When I first started investing back in 2003 or so, I was obsessed with buying companies trading under book value. Like most obsessions, this one wasn’t healthy.
Book value, for those of you unaware, is one of the simplest financial ratios out there. If a company’s share price was under the net worth of that enterprise, it traded under book value. Buying $1 worth of assets for 75 cents seems like a pretty easy way to make money, especially if those assets historically traded for $2. All I needed to do was repeat this process a few dozen times and I’d be RICH, BABY.
Alas, it turns out investing is much harder than that. Who coulda thunk it?
These days, book value only enters the equation as a secondary ratio when I’m doing analysis. It turns out there are lots of reasons why it’s not the greatest. Asset values can go down, and companies are not excited to admit this. The logical conclusion to this is obvious; assets that really should be impaired remain fully valued on the balance sheet, giving investors the illusion they’re still worth the full amount.
(Note that book value is still useful when looking at some sectors, like REITs and financial stocks. It’s not a completely valueless ratio)
Intangible assets make up the majority of value when looking at a company’s balance sheet today. Pepsi is a great example. Much of that company’s value lies in its brands. People like Pepsi, Lays chips, Quaker oatmeal, Tropicana orange juice, and so on. Because they like those brands, they’re going to keep on buying them. Both those attributes have value, just like a piece of real estate. But unlike physical property, you can’t easily value them. Intangible assets will always be trickier to value.
How about your own balance sheet?
We’re taught that net worth has a very simple definition.
Assets – Liabilities = Net Worth
Both categories only include tangible items. Stocks. Real Estate. Debt. Note the absence of intangible items. Hell, the next net worth statement I see with intangible items on it will be the first.
But I’m becoming more and more convinced this is the wrong way to go about it. Let’s use getting a college education as an example. As much as I’m anti-college, I’m also the first to admit the statistics are right. People who go to college and graduate tend to enjoy much higher earning power. Let’s say the average university graduate earns $1 million more in their life versus the average high school grad. Sure, there are some duds who took gender studies in there, but they’re cancelled out by all the finance and engineering folk.
Now let’s imagine the net worth statement of a recent college grad. Assets likely are pretty close to zero. Liabilities are through the roof, thanks to all the debt taken on to fund the degree. We’re left with a negative net worth and a recent grad hopefully super motivated to get that ratio back to positive.
This isn’t entirely accurate, however. That debt wasn’t acquired for shits and giggles. It exists because becoming proficient in a topic is profitable. That knowledge is clearly worth something, yet it’s never put onto a net worth statement. Why is that?
There’s one very simple reason why not. Like the value of Pepsi’s brands, it’s tough to figure out. There are also a million variables that could impact the value of that intangible asset over time too. Is a degree really so valuable if you plan to drop out of the workforce in five years to start pushing out babies? Or because you want to work 15 years and then retire early? Degrees are still worth something to these folks, but perhaps not as much versus someone who plans to use their degree for 40 years.
One could argue the benefits of the college degree end up on your net worth statement anyway, thanks to the increased income it provides. Okay, fine. I’ll allow that. But what about other intangible assets? Unless you’re a weirdo hermit living in your mother’s basement (THAT’S ME, BABY!), you know people. Those relationships have value. They could lead to a lucrative new job or a business opportunity. It’s the same thing with your family. I know a kid whose family is worth anywhere from $20 to $50 million. His last name absolutely opens doors for him. Why shouldn’t he be allowed to put that value on his own balance sheet?
The bottom line
I admit this becomes a slippery slope very quickly. It also opens up all sorts of uncomfortable questions about privilege and whatnot. And to be completely honest, I think allowing people to put intangible assets on their net worth statements is a bad idea. The average person overvalues the hell out of everything they own. They’ll do the same with their university degree and contacts.
But at the same time, these intangible assets are hardly worthless. They’re definitely worth something, even if it’s hard to value. They shouldn’t be immediately valued at nothing. Keep this in mind while paying off your college loans and it’ll make that journey a little better. It might even cure someone of the “student loans must be paid off at all costs” mentality.
