Sunday, April 22, 2018

The Cyclical game is not for long-term investors, but it can make you a fortune

Warren Buffett’s system to investing in stocks is in some ways simple.  He always asks what the company’s competitive advantage is. For example, Coca Cola’s brand is so strong that when they sell the stuff and no changes are required (such as product adjustments due to health concerns) it is very difficult to compete with it. In some ways, Coca Cola is not a beverage company (anyone can make a cola-like product) but it is a marketing giant. It is nearly sect-like when they have people that swear by Coke versus those that are fanatical about Pepsi.  Really? Nobody can make ketchup like Heinz?  That is what Warren calls the moat around a company. Other moat examples: Microsoft Windows, iTunes and other Apple products.
Secondly, Warren needs predictable cashflow from his investments.  No accounting chicaneries and with earnings that can be extrapolated for many years into the future along a nearly straight line. Because then it is easy to calculate the intrinsic value of a company. We have done that on this blog also in the past. In addition, Warren uses his insurance company (or better companies) to provide him with interest free money owned by other people (insurance premiums).  Thus, he uses very cheap leverage to increase his earnings even more. But financial engineering is not today’s topic.
Many companies have a much less predictable ‘future earnings stream’. Warren may want to keep his companies ‘forever’ but if you invest in companies with less earnings visibility you’d better be ready to run at the first sign of trouble.  Oil and gas companies are an example of that kind of investment, which often is referred to as cyclical investments.  Most resource companies such as mining, fertilizer, or agricultural companies are cyclical.  When dealing with a product made in mature technology industries (i.e. car manufacturing) they become cyclical as well.  Look at PC makers, they used to be leading edge technology companies; or smart phones, same thing. When these products mature they no longer can charge premium prices and the number of computer manufacturers, or today smart phone makers, go through the roof. They start to compete more and more on price instead of based on superior technology. Thus, this once high margin specialty business becomes like a commodity with no special pricing power other than supply and demand. They evolve into a cyclical industry. Companies like Apple and Samsung try to keep enticing us with ‘revolutionary technology improvements’ and thus stand out above the crowd. Yet, they are gadget makers on the cusp of losing their special appeal just like Kodak or Blackberry before them. They become ultimately cyclical.
Cyclical companies rise and fall on supply and demand.  If times are good, gold mining companies crank out as much as they can, and the production costs barely matter as everyone wants to own gold.  Then suddenly everyone (the market) realizes that we produce more gold than people want to own. Demand dries up or just slows and gold prices, like in 2011, crash. A bear market for gold has arrived. Companies have overinvested, many managements took on enormous debt (it is amazing how short-term management teams think and not just because they are dumb) and the bear market will separate the men from the boys. One after the other mismanaged gold company goes out of business and if you invested in this stuff, your share prices can easily fall 70 or 80 or 100% from their peak.  Supply of gold crashes; ‘everybody hates gold’ and nobody wants to produce it and sometimes slowly, other times quickly, a new supply shortage develops; the cycle repeats it self. We have seen this happen in gold, in uranium and of course in oil and gas. What about autos? Same thing, remember 2008 and the GM bankruptcy?
Thus, investing in cyclical companies is not for the faint of heart and it is certainly not long term.  You buy when everyone hates the industry with a vengeance such as today with Alberta oil and gas; preferably when you start to see some ‘green sprouts’ showing up along the industry’s waste land. You buy dirt cheap and you wait for demand to take off. Sometimes it can take years before it takes off and then your investment is dead money until… It is often a question of when not if. The cycle always repeats in one form or another. Multistage fracking in horizontal wells truly disrupted the previous oil and gas cycles. We went from a ‘peak oil’ model to a model of endless and cheap supply. “Oil and gas are passé”, those of limited brain power and faulty memory tell us. "We are living through a technology revolution." That is true. Because in the past, we could only produce from good quality reservoirs with high flow capacity (in the oil industry that is called 'high permeability').  Modern technology allows us to produce from nearly waterproof rock such as concrete. Today we produce from rocks that have very low flow capacity. The volume of rock that can be considered reservoir, and thus recoverable oil reserves, has increased enormously. It is more expensive to produce from those rocks but over the past decade companies have drilled massive numbers of horizontal wells that has led to oversupply.  It restored the oil and gas production capacity both in the U.S. and Canada, with the U.S. producing at all time high rates of over 10 million barrels per day! More than Russia and more than the Saudis!

