November 2014

The Monthly


With this commentary, we plan to communicate with you every month about our thoughts on the markets, some snap-shots of metrics, a section on behavioural investing and finally an update on some of the people at MacNicol & Associates Asset Management Inc. (MAAM). I hope you enjoy this information, and it allows you to better understand what we see going on in the market place.


“When buying shares, ask yourself, would you buy the whole company?” – Rene Rivkin





Market Commentary: Completing the Taper

By far, the largest headline market story over the previous month has been concerning the U.S. Federal Reserve, and the fact that they have finally completed the tapering process for the third round of their Quantitative Easing (QE) program. For interest, we thought it would be useful to detail the specifics of the QE program, its effects (or lack thereof) on the economy, and to lay out what comes next for the Federal Reserve.


The Quantitative Easing program was initiated in 2008, in the wake of the recent financial crisis, as an effort to bolster the fragile economy and to stave off deflation. To accomplish this goal, the Fed sought to purchase government debt and mortgage securities off of financial institutions, allowing them to increase the health of their balance sheets. As payment for these securities, the Fed would debit the bank’s financial reserves, effectively creating money out of thin air, which is why some people refer to the process as ‘money printing’. The initial benefit of this action was to remove a significant amount of ‘toxic’ assets from bank balance sheets, improving their financial health and allowing them an increased ability to make loans. However, these assets did not simply disappear, as they now currently reside on the Fed’s balance sheet. In fact, as a result of the QE program, which came in 3 stages, the Fed has become the largest holder of U.S. debt, and its balance sheet has ballooned to approximately $4.5 trillion, made up of $2.46 trillion in treasury securities and $1.71 trillion in Mortgage Backed Securities. The chart below details the growth of the Fed’s balance sheet since the initiation of the program.
The method of this initiative was contentious from the start, as it was ambiguous how increased bank reserves would save the economy. Many people saw QE as a way to inadvertently bail out the banks, by taking toxic assets off their hands which they themselves had a large hand in creating. Additionally, the increased reserves, which the banks received as compensation for their bad assets, were also sitting idle, as banks were reluctant to lend and consumers were unwilling to take out additional debt. This has resulted in excess bank reserves, which are the level of reserves held by a bank in excess of the mandatory amount, to also skyrocket to almost $3 trillion. The QE program proved relatively ineffective in bolstering economic growth in its infancy, and thus had to be followed up with an additional two waves of purchasing programs until material economic improvement was observed.
The QE program continued in perpetuity, in ever-increasing amounts, until May 2013, when Fed Chairman Ben Bernanke noted that they were satisfied with the current trend of economic strength in the U.S., and stated that they would begin to ‘taper’, or wind down their QE program. This process began in December 2013, and as of October 2014, the Fed has officially eliminated its monthly purchases of government securities. Although market response was initially negative, stocks have since rebounded, with several experts stating that tapering is a sign of the Fed’s faith in country’s economic growth. However, successful tapering does not mean that everything is back to normal. The Fed’s balance sheet remains at an all-time high, and is slated to maintain that level for the time being, as current Fed Chair Janet Yellen has stated that they will continue to renew maturing securities and re-invest their profits in order to maintain asset levels. In addition, the Fed has also forecasted that they will keep their key Fed Funds Rate at close to zero for ‘considerable time’, which is the main instrument used to set short-term interest rates in the economy. The end result will likely mean low interest rates for some time. Moving forward, the tapering program has eliminated QE from the headlines, but its symptoms remain in the form of an exorbitant Federal Reserve balance sheet and incredibly large excess reserves; tapering is a positive step into the right direction, but we are not out of the woods yet.

Behavioural Investing: Avoiding Confirmation Bias 

For this month’s Behavioural Investing portion of the monthly, we’d like to discuss another vitally important aspect of investing: avoiding confirmation bias.
For those unaware, confirmation bias refers to the fact that we, as human beings, tend to seek out information that confirms our pre-conceived notions, rather than disputes it. In the world of investing, this fallacy can result in biased analysis, which can in turn cause an investor to ignore certain important data.  As with other major aspects of Behaviour Investing, confirmation bias is inherently linked to many other aspects of the discipline. For example, the tendency for individuals to over-estimate their own abilities is a major contributory factor in the creation of confirmation bias, as people tend to overweight their own beliefs and analysis when compared to research and data provided by others. Loss aversion is a phenomenon which is also heavily linked to confirmation bias, where investors hold onto stocks for longer than they should due to an emotional attachment and the fear of loss.

Avoiding this pitfall is a difficult process, and one that requires honesty and objectivity in all aspects of the investing process. Warren Buffet, for example, is particularly well known for his even-handed and logically sound investing, and has acknowledged himself that he takes all possible steps to avoid his ‘brain bug’. Below are the two steps that Mr. Buffet takes in order to avoid confirmation bias to the best of his abilities:

  • The first step is always to acknowledge the possibility that you are confirming your own preconceived hypothesis.
  • The second step is to surround yourself with opinions or individuals who don’t necessarily agree with you.
    • As an example, at a recent annual investor meeting, Buffet invited a hedge fund trader by the name of David Kass to speak, who has openly disagreed with Mr. Buffet and was in fact shorting his stock.



At MacNicol & Associates Asset Management, avoiding confirmation bias is of utmost importance to us, and our entire team actively seeks to remain objective in all aspects of our investment process. To do so, we utilize a multi-layered research frame work, comprised of a multitude of voices, which all provide unique – and often contrasting – opinions on certain topics. Using all available information and opinions, we attempt to construct a unique mosaic which we believe is the most logical outcome and scenario. In addition, it is also important to us that these conclusions and vantage points remain fluid, and are constantly discussed and updated as new information arises.



For the personal section of our Monthly Commentary, we’d like to profile a few of our younger members of the company: our Research Associate, James Winckler, as well as our newest addition to the team, Erin O’Connor.
James is originally from out west, and actually grew up on a small island off the coast of Vancouver by the name of Bowen Island. In pursuit of further opportunities, James chose to attend school in Ontario, choosing the Richard Ivey School of Business at the University of Western Ontario. James joins our Senior Vice President Scott Baker as our second graduate from Ivey. Joining in January 2013, James serves as an integral layer of our extensive investment process, providing both investment-specific and macro-economic research to the firm. This week, James is excited to be visiting Florida for the first time since his teen years, and is hoping the weather differs from the hurricane season he experienced last time he was there.
As you may know, Naima Egal is on maternity leave.  We are pleased to welcome Erin O’Connor who has filled in admirably since Naima’s departure.  Erin comes to us with a strong background in client support and relationship management.  Erin has studied Sociology, Geography and in the end focused on Education where she received her Bachelor of Education from Lakehead University in Thunder Bay.  Erin has a busy schedule with all of her volunteer activities.  She is a Board member with Resources for Exceptional Children and Youth; a cause Erin feels strongly about.
We hope you will join us in welcoming Erin to our team.

David A. MacNicol, B.Eng.Sci., CIM, FCSI, President, Portfolio Manager
MacNicol & Associates Asset Management Inc.

November 2014