Don’t Sell Everything. It’ll Make You Poorer

Don’t Sell Everything. It’ll Make You Poorer

Oh my God, guys. This is great. Not the best ever, but it’s up there. Top five for sure.

I’ve gone on record saying that I think index returns will stink over the next five or ten years. Note that I said this before the big Trump-inspired stock market rally, proving that even though I am smarter than 14 mere mortals, it’s still really hard to predict short-term stock market trends.

Basically, the thought process goes like this. When looking at things like the CAPE ratio (that’s an average of price-to-earnings ratios for the whole stock market over the last 10 years) and current ratios like price-to-earnings and price-to-book value, the stock market is overvalued. It was expensive back in August and it’s even more expensive now.

That doesn’t mean I’ve sold everything and gone to cash. I have only sold one stock since I wrote that article. That stock was Directcash Payments, and I only got rid of it because it agreed to be acquired by a competitor at a big premium. I sold at a nice gain and then cycled that cash into a new investment in Artis REIT.

I also sold half of my Cloud Peak investment when it spiked the day after Trump was elected. Probably should have sold it all in hindsight, but oh well.

And that’s it. Those are the only moves I’ve made with my stock portfolio since writing that bearish article.

I just checked my stock market accounts and I’m about 90% invested. That’s about average for me; I like to have a little cash on hand to take advantage of buying opportunities.

I continue to hold even though I’m still bearish for a number of reasons. Damn near everything I own pays me a dividend now, yields much higher than anything Tangerine or EQ Bank can give me. I believe the stocks I own are undervalued. And I have no other investing opportunities, especially for retirement accounts.

Besides, we all know betting on crashes is dumb, right?

Right?

Apparently not

(Hat tip to friend of the blog Kapitalust for pointing this all out to me)

Let me introduce you to a former blogger called the Dividend Hustler. Mr. Hustler, like a lot of his peers, was a dividend-growth investor looking to retire early on dividends. He had about $850k invested in a portfolio producing about $30,000 per year in passive income. Not bad.

Then, one day back in September, the Hustle Man decided he was going to liquidate all of his holdings. Sell everything, just like that. The reason? Well, let’s just say it’s not exactly iron-clad.

I rarely sell and just got this crazy feeling and my gut instinct is telling me it’s gonna finally come soon.  The presidential election in a month and a half will give us crazy buying opportunities along with all the macro events happening around the world.  Christmas and New years gives us buying opportunities as well as people rebalance and take some gains and tax loss harvesting.

A “crazy feeling” and “gut instinct” is all this guy had going for him. He had no actual evidence. It was nothing better than shrugging and betting on red.

The amazing part is the comments that post garnered. Most are actually pretty supportive. Have a lookie-loo.

Mr Hustler did end up being right about one thing. The election did generate a lot of volatility. It was just in the opposite direction as he expected. That’s what happens when you invest based on hunches.

Never sell everything

It’s easy to laugh at the guy with the benefit of hindsight. And in his defense, he’s not the only guy who made such a mistake.

Poor Kurt’s kids. Looks like you jerks are going to community college. Just kidding. Daddy would never do that to you. They don’t even have safe spaces there!

Stock markets are really hard to predict on a day-to-day basis. They could soar or crash or go sideways. Often, we don’t even know why markets do what they do. Ever hear the business news talk about “profit taking” when stocks go down? That’s code for “yeah, even we have no idea.”

¯\_(ツ)_/¯

The good news for us is stock markets aren’t that hard to predict over decades. They go up. And investors get paid dividends even when they’re not going up.

Why bet against that trend? Cause that’s exactly what you’re doing when you sell everything.

Let’s wrap it up

Mr. Dividend Hustler was apparently so embarrassed by his sell everything move that he deleted his entire blog. Kapitalust only found out the goods after using internet archives. Hustler knows he messed up.

Don’t make the same mistake. It’s fine to not add any capital to the stock market at this point. Do what I’m doing and focus more on paying down your mortgage or invest it in other stuff. Preferred shares or bonds should hold up pretty well.