The new technology also opened opportunities in other parts of the world. In Poland and recently in the Middle East. Europe would also be able to produce a lot more, but this technology with horizontal wells stretching out several kilometers and spaced just hundreds of meters apart does not go over very well in densely populated areas such as large cities.  Do you really want one or two of these horizontal wells below your city block?
But after fighting the oversupply that $100 per barrel oil combined with this new technology created for several years now, oil production and somewhat less so gas production has fallen off while demand has increased. Now we enter a period of supply shortage and… rising oil prices.  This is probably the time that the cycle turns up again and to load up on many commodity stocks. Gold is off the bottom as well and there are signs uranium and silver are turning. Coffee may become more expensive as well.  Rising commodities often translate into inflation and visa versa.  Increased government spending and debt also are inflationary and thus we are looking for a new uptrend in the ‘currency commodity’ as well, i.e. rising interest rates.
But whether you decide to invest in these, often very lucrative, cyclical industries or not, be aware that they are very volatile and risky. If you don’t like the game of musical chairs for stocks in general, then investing in cyclical industries is like an extreme sport.  Different types of industry require different types of investment styles.  One of these days, I’ll discuss here what style is required to invest in high-tech.

Saturday, April 21, 2018

Analysis of a coffee maker – part II

I write about what I think is important. Coffee plays an important part in my life. Thank you-know-who that science has now decided that coffee can be beneficial to your health. After all, it is not likely that I will give up my 10 cups or so per day – and now I can drink all I want with a good conscience.

My earlier post on coffee maker analysis shows how I sometimes agonize about a decision – even to the point of paralysis. Then suddenly I jump and once the decision is taken I execute. The coffee maker decision has been put-off for at least a year. But last weekend I did not want to wait anymore.  I put off deciding because I wanted it for the new residence I am trying to build – but the city’s bureaucracy has prevented that since last July when my builder submitted for the first permit. Everything there after went slow.
Last January 2017 after years of thinking about what to do with my previous residence, I decided that building a new one on the lot was the right thing. Next, I hunted for a builder. Not many responded because one property was not big enough a project. One custom builder, though, responded and we met over several weeks. Then I noticed that the costs and charges escalated through the roof; apparently, the builder felt I might make too much profit on the property. I fired them – I don’t like being fleeced. After inquiring amongst several acquintances by March, I found an old friend from my boy scout leader days who was interested. By May we had the place roughed out and by July architectural drawings were ready for submission to the City. Then the misery started.
Dealing with the city we could not proceed with demolition until the utilities were disconnected. The bureaucracy was thus that it took until November to do so. Then we got permission in December to tear down the old house but… no building permit. A loft on the roof was not accessible enough by the Fire Department in case of a fire. I decided to avoid any problems and we redesigned the roof omitting the loft. In fact, I liked the design even better than before. But it took Rona nearly one and a half month to redesign the roof rafters. Finally, by February 2018 we submitted the updated design. O… the rules had changed just around that time and now the builder was required to apply for ‘builder status’ with the province which, in turn,  was required to apply for ‘New Home Warranty’ in spite of the fact that I would be living there for many years to come.  Once the builder was approved, he submitted for New Home Warranty. However,  the insurance company had a lot of demands as well, such as lines of credit with the builder’s bank and financial statements going back many years.

My builder (40 years in business) is a small outfit that builds anything including once every so many years, through his company, a residence. Thus, his company lays often dormant so how can he show consecutive annual tax returns? Anyway, it is now half April and we are still waiting for the insurance companies, some of which do no longer provide said insurance and… didn’t bother to inform us. We hope to start construction in May.

With this ongoing drama, am I going to wait for a good cup of Java until the house is finished 6 to 8 months from now (I hope)? Shoot, my application for a building permit feels like building an oil or gas pipeline!  So, I decided to buy the coffee maker. The old one has broken down and I ordered a DeLonghi Magnifica (I kid you not - Magnifico!) on Amazon which was delivered 2 days ago.
So today, Saturday I have been drinking cappuccinos and Americanos all day long while writing my blog posts. Delicious coffee – life is good again and I can handle a bit more bureaucracy. Bring it on!  Analysis, patience and frustrating set backs are basic to investing and the building of a good portfolio – my coffee maker analysis and home building experiences are a demonstration of that.

