Vanguard "They are the king of the hill," - Buffet Says Buy Index Funds Like Vanguard

Vanguard 'king of the hill' thanks to...Buffett
CNBC.com staff    | @CNBC
Thursday, 21 Aug 2014 | 2:14 PM ET

Investors may be warming up to the stock market, but they're taking the safe way in.

Passively managed funds are all the rage now, with market participants enjoying their low cost, high liquidity and tax advantages.

No outfit has benefited more from that approach than Jack Bogle's Vanguard Group, which has seen its total assets under management swell to nearly $3 trillion thanks to the allure of the firm's funds that track market indexes rather than make individual stock picks, according to a Wall Street Journal report.

That low-risk approach has gotten the imprimatur of none other than legendary investor Warren Buffett, who gave the firm his imprimatur a few months back. In his annual letter to shareholders, he advised them to follow the directions in his will, which mandates that his $66 billion fortune be divided with 10 percent in short-term government debt and the rest "in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)."

Since then, the cash has been rolling in as part of a trend toward index investing that has helped other big names in the field such as BlackRock and Dimensional Fund Advisors.

"They are the king of the hill," Michael Rawson, an analyst at Morningstar, told the Journal, which noted that Vanguard's Total Stock Market Index is the largest mutual fund in the world.
Vanguard also holds a prominent place in the exchange-traded fund space, ranking third in assets with $395 billion, behind BlackRock and State Street, according to ETF.com. Its Vanguard FTSE Emerging Markets ETF ranks fourth largest with just over $45 billion in assets.

How rookie investors can get taken: Roseman

An investment sales pitch by someone in your social network may be seen as more trustworthy. So, keep your guard up when approached by a friend.

How could so many innocent people fall for the outsized promises of convicted fraudsters Earl Jones in Montreal or Bernie Madoff in New York?

“When it comes to having confidence in other people, our group or family affiliations work as a stand-in for family relationships,” says Susan Pinker, a Montreal-based psychologist and author.

“Trusting others who look and sound like us feels natural. There’s a visceral satisfaction that accompanies letting up one’s guard.”

Signs of shared identity and status – accents, tattoos, tight pants or baggy ones, hairstyles, sock colours – are more persuasive face-to-face than they are over the Internet, Pinker says in her new book, The Village Effect.

“That’s why we’re more vulnerable to in-group scammers whom we meet in person than to faceless email scammerswho, like Earl Jones, want our bank account details.

“No matter what our culture, we all have the same inclination to trust members of our tribe, and the same feelings of indignation and shame when that trust has been betrayed.”

These comments resonated for me after I received a complaint from a Chinese-speaking consumer, who was persuaded to borrow money to invest – despite having a low income and almost no investing experience.

Related: Warning signs of investment fraud

The woman, then 56, earned $40,000 a year in a contract job at a university. She had just bought a house with a 40-year mortgage, while supporting her daughter and her elderly mother in China. Her husband was unemployed.

Despite her tenuous financial status, she said yes when approached by a Chinese-speaking financial adviser with a string of initials after her name and what sounded like a guaranteed strategy.

“She strongly prompted and encouraged me to borrow $100,000 from the National Bank to invest,” the woman says about her adviser.

“She told me this is the best way to gain money using others’ money to improve our difficult life. She promised that in case my money amount dropped after four years, she would pay all interest I paid for this plan.

“She emphasized that I would only profit. No loss in this investment.”

There was some truth in her adviser’s claim. The investment in question consisted of segregated funds from a life insurance company, which offered to give back part of all of the investor’s capital at death or maturity.

However, the investor did not have a written guarantee to cover the interest if the investment lost money after a four-year period.

“I have to pay $466.65 of interest each month since March 2011,” she said. “My health, both physical and mental, has been subjected to a great deal of damage. I suffer from insomnia, palpitation and extreme stress.”

The investor went to the life insurance company and didn’t get anywhere. She also went to the Financial Services Commission of Ontario, which dismissed her complaint.

