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Making money on the stock market is easy in principle.  Just buy companies through your Questrade online trading account when their price is low and sell when the value of your shares goes up.  Simple, right?

Many people have made oodles of money off of explaining their unique (or in many cases – not so unique) strategy for accomplishing that simple strategy.  One of the most common investing approaches you hear is to “zig when others zag,” or as Warren Buffett says, “Be greedy when others are fearful and fearful when others are greedy.”  This all sounds pretty straightforward, everyone that spends a little bit of time looking at balance sheets should be able to do better than most right?

Well, statistically, we know that the vast majority of people who try to pick their own stocks do terribly and presumably a fair number of those people have read a few books and watched the 24-hour business news channels.  Due to our prehistorically-wired lizard brains we’re not good at this whole zigging thing, we’d much rather zag with the rest of the pack – it just feels safer and is reinforced by what everyone is talking about all around us.

Why Not Just Pick the Winners?

Those people who are successful in implementing a strategy of buying stocks when they are out of favour and selling them right around their peak (usually as they are being talked about the most) often refer to themselves as contrarian investors.  Many people who are wannabe contrarian investors (and maybe a few who are the real deal) will look down their noses at couch potato investors like myself and make statements such as, “Why buy the index and purchase all of the losing companies when you can just pick the winners instead?”  Of course this ignores all the hard data out there about our ability to pick winners, but let’s ignore that boondoggle for a second and focus on another reason these conclusions are wrong:

Being a good indexing or couch potato investor automatically makes you a semi-successful contrarian investor!

Related: Our eBook On Index Investing

“But how can this be?” you might ask.  After all, you’ve been conditioned to expect only geniuses and “numbers people” can be great contrarian investors.  Besides, isn’t index investing just boring and repetitive?

Yes, I admit it.  Index investing is a boring and repetitive way to become a millionaire.  Personally, I prefer it to an adrenaline-stimulating path to bankruptcy, but hey that’s just me and I’m a pretty boring school teacher when you get right down to it.

None of that verbiage or lingo though, changes the fact that good index investing makes you a good contrarian investor by definition.

The reason behind this lies in the idea of asset allocation and re-balancing your portfolio a few times a year (or even just once if you want to keep life really simple).

Related: Trade ETFs For Free With Questrade

Life is a Balancing Act

If you’re not familiar with asset allocation or re-balancing you can get a more thorough explanation in our free ebook.  The basic idea is that depending on your age, investment goals, and risk profile, you should have a certain amount of your portfolio in somewhat risky assets like commodities and stocks, and a certain amount in less risky assets such as preferred shares, investment-grade bonds, and GICs.  From this basic level you can get into more complex aspects of asset allocation if you wish, such as diversifying certain asset classes by geography or industry.

Related: What Is an Index and Why Are They Important

For example, many Canadians have too much of their investment money in Canadian companies.  They would be much better off in terms of real returns and stability over a long period of time if they had invested in some companies from all over the world.  Researching oil companies in Brazil, manufacturing giants in China, or junior mining companies in Africa would be exhausting and beyond the capability of almost all investors.  This is where index investing comes in.

How you build your low-maintenance, couch potato portfolio should be based on what asset allocation fits you.  From there, all that is left is to purchase the low-cost options that fit what you want and then keep the percentages straight for the next 30+ years.  Personally, I prefer the extremely low MERs of ETFs purchased using discount brokerages, but how you choose to execute setting up your portfolio is up to you.  The logistics usually become window dressing as long as you stick to the basic idea of low-cost index investing.

Related: Why you should Index Invest

There are some great model portfolios featured here for people who want the most simple of accounts (still virtually guaranteed to beat 70%+ of all investors) and for those who want to sink their teeth in a little deeper.  At least they will be a good starting point if you haven’t read our ebook and aren’t sure what asset allocation is all about.

