TBW

To address the point of forced sellers. I think there will be. Plenty of investment properties owned were the economics only worked in a house appreciating market (most house or condo's in GTA are negative carry every month). Add to that the amount of people that have over leveraged themselves. Finally, in the US homeownership went from ~70% to low 60s. We may see a similar, although perhaps not as dramatic move, as our homeownership % is now above 70%. Also, I think the assumption of automatic mortgage renewal will be challenged. I am hearing more stories were banks will not just renew a mortgage unless the credit risk is fine. HCG getting bailed out by WEB hid the fact that the alt lending space was en mass going to have a renewal issue if GICs kept getting pulled. The big banks cannot renew most mortgages that were originated by the alt space due to OSFI rules. This could, I am not certain it will, cause further forced selling.

This has been fascinating, thats for the thoughts all. I think the biggest evidence of marketing vs skill for investment managers is the often quoted stat that is roughly 'most funds fail to beat their benchmark'. I think the explanation for this is the focus on marketing. If you are thinking of running an investment company as a business it is much better from a business pov to be wrong with the crowd then be differentiated and risk underperforming in a bull market. If all of your peers are down, then its simple to explain to clients 'no one saw this coming'. You then market yourself on how 'different' you are. Combine fees with the incentives to be a 'closeted' indexer then you have an almost guarantee that funds will underperform the benchmark. I have witnessed plenty of this behaviour in my career. I think this viewpoint of better marketing vs skill also explains the clustering of hedge fund positions. If you hear a decent pitch from a well known fund, then perhaps you can't afford to not be involved rather than try to explain to your clients why you underperformed the star fund of recent memory. My two cents on the topic.

If the anecdotes in Garth's latest post are even sort of true, the GTA bubble is imploding. http://www.greaterfool.ca/2017/07/11/it-could-be-worse-2/ From my POV, houses listings are increasing and sales are slower. For the first time ever one listed and failed to sell in my hood. But not sure I am seeing panic like described in his post. It is increasingly likely the bubble burst, but think we need more time to be say so definitively. I took a look at the OSFI new letter on mortgage underwriting. Found it fascinating. They mentioned some serious failings in underwriting and clearly know about a lot of poor behaviour. I ask why they don't disclose more. https://onbeyondinvesting.com/blogs/blog/so-what-are-you-really-saying-osfi-taking-a-look-at-their-latest-mortgage-underwriting-letter

Toronto, On

My view is Canadian firms play more games than US firms. Not a matter of accounting, although that is a large part of this, as much as it is lax enforcement of rules. Really rare to see white collar crime charge here. I see issues with expenses capitalized, reits, loan loss reserves vastly understated, with lenders, and poor disclosures. Plenty of good companies too, dont get me wrong, but I think more dilligence is required when investing up here. If you want to learn more there was a great Globe and Mail investigative article on Amaya. Highlights all types of issues investors should be aware of. I found it to be a shocking read.

Hi Petec. I own Westaim stock and am a big fan of their management. Really impressive capital allocation track record there. Arena CEO has an interesting past. Check out this podcast interview he gives to get a sense of his style https://www.bloomberg.com/news/articles/2016-04-04/odd-lots-the-unbearable-brightness-of-being-a-shadow-bank I think this investment is a homerun for Westaim and a very smart one for FFH. The risk is in the execution of Arena and their investing abilities.

I think Liberty's point above was the right one on these announcements. This tax does not need to be effective it just needs to change the psychology. Housing bubbles need 2 things, cheap/easy to access credit and psychology (typically due to some narrative, houses only go up, supply, foreigners etc.). Credit is being restricted by the big 6, everyone I talk to it's harder to get a mortgage from them. The next providers were the HCG's/EQB's of the world that sourced from the Broker network. HCG announcement should mean that credit availability will be much more scrutinized and brokers more wary to cheat. So credit is availability is shrinking quickly. The last thing is the psychology, this seems to be cracking (just from hearing what the average person is saying, newspaper headlines, comment sections etc), so if a new tax can kill the narrative for the last buyers this thing ends soon. My view and portfolio position is that this is over.

