK.UN). Since having bought them, ARTIS seems to have outpaced Whiterock, although looking back at the price history, they haven’t diverged much. Add to that the fact that my position in ARTIS far outweighed that in Whiterock, it seemed time to rebalance my portfolio. Since my accounts recently transferred in to HSBC, I thought this would be a good opportunity to use the unfamiliar system to place a trade.

On the evening of Monday January 16, I placed an order to sell 2500 units of AX.UN at a limit price of $15.10 (just in case). The trade filled immediately at $15.14. I then placed an order to buy 2600 units of WRK.UN at a limit price of $14.30. That trade filled immediately at an average price of $14.2931. I was happy with the immediate fill, so I wouldn’t have to “babysit” the trades, watching for partial fills or for market movement.

I was even happier the next day, Tuesday January 17, when WRK.UN opened over 12% higher than the prior day. The reason for the increase: Dundee REIT (D.UN) announced that they had entered into an agreement to purchase all the units of Whiterock REIT at $16.25. I had no idea that was coming.

Why don’t I think this was dumb luck? I admit it was lucky, since I didn’t know about the event and the timing was fortuitous. I had owned units of Whiterock, in varying amounts, for two years. I read their financial statements and listened to the investor presentations by management that accompanied earnings reports. I was comfortable that the company was profitable and growing. The company was obviously as attractive to Dundee as it was to me. So although there was luck involved, I’d prefer to call it “smart luck.” I’m glad I acted when I did.

When I worked as a stockbroker, I was always interested to see portfolios that had been put together by other advisors. This was most common when working with people who were considering moving their accounts or transferred their accounts to me. In many cases, the prior advisor had given good advice and the holdings were reasonable.

There was one thing that would bother me whenever I saw it, however, and that was matching accounts. My father was my branch manager, and he used to always create matching accounts. Let me explain: If a client’s portfolio was to contain 50% Canadian equity, 20% foreign equity and 30% fixed income, then the RRSP, the open account and the spouse’s RRSP would each be allocated 50/20/30.

With mutual funds, this made some sense. The trades were free to us and to clients, so although placing trades to rebalance each account meant (in the example above) triple the number of trades, it made almost no difference to us. Further, all account statements and all software views showed only one account at a time, never consolidated across all accounts for both spouses. Because we created matching accounts, it was easy to see that the overall portfolio was always balanced by virtue of being the product of matching accounts.

With stocks, it makes less sense, especially when each trade is charged a commission. Returning to the example above, suppose the RRSP holds 50% of the assets, the open account holds 20% and the spouse’s RRSP holds 30%. Each account would hold fewer positions if the RRSP held all the Canadian equities, the open account held all the foreign equities and the spouse’s RRSP held all the fixed income. (This would have to be done with taxation and investment risk tolerance in mind.) Assuming that the Candadian equities and foreign equity portions were each composed of 10 stocks and the fixed income was composed of 5 bonds, each account would have to hold 25 positions in order to match. Consolidating positions per account would mean 10, 10 and 5 positions. When trades are made, such as when adding new funds or rebalancing, this would result in just one third (1/3) of the transactions and one third of the cost.

The drawback is that some accounts may unexpectedly outperform others and that each account may not appear to be diversified. In the end, however, the holding taken together all form the client’s (or couple’s) portfolio, so diversification and performance are really only meaningful at the portfolio level. There doesn’t seem to be any really good reason to hold the same position (stock or bond) in more than one account at a time.

The strange thing is that I haven’t seen anyone do it this way. I haven’t seen a portfolio where each account held unique positions. Am I missing something? Is there a reason this wouldn’t work? Would it not really reduce trading costs?

I worked for seven years as a financial advisor. For most of that time, I was a licensed stockbroker and for part of the time, I traded stocks in my own account and then on behalf of my clients. As a professional, we were generously offered the chance to pay just $25 per trade. In my margin account, the interest rate was prime + 1%. I didn’t really feel very lucky to pay those relatively high amounts, even if the trade commission was lower than my clients.

