Why You Should Invest in Poland

Why You Should Invest in Poland

Back a couple of weeks ago, I pointed out how I believe returns in Canada and the United States will suck over the next decade. I’m combating this by paying off my mortgage instead of investing, mostly to please my wife.

I realize not everybody is in the same shoes as me. Some of you are very happy to carry a mortgage at today’s low interest rates, choosing to pay the minimum to maximize that sweet, sweet leverage. Hell, you’re okay with never paying the thing back, and I’m quite okay with this.

But at the same time, I think it’s silly to invest in most North American equities today. So instead, I’ll let you guys know about some alternatives I find to be pretty compelling.

First up is Poland. Here’s why you should invest in Poland.

Why Poland?

What am I supposed to do, not start with my favorite Polish joke?

Two Polish guys decide they’re going to get into business selling watermelons. They buy a hundred melons for a dollar each and then sell them for a dollar each. After the day is over and the two are counting their money, they realize they didn’t make anything. “I know our problem!” exclaims the first guy. “We need to sell more!”

Poland is probably best known for being Nazi Germany’s whipping boy in World War II, achieving its independence for all of 20 minutes before the Soviets took over. After a few decades of communism, the country moved to a capitalist system in the early 1990s.

Poland has joined the EU, but maintains its own currency, the Zloty. Yeah, I don’t know how to pronounce it either. It has carved out a bit of a niche as a low-cost producer of goods, exporting wares to Germany, France, and other richer countries. GDP growth has been pretty good, coming in at above 5% until recently, where it has dipped to between 2% and 3%. It was one of the few countries in Europe to post a positive GDP number in 2009.

The big reason why I’m excited about investing in Poland is its stock market is so damn cheap. The country’s stock market has a cyclically adjusted P/E ratio of just 8.6, meaning it trades at just 8.6 times its ten-year average earnings. The same ratios in North America are three times as high.

Shares of the largest companies on the Warsaw Stock Exchange also trade at an average of just 1.1 times book value. Canada and the United States trade at an average of 1.8 and 2.8 times book value, respectively.


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Over the last five years, the benchmark Polish stock index (abbreviated WIG) is up a little over 20%. The S&P 500 is up almost 90%. Over the last decade, the WIG is up 11% while the S&P 500 is up almost 70%.

We have a market that has underperformed and is cheap. That’s exactly why you should be interested in investing in Poland.

Interesting individual companies

I’ll just spend a little time on a couple individual companies that look interesting. Feel free to skip this part if you find individual Polish stocks far less delicious than Polish sausages.

  • Warsaw Stock Exchange trades at just 12.5 times trailing earnings, and should recover as investors buy more Polish stocks. Has a net cash position and pays a ~7% dividend.
  • Poland Energy Group trades at 8.5 times trailing earnings despite having a tough last year. It is borrowing aggressively to expand capacity, yet barely has any debt at all. Much less levered than North American utilities.

If you want to buy individual stocks from Poland, use Interactive Brokers. They’ll let you buy directly on the Warsaw Stock Exchange. Some of the bigger companies trade over the counter in the U.S. too.

Most of the big companies have financial reports in English as well. Not sure about the smaller ones.


The easier way for most people to invest in Poland is through ETFs.

The largest one is the iShares MSCI Poland Capped ETF (NYSE:EPOL). It trades at $17.88 with a market cap of $173 million. It has a dividend yield of 2.5% and average volume is more than 80,000 daily shares. It has a management expense ratio of 0.63%, which is a little high, but not alarmingly so. That’s what you’ll pay to passively invest in a place like Poland.

The ETF has 39 different holdings. The largest five positions, which are the country’s four largest banks and its largest energy company, make up about 42% of the fund.

And in an interesting side note, shares of the ETF trade at a 1.9% discount to their NAV. This doesn’t happen much with ETFs.

The other ETF

The other ETF choice for people wanting to invest in Poland is the Market Vectors Poland ETF (NYSE:PLND). I own the Russian version of this ETF.

