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ZLB is kicking butt.

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Jun 16, 2010
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ZLB is kicking butt.

Wow, this simple ETF is performing extraordinarily well. Doesn't have a long track record, however. Anyone know if this strategy has worked somewhere else in the past? I'm curious to find out if this strategy (low beta stocks) works in both up and down markets.
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MarcJ55 wrote: Wow, this simple ETF is performing extraordinarily well. Doesn't have a long track record, however. Anyone know if this strategy has worked somewhere else in the past? I'm curious to find out if this strategy (low beta stocks) works in both up and down markets.
Just bought 100 shares of ZLB and 100 shares of ZUQ on margin since D/E fell below 65% ><. Fingers crossed! I looked at the components and they seem good! PE (as of May 31st) seems a bit high on ZLB compared to ZCN but the way I see that is I'm paying for LOWER VOLATILITY.

Levering and then buying low beta seems rational no? Don't try to time the market and remember to diversify and most important of all, have fun!
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MarcJ55 wrote: Wow, this simple ETF is performing extraordinarily well. Doesn't have a long track record, however. Anyone know if this strategy has worked somewhere else in the past? I'm curious to find out if this strategy (low beta stocks) works in both up and down markets.
It still has equity exposure. Time will tell how quickly it recovers after a down market.

Update: Sorry, mixed up with ZLU regarding the dollar comment. It's mostly invested in defensive sectors, so it's doing better than the market which is heavy in resources. But I personally wouldn't invest on a ETF that uses Beta as the criteria to buy or sell companies.

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rodbarc wrote: It still has equity exposure. The performance has been boosted due to the dollar conversion. Time will tell how quickly it recovers after a down market.

Rod
He's talking about ZLB though not ZLU. What do you think of ZLB. It holds stocks that are very different than TSX composite. A bit more REIT & utilities than I would normally pick but that's one of the reason I like it for myself. Only thing I'm afraid of this is the REITs and utilities getting whacked when rates go up but those sectors appears to have taken a good beating already so I'm assuming most damage has been priced in.
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zakarydoks wrote: Just bought 100 shares of ZLB and 100 shares of ZUQ on margin since D/E fell below 65% ><. Fingers crossed! I looked at the components and they seem good! PE (as of May 31st) seems a bit high on ZLB compared to ZCN but the way I see that is I'm paying for LOWER VOLATILITY.

Levering and then buying low beta seems rational no? Don't try to time the market and remember to diversify and most important of all, have fun!
ZLB is currently invested in defensive stocks, which tends to do well in flat or down market, but underperform in bull market. However, I don't like the criteria based on Beta.

Low beta doesn't mean safety. This is a big misconception where one thinks that beta equals risk.

Beta is a simple measure of price volatility. At the right valuation high beta could be more of an indicator of extraordinary opportunity than high risk. However, high valuation represents high risk, even on a low beta stock. Therefore, beta is not a measure of risk - so it's not "safer". Beta is a rearview mirror metric, and as such, does not necessarily predict how volatile a stock might be in the future. A company’s beta can go from very high to very low as time goes by - same company, it's the price movement (not valuation) that gives the beta score.

As high profile billionaire investor Seth Klarman wrote in his 1991 book Margin of Safety:

"I find it preposterous that a single number reflecting past price fluctuations could be thought to completely describe the risk in a security. Beta views risk solely from the perspective of market prices, failing to take into consideration specific business fundamentals or economic developments.
The price level is also ignored, as if IBM selling at 50 dollars per share would not be a lower-risk investment than the same IBM at 100 dollars per share. Beta fails to allow for the influence that investors themselves can exert on the riskiness of their holdings through such efforts as proxy contests, shareholder resolutions, communications with management, or the ultimate purchase of sufficient stock to gain corporate control and with it direct access to underlying value.
Beta also assumes that the upside potential and downside risk of any investment are essentially equal, being simply a function of that investment's volatility compared with that of the market as a whole. This too is inconsistent with the world as we know it. The reality is that past security price volatility does not reliably predict future investment performance (or even future volatility) and therefore is a poor measure of risk."

For example, JCI was a low beta stock between 2007 and 2009. Its return during that period was -40.% ROR. It's been a high beta since 2011. Its return since becoming a high beta is 77% ROR, but it doesn't mean it's riskier. Actually, current fundamentals from JCI are solid, and being high beta it becomes an advantage.