The matter is now with a lawyer, Ryan McConaghy, who shared her statement of claim and the adviser’s and insurer’s statements of defense.

There were several warning signs, which others approached by an adviser in their social network should heed.

Insufficient information. The investor wanted time to review the materials at home, but was pressured to sign the loan application right away. Didn’t she trust a top adviser at a major insurance company?

Forms done by adviser. The investor had to sign a checklist on borrowing to invest. Later, she learned the adviser had filled out and signed the form without her knowledge.

Falsified financial status. The insurance company was told the investor had excellent investment knowledge, high risk tolerance, an objective of growth, $48,000 in income and $490,000 in net worth (actually $81,000). The loan term was shown as five years, not four.

Vulnerable to market declines. By June 2013, after a market setback, the investor owed $35,000 more than the value of her portfolio. Meanwhile, she had paid $15,000 in interest on the loan.

The adviser said it was the investor’s idea to get into the stock market and buy segregated funds. She had signed the checklist after doing a review with the adviser and had expressed a desire for an aggressive investing profile.

“The plaintiff in her pleading grossly exaggerated her lack of sophistication and abilities, solely in an improper effort to generate sympathy from the honourable court,” the adviser said.

The life insurance company said its working relationship with the adviser was that of an independent contractor. It said the plaintiff was well educated, holding a Ph.D., and married to a man who had owned a small business.

The woman’s losses were a result of her own negligence, the insurer said. She had used a market timing strategy with funds supposed to be held as long-term investments. She had failed to read the documents presented to her. She had failed to take timely action when her investments dropped.

I spoke to the woman and asked her why she had agreed to a strategy of borrowing to invest in the stock market, given her shaky finances. She said she had trusted the adviser’s expertise and promises to repay interest.

The lawsuit, yet to be argued in court, shows that rookie investors can succumb to unrealistic pitches by someone in their affinity group.

The moral: Never let up your guard. Keep your wits about you and your skepticism on high alert.

The chase by Frances Horodelski:

Fed fatigue
The chase by Frances Horodelski:

Top stories on BNN.ca

On this day in 1988, Ronald Reagan (a senior himself) declared today National Senior Citizens Day. "For all they have achieved throughout life and for all they continue to accomplish, we owe older citizens our thanks and a heartfelt salute. We can best demonstrate our gratitude and esteem by making sure that our communities are good places in which to mature and grow older."

Fed fatigue. There is more than sufficient ink being spilled on the analysis of the Fed’s FOMC minutes released yesterday. Suffice to say that the U.S. dollar likes what it heard as do global stocks and U.S. futures, bonds a little less so. Maybe the most important line is “that labour market conditions had moved noticeably closer to those viewed as normal in the longer run.” The term normal, normalizing, normalization was used 19 times in the statement. The committee also noted that “Participants agreed that the Committee should provide additional information to the public regarding the details of normalization well beforemost participants anticipate the first steps in reducing policy accommodation to become appropriate.” Translation: we’ll tell you how we’re going to do it well before we need to do it.

Market participants will now await the big speeches tomorrow including Janet Yellen in the morning. The theme of this year’s Jackson Hole is “Re-Evaluating Labour Market Dynamics” and the program will be released today at 6 p.m. mountain time.

It is global PMI day (when Markit provides an early look at the manufacturing sector around the world) and generally the data points were softer than expected and softer than the previous month. The weakest link is France which remains below 50 (the demarcation between expansion and contraction in the manufacturing side of the economy) but at the same weak level as last month. All the other major countries have numbers above 50. The number for the U.S. will be released at 9:45 a.m. ET.

On the earnings calendar, Hewlett Packard is trading down about 1% this morning post its results last evening. The company’s results were at the high end of guidance, the mid-point of its full year outlook was raised, revenue rose for the first time in 11 quarters and the hardware side of the business grew although services fell. Free cash flow is coming in above the company’s forecasts but RBC wonders whether it is sustainable. Barclays notes that cash flow is “exceptionally strong” providing more options for the company’s next fiscal year. Barclays rates the name neutral but has raised the valuation target to $41 from $38. There are 16 buys, 19 holds and 2 sells.