It is much smaller than its main competitor, with a market cap of just $13.8 million. Liquidity is also much worse, with this ETF trading an average of just 2,000 shares a day.

As of right now, the management expense ratio on the fund is 0.6%, and is contracted to stay that low until 2017. However, it could easily rise at that point. According to the fund’s fact page, the gross expense ratio is 1.11% and 0.51% is being refunded to investors.

Many of the same banks dominate the top holdings, with a mining company thrown in because hey, why not? The top five holdings consist of about 35% of the fund, and the total number of holdings is 25. The dividend yield is better, coming in at 3.2%.

Of note, there are also emerging markets ETFs that will give one a small exposure to Poland as well as other cheap markets. They might be worth a look as well.

Weekly Linkfest: Edition #1

Weekly Linkfest: Edition #1

Sorry kids, I’ve retired the Sunday Morning Link Dump. May it forever rest in scantily clad peace.

Instead, allow me to do something that’s going to be a lot easier–at least for me. I’ll continue to feature stuff I think you guys will like, from a number of finance blogs, traditional media sources, and maybe even my tweets. We’ll start out with a little something that’s on my mind, just like before. We’ll just skip all that stuff in the middle.

So without further adieu, let’s get to it. Here are the things I liked this week.

1. Toronto Life Magazine, which regularly profiles terrible real estate deals like the one I made fun of on Thursday, isn’t just all about the housing bubble. They also did a profile on Kevin O’Leary I thought was pretty good, even if the writer clearly went into the article despising the guy.

2. Over at Money Nomad, a guest contributor told the story about buying 98 acres of land for just $14,000 in Georgia. No, not that Georgia. The country.

3. Vanessa pointed out how being a solopreneur sucks more than the unnamed person who once gave me a chunk of concrete from his basement as a “gift.” I 100% swear it happened and he was serious about it.

4. Over at the Vox Youtube channel, there’s a detailed explanation of why you shouldn’t drive slowly in the left lane. Please forward to all of your fathers who do 111 km/hr and get mad when everyone passes them.

5. The Financial Canadian points out that there’s a pretty simple path to becoming a millionaire. You start young, save a bunch, and you’ll get there. It’s simple advice maybe, but it’s still an important reminder.

6. Liquid Independence made an investment in a not yet publicly traded online music player. I’m not exactly sure what it has going for it over all the other alternatives, but hey. It’s still a pretty interesting story.

7. Moneygeek, a blog I continue to think is criminally underfollowed, talked about what it was like to work for a hedge fund. Did his boss used to throw phones at him like Jim Cramer used to do when he ran his hedge fund? Click through to find out.

8. Boomer and Echo argues the rule of thumb saying a retiree will need 70% of their final pay is likely way too high, with some people only needing 35-40%. I think he’s onto something.

9. Nick Denton, the owner of the recently shut down Gawker, did a bunch of questionable things to avoid taxes, like a lot of other rich guys. The fun part is how Gawker writers used to get upset about other companies doing the same thing. Ah, hypocrisy.

10. If you’re on Reddit and you’re not following r/PFJerk, you’re doing Reddit wrong. If you’ve ever thought us PF folk go a little nuts sometimes, you’ll think it’s hilarious.

The best of Nelson

I write stuff for other websites too. Here’s a few samples.

1. I wrote about the latest goings on at Home Capital Group, which is always good for a chuckle. Never change guys.

2. I talked about some mutual funds that are well worth their fees over at Sustainable Personal Finance.

3. And over at the Lowest Rates blog, I gave some tips on how to make the most out of your credit card rewards.

Just a reminder, I am available for hire to appear on your blog. Contact me to get started. 

Tweet of the week

What am I supposed to do, not include this?

Have a good week, everyone.

No, These Millennials Didn’t Get Rich By Avoiding Homeownership

No, These Millennials Didn’t Get Rich By Avoiding Homeownership

Y’all probably heard about Kristy Shen and Bryce Leung, the 30-something couple that turned the Canadian PF world all atwitter when the CBC profiled them and their $1 million portfolio.