I think this is an interesting discussion. I think you can look at things a variety of different ways to attempt to justify what prices are or aren't rational. If you take a big step back this is very simple to me. The average house cannot be bought by the average family. That cannot be sustained for long. Some 'global' cities perhaps it can for a while, but not indefinitely. The bubble in Toronto will pop, likely soon. Prices will drop significantly across Canada until the average house can be bought by the average family (probably overshoots that). The underwriters and lenders will suffer massive losses. Invest accordingly. This has been the same in every country that has experienced the price surge Canada has. Examples, Spain, Ireland, USA, Netherlands etc. All have the same issues, rapid price increases, stupid lending, wide spread fraud - then crash. No different here.

Imo boc is in a tough spot. The time to raise rates was 2yrs ago, instead they cut. Now I dont think they can raise because when this all blows they will likely have to go to the 0 bound. I would be happy if they did raise, just seems like they can't.

To answer your questions. Portfolio's were all long only (I think, nothing was mentioned about shorts). One of them may have hedged, but that seemed like a trivial detail to their returns. I don't know much about the down years for most participants. The highest returner had some truly massive swings with his portfolio being down substantially a few times during the period of monster returns.

I have a new entry from someone, from the forum, that just crushed it in real estate. IRR north of 60% over a 10yr period. While it is a different asset class I think there still are many similarities with our other high performers. In this case the investor identified really cheap assets. He used a clever approach, and a tonne of leverage to buy these assets as quickly as possible on a small amount of initial capital. Doing all the work himself he was able to conserve as much cashflows as possible that he could then reinvest. Much like the other stories, this investor is extremely patient and only buys a very small portion of the deals he does deep due diligence on. Then he swings massively. So, path to great returns is still identify something very cheap, swing large, and hold. In this case, the willingness to get your hands dirty and do all the work yourself was a tremendous part of the success. To those that are thinking the leverage here must have been huge. It was, however the mortgage payments are covered 3x by rent. That is already more conservative than anyone buying a house in Ontario these days...

Haha. A midcap one would be novel. I have to say I can't stand Barry Ritholtz. I find him too overbearing on his guests, interrupts too much, tries to seem too smart etc. He does get amazing guests and I still do listen from time to time, but I often think how much better the show could be if someone else hosted. I could be alone on this. A couple podcasts I would add: Oddlots - bloomberg podcast Grant's Podcast Not exclusively Finance/investing Energy Gang - look into energy sector, esp clean energy and renewables. It's excellent Crimetown - look into Providence, RI mob scene - it's awesome Reply All - I am sure most podcast fans already listen to this one Startup - by Gimlet media - last season was on former American Apparel CEO - really worth listening to.

People seemed to like my last post, so will put this one here too. https://onbeyondinvesting.com/blogs/blog/canadian-lenders-are-safe-arent-they

All the high returners were people from this board. Certainly there is a survivorship bias. Concentration is a double edged sword. I think what separated these people is they seemed to be patient and concentrate when there was a real no-brainer type of investment (altho one could argue that without Fed actions perhaps BAC would have had more trouble, more dilution, default risk etc.). I think concentration when done very selectively and not very often (like once every 5 to 10yrs) is a good strategy. You raise a good point. In an expensive market like the one we are in I think concentration could be very dangerous.

Its my pleasure. Really enjoyed gathering this info. Still time if others want to contribute.

I suggest you watch the video I linked. Explains how Genworth does all the things I mentioned. There certainly is some chance I wrong and EQB and HCG are conservative lenders. But I am sceptical.

Good questions. Yes I mean on the personal portfolio leverage there was little leverage used. Other than financials, most of them avoided companies with lots of leverage. Since these investors were very concentrated they tended to avoid companies that had chances of being a 0. You can argue that since they did invest heavily in financials on a portfolio basis there was a lot of leverage involved with these returns. Some of the financials may have been invested in warrants, but I think mostly in common stock. Don't know fully the details on this though.