If you’re not quite as obsessed with cutting fees to the absolute bone as I am, but still see the wisdom in index investing, you may want to seriously consider Canada’s robo advisors.  I’ve recently recommended my favourite robo (see our Wealthsimple review) to several of my friends who were a little intimidated at the thought of opening up a discount brokerage account and buying and selling their own stocks.  These fintech creations will automatically buy low and sell high for you, by using a computer algorithm to simply rebalance your portfolio from time to time.  It will cost you somewhere around the .5% MER range (a bit more expensive than purchasing your own ETFs, but still substantially cheaper than going with a traditional commission-based financial advisor) but in return you get the easiest way to create a “set it and forget it” portfolio – an option that is proving to be increasingly popular with Canadians!

But how does this all make me a savvy contrarian investor?

Once you have determined what percentage of your portfolio should be in each asset class and you are properly diversified you can sit back and let the numbers roll in.  The thing is, those percentages won’t stay in one spot after you purchase the investments because the value of those investments will go up or down.

For example, let’s say that you had $1,000 to start your portfolio with.  If you decided you wanted 60% of your portfolio in stocks and 40% in bonds you would obviously purchase $600 and $400 of whatever way you decided to get exposure to those equities (again, we recommend low-cost ETFs).  If the stock market did well over the next six months, and your $600 worth of stocks were now worth $650, and your $400 worth of bonds were now worth $375; consequently, you obviously would not be balanced the way you want to be right?  Some quick math tells us that stocks now account for 63.4% of your portfolio.  In order to rebalance you will have to buy more bonds ($35 worth by my calculation).

This is obviously a very simple example where we are only seeking to balance two different types of investments.  With small portfolios, investors can rebalance pretty easily simply by considering how much to add to each type of asset whenever they add investments to their overall portfolio.  Once you start dealing with a larger nest egg, you will have to sell a part of the category that is doing well and use that money to purchase more of the category that isn’t.

If it helps, just visualize the above example with a couple of zeroes on the end of every number.  If you had $65,000 worth of stocks and $37,500 worth of bonds, then you would probably want to sell about $3,500 worth of stocks and purchase $3,500 worth of bonds in order to get back to the overall asset allocation levels you wanted for yourself.  It’s pretty easy to see why this practice is referred to as re-balancing.

Related: How To Balance Your Portfolio… The Lazy Way

The way this basic math makes you money is that you are guaranteed to consistently be selling assets that are doing well (re: sell high) and purchasing assets that the talking heads on TV are trashing every day (re: buy low).  This makes you a contrarian investor.  You should know that being a contrarian investor means that you will be often doing the exact opposite of what Jim Cramer, or anyone else on the 24-hour business news networks is telling you to do – that’s how you know you’re getting it right.

Does anyone else consider themselves a contrarian investor?  How often do you re-balance?  Because of my relatively meagre portfolio I only rebalance every six months at the moment.

Article comments

Mitch says:

Really appreciate your blog! Because of my reading on here I went from having a few mutual funds (which I barely understood) to opening a wealthsimple account and a Questrade account. Had no idea how financially illiterate I was till I read your blog. Keep up the great blogging!

SST says:

Totally missed this one! :O

Without continuing the endless back-and-forth, I’ll just put up a great chart (hope the linky works) demonstrating the value of tangible assets such as gold and cash — 50% of the Permanent Portfolio:

(note: chart formulated by a very intelligent and wealthy person and recipient of a Reed Irvine Accuracy In Media award; in short, he does not mess around.)

Notice the volatility of ‘Equity Value’ (stocks) vs ‘Tangible Assets’ (stuff).

At one point in time, far left, both tangibles and net assets were worth more than stocks.
Then the easy credit machine was turned on full-blast in the early ’80s.
Once credit surpassed NAV there was no turning back.
(Notice the reason for parallel movement of tangible:credit.)

Easy to see where the extra “value” in equities is derived — credit driven speculation.
Easy to see where the crashes in equities is derived — credit driven speculation.
During the last crash equity value dropped ~50%, tangibles ~18%.

Again, the value of tangible assets is to negate volatility.

re: 5) Cuban makes me laugh (in a good way!). He hates the stock market more than I do (and always has)!

