SharperDingaan

We've all heard about Canadian 'snowbirds' living in Florida during the winter, for 6 months less 1 day every year - to preserve their health care benefits. But few realize that many are now going to either the southern hemisphere - where its much cheaper and summer, or the Caribbean. There are many ways of doing it, but most would either fly down or travel by cruise ship, and rent an apartment + car - split over a few people. Every winter a different location. A very modest $C monthly retirement income, permits you to live like a king in either Cape Town or Durban (South Africa) - and perhaps enjoy a safari while you're there too. The number of retirement $ does not equal quality of life. SD

Think of a portfolio of 4 assets (A, B, C, D), each worth $10, each marginable, each a 25% weighting. Total investment of $40. For example purposes, only the value of Asset A changes. Asset A is 1 share of XYZ coy, bought at $10 - The price drops 1/3 to $6.67, you double down. Another $10 for 1.5 shares at $6.67, bought on margin. - The price drops another 1/3 to $4.45, you double down again. Another $10 for 2.25 shares at $4.45, bought on margin. - Asset A is now 4.75 shares at $4.45 worth $21.14, Assets B through D are worth $30, total portfolio is $51.14. Asset A is 41% of the portfolio, and the portfolio is 39% margined (20/51.14) x 100%. A very dangerous & unhealthy place to be. A double for Asset A is only $8.90 – not $20; a 25% (1.19 shares) sale of the position at $8.90 will reduce margin by $10.57. Your expectation is that Asset A is worth > $10, if it just reaches $10 you still have 3.56 shares of Asset A worth $26.17 (35.60- 9.43 of remaining margin). A very good place to be. If nothing further happened during the 12 months; 2.25 shares of Asset A would be sold to repay the margin, leaving 2.50 shares. As the expectation is still that Asset A is worth >$10, it remains a very good place to be. Obviously if one of Asset B though D is a cash equivalent, margin is reduced. If you thought Asset A is no longer what it was, you would sell it completely. When you think Asset A is getting overvalued, simply sell enough to recover your capital, & let the rest ride – it is house money. Sure you have to wait, there is risk, & nothing is guaranteed. That is just life in general. SD

Agreed the hedge is a cost. But think of a hedge as simply a sell (to protect against a price decline) & a later repurchase of the same number of shares. On entry, the cost of the hedge is unknown - it is the potential loss on repurchase + 2 commissions. However, if the hedge event occurs; the cost becomes negative - it is the gain on repurchase - 2 commissions. A successful hedge is a profitable hedge. The purpose of process is to produce result, result matters. The question is what is the right metric, & right timeframe, by which to measure. Most would agree with time weighted return, but 1 trip around the sun is pretty meaningless. SD

We use a concentrated equity portfolio, 4-5 assets at most - including preferred & cash. We expect to have to double, or even triple down, on initial purchases - to a maximum 50% of the portfolio. The additional purchases will be margined against the whole portfolio, & the expectation is no further trades for 12 months; the monthly interest charge is a reminder we've screwed up. We then either sell 25% of the position on a double within the year, or enough to pay off the margin at the end of the 12 months. Depending on 'view', we may overlay a long or short trading position on the same equity. Ultimately there will be some further opportunistic sales to recover our initial investment, & the preferred position will pile up. When it gets to around 75-100% of original capital we liquidate & withdraw the funds. On a net basis there may be 15-25 trades a year, depending on how much hedging we do (sell & buy of the stock itself). We find it is enough to contain the urge to trade, and limits the total all-in cost for a year to about $250-350. SD

'That doesn't answer my question. You can hedge against X, and X doesn't happen. Does that make it a bad hedge? Perhaps X occurring was a 50% probability event, and the coin just landen heads instead of tails.' If you lost $ - WHEN YOU CLOSED IT OUT - it was a bad hedge. The hedge itself may have been bang on; but it was put on too early/too late, lifted too early/late, or the event just didn't occur (as you thought it would). As with any tool, there is a cost to using it, & the skill is in how you apply it; in 20/20 hindsight you just made the wrong choice. But ... if you find that you mostly lose at hedging - either stop doing it, or go to cash. You hire a plumber for a reason - he/she is good at it, you aren't, and the cost of the repair is a lot lower if he/she does it. It's a brutal test ... but if you can learn from it, it will serve you well. SD

