Investing Philosophy Updated for 2018

For the past 10 years, I was a strong proponent of dollar cost averaging. But our bull market will come to an end in this 4th turning.

As of this writing,  Bank of Canada rate is only 1.25%. In 7 months we expect it to be at 1.75%.  With historically low-interest rates housing prices have been increasing as it was easy for Canadians to afford more expensive homes than they should have. It also discouraged people from saving money in savings accounts and GICs in favor of riskier investments (Cannabis, Tesla, Facebook, Netflix). All of this has artificially stimulated the economy and created jobs but as with any intervention in an empirically complex system, it is not a simple cause and effect but a multiplicative chain of unanticipated effects.  Increases in government and household spending keep the masses from the pain of living beyond their means.

Still, at 1.75% there is no reason to panic.  But 5% by 2019, higher interest rates will have a series of multi-dimensional interactions the

1st order effects:

  1.  It will cost more to borrow: increasing your mortgage payment and increasing the number of people that can not get financing (an increase in the rate by 40%  would result in a 20% increase in people who can not get financing).
  2. There will be more incentive to pull out of riskier investments and earn sub-4% in a CDIC insured GIC

The 2nd order effects:

  1. Real estate prices will go down
  2. People will feel less rich

The 3rd order effects:

  1. Household spending and stock market investment decreases

The 4th order effects:

  1. Global equities will be down 20-40% from the maxima
  2. Consumer products more expensive due to inflation and depreciation of the Canadian dollar as the trade deficit widens

The 5th order effect would be a total trade-war, that will lead to a currency war which will transform everything.

Recommendations

  1. Prioritize building a scalable business. Only acquire business vehicle if it makes you more PROFIT than it costs.  Consider selling a business at its ATH.
  2. If you know which city you will be in for the next 10-years, buy a home no more than 4x your gross annual household income with no less than 30% down. If you don’t have 30%, either continue to rent or buy a home 2.5x your gross annual household income with 20% down.  If you put down significantly less and are worried about your monthly payments then considering selling now.  For 2018 $500K-$1M seems appropriate in Edmonton. Anything more will be more difficult to sell.
  3. After investing as much as you can in your business first, multi-tenant real estate (higher rental yields per square foot/unit) second, a paid-off house (third), then just collect money in GICs.  Just don’t upgrade your house and your car so that you need to work.
  4. Since only half the gain is taxed, and you can pay yourself tax-free dividends out of your Capital Dividend Account, capital gains are the most tax-efficient corporate passive investment. Even pre-crash there are distressed properties. In this example put down $100k on a $500k purchase price to avoid CMHC.  Put another $125k of labor and materials if you can sell it for $750K, thereby double your $125k investment.  If your transaction does not add value to a distressed property, then ensuring your income is twice your mortgage payment will hedge against any drops in value.
  5. Once your net worth exceeds $6 million CAD then consider setting up a trust.

Pre-­crisis Framework

  1. Cash in all your shares/mutual funds, the surplus real estate now at the ATH and protect the proceeds by CDIC protected by staggered GICs.
  2. Protect your Dunbar’s #  – You are the average of the 5 people you spend around with most, so choose your employers, staff, and friends carefully. Cut the bottom 50% over everyone you know out of your life for good. Double down on the top 50%. To be polarizing is a good problem to have. I lose bad contacts and obtain good ones.
  3. If you are young, skip school and exhaustively learn code online or a trade.

The future will belong to:

  1. People who are the best at what they do through 90%-doing & 10%-learning.  Hone useful skills that allow you to deliver a service/product that people want and you can create opportunity regardless of the economic environment. Switzerland’s strong apprenticeship system has made it the most competitive country 7 years in a row.
  2. People with money. Strive to save 90% of your income.  Buy your car using metrics for yourself and not prestige for others. (12.7% of Switzerland’s population has a net worth over $1M vs. 1.4% in Canada.)

Post­crisis Framework: “Buy when blood flows in the streets.”  – Freiherr von Rothschild

  1. Buy small-cap stocks and multi-tenant real estate after the market crashes.

Background of the 4th Turning

  1. Canada’s trade deficit increases to $2.7B!This further confirms what reports have been saying for years. Canada is losing its competitiveness
  2. Canadians are living beyond their means and accumulating too much debt (Canada has the highest household debt of the G7 and the ratio of federal debt to GDP is the deepest within the G7)
  3. High demand for imports means more jobs are going overseas.
  4. As our exports continue to decline so will the value of our currency which in turn contributes to already rising inflation which will compound the housing cycle which is already in progress.
  5. The Canadian government is now heavily based on the Keynesian map – the road taken for a risky strategy.  The Fraser Institute has shown in a study that the debt of the Federal level and the provinces have clearly increased again over the last eight years after a good eleven ­year period of the economy. If the total debt in the years 2007/08 was at around 834 billion USD.  On several years low, it has grown again since then. A debt for all jurisdictions of around 1300 billion USD is expected for 2015/16. This corresponds to a growth of 54%, with the increase in the Federal level alone being 34%.
  6. Canada and its provinces have paid interest totaling $ 61 billion in 2014/15, which accounted for 8.1% of total income.  The amount Canada pays in interest was only slightly smaller than what is spent on all primary and secondary schools throughout Canada.  The amount Canada pays in interest was greater than all the pension plans of the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP), which amounted to around 51 billion USD.  In the province with the highest debt, the interest payments this year are expected to be about three times the expenditure on health care and education.
  7. Other organizations such as the International Monetary Fund (IMF), the OECD, the rating agencies and the Bank of Canada have also warned that the indebtedness of the Canadian private households appears to be at a serious level, especially thanks to record interest rates. If this trend continues for a while, then a disruption of the interest rate is likely to be more serious.
Foreign demand for Alberta’s natural resources contributed to our current situation.  Canada’s abundance of natural resources has interesting side effects. The trickle-down of wealth erodes productivity and created a nation dependent on Alberta.  Adaptability and productivity stay low while increasing costs, inflation, and unemployment. While consumption in Canada continues to overtake production, we will continue this downward spiral. 

After 12+ years our blog is still the least influential financial blog on the internet, and our 100+ customers is a tiny fraction of millions of small business corporations in Canada.  We are not driven by money and popularity, rather we driven by legacy, greatness, and hyper-focused on adding value.

Advertisements