(continuing beyond the focus of this article…)

“To say though, that there are not insane amounts of vested interests in the stock market is just incorrect. The lobbying efforts of the financial industry alone, plus the major pension plans around the world, and far more wealth than your 21 Tigers depends on the stock market. I feel very comfortable aligning my interests with that camp.”

Then you’ve just admitted to the stock markets being rigged.
How do you intend to discover an actual true price in which to invest?
Or does it matter: it’s all manipulated so just run with it and hope you don’t get wiped out!

Gung Hay Fat Choy!

SST says:

Fact spinning? Cherry picking?
None of the above, but thanks for the presumptuous assumption.

Let me educate you:

1) Gold: it is inane and ignorant to use any gold valuation prior to it’s first full year in the free market, 1972. Any time before that is to use 100% government price-controlled levels. Pre-1972 gold was used as a trade mechanism and was thus held constant.

Forty-plus years is not a big enough sample size for you? Really? Exactly how long do you expect your own investment timeline to last, 60, 90, 150 years?

2) Please detail the pre-1814 stock market information YOU have researched. And please don’t quote Siegel. Plenty of analysis has been done to show his “data” is almost completely a hackneyed, convoluted, theoretical patch-work. Garbage in, garbage out. I tend to stick with reality-based, measured, factual data.

3) The date for the Yale-Buffett comparison was the year of inception of the Yale Private Equity Fund. It did not exist before that date thus it is not cherry-picking. Unless you would like me to fabricate some fraudulent back-testing?

I can certainly compare the lifetime returns of the two funds if that makes you more comfortable:

Annual Returns Since Inception
Yale: +40%
Berkshire: +21%

For Berkshire I used stock price for both 1964, the year Buffett took a majority ownership in the company, and 1967, the year he started acquiring companies into the Berkshire portfolio (i.e. acting like the BRK we know today).

Your ‘size of portfolio’ excuse is just that, an excuse.
What is the size of Yale’s Private Equity Fund within the realm of private equity? Might be a similar ratio as Buffett’s public equity fund within in the realm of public equities?

If one assumed Berkshire’s assets value at ~$427 billion to be ONLY US stocks, with a total market cap of all US public companies at ~$19 trillion, Berkshire would own a mere 2% of all stocks (globally, stocks cap at ~$51 trillion). But we know all the assets are not just US stocks, but also includes foreign stocks, private equity, options, derivatives, currencies, etc. Thus, saying Berkshire is too big to “generate high-percentage returns” is, once again, ignorant. Vanguard has 5 times the assets Buffet has, they don’t seem to have a problem producing decent yields.

But do what you must to defend your favored guru. Since no one’s portfolio will ever be as massive as Buffett’s, size is a non sequitur.

Regarding the ‘PP versus X’ article, there have been far more detailed analysis on the matter with the same conclusion: the extra return is very costly in terms of volatility; that is, you pay a high price for that extra 1-2%.

A 25% stock allocation can provide 8%; a 60% allocation provides 10% = I need to up my stock holdings by 35% just to gain an extra 2% of yield? My 25% gives me 0.32% yield per percentage of stock holding, yours gives 0.16% or HALF of what the PP returns. The math says that’s a massive amount of dead weight in the 60% portfolio.
(If you do enough research into the matter, you’ll find that 99% of the stock market is dead weight.)

You say the stock market is so safe because there’s so many rich people with skin in the game? That’s a whole different article and its own separate discussion, but is completely faulty logic.

I like to use the ‘Tiger 21′ group as one of my favorite investment role models. I like them because the members are essentially investor “noobs”. They made their money outside of the stock market and are now learning how to invest.

Look them up. Rich people. Take a look to see how much of their wealth is allocated to stocks. Hint: it’s inline with the Permanent Portfolio. When your investable assets hit $10 million perhaps you’ll convert me to buy 60% more stock than I need to.

You might think stocks are the best way to accumulate wealth, but perhaps that’s because the stock market is all you’ve ever known and all you’ve ever been exposed to. The financial industry has does a hell of a marketing job. Shout about something long and loud enough and it’s bound to be true, right?
Don’t get me wrong, probably anyone with investable money should own some stocks. I own some (20%), heck, Bill Gross probably even owns a stock or two! But stocks are not the be-all end-all of the investment world.