Timing the market is a suckers game. It’s that simple.

Let’s Answer Some Financial Questions From Reddit

Let’s Answer Some Financial Questions From Reddit

Ah, Reddit. The place where we go to see pictures of cute kitties, stupid memes that have already been posted 84 times, and scantily-clad pictures of OP’s mom. It was also primarily responsible for electing Donald Trump, so thanks a lot, jerks.

We’ve already made fun of Reddit at least once before, back when I lamented the lack of decent questions on the personal finance subreddits. Nice work, everyone, using it as your own personal Google.

And then there are people who respond, for no reason but to gain imaginary internet points. Some of Canada’s PF bloggers are active on Reddit and use it to increase their brand. I get that. I’ve even seen a few of them do it effectively. I don’t get why personal finance enthusiasts would spend time answering questions for nothing. Those are actual skills. Leverage them into getting paid, yo.

Anyhoo, because I am a giant hypocrite, allow me to answer some of Reddit’s best questions. Did I say best? Sorry, that was a typo. These questions are terrible.

Uh, Nelson?

(exasperated sigh) God I hate you.

Why are you so mean to people just starting their finance journey?

It’s not that. Really. I just want people to use their own grey matter once in a while. Or figure out the search function. Trust me, your question has been asked before.

I see

Also, Financial Uproar got suggested as a blog to read in one of those threads, and some asshole downvoted it. So, yeah. BURN THAT PLACE TO THE GROUND.

Half off house

half-off-house

(Literally laughs ass off)

Okay, there’s gotta be more to this. Let’s open it up and see what aconfusednoob gives us for details.

aconfusednoob

First of all, Mr. Noob isn’t very good at math. At best, he’s buying the house for 55.5% of its value. At worst he’s paying nearly 63% of the house’s value. But whatever, this is a minor detail. Let’s go straight into the craziness of this plan.

First of all, these two sets of people need to hammer a lot of details out. Who gets the rent from the college kids? How will they decide how much rent the parents pay after a decade? Who decides what repairs need to be done? Who covers expenses like insurance and taxes? Hell, we don’t even know where the place is. There are way more questions than answers.

If I was this guy, I’d buy the place without any written agreement in place. Then I’d boot the parents out like they were slobbering drunks at closing time. Take that, assholes.

Joint accounts

joint-accounts

People. How many times do we have to go over this?

Bank accounts do not matter. At all.

Even if you pay a small fee, who cares? A few bucks a month isn’t keeping you down. It’s keeping nobody down. Just pick a bank account and be done with life.

And while you’re at it, don’t chase savings account promotions. Having money sitting in the bank is silly. Invest that ish, yo.

Do the kids still say ish and yo?

They never did.

NO TIME FOR YOU, ITALICS MAN.

Please validate my choices

YES. These ones are my favorite.

criticize-portfolio

We’re going to need to check the details on this one. It’s sitting at zero upvotes, so here’s hoping for some crazy junk in there.

portfolio

YESSSSSSSSSSSS. Guys, OP fucking delivered. There’s so much here I don’t even know where to begin.

Half of this crap really doesn’t matter. You have two RBC credit cards? A decent credit rating? Oh boy. SOMEBODY GET THE FAINTING COUCH, NELLY’S GONNA PASS OUT.

He’s also buying company shares that pay a dividend of 20%? I’d be impressed if it was true. It’s not.

Also, what’s up with a guy making $150k not contributing a nickel to an RRSP? I’m seeing too much of this. TFSAs are all fine and dandy, but high income earners who aren’t taking advantage of RRSPs are basically lighting money on fire..

Finally.  A bizarre question on cheques

endorse

I don’t even know what to say. Why don’t you just take a picture of it using your smartphone like a regular person?

Investing small amounts

investing-1000

First of all, if you only wanted 10% of your portfolio in VAB (Vanguard’s bond fund), why would you invest in it first? That doesn’t make any sense.

About two years ago I talked about how index investors are making the whole practice way the hell too complicated. This is exactly what I’m talking about. $1,000 isn’t a inconsequential amount of money. I would gladly take it if you didn’t want it. But if you’re looking to build a million dollar portfolio one day, then it’s peanuts. Just get it invested in equities and ask questions later.