Another example, AAPL was a low beta stock between 1999 and 2001. ROR during that period was flat. It became a high beta stock between 2004 and 2007. ROR during that period was 1,514%.

A more aggressive example is JNJ, high beta between 1996 and 2000 (128% ROR) and low beta between 2004 and 2009 (14% ROR).

At the end of the day, beta is a rearview mirror statistic that is based solely on an analysis of its price history. That's a poor criteria to invest for the long term, in my opinion. Valuation and earnings are the biggest drivers for total return, and I don't see those criteria on that ETF.

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zakarydoks wrote: He's talking about ZLB though not ZLU. What do you think of ZLB. It holds stocks that are very different than TSX composite. A bit more REIT & utilities than I would normally pick but that's one of the reason I like it for myself. Only thing I'm afraid of this is the REITs and utilities getting whacked when rates go up but those sectors appears to have taken a good beating already so I'm assuming most damage has been priced in.
Correct, I mixed up ZLB and ZLU. Still, see my earlier post for my thoughts on ZLB (and its main criteria based on Beta).

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Rob. It sounds like you don't use any ETFs in your portfolio at all. You pick all your own stocks?
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zakarydoks wrote: Rob. It sounds like you don't use any ETFs in your portfolio at all. You pick all your own stocks?
Correct. For trading and investing.

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rodbarc wrote: Correct. For trading and investing.

Rod
I'm still not confident enough to that, it's like a psychological barrier for me, I blame things like EMH and fear of losing my money. You seem like a very sophisticated user of financial information, did you learn it just for investing your own funds or are you a professional.
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zakarydoks wrote: I'm still not confident enough to that, it's like a psychological barrier for me, I blame things like EMH and fear of losing my money. You seem like a very sophisticated user of financial information, did you learn it just for investing your own funds or are you a professional.
I used to be a believer of efficient market hypothesis but then I started noticing how my friends/family/coworkers made their investment decisions... I wouldn't say all market participants are fully aware of all available information at all times lol
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SkimGuy wrote: I used to be a believer of efficient market hypothesis but then I started noticing how my friends/family/coworkers made their investment decisions... I wouldn't say all market participants are fully aware of all available information at all times lol
I'm sure a lot of these ETFs are manipulated too. There's strong incentive to manipulate at the million+ share level, instead of bugging some small (or even large) company's stock.
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rodbarc wrote: Correct, I mixed up ZLB and ZLU. Still, see my earlier post for my thoughts on ZLB (and its main criteria based on Beta).

Rod
What do you think of ZGQ then? I think it's decent in terms of valuation and earnings.
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zakarydoks wrote: I'm still not confident enough to that, it's like a psychological barrier for me, I blame things like EMH and fear of losing my money. You seem like a very sophisticated user of financial information, did you learn it just for investing your own funds or are you a professional.
Investing and trading for me is just a hobby, to help funding my other hobbies. I'm not in the finance field. I learned the old school way of value investing.

One of the best teaching books, available for free, are the Berkshire Annual Letters to shareholder. Buffet explains is fairly simple term that it`s all about having defined criteria to find quality companies - and purchasing them at the proper price. The rest is temperament, which has nothing to do with financial knowledge. Read them when you have some time. The 1996 letter explains how anyone can be a successful investor ("Common Stock Investments" session) and the 2013 letter (from page 16) explains how you can build the required temperament.

Another great book is "The Intelligent Investor", from Benjamin Graham. Buffet made his initial fortune following Graham steps.

I don't believe in EMH. If the market was efficient, there would be no bubbles, or overvalued companies or undervalued companies. The saying "the market can stay irrational longer than you can remain solvent" wouldn't exist. I believe, however, that the market is always seeking efficiency. So a company that is trading below its intrinsic value will eventually appreciate at least to its intrinsic value. At the same token, a company that is trading way higher than its intrinsic value, will eventually correct and normalize to its intrinsic value. Price follows earnings, always, and it's a matter of time for that to materialize. One business cycle is 5 yo 7 years, so one needs to wait at least that long to see some "immediate" results.