For # of ideas, look at your trading history over the last 3-5 years (for most this will be on-line). Every group of trades you did was based on an 'idea' - ie: 10 sales & repurchases of XYZ at different prices is one 'idea' - you were hedging XYZ against some future event. If you bought XYZ back at a big gain - it was a hit, if it was at +- 10% of the sale proceeds it was neutral. It's not hard. Don't care what happened after you bought or sold - you didn't execute. Look at the big losses. Anything common? Why were they so big? What happened to the stock at each of 3, 6, 9 months later? For most, the cause will be panic - couldn't stand an unrealized loss of >15%. Had you done nothing, there might well not have been a loss. It will not be pretty, but it will point you to what kind of investor you really are - not what you think you are. If you suck at investing (most do), simply put your $ into a preferred share mutual fund - it will cost you a lot less, & make your life a lot more relaxing. To get better - you have to stop doing the stupid; hence focus on the losses. It may be as simple as a more realistic expectation, or buying an additional X% when you currently would sell - & taking that other guys lunch. Not big changes. SD Yes I can't do it as I never have access to perfect information, even after my investment end or many years after. There is a serious risk of acting on results here. You can make an investment and lose money (or not make the maximum) while having acted completely optimal and vice versa you can make money (even lots of it) with a stupid investment (and blind luck on your side). Of course try to do a retrospective but I wouldn't count it this exact. The only exact thing to measure is rate of return (over a decade at least).

Hits/Misses/No Change is 33 1/3% each. On a history of 9 'ideas' - 3 work well, 3 are net neutral, 3 bomb completely. 2 ways to win 1) Winning $ > loosing $, and 2) skill at 'working' the net neutral tranche. 9 'ideas' does not mean 9 different 'names' - you may have used 2-3 ideas on a single 'name' over the period that you've owned it. Debt. Pretty much everyone had a mortgage when they bought their first house. Pay off your own mortgage, & maybe your kids as well - in return for grandkids, sooner. Life changing. Simplification. All for it. Just keep in mind that it applies to discretionary income as well. There are lots of ways by which to 'give back'. At this time of year, 'Secret Santa' has a lot going for it. SD

A few useful things learnt over the years .... Divide the pile into 3 - hits, misses, no change. Over a lot of investments the number of wins and misses should roughly cancel out, & your returns will come primarily from 1) how well you handle the no change, and 2) how effectively you hedged your various risks along the way. The 'art' and 'skill' of the profession as it were. Overlap your hits and misses with your circle of competence; ideally its maybe a 2/3 overlap. Most returns will come from knowing what you're doing, & fishing in the right places. Luck non-withstanding. Withdraw 1/2 the capital every time the portfolio doubles; proceeds pay off mortgages, &/or buy treasuries. Alternatively pay yourself a 7% annuity over 10 years (rough time required to double the portfolio assuming rule of 72). The objective is the systematic withdrawal of capital from the casino; there are lots of ways by which to do it. Our preference is lump sum withdrawal; simply because in the 'good times' we can often double in 12-18 months, & in the 'bad times' we can often be down 30-40%. If you've already withdrawn your capital (ideally a few times), you're also really working with house money - & the downside volatility becomes no big deal. Every withdrawal is truly a bonus, so once all your debts are paid off - do something life changing with it. SD

'The one thing that is not reacting correctly at the moment, I think, is the USD. I understand assets moving away from emerging markets but, once there is realization that the U.S. debt to GDP will skyrocket (at least temporarily), I can't see the currency heading up. Moreover, with the kind of move that we have seen in treasuries, refinancing risk goes up a lot and the share of budget going towards interest payments.' Keep in mind that if he wants those manufacturing jobs back in the US, he's going to have to devalue the USD - and automate the new factories to get around the demographically small number of young Americans. The same thing as is currently occurring in the UK. Then keep in mind that the US is the 'sleeping giant', it has been sleeping for a very long time, & Trump has woken it up. The domestic US infrastructure market is big enough to absorb the vast bulk of the supply from that bigger domestic workforce, he has the domestic resources to do it (oil, steel, etc.), and he can ignore export sales for some time (ie: extended FX devaluation war - & disincentive to stay in the TPP). He can quite easily haul US infrastructure into this century, use the age wave to progressively reduce the workforce as the infrastructure is replaced, and end up with high tech state-of-the-art infrastructure, everywhere - run by high-tech employees, when he's done. An 'us versus them' trade war to promote 'kinship', todays workforce successfully retired, & everyone voting for him because he's secured a long term economic place in the world for their kids. Game changing. WWII woke up the US, and it pushed the US into prominence all around the world - for decades. The good news is that this time around - it looks like no bullets. It looks like helicopter money, & in the early days would be - but its really the cumulative $ that have been piling up on everyone's financials, & diversion of the existing QE out of the weak sisters in the banking sector. Again, game changing. SD