I see it well enough

Godfried, you may say, why do you think that you know it all?  Why are the political left and its fanatical special interest groups wrong and why do you think individuality is so important? 

I know, I see the world from my not another person’s perspective. A lot of this blog is about my world view. And how I perceive where the world is going. Investing is very personal. In fact, as investors we allocate capital to where we think it does most good. As such, you cannot walk blindly through this world and unfortunately, you are exposed to print and electronic media that scream emotionally loaded content at you all day long.  It is though to step away from the hysteria of headlines – much more so today than 20 or 40 or 100 years ago. The dispersion of information through the internet is so fast and ‘loud’, with us on the receiving end not having a chance to fact check everything. There is a lot of ‘fake news’ to sort through without us receivers having much of a chance to decide what is true and what is a blatant lie. And we often react with our emotions rather than rationally. And even so, we are not all Commander Spock, while most of us can only dream of being Captain Kirk whose intuitions combined with Spock’s logic allways lead to a happy ending. With all this uncertainty, us humans tend to cling to dogmas – non-existing certainties. We need badly something to hold on to and… there is nothing but our inner self.

Neither investing, nor my other passion in life - geology, is all about logic and truth.  Yes, facts and objective data are important, but we never truly see the total picture.  It is much more about seeing ‘enough’ of the picture to be able to make a decision. And no-matter what our decision is, it is often wrong. Yet, there is usually enough time to review our decisions and correct or better adjust.  Our lives are not about absolutes. Things always change; our view points change. Having said that, there are days that I think that at heart, I still am that adolescent naïve boy from my later teenage years, who wrote agonizing comments in a diary full of newspaper clips and thoughts about the existence of ‘a God’.  I suspect my thinking has become more sophisticated and my life experience has taught me more about the uncertainty of things. There always seems to be another way of thinking about or of doing things. But the core of me hasn’t changed. Which is nice, because it keeps me young and always wondering.

Geology or investing or many of the other aspects in our lives is not about being absolutely right. It is not about knowing the absolute truth. There is no such thing. We just have to know what to do next and with enough optionality to change course if things do not work out. Strangely enough, this is not allowed for politicians or so it seems. Stephen Harper wrote about building a ‘Firewall around Alberta’ in 2000.  The Liberals were using that against Stephen Harper a decade later. Yet, as Prime Minister of Canada he looked out for the entire country and did not do much in terms of building such wall.

It is not about being absolutely correct. It is about having enough insight into an issue to reduce the odds of losing money or rather to advance and optimize our returns. All investors do is directing their investments to what they believe is most profitable for ourselves first and also to what is most beneficial for those around us.  By accumulating assets for whatever reason, we accumulate means to do what we feel is most important in our life and for everything around us.  We are little boy scouts trying to be ‘wise in the use of our resources’. Not only for today but hopefully for many years to come. If we are successful in our investments, we grow and can direct matters around us even more and if we make the wrong allocations then our influence on the world around us declines. It is not about knowing the absolute truth.  Live is one big, ever changing, uncertainty and we will do fine as long as we see matters well enough.

Tuesday, April 17, 2018

Calgary Real Estate Opportunity

Oil has started a bull market, but the Canadian anti-business climate and pipeline issues have put a damper on things. In the stock market, oil companies are priced cheaper than cheap. Assuming the Trans Mountain Pipeline goes ahead, we are looking at a multi-year bull market in oil stocks and to a lesser degree in natural gas. North American natural gas production is likely to rise with oil production and unless we get some long cold winters, the gas industry will not be very motivated in active gas drilling. On the other hand, the declining heavy oil production in countries such as Venezuela and Mexico is opening an opportunity for Canadian heavy oil producers; I am talking about a declining oil price differential due to refinery demand in the U.S.  If we also get export opportunity to Asia things will be even better for Alberta.

Calgary real estate prices usually goes down with oil prices. The 1982 Downturn being the best example of that. The difference between that and the current down turn is that Calgary real estate prices from 2008 until 2016 were relatively muted rather than the screaming bull market in housing leading up to the 1982 crash. Also reducing the severity in declining Calgary housing prices over the last few years are low interest rates. Worse hit than housing prices were rents which have fallen close to 30%, especially in the lower end of the market where apartments and townhouses reign. With the new oil boom this will change, and I foresee a booming real estate market for late 2018 until 2022 or so. Higher interest rates may be a bit of a headwind, but I suspect these rates will not go up in a straight line. After reaching 3 or 4% the rate increases will likely stop as higher oil prices will also create an economic damper.