Fear of losing money is emotional. The big risk of total loss associated with equities is quite rare, and I believe, more fear-based than fact-based. Furthermore, the risk associated with a falling stock price, especially when the underlying business remains strong, is more related to investor action than pure loss. In other words, the greatest risk of a falling stock price is how the investor reacts to it.

The following quote best reflects how I stay rational and overcome the fear of losing money:
"I see the stock market as the store where I can shop in to buy good businesses. Once I do purchase the business, I no longer worry about the daily quotes. What I do care about is how the business is performing on an operating basis, and of equal importance, the overall financial health and strength of the underlying business. In the long run, business owner returns will be determined by, and as a function of, how well the business performs."

This is no different than what Graham wrote over 60 years ago:
"Investing isn’t about beating others at their game. It’s about controlling yourself at your own game. The challenge for the intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy—from buying high just because Mr. Market says “Buy!” and from selling low just because Mr. Market says “Sell!”" The Intelligent Investor - Benjamin Graham

Investing (or trading) can't be emotional. A solid plan with proper due-dilligence can give the basis for one to remain rational. Understand your goals and build a portfolio that meet those goals - which can be tracked by tracking earnings of those business.

"Over a 10- or 20- or 30- year investment horizon, Mr. Market’s daily dipsy-doodles simply do not matter. In any case, for anyone who will be investing for years to come, falling stock prices of good businesss are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end—if you remain steadfast until the end. Instead of fearing a bear market, you should embrace it. The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years."
The Intelligent Investor - Benjamin Graham

Rod
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cn_habs wrote: What do you think of ZGQ then? I think it's decent in terms of valuation and earnings.
I usually don't like any ETF, for 2 reasons: No control on which companies the ETF is invested on (I might not want to invest in some of those companies) and no control on valuation (when you buy the ETF, you'll buy overvalued companies too). For this one, quality criteria is there, but valuation is not.

First, what is the objective and risk tolerance? This seems a growth ETF, so it adds extra risks. Although this ETF screens for high ROE, low leveraging (this could be a disadvantage) and earnings growth YOY, the rebalance is done semi-annually, so one might be paying too much for many of the holdings. Valuation is not one of the criteria described for screening, and this criteria is as important as quality, in my opinion. The companies are 70% in US, so currency is a factor in performance (I rather hold US stocks in a US account so that dividends are not converted, preferably in RRSP, so that withhold taxes don`t apply). Also, 30% of the ETF is on Information Techonology sector, so diversification is somewhat lacking here.

For such low liquidity, I rather choose VFV.TO over this ETF. Lower MER too (although it will never address my issue on quality and valuation, simply because I evaluate and invest one company at the time as opposed to a basket of stocks).

Rod
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rodbarc wrote: I usually don't like any ETF, for 2 reasons: No control on which companies the ETF is invested on (I might not want to invest in some of those companies) and no control on valuation (when you buy the ETF, you'll buy overvalued companies too). For this one, quality criteria is there, but valuation is not.

First, what is the objective and risk tolerance? This seems a growth ETF, so it adds extra risks. Although this ETF screens for high ROE, low leveraging (this could be a disadvantage) and earnings growth YOY, the rebalance is done semi-annually, so one might be paying too much for many of the holdings. Valuation is not one of the criteria described for screening, and this criteria is as important as quality, in my opinion. The companies are 70% in US, so currency is a factor in performance (I rather hold US stocks in a US account so that dividends are not converted, preferably in RRSP, so that withhold taxes don`t apply). Also, 30% of the ETF is on Information Techonology sector, so diversification is somewhat lacking here.

For such low liquidity, I rather choose VFV.TO over this ETF. Lower MER too (although it will never address my issue on quality and valuation, simply because I evaluate and invest one company at the time as opposed to a basket of stocks).

Rod
VFV has done amazing this year especially due to the U.S dollar rise and it being in Canadian funds.
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rodbarc wrote: Investing and trading for me is just a hobby, to help funding my other hobbies. I'm not in the finance field. I learned the old school way of value investing.

One of the best teaching books, available for free, are the Berkshire Annual Letters to shareholder. Buffet explains is fairly simple term that it`s all about having defined criteria to find quality companies - and purchasing them at the proper price. The rest is temperament, which has nothing to do with financial knowledge. Read them when you have some time. The 1996 letter explains how anyone can be a successful investor ("Common Stock Investments" session) and the 2013 letter (from page 16) explains how you can build the required temperament.