In case you didn’t read the story, here’s the one two paragraph summary. The couple got rich and then retired at 30 or some other ridiculous age. They’re currently doing the same thing many others in their shoes do–travel and start a blog profiling how great their lives are. They’re convinced avoiding home ownership was the key to amassing such a large portfolio.

Instead, the couple put their cash at work investing with noted housing bear Garth Turner, putting their $500,000 nest egg into a 60/40 stock/bond allocation back in 2010. By late-2014, the portfolio had doubled to $1 million. So they quit their stressful (and high-paying) tech jobs, preferring to, I dunno, watch the sunset. Or whatever it is people do who don’t have jobs. Yell at teens, maybe.

Anyhoo, it turns out the couple is very wrong. Avoiding home ownership didn’t make them richer. If anything, it made them poorer.

A deeper analysis

Let’s review what we know about the couple their own financial advisor called “tireless self-promoters and reasonably irritating juvenile 1%-ers.”

  • They saved up $500,000 by 2010
  • They continued to save large amounts from their well-paying jobs up until the end of 2014
  • They had a reasonably conservative portfolio

Let’s use a compound interest calculator to make a reasonable assumption of their portfolio. I used a $500,000 starting balance, a $50,000 additional contribution, five years of growth, and 8% annual return. Here are the results:

Eh, close enough

Remember, Turner even remarked just how well the two saved, so I think I’m being a little generous on the return. I’d suspect their actual rate of return was much lower and it was supplemented by a higher savings rate.

Now let’s make another assumption. Say they bought an average Toronto house in 2010. Instead of putting their $500,000 down on the house, they put down a measly $250,000, investing the rest.

First, let’s figure out the return on the house. The median price on a property in Toronto was $367,750 in June, 2010. The same property could have been sold for $587,505 back in November, 2014.

Thus, the couple could have turned $250,000 into a gross profit of $219,755. We’ll round that down to $200,000 for expenses like paying a Realtor to sell the place, taxes, and so on. Other costs like the mortgage would have been quite low, since they would only have borrowed just over $100,000. And knowing them, they probably would have done something smart like renting the basement.

We’re up to $450,000 in capital, a good start. But what about the other $250,000, plus the $50,000 added to the pile each year?

Glad you asked. Here’s the results of that:

compound 2

Add the two together and we get a nest egg of $1.13 million, a full $80,000 more. Or, if you want to look at it another way, they would have ended up approximately 8% richer had they bought a house and then sold it a couple of years ago. They’d be even richer if they had held on until today.



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This is why they’re rich

As the story gained traction, an important detail began to emerge. Back when they worked, Shen and Leung worked really hard. They did the stereotypical tech thing of basically sleeping at their desks. Additionally, they were both in jobs that paid a lot of money. Both made over $100,000 per year for their whole working lives.

Unlike many of their peers, they were smart about it. After realizing they didn’t spend much time at home, they got the cheapest accommodations possible. Why splurge when you’re never there? They were similarly cheap in other aspects of their lives too.

This story sounds familiar, because it’s literally the story of every early retiree. They all worked hard (usually in tech), lived cheaply, had a spouse on board with the plan, and eventually saved up enough cash to say sayonara to working, maybe forever.

The key to their success doesn’t come from investing. It doesn’t come from cashing out stock options. And it especially doesn’t come from avoiding home ownership. It’s all about saving. A high savings rate is 99% of the reason why these people are rich, Shen and Leung included.

There is a simple sauce for retiring early, and it has very little to do with homeownership. As long as you can save aggressively and not shoot yourself in the foot, you’ll make it there.

Toronto Real Estate Is Nuts: Edition 5,028

Toronto Real Estate Is Nuts: Edition 5,028

Over the years, I’ve said plenty about overvalued real estate in Canada, especially in Toronto and Vancouver.

In a post some said was my finest ever (thanks, three readers!), I wrote a whole bunch of words about how Canadian real estate is way, way, way overvalued. That was in 2013, which is almost long enough ago that even if I end up being right, I was early enough my prediction shouldn’t really count.