So, the coming year may be a last opportunity to buy cheap Calgary real estate, followed by a recovery of Alberta’s economy. Only thing we may regret is the likely overconfidence of oil & gas industry workers who wish to make up for their suffering from 2014 until now. I expect Mrs. Notley to be deposed of, regardless of her latest attempts for heroics – she and her colleagues  have presided over a bad economy during which she increased taxes of all manner while spending like a drunken sailor. That has not gone over very well.  Also, so-called green thinking may have reached the end of its political road – many Ontarians are sick of being fleeced while paying super-high energy prices and Alberta has seen the true nature of an NDP, kind of like Bob Rae’s performance during an earlier downturn in Ontario which left that province with economic scars felt for many years. We have also seen what the laconic attitude of federal liberals have cost this country – we wouldn’t have been at the mercy of Americans today if Curly Justin had not destroyed Canada East and Northern Gate Way.  That is regardless of his latest impotent grandstanding that has driven us close to a constitutional crisis and an extremely divided country.  So, I suspect that we will say goodbye to him as well.  I would have preferred a libertarian like Maxime Bernier, instead we may have Mr. Personality Andrew Sheer who defeated Maxime in a leadership contest severely affected by corrupt protectionist Quebec dairy farmers.  Sorry for bashing Quebec but I don’t think they will be highly respected by Albertans who have seen their destructive attitudes now in action on several issues.  The B.C. – Alberta relationship is more likely to improve provided a significant leadership change in both provinces. If not, B.C. will likely pay a high price for today’s politics.

I would not be surprised to see annual Calgary real estate price increases in the order of 5 to 6%, which would be manna from heaven for Calgary home owners anxious to catch up. Yes, I don’t think that Alberta will easily forget the pain imposed on it by the rest of Canada even if many were deluded by dreams of electric cars and solar panels.   Dreaming of a better world is fine but not if you do it at the expense of your neighbors. I think, the Alberta separatist mood will linger for many years to come.  Once bitten, shame on you but having now been bitten twice, the West will be extremely suspicious of eastern demagogues.

With a further decline in manufacturing due to automation, I think that Eastern Canada won’t be doing so well over the coming decade, especially with large provincial government debts, super high energy prices and an Alberta that will no longer be willing to subsidize the rest of Canada so generously. Economic power will resume its growth in Western Canada; and so will Western population growth, another hot iron in the fire of Calgary’s real estate market. Maybe, this reads a bit resentful towards Eastern Canada and B.C. However, if you think so, remember the anger that has been growing in the Alberta population over the last 3 or 4 years over the support they received during these hard times from the rest of Canada. Investment geniuses such as Murray Edwards have not for nothing emigrated to Europe during these last years.

Sunday, April 15, 2018

A disastrous weekend with three political clowns

I have been watching the bungling of our so-called governments over the [last] weekend.  A prime-minister and two NDP provincial premiers show how to divide and bankrupt a prosperous country in under three years. A prime minister so spineless and stupid that he barely could manage to interrupt his overseas vacation trip at the expense of Canadian tax payers to try and heal the rifts he created in this country with his ill-advised policies. From the quiet of my Calgary living room, I can barely fathom the resentment and anger this weekend’s circus has created in Alberta and Saskatchewan.  And, for that matter in Northeastern BC and in BC’s interior.  I can not begin imagining the damage this has done to the relations between people living in B.C. and in Alberta. This will take years to heal.  And just imagine what this will do to Alberta’s separatist movement.  They now have gotten a fire in their belly that may take decades to burn out.  Justin, if you think that the NEP scarred the West then just see what the fall-out from this weekend's circus will be.