There is no way a bank takes them out. Why would they do it when they have a risk free model with the government? I was thinking more along the lines of EQB taking them out or doing some sort of merger since EQB is in the same situation as HCG. For the record, HCG and EQB are leaders in the alt-A regulated market. There's not many players, and it's a highly niche-type market. Take a look at their non-performing numbers over time - it doesn't jive with the fraud thesis. I used to think this. However it doesn't really pass the reality test to me anymore. I think their numbers are too good to be true. Genworth Canada is a good example. Their delinquencies are really low. Part of the reason is that they restructure a lot of these loans and then don't disclose it. They amend payments, delay payments etc and I think this gets them out of having to show these actual troubled loans more clearly in their accounting (ie. the semantics become different and thus not needed to report). In Genworth's case the number of cases where they are 'proactive' is buried in one report they put out annually (I forget which one atm). Here is a video that explains their process https://www.youtube.com/watch?v=ECHZ0a_-Ojw. I suspect the other suspects EQB, HCG do something similar. Read those SA articles on how HCG was selling off some of their Brampton originated loans. Too much smoke here, anecdotal evidence for me to believe their deliquentcy numbers or more importantly that they will stay this low. Seems impossible to me that you can lend in lower quality borrowers and face less risk. Normal US banks has loan loss provisions in the 1 to 2% - and EQB and HCG are 0.10% - doesn't make intuitive sense to me.

5 high returners generously responded to my request for information about how they achieved their returns. I have tried my best to synthesize their responses. I learned a lot from this and I hope you all do to. Average 10yr return 32.4%, (high 52%, low 25%) -all were non-professionals during most of this period. One of the individuals has since started a fund -all 5 generated all their returns from stock investing -most, but not all, were fully invested in the stock market -returns came largely from midcap stocks or large cap (financials) -leverage was not used at all in 3 cases and sparingly in 2. When leverage was used it was primarily through leaps or some margin. I was surprised how similar their stories were. I expected a broad range of approaches to large returns. The primary way these investors achieved such high returns was from concentration. Some concentrated to as little as 4 stocks, some in the 10 range. The major theme, was find something within your circle of competence, at very cheap levels, and go big. They key here is finding something really cheap and then you can take more confidence in your valuation and ride out the volatility you will inevitably face. Obviously this strategy is a double edged sword - you have to be right about both the company and your valuation. All investors seemed to be very patient with low turnover. These people are all following the preachings of Munger, be patient, buy what you understand, swing big at the fat pitches, and hold. I was also surprised that their approaches were fairly steady. I had expected returns to be largely driven by concentration in one outsized winner. However, only two of them told me about one position having an outsized impact on their returns. Without these positions they still said they achieved returns well over 20%. This tells me that the approach is the key takeaway, insist on a very large value discrepancy, and be patient for these opportunities. There style was not so much about trying to hit one big home run. All the investors had different valuation preferences. Some focused on longer term earnings power, some looked at EV/EBITDA, others Book value and ROE. All looked for deep value though. Sometimes that was a very beaten up stock in a beaten up sector, sometimes it was looking to buy compounders opportunistically, and other times it was a combination of both. The investor’s style was, typically, look to see if large corrections, in parts of the market they understood, created some obvious opportunities. Large parts of their gains were from financials after the GFC. They picked stocks in companies they were confident would survive, at really cheap levels, went big and rarely sold. Examples of this would be FFH in 2006, BAC since the crisis, O&G companies in the last year etc. This is a good personal reminder for me. Most everyone could recognize the long-term value in BAC (if they survived), lots of people bought (like I did), but almost all of us likely bought too little and sold too soon (like I did). Other interesting aspects is these people all really enjoy reading and learning about investing. Despite large returns their lifestyles haven’t changed much and all spend roughly the same or more time studying companies/investing. I asked them all if they thought they could achieve similar returns in the next 10 years. They had mixed views on this. Some were reasonably confident they could always find decent opportunities and could achieve similar returns. Others were confident that their rational approach would allow them to continue to beat the market, however we are in a lower return environment and past high returns may not be as easily replicated. I want to thank the contributors again for their time and knowledge. It was a lot of fun learning their stories. If anyone else wants to contribute please do. If anyone has any further questions please let me know.