When I retired last month (without any recognition or thanks for my service to my employer), I chose to transfer my accounts to HSBC Invest Direct. This is not an endorsement, simply my experience. The good news is that the experience has been entirely positive.

I had to fill out the forms entirely on my own. When I was working, that’s a service we offered our clients, but self-directed means “self-serve” in almost every way. Fortunately, I’m very familiar with account opening documents, so I got them all completed correctly. (I did miss the Alberta CES grant from for the RESP.) I then took the forms in to a branch to verify my identity and send the forms on to head office.

I wanted to open the accounts before transferring any holdings, but I had waited too late in the year for my needs. As soon as accounts were opened, I logged in to check that they were all opened correctly. In my job, we double-checked everything, just in case, and caught an occasional error. In this case, everything seems to have been done correctly, although I can’t see who the beneficiaries are in each registered account. Oh well.

The transfers happened smoothly and quickly. I phoned on the day the transfers arrived to find out if they would reimburse the $131.50 transfer fees for each account. I saw the fee charged in my accounts as they transferred out, and the woman on the phone pointed out that they had already been reimbursed at HSBC. I was pleasantly surprised.

She asked if I had any more questions, so I verified that my trades will be charged only $6.88 commission on North American exchanges. I also found out that I’ll only be charged prime (3.25%) on my margin loan. That’s cheaper than previously, but it’s also slightly less than my secured line of credit. I was very pleased.

I haven’t placed any trades yet, and I haven’t yet found out if they offer Level 2 data (market depth). I generally place limit orders, so they sometimes don’t fill all in a single day. I want to find out how they treat commissions in that situation, but even if I’m charged for each fill, 2 or 3 times, it is still likely to be less than I paid previously.

I was tempted to make up predictions for the stock market. That’s pointless, of course, since I can’t really know what will happen over the course of twelve months. The coming months aren’t likely to bring much improvement until the debt crisis in Europe is resolved or fades away. That could happen in a few months, but it could just as easily drag on all year. And there will certainly be unexpected events that will crop up.

None of that causes me to despair. The first reason that I think 2012 is going to be a great year is because there’s a whole world of opportunities out there for my money. I am currently invested in Canadian stocks and an ETF, but I could just as easily invest in fixed income, in commodities, outside of Canada in the US or in emerging markets. Alternatively, if I decide I don’t mind working harder, taking more risk and having more direct control, I could buy a (small) business outright. Because the world is so large and the conditions are always changing, there should always be somewhere that presents opportunity.

This is the view that Peter Cundill took, according to his biographer in the book “There’s Always Something to Do.” This was a view that was shared by the RBC analyst I listened to a few weeks ago, who found European companies to be very cheap; one example was Renault (if I recall correctly), where the car company is free after accounting for cash on the balance sheet and minority interest in other car companies.

There are areas that have come through the recent economic turmoil mostly unscathed. Alberta is a good example. Our oil, gas and other natural resources are still in demand. Our population continues to grow, especially since we’re a destination for immigration. There was already lots of money here from the recent oil boom, and we weren’t over-leveraged. Our government has taken a fiscally responsible approach (relatively-speaking) to revenues and programs. There must be other regions that have similar strength, such as Australia, Chile, areas in China or Eastern Europe. I don’t know for sure, because I haven’t yet taken the time to look closely, but these are the areas I would look at first.

The other reason that I feel 2012 is going to be a great year is because I’m going to do what I can to make sure it is. A quote springs to mind: “The best way to predict the future is to create it.” (Peter Drucker, Abraham Lincoln and Molière all seem to have said this.) I’m prepared to do everything I can to make 2012 a great year for me. I’ll volunteer for causes that are important to me. I’ll meet people who share my values and find people who want to work together. I’ll improve my capabilities for strategy, leadership and cooperation. I’ll work for income and I’ll work toward a new degree (a Masters of Education).

Even if everything around me falls apart, I plan to make 2012 a great year.