Lending Loop works something like this. Businesses need money, but banks are notoriously stingy when lending to small business. They want things like personal guarantees and collateral and whatnot. You can’t blame them. Why lend to small business when there are large businesses and potential homeowners who want the cash instead?
It’s tough for small businesses to get funding. They’re often forced to do creative things like hitting up their local private mortgage lender. I’ve done quite a few deals over the years where someone will borrow against their house and put the money into the business.
Lending Loop saw this problem and created a solution. It’s Canada’s first true peer-to-peer lender, connecting small businesses with investors who are looking for yield. Loans yield anywhere from 8% all the way to over 20%, with most businesses paying double-digit gross yields. The company grades each loan from A+ (the keeners) to D (the class clowns), with interest rates going up as the rating goes down.
I first wrote this Lending Loop review in late 2016, right after the service opened back up (it ran into some regulatory problems, mostly because it was so new and the powers to be didn’t really know what to do). Let’s take a closer look at how the service works and how things have changed in last couple years.
The first step is signing up for an account. It wasn’t a cumbersome experience. It took maybe five minutes of my time, although I just skimmed some of the small print. GASP DON’T TELL THE CHILDREN.
You also have to fill out an investor profile. My risk tolerance is VERY AGGRESSIVE because I’m a badass who lit four buildings on fire before breakfast. THE RUSH, BABY.
The next step is funding your account. All you need to do is give it your account info (found on any cheque), and you’re in business. The money took nearly a week to get from my account to the point where I could lend it out, which I thought was a little much. This is a very minor quibble, though.
When I first started lending to small businesses via Lending Loop, the pickings were pretty slim. Borrowers were more popular than an actual woman in a chat room. That joke wasn’t even funny 20 years ago!
Things are much different now. There are currently more than a dozen different loans available to fund in the marketplace, with more showing up most every day.
Lending Loop posts certain information about the business including a little story, the financials, any collateral pledged to cover the loan, and a Q&A section where investors can ask management questions. They’re not obligated to answer questions, but most make at least a token effort to alleviate any potential concerns. Note that companies with collateral pledged against their loans tend to pay much lower rates.
You have to put a minimum of $25 into a loan and invest $200 into the service to get started. These are extremely reasonable numbers. You can also send up an auto-lend feature, which puts a set amount into each loan that shows up on the marketplace. It’s kind of like index investing, in a way.
Lending Loop does take some fees, but they’re not excessive. They take 3.5% off the value of the loan as their cut. So if a business is looking for $50,000, they’re getting $48,250. They also take 1.5% of the interest as a charge for processing the loan. So an 18% interest rate nets out to 16.5% for the borrower.
Note that you have to pay taxes on your gains. Lending Loop makes this easy, automatically sending you the tax slips each February.
How is my investment doing?
I recently took a few minutes to scrutinize my Lending Loop portfolio, as well as putting some cash back to work, and I was pleasantly surprised at the results.
First, the bad news. One of the original five loans I made back in 2016 has defaulted. The borrower still owes approximately 2/3rds of the amount financed. Lending Loop has made efforts to collect, but as the old expression goes you can’t draw blood out of a vampire, even one of those sexy True Blood ones. Fortunately, the business is only a few hour drive away, so in theory I could go and break the guy’s kneecaps.
Wait. I’m being told by my lawyer to tell y’all that breaking kneecaps is a very bad idea and should not be attempted. AW COME ON MAN IT FEELS SO GOOD.
The rest of my portfolio is performing fine. In fact, I even had a couple of loans that have paid me out completely. My five note portfolio has now expanded to eight different names.
All these details are fine and good, but you ANIMALS care only about one thing — just how much money I’ve made. Okay, jeez. I’ll tell you.
In just under two years, my investment is up 18%. That works out to a little more than 9% a year, which includes one of my original loans going straight to hell. Also I haven’t been meticulous in checking my account, meaning I had cash to reinvest that didn’t happen immediately. If I would have done that, I’m confident my Lending Loop portfolio would have returned at least 10% a year, which meets my long-term compounding expectations. Not bad.
In fact, I’ve just transferred more money to Lending Loop. It’s still a very small part of my portfolio, but I’m satisfied enough to give it more importance.