Ever read the 1940’s seminal classic by Fred Schwed, “Where Are the Customers’ Yachts?”
Stocks have been a consistently dismal wealth generator for the retail investor.

For an educator, I think you would do more independent research rather than believing the word of others, whole hog, without any further investigation into their data, methodology, or otherwise.

I’d cut you an ounce of slack because you are not a financial industry professional, this is your hobby. I won’t, however, precisely because you are an educator and telling people to “ignore everything else” is very wrong. Knowledge is power, after all.

Of course, those reading anything on the free internet should heed the old adage: You Get What You Pay For.

Good luck.

Kyle says:

There is a humorous thing here that I should point out for readers that aren

SST says:

Hey, Kyle! Thanks for the shout out!

Yes, you are indeed young.
If only we could all have unionized government jobs to simplify out investment decisions.

Cash/bonds in the Permanent Portfolio are utilized to negate volatility/risk.
You ask why hold cash/bonds, I ask why would I hold more than 25% in stocks when my 25% can return just as much (<1% difference) as your 60/80/100%?
You can always research the math and facts if you care to learn. Or just keep on belivin'!

As for your beloved guru Buffett, here are couple more facts for you to chew on:

Annual Return 1972*-2011
Gold = 9.54%
S&P 500 TR = 9.7%
(*the first full year gold traded in a wholly free market)

Those Buffett-coveted 500 really awesome "make stuff" companies managed to beat a shiny do-nothing rock by a whopping 0.16% per year over 40 years (before taxes and fees; in reality gold beat stocks).
To-current return of gold is 8.3% annually vs 10.3% for the S&P. Thus, the long-term value of productivity of the S&P 500 is a mere 2% (before taxes and fees). Again, wow, quite a return!
And of course there's never been any "speculation for value" in the stock market. 😉

Buffett has also been bested for decades by those NOT investing in the stock market:

Berkshire vs Yale Private Equity
Annualized Returns ?10-year (2002-2012, most current)?
Yale: +13%
?Berkshire: +9.1%

40-year (1973-2012)?
Yale: +30%
?Berkshire: +20%

But these are just more math-based facts. Don't worry about it.

The purpose of being a capitalist is to make as much money as possible, through whatever means possible. Being enthralled with one paradigm — stocks — for reasons of ease and simplicity is to deny a vast degree of potential profit. You get what you pay for.

You should also research "ownership".
Buying a stock, which is legally not held in your name, and thinking you own a) the stock, and/or b) the company with the associated name is faulty. A dividend payment does not constitute ownership.

Buying an ETF, REIT, mutual fund et al puts you even further outside the realm of ownership as you quite literally own nothing.

Good luck with your millionaire dream and please don't confuse running a blog with the grandiose notion that you know everything.


Kyle says:

A great way to spin facts SST. Very persuasive.

I should start by saying I like the concept of a PP – it’s just that the Browne 4×25 theory that you support is way too high in its allocations to cash and gold. You’ve cherry-picked returns for gold during a very particular time period whereas we have over 200+ years of stock information to compare to (I understand the idea of post-72 returns being the most relevant, but it’s not a big enough sample size for me). Then you cherry-picked the later era of Buffett’s investing streak once he was responsible for controlling a much larger amount of assets (many times the size of the Yale fund you compare to) thus making it more difficult to generate high-percentage returns.

Regardless of Buffett or what cherry-picked investment periods you quote, I will philosophically never agree with having half of my entire portfolio in cash and precious metals. One of my favorite investment authors explains why the PP has generated far less Alpha than a globally diversified portfolio would have. The difference is pretty substantial and I believe it will only get more so going forward. Investing in an asset that’s value is based almost entirely on speculation will simply never let me feel safer. Besides, the Canadian part of my portfolio will always have substantial exposure to gold anyway.

In regards to worries about ownership, I’m way more worried about dying in a car accident or having lightning strike me than I am about our entire equities system come crashing down. With so many wealthy decision makers having such strong interests in the health of the stock market, I’d argue that there is no safer place to be.