I also told people how to short real estate using options, or how to indirectly short the market by buying related companies. I also wrote about how I tried to short the market and how it didn’t exactly work that well.

So instead I just hang out on the sidelines, rubbing my hands together in anticipated glee, just waiting to laugh at you suckers who bought at the top of the market. I take breaks to twirl my evil moustache and laugh menacingly.

I sometimes wish for a perfect real life example of how dangerous investing in Toronto real estate is. I think I found it. Take it away, Toronto Life magazine.

The seller had lived in the (2 bedroom on an impressively leafy lot) house for 40 years. A neighbour approached him in early summer about buying the place and renting it back to him, but the deal fell through. The seller’s interest was piqued, though: he saw an opportunity to make money without moving. He found an agent willing to market the house as an investment property.

I have never met this seller, but I immediately like him a full 162% more than most of my relatives.

The buyer, who is a real estate agent, was completely on board with the seller’s plan. She agreed to rent it back to him for a minimum of 5 years, for $2,500 a month. The seller will pay for his own maintenance and utilities.

Of course it’s a real estate agent. Those people are the best at putting all their eggs in one basket. Okay, how much did he get for the place?

The house was shown about half a dozen times, but the agent investor moved the fastest. The seller accepted her offer, for $77,000 under asking.

By the numbers:

  • $912,000
  • $3673.78 in taxes (2016)
  • 880 square feet
  • 35 days on MLS
  • 2 bedrooms
  • 1 bathroom

Let’s take a minute to just soak in the fact a house with 880 square feet of living space costs close to a decent middle class retirement. I just paid less than $200,000 for pretty much the same thing. I’m not saying you should leave Toronto and never come back, but…

Oh wait. I did say that.

Now onto the good stuff. How much money is the buyer making off this thing?

Some assumptions:

  • Total cost of $925,965 thanks to Toronto’s land transfer tax
  • Mortgage of $729,600
  • Down payment of $196,395
  • Mortgage rate of 2.59%, five-year fixed, 25-year amortization
  • Mortgage payment of $3,306.28
  • Mortgage interest of ~$1,500 per month
  • Maintenance of zero, property management of zero
  • Taxes stay at $3,673
  • House insurance of $3,000
  • Rent of $30,000

First, let’s look at our nice Realtor’s return based on the entire investment, including having to pay the land transfer tax.

Income: $30,000
Expenses (including mortgage payments): $46,345.00
Cash flow: (16,345.00)
Cap rate: LOL%

Now we’ll just look at mortgage interest instead of a whole mortgage payment. This goes down over time, of course, but we’ll assume $1,500 for the first couple of years.

Income: $30,000
Expenses: $24,673
Cash flow: $5,327
Cap rate: 0.57%

And finally, a return on capital.

Income: $30,000
Expenses: $24,673
Cash flow: $5,327
Down payment: $196,395
Return on capital: 2.7%

Just yesterday I did a post on Oaken Financial GICs which pay a 2.75% interest rate. You could make more money just doing that than taking on all the risk and added work of trying to manage a rental.

So there you have it. All you need to do to match the return offered by a GIC is leverage your money five times over and buy a house in Toronto’s crazy-overvalued real estate market. Please don’t. Seriously, I’m begging you. This won’t end well.

Product Review: Oaken Financial GICs

Product Review: Oaken Financial GICs

Because hey, even though GICs yields approximately 0.0009%, maybe some of you want to buy them.

Remember back in the day when you used to be able to get upwards of 4% (GASP!) on GICs? Pepperidge Farms does. And so does your boy Nelly. But that ain’t going to help you today.

If you’re like 85% of the country and have an account with an EVIL big five bank, you’re looking at some pretty craptastic GIC rates. On a five year GIC, which have the best rates, CIBC offers 1.25%, Bank of Nova Scotia, TD Bank and Bank of Montreal offer 1.5%, and Royal Bank leads with a 1.6% rate. SUCH GENEROSITY.