So, it is without much doubt that Jason Kenny will be next year’s premier. I don’t know how much damage he plans to cause to B.C.s economy, but they better prepare for life as an island nation.  Maybe they can make a living of the palm trees they don’t really have. Imagine blockading coal transport or worse grain transport to their ports?  And tariffs on anything B.C. even if it only moves through Alberta. Justin Trudeau you really screwed this country with your small business tax reforms and your environmental drivel. I wouldn’t be surprised that you are only a one term very forgettable prime minister.  Ontario small business hates you with a vengeance.  Wynnie is using the old ‘bigot’ scare techniques against Doug Ford the new leader of her province's P.C. party. That is probably not going over well after all the corruption and document destruction her party imposed - all in the name of a green Ontario. So I am pretty sure, that will flow over into federal voting patterns as well.
I don’t know the immediate reaction from investors, but I hope that we don’t wake up Monday morning with a big fall in Canada’s stock markets. A stock market that will become more shakey with every minute that it takes to resolve this intolerable anti-business climate created by these three political charlatans, in particular over this weekend.  I for one have moved a lot of investment stuff out of Canada. Its stockmarkets are already such a brilliant performance disaster since 2014 and now this. The global investor is likely to stay away even more, while Canadian savings look for more fertile investment grounds beyond Canadian borders.  Whether this will go slowly or with a big bang, who knows?  But as matters stand today, with the three clowns at each others throats, I don’t think we offer an appetizing sight to anyone.


I publish this post with some delay (April 21). Initially I thought it was too harsh. Someone reviewed it for me and felt it was dead-on.  No matter whether you agree with it or not, government interference has created the pipeline mess and now it tries to nationalize the project by buying it at a rock bottom price. This of course, as the Canadian Tax Payer Federation and others say is inappropriate: governments using tax payers' money for projects that should have been funded with private capital rather than spending said taxes on social and communal issues. This is exactly what I so oppose, a government that gets more and more invasive in our daily lives. 

Do I want to live in the Wild West?  No, but I do not only want a clear separation between religion and state, I also want a clear separation between state and private. This latter is thrown under the bus these days. 

Some may say, how does this jive with your view that we're going to see an oil boom?  I struggle with this, I guess I am still too much tied to this country to see it entirely objective. The answer lies in my actual investment behavior. I believe in an oil boom. I think that this mess ultimately will be settled by economics. Canada is likely to lag and so I will invest more and more in overseas opportunities. But I know the  Canadian oil industry well enough to see opportunity here as well.  CNQ is not only heavy oil, far from it. There is lots of oil in Saskatchewan of the light variety and with an infrastructure independent of dillbit. I see Montney relieve in B.C.'s planned LNG facilities and we do get better access to the U.S. through Enbridge Replacement of Pipeline no3 and TransCanada's Keystone - at a discount. 

I also am concerned about corporate, state and private subprime debt.  I am not so concerned about mortgage debt because of the increased value of underlying real estate. But even there government can't keep its claws away and they will probably screw it up, especially for the Millenniums who have voted for this government and will, ironically, get screwed by it.  It is this generation that has no eye for economic reality yet and that does not see that they will have to repay this ballooning government debt. So, yes they will become the tenants of the baby boomers who after years of low interest on their assets, will own real estate with escalating rents.

So, with destabilizing levels of debt, I see lots of financial uncertainty on the horizon and an economic system with few tools left to encourage economic growth and the lowering of investment returns. To be protected, you must accumulate assets.  I heard a great statement by Porter Stansberry, the libertarian founder of wildly successful Stansberry Research:  The rich accumulate assets not income. So they don't pay income taxes. (I rephrased). Well, Millenniums set themselves up to become income earners rather than asset builders - even worse than their parents, the baby boomers. Ironically, many Canadian baby boomers have become suddenly wealthy in several parts of Canada due to the explosive real estate markets. However, by doing so, they have taken away the opportunity from their children to own a residence.  This world of ours is truly a strange place.