You might be able to convert me to some version of a PP, but not one the 4×25 model – especially not given my specific financial situation.

SST says:

“…asset allocation [and] re-balancing…”

This article is a long-winded way of saying: Permanent Portfolio.

25% Stocks
25% Bonds
25% Cash
25% Gold

Re-balanced once a year.

Please don’t confuse a portfolio of multi-sector stocks as being “diversified” — you still own ONLY stocks.

For 40+ years Browne’s PP has real/total returns of <1% difference compared to the standard 60/40 (and 100) portfolio, but with much less volatility.

As for "index investing is a boring and repetitive way to become a millionaire", I wouldn't worry too much about becoming a millionaire; only ~1% of the Canadian population are millionaires. Good luck.

Kyle says:

Why do I need money in cash and bonds? I have a defined benefit pension plan and I’m a still young-ish (as my students tell me).

When it comes to gold I subscribe to the Warren Buffett school of thought – I’d rather own companies that make stuff people need/want than a metal that relies on speculation for value.

As far as becoming a millionaire, I think there’s room for two millionaire teachers in Canada!

Please don’t confuse a little bit of knowledge with the grandiose notion that you know everything.

Mat says:

Perfect! Thanks for the response Kyle. I will do more research regarding the TFSA switch.

Thanks again,
Merry Christmas!

Mat says:

Hi Kyle,

MoneySense, I’m also a huge fan of the magazine. This site’s blogs and information go hand-in-hand with their thoughts and strategies! That’s why I enjoy reading both, it’s clear advice for young Canadian investors like myself. To answer your question, I’m a returning University student pursuing my Engineering Degree (I believe I wrote about this in one of your other blogs a couple months back)and I needed advice regarding my financials and OSAP. I believe this was in August, and at the time they had a section on their website called ‘Ask MoneySense’, I took advantage of this and sent them an email regarding my situation. I kind of forgot about the email, but they finally got back to me earlier this month as they were in search for candidates for an RRSP portfolio make-over for their next issue. They then connected me with one of their advisers, he did a review of my overall portfolio and basically gave me the advice to build a Couch Potato Portfolio since my situation really wasn’t that complicated as a student and I have just under 50K to invest. It was great free advice, and now it’s time to start building an ETF portfolio!

This brings me to a couple more questions regarding buying ETF’s. I will be buying sometime early in the new year, but I feel like determining the time to buy ETF’s is tricky. I personally think the market is beginning to become over-priced, and I know with my luck, after buying, the market will have a 5-10% pullback. What are your thoughts on this? How do I value ETF’s and determine when to buy? And finally, I’m opening a TFSA account with Questrade, now I plan on transferring my current TFSA (with RBC) to my Questrade account, do you know if this is straight forward, or is there a specific way of doing so to avoid over contributions?
Thank you!

Kyle says:

That’s a cool journey Mat. I do remember some questions from a person that fits you’re profile.

The TFSA question is a great one that I had never considered. I immediately put in my “to do” queue. Here is what I found from the CRA. It looks like you can switch it over, but to avid over contribution you must be very specific.

In regards to ETFs and timing the market here are my thoughts:

1) You can’t time the market. I can quote a whole lot of literature if you want me to but the long and short of it is that it is very unlikely you can time the market. If you put a gun to my head I’d say North American stocks are probably slightly overvalued right now, but I cannot emphasize enough how futile market timing is for most people.

2) You’re saving for retirement if you’re looking at stocks I presume? As long as you are, who really cares about a 10% pull back in the short term? It’s 30 years down the road you’re worried about right?

3) You don’t really need to know how to “value” ETFs in a stock-picking sense, but if you were trying, I’d say it’s very similar to looking at any group of stocks. I’d look at P/E ratios first and foremost, after that it obviously gets a little more complicated. You’re just buying an index anyway right? It’s a pure asset diversification play.