50 - that is super interesting. I think EQB is also a 0. I am short those plus MIC (0 as well). I agree with RB, likely no one takes them out and if they do it won't be the premium to book they are trading at. Perhaps a big lender gets volu-told to buy them after the bubble has burst but that will still be much lower than here. I bought 1 share in each EQB and HCG so I can attend the annual meetings this year. That will be very interesting.

50cent - that is crazy. One of many reasons HCG stock is going a lot lower (my guess 0ish) CalvinL - does that happen a lot? That also seems crazy. Speaking of crazy, when I was writing my blog post I was at a coffee shop. Woman sitting next to me was talking on the phone to mortgage provider to buy a condo. It was her second rental condo. She only buys condo's that breakeven from a cashflow basis (meaning mortgage and condo fees, excludes maintenance, vacancy risk etc.). Since she can't find any in Toronto she is buying in Collingwood (2.5hrs north of Toronto). She plans on buying a second one there in the next month, to give her a total of 3. Given how expensive real estate is in Toronto she thinks there will be a flood of money going to other towns and wants to buy the cashflow breakeven places now before everyone else. I was shocked. She wasn't dumb, she analyzed the numbers and relative value thinks breakeven is cheaper than all her friends buying condo's in Toronto that cost them money every month (she knows one guy that has 5). It just seems that people in this city think you invest savings in real estate and consider no other option (stocks, businesses etc.). So in her mind since she is renting a condo to live in that likely costs the owner money but she can buy ones that don't, long term she is much better off. My question was why don't the negative carry owners sell? She had no idea but thought they should...

I actually went to the Toronto Real Estate Expo. It was a horrifying experience. Biggest takeaways: - everyone pitch is some form of 'get over your fear, don't analyze just buy' - I am not kidding that was pitched first 3 presentations. -Brad Lamb (king of condo's) said infront of 15k people that it's good to have a good relationship with your lender because they 'will bend the rules for you'. If that doesn't work, find a third tier lender there are plenty of them. -Every booth was pitching second lien mortgages as RRSP investments. Mostly in the 10% range. I talked to many of these sales people. There is no security on these loans. Typically it is offered on houses pre-renovation. Ie. buy house for 1mil putting down 20% (lie to bank to get that, don't mention you are flipping), get 500k second mortgage, then sell house for 2mil! I heard that pitch twice There is a boom in second lien with new lending standards. The second lien lenders are only looking at asset values, don't care about your personal credit or cashflows to sustain property. This is going to be a huge problem when prices stop rising. I wrote more here on my blog. https://onbeyondinvesting.com/blogs/blog/i-attended-the-top-of-the-canadian-housing-market-so-you-didnt-have-to I am email a bunch of these 'mortgage lenders' and 'investors' to learn more if anyone is interested I can pass on what I learn.

I think this just bursts on its own weight, no catalyst needed. These things are clearly psychological and its just a matter of when the psychology changes. The conversation I have on the subject has now changed to 'yeah its a bubble, but when is it going to change' from 'houses only go up' so I think psychology has tilted and its now only a matter of time. My bet would be this is the year Toronto pops. The scenario RB laid out is simply unsustainable. Looking up income stats on Statcan, only 5% of individuals make more than 150k per year in Canada. So for what sounds like an average house in the Toronto suburbs you need at least one of the two individuals to be in that top 5%. It just doesn't make sense. I know that HELOC from parents and second lien financing has to be a large part of the financing for such houses. What is interesting to me is that both loan types are callable at any time. From what I understand second lien's are from more 3rd tier lenders and therefore no reputational risk so I think people are underpricing the repossession risk when the mkt turns. Does anyone know who the big players are in the 2nd and 3rd lien mortgages? I really think you see house price declines north of 40% in Canada, over 50% in Toronto and Van.

So far I have 2 responses to my questions to those with huge outsized returns. Anyone else want to add before I compile? Thanks in advance for any contributions.

That is awesome! Thank you very much for your help!