And while you’re at it, consider some more alternative options if you only have $1,000 to invest.

Should I pay my debt?

10k-lottery

Three question marks, guys. OP is serious.

I’m glad you asked, OP. Listen closely, because this is going to get complicated. First, you’re going to need to get yourself one of those offshore shell corporations. I’d choose Panama, but it’s really up to you. Then you invest the cash in inverse volatility futures, generating an income stream by selling puts. Then you need to invest that income in structured exchange notes, preferably ones that trade on the Nikkei exchange.

Or you could just pay down the damn credit card debt. Either or.

Leaving the country

leave-the-country

These people actually exist? YESSSSSSSSSSSS. Don’t move to Canada though. We don’t want you.

I like how OP just sort of throws it out there at the end that moving to a brand new country with only $1,000 might be a bit of an overreaction.

Last one.

Going nowhere fast

going-nowhere

Ah, the humblebrag. Sure, I’m worth more than 98% of other 27-year olds, but I’m struggling too guys!

I run into this with readers and other bloggers every now and again, and I’m always reminded about the value of patience. Becoming wealthy isn’t supposed to happen overnight. It’s supposed to be a gradual process. It’s supposed to be hard, dammit. If it isn’t, you won’t value it. Look at lottery winners if you don’t believe me.

This person has too many goals that cost too much money. I know your parents told you to reach for the stars or some other such nonsense. But the real world isn’t like that. We only have a finite amount of resources. Focus on one goal at a time, preferably one that isn’t graduate school.

Remember That Fidelity Study That Said Dead Investors Did The Best?

Remember That Fidelity Study That Said Dead Investors Did The Best?

About two years ago, seemingly every financial news outlet picked up on a study done by Fidelity Investments. This study claimed the company had looked over the accounts of thousands of individual investors, and they found a theme. The people who didn’t touch their portfolios did the best.

Fidelity threw a whole new twist on some tried and true advice, however. They pointed out that people really couldn’t resist the temptation of touching their investments. The only people who didn’t bother were dead. Thus, dead people had the best investment returns. The second best were basically dead, at least to Fidelity. They were the people who forgot they had an account.

This begged a few questions. How did dead people have portfolios that grew for long periods of time? Wouldn’t control of these accounts eventually turn over to people more, uh, alive? And how did Fidelity figure out these people were dead? I like to imagine the phone call.

“Hello, this is Brenda from Fidelity. I’m looking for Bob Johnson.”

“This is Bob. How can I help you?”

“Just checking in to see that you’re not dead, Bob. Talk to you again in a decade.”

So why am I bringing up this study again a year later?

Funny story

Allow me to quote from the New York Times.

Here’s how to get better returns in your retirement account: Pay as little attention to it as possible.

That was the conclusion of a study by the investment giant Fidelity, according to a 2014 article on Business Insider. The article relayed the transcript of a Bloomberg program in which the well-known money manager Jim O’Shaughnessy said that people who had forgotten that they had accounts outperformed everyone else.

Fidelity, which has received inquiries about the study ever since, without knowing why, told me this week that it had never produced such a study.

Oh man that’s great. Somebody made the whole thing up.

Here at Financial Uproar, I spent a lot of time trying to debunk various financial myths. You don’t need a six month emergency fund, since $1,000 is more of the optimal amount. RRSPs don’t have to just be used when you retire. And retiring early won’t make all of your non-sexual dreams come true. I hope after coming here a few times you’ll have at least a bit of skepticism surrounding “rules of thumb” and other such things.

But at the same time, the whole buy and hold investing idea is a good one. There’s a lot of value in finding a few good ETFs and sticking with them, especially for rookie investors. So I don’t want to disparage the message, because it’s a good one.

Seriously though, I’d still like to know what happened. If anyone knows more details, hit me up.

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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.

The TSX NEX is Filled With Trash

The TSX NEX is Filled With Trash

tsx nex

My rule of thumb is this.