Mat says:

Haha, no keep it up, I read all your blogs! Especially at this time; to make a long story short I was recently contacted by MoneySense, their next issue is on Portfolio make-overs and I was supposed to be featured. However, after a review of my portfolio, goals and situation from one of their advisers, they basically told me my situation wasn’t complicated enough and I should just build an ETF portfolio (Couch Potato Portfolio) for the time being. Therefore that is what I am currently working on. The only thing I’m finding confusing is the term ‘Portfolio’…Would my Portfolio include all my accounts or is it directed to each individual one – RRSP, TFSA, Savings…? Can you please clarify this for me. Thanks!

Kyle says:

Hey Mat,

That’s interesting. How did MoneySense come to contact you if you don’t mind me asking? I’m a big fan of the magazine.

The term portfolio is most often used to describe your overall group of investments – so it would encapsulate your registered account (such as TFSA and RRSP) and non-registered accounts, as well as something like rental properties. Maybe I’ll write a post on this in the near future.

Mat says:

Another great article Kyle! As a young investor, I learn every time!

Kyle says:

Thanks Mat! Sometimes it feels like you’re sort of blogging into the abyss, so it’s good to get a little encouragement once in awhile!

Phil says:

Does anyone else consider themself a contrarian investor? Yes and no. I am always looking for previously noted good companies at 52 wk lows, or maybe companies that have had issues with something in the past and turned out of favour, but I also will buy into momentum for things that catch my interest. Examples Gold corp is on my to buy list currently as it is a large, cash generating company in a very bad sector at the moment if it hits $21, I’m in, and will be for a couple of years. Momentum play, Redknee Solutions, I just bought some additional shares as I can see it has further potential momentum going forward. How often do you re-balance? How often… tricky one. I do not rebalance per say, but rather try and stay aware of what is working and not. if something has gone steady up 20% for no real reason, I’ll sell some and buy something else from my buy list… Equally I will sell some if a stock goes down more than 10% for no apparent reason… Now I’ll through back at you does it make sense that we all just go out and follow the crowd and get educated and find jobs to work at an make a living (similar to couch potato investing). What about entrepreneurial spirit? The lads and lasses that go out start something, would you consider them like stock pickers? If we all just followed the crowd, we’d be a pretty boring bunch, wouldn’t we? Yes there is a rush in picking winners and I use this positive energy to find future picks. There are many investor types, as there are my forms of work out there for one to do… Find what works for you, and do it. Don’t sit idle and think about it. Get your hands dirty and keep moving forward until you find what works for you. Just remember time is your advantage when you are young, how you deal with mistakes you make along the way will shape how successful and investor you will become. Great post! – Cheers,

Kyle says:

So here are my thoughts on the entrepreneur vs couch potato model:

1) Stock market picks don’t have much in common with taking a creative career path for me.
2) In becoming an entrepreneur my success doesn’t depend on someone on other end of the trade losing.
3) In starting a small business I’m likely (with some exceptions) not competing head to head with some of the smartest people in the world who have ridiculous insider trading advantages and technology I cannot fathom.

Your common-sense approaches do seem to ring true though and I bet you’re one of the few that are able to stick to your contrarian ways because of your confidence in the system. Thanks for you comment!

Phil says:

Ah… it was a stretch comparing an entrepreneur to a stock picker, but you understood my point. I have found that my best opportunity as a stock picker, is in the small cap sector, as many of the big boys don’t play with their technology at this level. Stocks usually under $5/share and market caps of $5-60M. There are opportunities at higher levels but only for momentum plays of stock with higher percentages of insider ownership. – Cheers and again, great post.

Kyle says:

I’ve heard the small-cap theory in a few places Phil, and I have to admit that it makes a lot of sense. Most of the big guys can’t play in that ballpark because any position they make would result in too large a share of ownership. Maybe one day I’ll have the capital to take those chances!

Chasing the adrenaline high is the stereotypical investor, but like you say – it can be a path to bankruptcy. In an economy struggling for growth, leaping from small gain to small gain while risking it all is just not going to work for most investors who are looking to improve their retirement or homebuying prospects.

Kyle says:

Thanks for stopping by Lyndsay.