Why blind index investing doesn’t exactly work – or beware the TSX Venture Exchange!

Typical free advice you hear on other channels talk about the virtues of passively investing in indicies. While putting some money in the S&P 500 or TSX Composite (generally speaking, close-to-the-top 500 and 60 capitalized companies in the USA and Canada, respectively) will likely represent a broad proxy for the corporate profitability of those two countries and over the long haul you will make profits in line with the growth of the overall economy, there are also bad indicies one can invest in.

Such as the TSX Venture Exchange.

Right now it has 385 constituents, and they are not doing so well:

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An investor in the TSX Venture index will have lost roughly 2/3rds of their investment over the past two years, while TSX Composite investors would have lost about 15%.

It goes without saying that if you invest in a basket of junk, it doesn’t matter how much diversification there is in that basket, you will get junk results. And this is indeed the case for the TSX Venture – it is an utterly failed index.

If you do have to dip your toes into the index, I would highly suggest cherry-picking for firms that have nothing to do with the mining sector. This leaves about 15% of the index (capitalization-weighted). Fundamentally, it seems nothing has really changed since the Vancouver Stock Exchange era where seemingly half the companies involved were just simply there to defraud investors.

5 thoughts on “Why blind index investing doesn’t exactly work – or beware the TSX Venture Exchange!”

  1. While I don’t necessarily disagree, isn’t the whole point of a venture index that it is full of speculative companies of which most are not likely to succeed? That is why these companies are not on the TSX proper after all.

    The reason for the dip down since early 2011 is simply that the availability of funding goes in cycles. This is the dry period, funding and investor appetite for the risks involved has evaporated and consequently many of the venture index companies which rely on continued equity injection to continue their projects are done.

    Do you have any actual evidence that these companies are defrauding investors?

  2. Forensic accountants Al and Mark Rosen lay out the argument that a lot of fraud occurs on the TSX Venture in their book “Swindlers: Cons and Cheats and How To Protect Your Investments From Them”.

  3. Judging by the information available online about that book, it doesn’t appear to be worth the paper its printed on.

    Some things worthy of consideration with regard to the TSX-V:
    * Of course there’s no long-term value generation. As soon as you generate significant value, you get moved OFF the TSX-V and onto the TSX proper. Index investing in a venture index is beyond dumb.
    * The Rosen book references “accounting tricks” and “IFRS boondoggle” and what not. The fact is, with most of these junior exploration companies, there are no tricks to be played because there is no revenue. The financials are meaningless for investment decisions – a record of accumulated losses only. What really matters is the technical reports on the properties the company is exploring and how to correctly interpret the results work done. Anyone about to invest in the TSX-V should know that.

    As with all investments, if you buy in at the market price, you will get screwed. You need to either be an insider and get in early – and out when the going gets good – or you need speical skills which Mr. Peter has to read the market direction, identify value propositions and time the market.

    For the rest of us, blind index investing is still the best option – as long as you employ a modicum of sense.

  4. I fully agree that investing in the index is the best strategy for the uninformed and undereducated investor. Especially the types the judge books by their covers rather than actually reading them.

  5. Do you have time to read every book someone tells you about? Or do you try to make informed decisions based on the available information?

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