Does Your Portfolio Need A Drink?

As if there weren't already enough problems to worry about in the world today. Uncertainty reigns supreme as the media presents us with the threat of global terrorism, a slumping global economy and the punishing effects of climate change. Yet, there is one problem that I believe we are not talking enough about, and that is the growing scarcity of freshwater. First the problem will be outlined, and then several interesting investment opportunities will be explored.

For starters, it is important to remember that the water we drink today has probably been around in one form or another for hundreds of millions of years. This is due to the fact that the amount of freshwater on earth has remained constant, as the earth works as a large desalination plant, regularly recycling freshwater through the atmosphere (evaporation) and back towards our faucets (rainfall/snow). Yet, at the same time, world population has been growing exponentially. What this has caused is an ever-intensifying competition for access to clean water for drinking, bathing, cooking, growing crops and manufacturing.

In fact, 70 percent of the world is covered by water, and only 2.5 percent of it is fresh. The rest of it is saline, and just 1 percent of the world's freshwater is easily accessible, with much of it caught in glaciers and snowfields. Strikingly, only 0.007 percent of the planet's water is available to fuel and feed its 7 billion people.

To make matters worse, humans are inefficient with their water use, water is even more scarce due to geography and climate change, and with population thought to grow to around 1.8 billion by 2025, it is estimated that around two-thirds of the world's population will live in regions where freshwater is scarce.

In the United States, many states are facing freshwater shortage issues and expect this to continue in the future. In addition, unconventional sources of demand, such as hydraulic fracturing for oil & gas exploration, may exacerbate shortages. Each well that employs hydraulic fracturing uses large amounts of water, and only a small percentage of this water can be reused. These facts beg the question of what is being done to combat the freshwater problem. The picture begins with desalination.

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Mind The Bubble: Should You Be Tracking Hedge Funds?

Hedge funds have filed their 13Fs for the reporting period of March 31 and the results are in! According to research conducted by FactSet, the top 50 largest hedge funds increased their equity exposure by 5.3% in Q1 2015. Exposure to the U.S. was increased as well as exposure to the energy sector. In addition, Apple (NASDAQ:AAPL) remained the top holding and the top purchases were Valeant (NYSE:VRX) and Qualcomm (NASDAQ:QCOM). At the sector level, the aggregate hedge fund portfolio was overweight in four sectors and underweight in six sectors relative to the S&P 500 at the end of the first quarter. The Consumer Discretionary (NYSEARCA:XLY) (16.8% vs. 12.6%) and Energy (NYSEARCA:XLE) (11.4% vs. 8.0%) sectors were the most overweight sectors, while the Consumer Staples (NYSEARCA:XLP) (6.1% vs. 9.7%), Financials (NYSEARCA:XLF) (13.4% vs. 16.2%), and Information Technology (NYSEARCA:XLK) (17.4% vs. 19.7%) sectors were the most underweight sectors.

The question is: Should we care? Well as a starting point, equity hedge funds returned 1.4% in 2014, 11.1% in 2013, and 4.8% in 2012. At first blush, these results are downright embarrassing compared to the S&P 500 (NYSEARCA:SPY) which returned 13.5% in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean we should conclude that tracking hedge fund ownership is a waste of time?

I would argue that the answer is no. There are many brilliant money managers out there and historically hedge funds have been able to deliver more impressive alpha than mutual funds and index funds. Past performance is no guarantee of future performance, yet lets not forget that some managers like Carl Icahn and Warren Buffett have been able to average double digit compounded annual returns over the course of their investing careers.

The problem is that this kind of success has created a large demand for hedge funds causing diminishing returns for two main reasons:

1) With the proliferation of demand, funds have gotten excessively large and managers have been pressured to allocate bigger percentages of their portfolios to large-cap stocks which are typically more efficiently priced. This has led hedge funds to track the market instead of beating it. Even Warren Buffet has famously stated that his performance would be far more compelling if he simply managed less money leading certain commentators to go so far as to say that his portfolio has become a mutual fund.

2) The second problem is tied to the fact that most managers only have a handful of great ideas. Although he gives higher weight to these ideas, he still allocates to many smaller positions in order to mitigate risk, deploy more total capital and thus extract higher management fees. This portfolio allocation ends up having a profound effect on total alpha generation.

Finally, there is one other issue inherent in the financial industry itself that investors should be weary of when tracking hedge fund ownership. In a recent Bloomberg article the author outlined the findings of a fascinating note released by Citigroup. In this note it was suggested that the financial industry, by its very nature, “is doomed to forever be blowing bubbles.” Why? Because the performance of an asset manager is often judged against a benchmark which doesn’t necessarily have much relevance to their particular investment approach. If the manager believes a particular type of asset, asset class, or even industry is overvalued he may be pressured into holding it because his supposed benchmark does. If he chooses not to, his investors may head for the exits in light of possible underperformance. This is what the Citi analysts had to say:

“A weary client once defined a bubble to us: “something I get fired for not owning”. It is career-threatening for an asset manager to fight a big bubble. For example, the late 1990s [technology, media and communications] bubble almost destroyed the value-based fund management community. Any bond manager hoping that valuations were mean-reverting would have been fired many years ago.