The bottom line
When I first did this Lending Loop review, I thought the service had potential. I was just a little nervous about how things would work out. There would be risks to each individual loan; that much is obvious. I was more concerned about the nature of the business. Would it last? Would businesses sign up?
Lending Loop has exceeded my expectations. It’s a great way to invest without putting your cash in the stock market, and my personal returns have been solid. I hope it sticks around for decades.
$25 Sign-up Bonus!
Sign up for Lending Loop today and we’ll both receive a $25 sign-up bonus once your account hits $1,500.
Back in the day, when Italics Man was nothing but a glimmer of my imagination, I did a series of articles answering y’all’s DEEP PRESSING QUESTIONS about how to invest in certain emerging market countries with potential. Or I did it for the SEO. Both of these reasons are equally important.
Here are some of them. Feel free to LOL at the Turkey one, since that’s turned out to be a goddamned disaster.
One criticism I never got but a lot of you probably voiced silently in your heads was the risk of investing in a single emerging market. Russia and Turkey had crazy guy in charge risks, which will always make foreign investment in a country dangerous. Sure, you and I buying some random ETF aren’t really making a direct investment, but the result ends up the same if the crazy guy stops giving preferential treatment to foreigners doing business in a country.
Then there’s the additional risk of investors simultaneously hating all emerging market stocks, something that comes around every 5-10 years. All of a sudden investors wake up to the fact that nations like Brazil and China aren’t all sunshine, lollipops and blowjobs. This bearishness lasts anywhere from a few months to a year, then things recover, and everyone lives happily ever after again.
Let’s take a closer look at a couple of emerging market ETFs that I’m considering buying.
I sure am committing to this joke, huh?
Why does a guy with a dividend investing site need to buy an emerging markets ETF? Why not buy the stocks directly? Or buy Canadian stocks with emerging market exposure?
This is an actual great point, Italics Man. I still hate your face, though.
I don’t have a face, moron.
First off, I did buy a couple of stocks that have emerging markets exposure. They’re Bank of Nova Scotia (which has a bunch of assets in Central and South America) and Polaris Infrastructure, which owns a geothermal power plant in Nicaragua. I have a few others on my watchlist, too, like some of the airport operators. Airports are a fantastic business.
Most of the emerging markets stocks in Canada are gold miners or oil producers with assets in some far-flung nation. I try to avoid all resource stocks now, so buying them is out of the question. There are many more that trade on the NYSE, but it’s much more difficult to research these. I know the banking sector in Canada intimately. I couldn’t tell you much about the sector in Chile.
In short, it’s just easier to get my exposure via ETFs. And since most emerging markets have been whacked, I don’t have to pick individual ones. I can start nibbling at broad indexes covering vast portions of the earth.
Like the Vanguard FTSE Emerging Markets ETF (TSX:VEE), which is down nearly 4% in the last month and is only up a little more than 1% over the last year. It has a management expense ratio of just 0.23% and it pays a nice dividend of approximately 2%.
The bad news? It’s a China-heavy fund. Nearly 35% of assets are invested in China with an additional 14% invested in Taiwan. It’s almost like a single-country ETF in disguise.
The iShares Core MSCI Emerging Markets ETF (TSX:XEC) only has 28% China exposure, and Taiwan’s share of assets is 12%. It also has a decent portion of its assets invested in South Korea. It charges a slightly higher management fee (0.28%) and offers a dividend yield of approximately 1%.
The Fund I’d Choose
The main problem with most of these emerging markets ETFs is they’re cap weighted. This means they own most of the largest companies. These companies are mostly Chinese. Hence, we get a large amount of exposure to China.
The Schwab Fundamental Emerging Markets ETF (NYSE:FNDE) might be the best solution. It still has about 20% of its assets in China, which is a much more reasonable number. It pays a 2.8% trailing dividend and the portfolio as a whole seems to be pretty fairly valued. Morningstar says the portfolio trades at approximately 8x forward earnings and slightly under book value. Finally, it’s a large ETF with more than 300,000 shares trading hands daily. Those are the kinds of metrics I like to see.