There aren’t a lot of us, but Canada is in the AAA group and continues to be worthy of that rating according to Fitch which affirmed that credit rating last night. Who else is in the club – Australia, Denmark, Germany, Finland, Hong Kong, Liechtenstein, Luxembourg, Mexico, Norway, Singapore, Sweden, Switzerland and the United Kingdom. The United States has a split rating with S&P at AA+ while Moody’s remains at AAA. There are only three U.S. companies with AAA ratings: Microsoft, Johnson & Johnson and Exxon Mobil.

Today’s BNN line-up includes CEOs from Exchange Income Corporation, BuildDirect, Whooshh Innovations and Caldwell Investment Management. Our shows will also focus on the opportunities and expectations for the Canadian banking sector as Royal Bank kicks off reporting season tomorrow as well as our ongoing plethora of investment ideas.

Headlines are few and far between but we do expect the Department of Justice to announce a record settlement with Bank of America where the latter will be paying an estimated $17 billion in fines for its participation in the mortgage debacle of the financial crisis. We have breaking news that Family Dollar is saying not yet to Dollar General due to anti-trust concerns and the belief that a deal with DG couldn’t be completed given those concerns. FDO cited a letter from Dollar General in a letter sent last night that included “blatant mischaracterizations and did nothing to address the anti-trust issues in DG’s proposal.” And in other news, Wind Mobile is dramatically dropping its roaming rates.

We’re awaiting existing home sales and the leading economic indicators at 10 a.m. ET. A couple of interesting analyst changes including Cameco dropped to hold from buy at Cowen and Tesla’s new coverage at CSLA with a buy and a $300 target.

www.bnn.ca

Central bank hawks put the brakes on stocks, boost GBP and USD

1 hour ago by Colin Cieszynski

The stock market rallies that kicked off the week appear to have run out of gas, with indices in Europe starting to backslide and U.S. markets heading for a flat to slightly lower open.

While indices appear due for a trading correction after several straight days of advances, the blame for today’s retreat appears to fall squarely on the shoulders of hawkish central bankers who appear to be gaining strength.

Minutes from this month’s Bank of England meeting showed that two MPC members (Weale and McCafferty) voted for a 0.25 per cent rate increase, the first dissenters on interest rates since Governor Carney took the helm last year. This news helped Sterling to retain its footing, though it remains below the 200-day average and Fibonacci level near $1.6690 it broke earlier in the week.

The Bank of England news has also changed attitudes about the minutes from the last FOMC meeting which are due this afternoon. Although Fed Chair Yellen is expected to remain dovish at her Jackson Hole speech on Friday, the last FOMC meeting had its first hawkish dissenter of the year and the street may look to the minutes for signs of how many potential allies Philadelphia Fed President Plosser may have who could put pressure on the others to reduce stimulus faster.

The potential that the hawkish camp at the Fed may be growing has dragged on U.S. stocks this morning, and a guidance cut from Target hasn’t helped the bulls cause. USD is on the rebound today against most other major paper currencies but gold has stabilized in the mid $1,290s after yesterday’s takedown. In addition to GBP, CAD and NOK have been relatively strong with crude oil on the rebound. NOK may also be active this morning with Norges Bank governor Olsen speaking.

AUD has held up relatively well despite more threats from RBA Governor Stevens who noted AUD isn’t doing enough to help rebalance the economy, that he feels the market has underestimated the downside risk to the dollar and that the RBA could still intervene in forex markets at any time without notice. NZD, meanwhile continues to underperform its peers following soft inflation numbers earlier in the week.

Corporate news
Target $0.78 as expected, cuts FY guidance to $3.10-$3.20 from $3.60-$3.90 below street $3.43

Lowes $1.04 vs. street $1.02

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