If the glove don’t fit, you must acquit!! 

Topical, Nelson, Real topical.

When it comes to investing, large companies are almost always priced efficiently. There are thousands of analysts spending tens of thousands of collective hours poring over the latest earnings release from Suncor Energy. The chance of you or I discovering something important hidden in a footnote on page 57 is pretty much nil.

The smaller the company, the better chance you have to identify some sort of mispricing. Big investing firms aren’t going to follow some tiny obscure company that only does a few million per year in business. There are countless opportunities hidden among these stocks. I did quite well investing in MRRM, for example, making a little more than 50% in just under a year. When I bought it, it had a market cap of $7 million.

Many of the smaller companies in Canada hang out on the TSX Venture Exchange. The vast majority of stocks on the exchange are either in the energy or mining space, as hopeful entrepreneurs scrounge up enough outside investor cash to get a company worth a few million. They get a listing on the Venture exchange, and hopefully put their dream plans in motion.

There’s a bit of a wild west mentality over on the Venture exchange. Insiders regularly take fat six-figure salaries to be in charge of companies that have no revenue and little hope of ever making money. Many of these companies play fast and hard with accounting rules. And most are constantly raising money to keep afloat.

Trying to find good investments on the Venture exchange is the investor equivalent of turd mining. You’ll find some gems, but you’ll have to wade through a lot of stinky stuff to find it.

Knowing this about the Venture exchange, this chart probably makes a lot of sense.

tsx venture 2011-16

Yes, kids, that is a 78% decline over the last five years for the TSX Venture Composite Index. Gold stocks were riding high in 2011, which didn’t end well. Energy helped give it a little support, but that died off in 2015. The Venture exchange is so out of favor you can’t even buy an ETF that covers it. The two that were in existence quietly went away.

Here’s a list of the top holdings of the index. Yes, at least one is a marijuana grower. See if you can guess which one!

venture top 10

 

Besides the marijuana grower (that’s Canopy), we have a couple of tech companies long on ideas and short on cash, a company trying to mine gold in Peru, and a few energy companies. Storm, the largest of the bunch, has a market cap of $370 million, and apparently no desire to graduate to the TSX.

Basically, to encourage companies to list at all, the TSX Venture Exchange has more relaxed rules. Fees are also less for Venture companies. So as you can imagine, the more, uh, questionable stuff ends up on the Venture exchange, while the actual businesses graduate as quickly as possible to the main exchange.

In a world where Dragon’s Den, Shark Tank, and various other forms of venture capital are a thing, apparently having two exchanges wasn’t good enough for the folks at the TSX. Other alternative exchanges were popping up, as big banks realized they didn’t really need the TSX taking a small cut of every trade.

So the TSX decided to launch a new tier of trading, focused on the stocks that didn’t qualify to trade on the TSX or TSX Venture exchange. It’s called the TSX NEX, and it’s something you should never touch.

Most of the companies on the NEX have been either kicked off or have voluntarily given up their TSX/Venture status. Often this happens because a company doesn’t bother to release earnings results. Because hey, when I’m looking for investment opportunities, I’m attracted to companies that can’t be bothered to tell investors what’s happening.

Most companies end up on the NEX for a period of time and then quietly get suspended or delisted. There are approximately 410 companies listed in the company directory, and approximately 180 are suspended. There are others that have halted trading for whatever reason.

Interestingly enough, I actually own a stock that trades on the NEX Exchange, Automodular. That sucker is up nicely for me, gaining about 50 cents per share all told. I recently tried to sell at $2.70 but couldn’t get anyone to buy. The company looks to be liquidating, we’re just waiting for the results from the a lawsuit it filed against General Motors.

I’d recommend most investors ignore the TSX Venture entirely. It’s filled with crappy mining stocks that will never see the light of day. The amount of effort to find the good stuff in there probably isn’t worth it for the average person.

I’d especially recommend investors stay the hell away from anything trading on the NEX Exchange. Fortunately, they’ve made it easy, requiring every ticker symbol on NEX to end in .h. So if it says .h, that means stay the Hell away.