The only real downfall? It trades in U.S. Dollars. There’s a cost to doing that conversion for Canadian investors.
I know the whole point of ETFs is to avoid the bias of picking certain stocks or countries, but China gives me ulcers. There is a lot of stuff to worry about. If China continues to show weakness, the Schwab fund should outperform its peers. And if China keeps on trucking, FNDE will still go along for the ride.
I know someone who recently lost the diamond in her engagement ring. After about eight hot seconds of looking — the phrase needle in a haystack seems apt here — she declared the stone lost forever and her life over. Her husband (the nicest guy in the world, btw) was going to beat her like Chris Brown after losing at an awards show. Topical!
This did not happen, of course. Instead he bought her a gigantic new engagement ring to symbolize their more secure financial status. The ring cost $2,500 on sale at some jewelry store. She loved it so buddy forked over the cash. Hopefully he got laid that night.
One of the major selling points for this ring was the jeweler’s appraisal that came with it. According to this IRON-CLAD CONTRACT, this ring had $6,100 worth of gold and diamonds on it. Confident they were getting a deal, our story’s heroes emerged from that jewelry store with the assumption they were somehow richer from the experience. What a fantastic marketing job by this store. I want to buy them all medals.
Anyway, here’s why that appraisal (and every other jewelry appraisal) is a giant scam.
The business of jewelry
Buying jewelry is kind of like buying underwear. Very few people are going to buy it used no matter what the deal is.
Which is a real shame, really. 50% of marriages end in divorce. Even some happily married couples are forced to hock the family jewels for pennies on the dollar to make rent money or buy diapers for their whiny offspring. Nobody can argue jewelry is a necessity, meaning it’s the first thing sold when the going gets tough. Put all of these factors together and the conclusion is obvious — there’s a lot of supply out there. Demand? Not so much.
Who exactly is going to pay appraised value for a diamond? Nobody. If you’re one of the few women who would ever wear second-hand jewelry, you want a reason to do so. It’s only logical. If you can’t save significant cash buying used, why even bother? It’s the entire reason anyone buys anything used.
Think back to the original story for a second. If that ring was really worth $6,100, why was it on sale for $2,500? Why wouldn’t the jeweler sell it for much closer to appraised value? Why wouldn’t they take the stones off and use them in other pieces?
FWIW, my guess is that piece was purchased, returned, and then the store blew it out. The ring looked brand new and the people buying it never thought to ask whether it was used or not. It’s probably better not to ask.
The true test of value
Let’s look at the bigger picture here for a second. What exactly determines the value of an object, house. investment, or your body? Don’t answer that last one. Financial Uproar is a 100% hooker free space and we’d like to keep it that way, thanks.
Come on, Italics Man. Even you can do better.
I don’t even exist, you moron.
What determines the value of anything is pretty simple, really. Something is worth what someone will pay and not a nickel more.
In theory, this is a fine hypothesis. Things get a little trickier in the real world though. Say you’re selling your house. Your Realtor comes by and says the place is worth $500,000. Congrats, baller. The market seems pretty efficient, so you accept this explanation.
But what if there was a non-zero percent chance you could convince somebody to pay $525,000? Or $550,000? Would it be worth it to price your house accordingly? These are the kinds of questions every home owner struggles with at some point. After all, it takes just one person to pay a wildly inflated price to make it worthwhile. And if one person would pay $550,000, what are the odds of that person finding your listing and slapping down the cash?
The opposite can happen, too. An impatient seller takes $450,000 because they want out now, dammit. Is the house worth $500 large still? Or has the value magically dropped to $450,000? I certainly don’t think so; this is why I increased the value of my house on my net worth statement a full 14 seconds after buying it. An efficient market often takes time, especially in big ticket items like houses.
The bottom line
Appraisals are just some guy’s opinion of value. Take them all with a grain of salt. Jewelry appraisals are especially suspect. No, you’re not selling your ring for more than what you paid for it.
(Blows off the layers upon layers of cobwebs)
(Starts to slowly clean up the rubble that used to be a prominent personal finance blog)
(It’s moving, but only barely)
(Oh my. What could it possibly be?)