Fortunately, it isn’t very hard to do a lot better than that. Getting in excess of 2% isn’t hard, and it’s even possible to find five year GICs that pay more than 2.5% annually. Now we’re talking.

You might scoff at the difference between 1.5% and 2.5%, but it actually matters. The difference per $10,000 invested is $100 per year. That doesn’t seem like much, but that’s because you’re looking at it all wrong. $250 per year is 66.6% more than $150 per year.

This is an important lesson to learn about finance. Banks know most people don’t care about halves of percents. But they can really make a difference, especially in a low interest rate world.

Oaken Financial, meanwhile, doesn’t screw around with stuff like that. It has carved out a niche in the market by giving the highest GIC rates out there, including a whopping 2.75% on a five year GIC. Let’s take a closer look and see whether this is a good spot for your fixed income cash.

How do they do it?

Like many of the other companies offering high-yield GICs, Oaken Financial doesn’t have much for physical locations. So it keeps its costs down that way.

Oaken is a subsidiary of Home Trust, which is then a subsidiary of Home Capital Group, Canada’s largest alternative (read: crappy credit) mortgage lender. It’s a big company with some $25 billion in assets, most of which is lent out against houses in the Toronto area.

When a bank lends to people with crummy credit, they can charge more. That’s why my latest car loan was 700% a week. When borrowers are charged more, a lender can afford to pay more for capital and still be okay.

This works until it doesn’t. If something happens to bring down the whole housing market (especially in Toronto), Home Capital is in trouble. I’ve previously mentioned how I think Home Capital is screwed if the bubble pops.

EQ Bank–which has a high-interest savings account that keeps paying less interest–works in much the same way.

As a GIC holder, the riskiness of the underlying loans should be of little concern to you. Oaken is CDIC insured, which means the federal government guarantees all deposits up to $100,000. I wouldn’t be too worried with anything above that either, since it would be very unpopular politically if the government let deposit holders get hurt if the bank went down.

And most people can easily increase the CDIC amount to $200,000 by having one GIC themselves and putting another in their spouse’s name.

Sorry, single people.

The process

There are several ways you can get an Oaken Financial GIC.

The easiest would be to go to one of their locations in Calgary, Vancouver, Toronto, or Halifax. These are all located right downtown near public transport, so there’s really no excuse for not going to visit. Tell them Nelson sent you just to see the confused look upon their faces.

You can also phone or email them to walk you through the process.

You can deal with an Oaken-approved mortgage broker. They’ll have you complete a simple form, make out a cheque to Oaken, and send off the package for you. They get a small commission for doing so.

The easiest way to do it is online on the company’s website. I filled out the form in less than five minutes. It was quick and painless. Note the only way to send your money to them is via cheque, but they can direct deposit after that.

Other things to know

The most important thing to know about Oaken Financial’s GICs is the difficulty of getting out. You have to show the company proof of financial hardship (or, I kid you not, death) to get out of a GIC early, rather than just paying a penalty like with a normal bank. Cashable GICs exist, but they max out at a rate of 1.85%.

From the company’s referral website for mortgage brokers:

oaken early redemption

And if you’re going to do that, maybe the better option would be to just stick the cash in the Oaken Financial high-yield savings account which yields 1.75%.

You can choose to get paid interest annually, semi-annually, or monthly. Note that you’ll forfeit a little interest if you choose a semi-annual or monthly payment option (2.75% to 2.7% to 2.65%).

I’ve also heard reports of things taking a little while when Oaken does get an application. Each one is delivered to the Toronto office where it’s overlooked by employees, so it’s nothing to be alarmed about. Just remember if you do use them it takes a little bit of time.

Should you do it?

There’s really only one disadvantage to using Oaken Financial, and that’s the lack of redemption privileges. There are ways around that, like signing up for a one year, 18 month, or two year term, but those have lower rates of 2.05%, 2.25%, and 2.40%, respectively. So you’ll give up a little bit for increased flexibility.

Overall I’d say its products are pretty comparable to its peers’. As long as you’re cool with committing to the whole term of your GIC, I say you might as well use Oaken.