Big bubbles are especially dangerous. TMT stocks already represented a large part of equity market benchmarks when they re-rated aggressively in the late 1990s. By contrast, Biotech stocks might currently be expensive but their small market cap means they are still not a big benchmark risk. You don’t get fired for not owning Biotech stocks now, but you did get fired for not owning TMT stocks in the late 1990s.

Bubbles are obvious in hindsight, but they are very hard to fight in real time. Indeed, proper bubbles are so overwhelming that they force sceptical fund managers to buy into them in order to reduce benchmark risk and avoid significant asset outflows. As these sceptics capitulate, of course they contribute to the bubble and so force other sceptics to capitulate and so on and on until there are no sceptics left to capitulate. It makes sense for an asset management company to manage its business risk but this can end up contributing to the madness. Through this, the modern fund management is almost hard-wired to produce bubbles.”

Nevertheless, tracking hedge fund ownership can be useful in order to train your mind to spot trends and find new stock ideas. The trick is to be able to separate the great ideas from the mediocre ones and spot bubbles before you join the crowd inside one.

4 Can't Miss Industry Trends With High Growth Potential

If you can tune out the barrage of negative news regarding the state of the world economy, there are many reasons to be optimistic given the incredible amount of game changing innovation going on right now. As a small example, there are at least 4 significant industry trends that are sure to change our lives for the better in the near future.

These 4 industry changes are tied to companies that are attempting to target non-consumption by developing technologies, products or services that solve problems currently lacking a solution. In a global marketplace where consistent top-line growth is becoming more difficult to identify, these investable trends and the star companies that go along with them should be on your radar.

1) Manufacturing Gets More Automated

Artificial intelligence stories dominate headlines, yet people underestimate the massive impact of more simple robotics and 3-D printing. Robots like UR10 from Universal Robots and Baxter from Rethink Robots are driving down manufacturing costs in the United States and Europe, making manufacturing in China less economical. In fact, the cost of operating such robots is less than the cost of human labor and also less of a headache (think employment contracts, and health and safety requirements). These robots can work 24/7 and are becoming so sophisticated that they can perform most human jobs. Yet the disruption doesn't stop here.

The hype surrounding the 3-D printing industry has cooled off as of late, yet in the future expect even robots to be replaced by powerful 3-D printers that may even allow us to design and print our own devices. Imagine being able to 3-D print electronics like your own TV or watch.

Companies to consider:

iRobot: (NASDAQ:IRBT)

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What You Should Be Aware Of Before Investing In The Stock Market

Perhaps you're beginning to make a solid income and you want to start “investing”. But what exactly is “investing” and what's the best way to get started? A good way to start thinking about investing is to see it as committing time and/or capital to a project today in the hopes of getting an additional benefit or profit in the future. The question is: what types of investments should be made?

Invest in yourself by keeping your debt in check

Ask around and it seems like everyone has an opinion: stocks, bonds, real estate or a startup. But it may not be best to start your journey as an investor in any of these assets. Instead, to get started, you may want to invest in yourself. When you paid tuition and got a degree you were investing in yourself. With your degree in hand, and perhaps a decent a paycheck coming in, you should continue investing in yourself by keeping your debt under control. To do so, focus on your debt to income ratio (this requires your gross income which is your income before taxes and other deductions). Ideally, what you want to do is to keep your debt to income ratio around 20%-30%. For example, if you earn $4500 a month (gross) and pay $800/month in rent, $200/month for a car lease and $250/month in consumer debt, debt divided by income equals $1250/$4500 or about 27%. Your debt to income ratio is so important because the less you owe, the more money you have control over. In the example above you have control over 73% of your income which you can use to save, invest and spend.

Set aside some money for an emergency

The next step to investing in yourself is coming to terms with the modern employment reality. Lets face it, for most of us employment for life is a thing of the past as job security is rare in light of productivity and efficiency gains. What this means is that you should try and set enough money aside to cover roughly 3 months of expenses while you search for a new job.

Start saving at least 10-15% of your income

Once you have your debt under control, start trying to save at least 10-15% of your income. The earlier you start the better, as a dollar saved when you are younger is much more valuable than a dollar saved when you are older as each dollar properly invested could be worth much more in the future.

Don’t let all your savings sit in cash, put your money to work

Now that you control more of your income and you have some savings what should you do? What you shouldn’t do is let it all sit in cash. You worked too hard for that money to let it sit idly as dead money in a bank account. Instead of just working for money, you should make your money work for you. This is the fundamental crux of investing that most Canadians don’t understand as 62% of their total savings are held in cash.

