Published by CastleMoore Inc., 1 First Canadian Place, Suite 3700, Toronto, Ont. M5X 1C9

September - October 2006

GM Genius

In late August 2006, GM announced its reentry into the muscle car business. The New Camero was going to be built in Oshawa, Ontario, providing employment for scores of auto workers. It seems like only a few months ago that the newspapers and securities analysts had declared GM terminally ill, dying a slow and agonizing financial death. Wasn’t their Car division losing money? Wasn’t the Truck division barely profitable? And wasn’t the finance arm [GMAC] was the only real profit center? And, now, it is becoming clear why. GM, it appears, can’t build small cars.

Ever since the 1960s European and Japanese cars have been gaining market share in North America. More and more Toyotas, fewer and fewer Chevies. And now, in a time when the price of gasoline is regularly over $1 per litre, they announce yet another eight cylinder monster.

Ok, we understand that “the testosterone set” is a valid market for auto manufacturers: 20 to 30 year old male drivers who like speed and power. But, you don’t have to be a marketing whiz to check out what these young men are buying now.

Check it out. Just drive to work with your car windows down and listen for the noise. Check out that little Honda with the big exhaust pipes. There are dozens of them.

And check out who’s driving. A 20-year old in a T-shirt with his baseball hat on backwards.

Sigh... maybe GM is not really targeting the 20 year olds. Maybe their real target market is aging baby boomer males who WANT to be twenty years old again.

The old/new Camero is proof that the big old car companies can’t build small cars. It appears the old car companies are obsolete: can’t compete in today’s economy.

Same is true for the big old investment firms. Obsolete: can’t compete in today’s economy. “Bigger is better” doesn’t work any more.

When the stock markets went up and up for years and years [1982 to 2000], “BIG”  worked. “Buy and Hold for the Long Term” worked. But when the markets go down or sideways as they have since 2000, small and flexible works better. “Buy low, sell high” works better.

The big mutual funds and the big pension funds are in trouble. But your personal RRSP has a fighting chance. Just don’t get caught imitating yesterday’s big old investment firms. Your advantage is your smallness and your flexibility.

Hmm... What will I do with that old Camero in my drive way? I wonder if it’s an antique car yet.

The part you’re probably unfamiliar with is this: when ol’ Rip finally awoke, the first thing he thought to do—well, after that!--was to check the value of his investment portfolio. So he found a pay phone and called the investment firm at which his account was located. The logistics of this would have been nightmare, but remember that this is fiction.

So he finally located his account—and what do you know?—his account was worth almost $6 million. So buy and hold does pay off after all! Or so he thought.

Well, hold on. No sooner did the broker inform him of his portfolio’s value than the telephone operator interrupted the conversation by saying, “Please deposit $2,000 for the next three minutes…”

[in case any of my rabbis is reading this, let me just state, before continuing, that the Rip Van Winkle story passes the Jewish content requirement by virtue of 1) having taken place in the Catskill Mountains, 2) the fact the Van Winkle must have awoken with the longest white beard you’ve ever seen, and 3) the authors name, albeit his surname, was Irving.]

The investment moral of the story is that investment performance alone is not as meaningful as if presented with a useful basis for comparison. In the investment business, we refer to that basis as a “benchmark”, and the most popular one used in the business is the Standard & Poor’s 500, a proxy for a broadly diversified portfolio of U.S. equities.

But the Standard and Poor’s may be a Poor Standard in several situations in which a meaningful comparison of your investment results is called for.

For one thing, no investment strategy can be considered successful if its results don’t keep pace with inflation, as our Van Winkle story demonstrates.

Secondly, the Standard and Poor’s, and other similarly constructed benchmarks, represent an investment strategy that is 100% invested in equities 100% of the time. With respect to asset allocation decisions, this is the riskiest (non-levered) strategy available, and is certainly not for all investors at all times. In fact, no market index-based benchmark considers risk at all.

(The buy and hold approach is fine for investors who plan on spending the next 20 years asleep under a tree. All others, please call…)

Thirdly, suppose that, on the day your child in born, you set up a college fund for him or her. You decided that, by the time your child enters college the fund will have to be worth at least $250,000 in order to fully fund his/her education. If you were to deposit $5,000 at the beginning of each year, your investments would have to earn about 11% annually in order to be worth the desired amount after 18 years. Thus, your benchmark in this instance isn’t based on any particular market, but rather on having accumulated enough at any point between now and your investment terminal point that reflects an 11% return on your investment to that point (i.e. $48,916 after 7 years, $97,807 after 11 years, and so on). If at any point you find your performance ahead or behind the 11% benchmark, you can become more or less aggressive as required. The bottom line is that the best benchmark is one that measures a portfolio’s performance against the investor’s stated objectives. For this reason, the relationship between a portfolio manager and his/her client begins with client profiling—in the case of CastleMoore, the creation of an investment   Blueprint™.

sheldon@castlemoore.com
1.416.306.5770 or toll free 1.877.289.5673

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CastleMoore Inc. helps investors manage their life savings. We are not stock brokers or mutual fund salesmen. We arediscretionary investment managers specialising in “buy low, sell high” strategies instead of “buy and hold” strategies like the other guys.

Our team’s previous experience in large national firms and small boutiques provides us the ability to deliver a high quality professional portfolio management service while adding truly independent advice to our clients for reasonable costs. A CastleMoore client enjoys the benefits of having focused portfolio management without the distractions of also providing a “super market” of financial services. We just manage investment portfolios effectively – plain and simple. CastleMoore is uniquely superior portfolio management. To know more, including the first step in transitioning your portfolio, contact us.

© 2006 Castlemoore Inc. All rights reserved.