Another great book is "The Intelligent Investor", from Benjamin Graham. Buffet made his initial fortune following Graham steps.

I don't believe in EMH. If the market was efficient, there would be no bubbles, or overvalued companies or undervalued companies. The saying "the market can stay irrational longer than you can remain solvent" wouldn't exist. I believe, however, that the market is always seeking efficiency. So a company that is trading below its intrinsic value will eventually appreciate at least to its intrinsic value. At the same token, a company that is trading way higher than its intrinsic value, will eventually correct and normalize to its intrinsic value. Price follows earnings, always, and it's a matter of time for that to materialize. One business cycle is 5 yo 7 years, so one needs to wait at least that long to see some "immediate" results.

Fear of losing money is emotional. The big risk of total loss associated with equities is quite rare, and I believe, more fear-based than fact-based. Furthermore, the risk associated with a falling stock price, especially when the underlying business remains strong, is more related to investor action than pure loss. In other words, the greatest risk of a falling stock price is how the investor reacts to it.

The following quote best reflects how I stay rational and overcome the fear of losing money:
"I see the stock market as the store where I can shop in to buy good businesses. Once I do purchase the business, I no longer worry about the daily quotes. What I do care about is how the business is performing on an operating basis, and of equal importance, the overall financial health and strength of the underlying business. In the long run, business owner returns will be determined by, and as a function of, how well the business performs."

This is no different than what Graham wrote over 60 years ago:
"Investing isn’t about beating others at their game. It’s about controlling yourself at your own game. The challenge for the intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy—from buying high just because Mr. Market says “Buy!” and from selling low just because Mr. Market says “Sell!”" The Intelligent Investor - Benjamin Graham

Investing (or trading) can't be emotional. A solid plan with proper due-dilligence can give the basis for one to remain rational. Understand your goals and build a portfolio that meet those goals - which can be tracked by tracking earnings of those business.

"Over a 10- or 20- or 30- year investment horizon, Mr. Market’s daily dipsy-doodles simply do not matter. In any case, for anyone who will be investing for years to come, falling stock prices of good businesss are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end—if you remain steadfast until the end. Instead of fearing a bear market, you should embrace it. The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years."
The Intelligent Investor - Benjamin Graham

Rod
We seriously need a stock quotes threads, your selection is amazing.
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I keep lots of them. They were a great help when I experienced my first crash, in 2001. And I certainly read them multiple times in 2008. I'll probably read them again on the next crash :-)

Rod
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rodbarc wrote: I usually don't like any ETF, for 2 reasons: No control on which companies the ETF is invested on (I might not want to invest in some of those companies) and no control on valuation (when you buy the ETF, you'll buy overvalued companies too). For this one, quality criteria is there, but valuation is not.

First, what is the objective and risk tolerance? This seems a growth ETF, so it adds extra risks. Although this ETF screens for high ROE, low leveraging (this could be a disadvantage) and earnings growth YOY, the rebalance is done semi-annually, so one might be paying too much for many of the holdings. Valuation is not one of the criteria described for screening, and this criteria is as important as quality, in my opinion. The companies are 70% in US, so currency is a factor in performance (I rather hold US stocks in a US account so that dividends are not converted, preferably in RRSP, so that withhold taxes don`t apply). Also, 30% of the ETF is on Information Techonology sector, so diversification is somewhat lacking here.

For such low liquidity, I rather choose VFV.TO over this ETF. Lower MER too (although it will never address my issue on quality and valuation, simply because I evaluate and invest one company at the time as opposed to a basket of stocks).

Rod
Would it be wise to invest in a comparable but more expensive ETF with a higher dividend yield?
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cn_habs wrote: Would it be wise to invest in a comparable but more expensive ETF with a higher dividend yield?
No. High dividend yield includes fragile companies that are paying high dividend, usually at a higher payout ratio than they should. You compromize quality. And because you buy a basket of stocks, you compromize valuation too. Look at some of their holding and their balance sheet. I would never invest in those companies. Chasing yield is not a good strategy, and that's what a high yield dividend ETF does.

Rod

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