By investing, you put your money to work purchasing assets that bring you passive income (income that flows in while you work away at your job or do whatever it is you love). This concept is hard for us to understand because most of us grew up being told that to get an income we needed to work hard, and put in the hours. Although there is nothing wrong with working for a paycheck, this advice completely omits the life changing benefits of buying/investing in assets which bring passive income and eventually can free us from being dependent on a wage. To get an idea of how powerful passive capital growth can be, consider this chart which shows that the value of the S&P 500 Stock Index has expanded by 5,212% (since 1980) while household incomes have only advanced 240% (since 1974).

Over the long term stocks have offered the highest average rate of return

So what assets should you be investing in? Well if your goal is to maximize potential income over the long term the historical record is unequivocal: stocks outperform the other traditional asset classes (bonds, treasury bills, gold) by a large margin.

Source: Siegal, Jeremy J. Stocks for the Long Run, 4th Edition. New York: McGraw-Hill, 2007

But what about real estate? The result is the same. If the S&P 500 Stock Index is compared to the Case Shiller home price index which is the leading measure of U.S. residential real estate prices, the stock market index outperforms by a large margin.

Furthermore, home ownership entails a whole range of costs that don’t apply to stock ownership. Think property taxes, insurance, maintenance, renovation and lack of liquidity (if you want to sell, there may not be a buyer).

Robert Shiller, one of the most famous Nobel Prize winning economists, recently went so far as to say:

“It would perhaps be smarter, if wealth accumulation is your goal, to rent and put money in the stock market, which has historically shown much higher returns than the housing market.”

The stock market isn’t as scary as you might think

These numbers are staggering and beg the question why anyone would invest in anything other than stocks? The problem is that many people don’t appreciate such facts because their understanding of the market is anchored in misinformation. The reason for this misinformation is linked to the relationship between human emotion and the stock market. Stocks are not just wildly swinging prices on a bunch of computer screens. They are interests in a business that reflect its value. When you buy a stock the price you pay reflects its value yet buy and sell decisions are typically made by humans who are naturally averse to loss and thus tend to make decisions grounded in emotion rather than reason. This is due to the fact that people tend to feel more strongly about the pain that comes with loss than the pleasure that comes with gain. Given the visibility of price in the stock market, the emotional distress caused by a sudden drop can be a daily possibility unlike the experience of being a homeowner whose price/value isn’t something you can easily verify on a daily basis.

Thus, due to the role of human emotion and the visibility of both gains and losses, the stock market is often understood as being volatile, scary and “a gamble”. This might explain why just 26 percent of Americans under the age of 30 (millennials) are now investing in the stock market, according to a recent survey by Bankrate.com. This is in stark contrast to the 58 percent of people between ages 50 and 64 who invest.

The important thing to remember is that although the stock market appears scary in the short-term, in the long term it’s a boring and predictable climb upward. In Berkshire Hathaway’s 50th annual letter to their shareholders Warren Buffett (arguably the greatest investor of all time) reminds us that:

"Stock prices will always be far more volatile than cash equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray."

For some perspective, consider this current snapshot of the S&P 500 Stock Index. What you will see are some hiccups but the trend is a steady line upwards indicating that if you simply followed the index since its inception in 1970 until present (45 years) you would have increased your wealth by nearly 8800%. That means that if you invested $10 000 in the Index and forgot about it you would have $1,209,950 today!

Grow your income and thus your wealth by investing in stocks

As the graph above shows, time can convert certain asset classes from the least attractive to the most attractive and vice versa. Thus, if you can think long term and realize that your investing horizon is far longer than you think you can use the stock market to grow your income and thus wealth by epic proportions. Wise investing takes discipline, effort and time but the long-term rewards of financial freedom or retirement comfort can be well worth the effort.

Does Socially Responsible Investing Have Hidden Costs?

The Millennial generation has become known as a more socially conscious generation, preoccupied with the environment, sustainability and quality of life. As these millennials enter the workforce and begin investing they will continue to support the growth of socially responsible investing. What are the implications of this new investment trend?

Instead of favoring profitability above all else, socially responsible investors choose companies on the basis of their performance across a broad range of social, environmental, governance indicators and rank at the top of their industry group. This is no small trend. There even exists a United Nations document outlining Principles for Responsible Investment now listing around 1,349 signatories. Furthermore, it has been estimated by the U.S. SIF's 2014 Report on U.S. Sustainable, Responsible and Impact Investing Trends that socially responsible investing (SRI) portfolios have reached around $6.57 trillion at the start of 2014, a 76% increase on the number reported in 2012. These assets now account for more than one out of every six dollars under professional management in the United States. That would be 18% of the $36.8 trillion in total assets under management.

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