You tried to kill me, but you couldn’t. I’ll never die.
OH GODDAMMIT IT ITALICS MAN.
So I guess I’m wading back into this whole PF blogging thingamajig. I know I said I’d go away forever and there was no place for my particular kind of finance commentary (92 dick jokes attempting to make a coherent point about something), but time (and quitting meth) has helped me come up with an interesting new business plan. I’m still hatching out the deets so I won’t say too much. Let’s just say it totally doesn’t involve me coming to all of y’all’s houses and stealing $20 from your wallet. At least not anymore.
It’s going to be lit. Do the kids still say lit? (Texts the only 18-year-old who will talk to me) He says if I don’t stop contacting him he’ll call the cops. Bummer.
Let’s talk a little about a personal finance mistake I may have made recently — paying off my house so damn aggressively.
Here’s the deal. It costs a surprising amount of money each month to live in a house you own. I still have to pay the stupid water bill and the electric to keep the A/C on 24/7. What? I refuse to take off one of my three sweaters. Then there’s the house insurance, the property taxes, the constant small improvements/fixes that keep popping up, and a billion other expenses. I own a ladder now. Why? Damned if I know. The only thing that scares me more than heights is the shower. YOU CAN’T MAKE ME GO IN THERE.
It costs about $700 a month to live in my paid off house, a figure that doesn’t factor in a nickel for house maintenance. That is more than I anticipated, to say the least. And I’ve got at least $1000 worth of upgrades planned in the next few months.
We figure if we’re patient we can get a decent place to live for $1000 all-in. A super-nice apartment at our former building is up for $1400, a figure that includes power, heat, water, and internet.
Let’s assume we throw up our hands and rent that place. On the surface, it would cost $600 more per month, or $7,200 per year. That’s bad.
But I can get access to $200,000 worth of capital by selling my house. If I invest that money and get just a 4% return, I’ll gain $8,000 per year. If I can do better than 4%, it makes all sorts of sense to free up that equity. That’s good.
At this point the only thing stopping me is laziness. $1400 per month is a little steep for my tastes, too. Note that if we settled and rented an $800/month apartment (there are probably a dozen of these available at any one time in town) we’d be miles ahead of the game. The problem is the $800/month apartments don’t have the kind of amenities we’re used to. Also, they’re cursed. Yep. Built on ancient Indian burial grounds. That’s bad.
That’s right. I’m one of those guys now. Someone who needs a dishwasher and stuff. Italics man would kick my ass if he actually, y’know, existed.
Hot damn is the Globe and Mail Financial Facelift series bad. I could almost do a recurring post every week making fun of it. It’s just the same thing every week. Can this couple who has clearly never read a personal finance or early retirement blog hang up their proverbial skates with juuuuuuust $1.4 million in the bank? You’ll never guess what our generic financial planner has to say!
Yeah, that’s right. I like gifs now. Just in time for them to fade into obscurity.
Also anyone who makes fun of Financial Facelifts is copying me.
Is it just me, or is every damn financial blog littered to death with ads? I understand my peers are happy RBC and BMO are taking them seriously, but enough with the 14 different reminders to sign up for the newest Johnny Come Lately roboadvisor.
The wife and I went to China in May. It was bananas. China might be the most interesting place I’ve ever been. I simultaneously loved and hated the place. It’s crowded as hell, noisy, dirty, and many of the citizens lack the basic respect given to each other that is so prevalent in the other parts of Asia I’ve visited. There’s also plenty of poverty. It’s everywhere.
At the same time, you’ve got to hand it to the government there. They truly are the next upcoming superpower. They’re hungry too. North Americans are too comfortable. The Chinese want desperately to be taken seriously. They’ll easily surpass us in 50 years. Hell, it might even be 20 years.
I kinda want to move there until I hear some of the horror stories. Certain hospitals won’t treat white people. Racism is rampant. Violence is much more common than other parts of Asia. And the government watches everyone. I couldn’t go to a soccer game without buying a ticket online and giving my passport info to some stadium employee. I’m surprised I wasn’t asked to piss in a cup too.
That’s about it. I gotta work in the morning.