Friday, April 13, 2018

Time for a bull market in resources

Tech stocks are losing their leadership in this 9-year bull market (for now).  These days, many investors are scared and predict the end of the bull market. The fears from 2008 still linger and many are careful. If sentiment is a contrarian indicator, then I start to believe that this is still not the year that the U.S. stock bull market will end. Many economies are doing fine and other than a short trading panic, I'd say no real euphoric overvalued market exists. The Trump ‘Trade-wars’ have had a sobering effect on investors. Canada’s stock market is in a semi-bear market.  The pipeline dispute is coming to a head and I get more and more the feeling that Trans Mountain will be build.  Maybe, we get a modest bear market, say 20% down or so or a severe correction but too many things point in the right direction.
We may not like Trump right now, but when we look back he may be seen as a Ronald Reagan is seen today. He is a hardnosed but in the end he wants to make deals not kill world trade. He wants to get better deals for the U.S. and with many decades of trade deficits who can begrudge the U.S. trying to rebalance the books.  Trump may be unpredictable but isn’t that the tool of a good deal maker and poker player?  So, whether he is a dumb bully or one of America’s better presidents that may only be decided in the future.
If no major bear market, or only a mild one, then what will take over the leadership in the markets? Probably commodities. Commodities have been severely beaten down. A strong U.S. dollar may have made matters worse. Commodity based industries who suffered from too much money between 2000 and 2011, have done their penance and are today lean and mean.  Even gold miners start to focus more on profitability rather than production. The oil industry, gold and uranium mining or potash, they all have shaken down.  Oil supply is now falling short of a demand that increases 1 or 2 million barrels per day every year. Emerging economies are the main driver behind demand for energy and raw materials.  Why are emerging economies likely to create even more demand in the near future?  Because consumers in the big economies of Europe and North America are firing on 3 cylinders if not 4. Thus, lots of export opportunities for emerging markets.
No matter how gruesome the conflicts in the Middle East, they will not significantly affect the world’s recovering economies.  The rest of the world is becoming increasingly less dependent on Middle Eastern oil and so, there is less necessity for the U.S. and other world powers to interfere in that part of the world that seems to endless bicker and fight. I hate chemical warfare as much as the next guy. The Middle East though must first learn to love peace rather than being a bunch of feuding tribes or sects.  Russia keeps on meddling, thinking it is still a world power rather than a perpetual trouble maker. What does its meddling in U.S. politics and in the politics of many other countries achieve?  Only more economic sanctions.  What did the Krispal poisoning in England achieve?  If it was an act of Putin’s revenge, then Russia pays a very expensive diplomatic price and it will suffer even more economic sanctions.
Adding it all up, I see a world with $70 to $80-dollar oil and rising prices for many other commodities. Contrary to the CO2 scare, declining sun spot activity has the potential to create a ‘little ice-age' in the coming decade(s). This year we have one of the longest winters in a decade and we have a natural gas inventory that is at five-year lows. The U.S. is exporting more and more natural gas and also uses gas for increasing natural gas-powered electricity replacing coal and preparing for the electric car. I suspect that higher natural gas prices are here much sooner than many forecasters think.  So, that means an oil & gas industry firing on all cylinders may be just around the corner.  Rising energy prices are just as effective in slowing down economic growth than increased interest rates. My guess is that consequently interest rates will rising slower than many expect.
Once the hurdle of pipelines is behind us, the economy in Western Canada will be growing at a much higher pace. Real Estate will catch up and we will be confronted with skilled labor shortages because of all the oil and gas expertise that has been lost during this last down turn.  It won’t be so easy to recover from that. It looks like Alberta’s NDP has somewhat grown up. I hope that the Liberals sudden discovery of the importance of the Oil & Gas industry for Canada and the importance of all its other resource industries will not be a temporary lapse in ideology but rather a more pragmatic stance for the good of Canada.  If the Trans Mountain pipeline will finally be build as well as LNG facilities along B.C.s coast we will have a good economy and a resource industry that has learned the importance of environmentally responsibility.  It would be, at least for a while, a win-win arrangement.
For investors this means that it is time to switch our investment focus to resource economies.  Canada, Australia and S. America. In a world where China finally learns what it means to be an economic superpower. It does not only mean ‘me, me, me’. It means, open borders not only for trade out of China but also for the rest of the world to have access to Chinese markets. And, may we pray for less theft of and more respect for intellectual property?  It is the mind that creates prosperity not objects such as coal, iron or oil.  It is our thinking hat that creates value from these ingredients. Our brains create more efficient production with ever less input.  And protection of intellectual properties creates an incentive to always invent better and more efficient things. China and India with such huge populations should statistically have more engineers and inventors than anyone else.  But if people are not free; are not allowed to think critically about everything in their lives; If they are not able to enjoy the fruits of their novel and innovative thinking then innovation will suffer.  That is the real secret and yes, based on sheer numbers, the U.S. and Europe should not be the economic power houses they are and if countries such as China and India want to play their roles in this world they will have to ‘grow up’ in those aspects.
I think, it is time to invest in resources once again; I think it is time to invest in emerging markets again and maybe we create in the U.S. a soft landing rather than a full blast economic downturn. They were first out of the gate from the economic ruins of the Great 2008-2009 recession and they are at the highest risk of entering the coming downturn first.

Sunday, April 8, 2018

Why I am so angry with Personnel Planning companies such as “WTF’

For years now, I have tried to coach my friends, colleagues and peers in investing. I also try to do this on a larger scale through this blog. Via this blog, I may reach a larger number of people than just my immediate circle of influence, but the percentage of blog viewers actually paying heed to my drivel is probably minuscule. I myself benefit from expressing my opinions on investing as well. It improves my thinking and hopefully my investing performance which is something quite elusive.

Many of you have probably heard of the rule of 72. When you divide 72 by the rate of investment return you get the number of years it takes for that investment to double in value. So let’s say that your investment returns you 10% per year, then your investment money should double every 72/10 = 7.2 or rounded 7 years. Not bad, you may say. But here is the crux, there are 3 factors that impact those returns enormously.  Uno: your friend the government who sets your marginal or top tax rate. That is the tax you pay on the highest portion of your income.  Say you earn $40,000 per year from your job, then the investment returns you earn are placed on top of that $40,000 and taxed at your marginal tax rate for federal and provincial income taxes combined.  If you make $50,000 income you are not very far from the country's highest top income tax rates. Maybe you have to make $60,000 to be in the top tax bracket and then set your marginal tax rate at 50%.  Your government though, doesn’t ask you how much you made on a real return basis it includes inflation and doesn’t acknowledge at all that your earnings made on investment includes a significant amount of protection against lost purchasing power that year. If that isn’t as unfair as you can make taxes then what about RRSPs?
But lets get back on topic. On your investment income you typically pay 50% taxes. Your after-tax investment return is not 10%, it is now only 5%. You must have guessed by now what the number two  influencer is of your real after-tax investment return. Right, numero dos is inflation.  So, historically, we have 4% inflation and thus your real return on an after-tax and after inflation basis is your nominal return of 10% minus 50% of 10% taxes minus 4% inflation or 10 – 5 - 4% = 1 percent.
Then there is the third factor. What is there more? Yes you bet.  Numero tres! There is your ‘friend’, the banker, stock broker and financial planner. Especially the financial planner who sells you products on commission basis.  These ‘experts’ that work for mass marketing companies such as ‘WTF’ in the previous post, charge top commissions.  Not minimal commissions like the discount broker or the ‘modest' commissions (if you keep a close eye on your investments) charged by your full service broker but your ‘ friend’ the financial planner charges sky-high commissions. They sell at super high commissions plus super high hidden mutual fund MERs (mutual funds charge each year a Management Expense Ratio applied to total investment value) or worse segregated mutual funds (typically at an MER that is at least another ½ percent higher). These last commissions and MERs often add up to 2 or 3% per year, unlike the much lower ETF MERs which are often a fraction of a percentage point. So we were down with your 10% return being reduced to a real, after-tax return of 1% and now you have to pay out of that your ‘friend’ the commission-based mass marketing financial planner, and you end up with a negative return. Multi-level marketing operators like ‘WTF’ don’t care and neither do their inexperienced investment advisors.  The latter, recruited from a mass of naïve investors that just started out to learn about these things, they often don’t even realize how much damage they do to your investments.
That is it: Taxes, inflation and commissions those are the real threats to your portfolio performance. That and one of the most insidious ‘tax shelters’ your government offers you under the guise of ‘tax -advantaged retirement accounts’: RRSPs and RSPs. With RRSPs and RSPs you get taxed to the max whenever you withdraw money from them often at your top margin rate that may be a lot higher then when 30 years before,  you made your tax-deferred contribution (not counting forgone dividend and capital gains tax credits). Unless you keep your total retirement income at the absolute minimum you will pay those deferred taxes through the nose! Did you bargain for that? Even after saving all your life, this government is still ripping you off big time. Then that same government turns around and accuses you of being an evil tax avoider. The hypocrisy is just beyond believing.  The only tax shelter that does not take you to the cleaners and lets you keep all your profits to yourself is the TSFA and here, the defender of the middle class, Justin Trudeau, reduced your, already very modest contribution limit. God forbid, you are no longer dependent on the state! 
After learning this, do you still love Justin, or would you want Stephen Harper back (too late)? Harper who created the TSFA and increased its contribution level to a more meaningful $11,500 per year. Remember, one of the very first things young Trudeau did? Yes, he reduced that contribution as fast as he could. Next his buddy Morneau started an ‘upgraded’ taxation scheme to ripp off small business even further.  You know, a population does not get the government it wants, but the one it deserves (that is a very old and wise expression).
If you think that I am to hard on those commission driven financial planners, I hope this post makes you think again.