FFH would be far better off if they simply restructured a little .... All the insurance firms in one box, and the investments in another (already occurs) The investment side pays the insurance side a minimum monthly fixed income stream, puts up a 3rd party bond to guarantee the insurance side capital contribution, and pays the insurance side an annual bonus if returns exceed some minimum. The black box stays private, & the 3rd party bond insulates the insurance side from the black box. Elegance, and grace. SD

This occurs because the proprietor is both the employer and the employee; hence the proprietor/employee pays the 4.95% for each legal party. The same applies to EI, except the employer portion is 140% of the employee portion. The plus side is that as with any company, all business expenses are tax deductible - lowering the taxable income on which the employer/employee will pay taxes. For most applications the structure works very well; the employer surplus cash is typically used to buy the office building as the interest expense is tax deductible. On employee retirement, the employer sells the office building and pays the proceeds out as a dividend to the employee for the rest of his/her life - the building essentially becomes the employees private pension plan. SD

Some additional grist ..... In todays Trump, & Euro break-up world?; Canada is looking very, very attractive - to a great many new people. We have systematically moved Canadian sourced gains into London (UK) real estate for a great many years; a very common diversification strategy amongst the wealthy of most of the Arabic, Asian, and African countries of the world. A large number of those people are now looking to Canada - & further diversification, primarily via infrastructure projects. Canada's multiculturalism has always been strongly linked to the Trudeau name. In todays more uncertain NA & European worlds, that multiculturalism is acting like the flame on the statue of liberty. Establishments younger generations are increasingly being sent to Canada to establish themselves (via start ups), and Canadian firms with extensive US interests are being heavily favoured. Long term roots and influence, in the modern day equivalent of Canada's accepting US Vietnam draft dodgers all over again. Everybody gets better when they have to play Gretzky every night; in the early days he gets a lot of wins, but it gets harder and harder very quickly. We just end up playing a different type of hockey, and at a higher level. Progress. SD

This entire conversation really rests on 3 questions: Approval of, and commencement of, pipeline construction across Canada; East, West, North and South to tidewater. Our own view is that there will be protests, and there will be a nationalisation; but its a reasonable proposition. Trumps presence also makes it more likely. Successful de-risking within the real estate sector, and restoration of a more conventional yield curve. We have great confidence in OSFI, and the Bank of Canada. A global focus on infrastructure investment would also make this easier. Oil &/or commodity prices rise significantly, and for a extended period. The underlying driver of course being the overall level of global reinvestment in infrastructure spending. The issue is that it's unlikely to be smooth. If anything, it's a sharp drop (re trade treaties) followed by a general rise. Time horizon matters. SD

This is actually bang on topic. Gurus don't like their ideas challenged - either by peon, or expert; it disturbs the universe. Whether its hard science (Galileo), or soft science (Management) - if it's not the existing 'convention', we don't want to hear it. Ultimately every idea is worth precisely zero if nobody uses it. I have the cure for cancer, but nobody believes it - so we all die instead. But if I'm willing to try it, I'll live - and its just the rest of you that will shuffle off. Of course I'll be pressured to deny my view, right up until it saves your life. We don't have to believe; we just have to be willing to experiment - and let the results speak. All those folks who had already flown with Burt were the experiment(s), they all safely reached ground again with no mishap (results); flying with Burt seems like a reasonable prospect. It's not an absolute guarantee, but it is an acceptable risk. You fly with Burt to your destination, and the guru walks ...... couldn't move on SD I disagree with this approach. The fact that John Smith never proved Fermat's theorem before does not mean that his current proof is incorrect. The fact that John Smith proved other math theorems does not mean his proof of Fermat's theorem is correct. You cannot use past success as a metric to judge a novel scientific model/theory/claim. It's particularly meaningless in this case where newest models need data and computers that did not exist 100 years ago. I guess you could argue that we should wait 10-20-50 years to see how the predictions of current models work out. I agree that this makes some sense, though clearly if there is an issue that needs to be addressed, waiting may have quite negative consequences. These are good questions. :) The answer to second question depends on the question "How bad is the problem?", which might be partially answerable within climate science domain. Clearly if scientists predicted temperature drops that would cause ice age, it would be "really bad problem". Similarly if they predict temperature rise that is significant enough to cause big issues based on experts in other fields (e.g. ecology, oceanology, agriculture, etc.) then it can be considered "really bad problem". If it is "really bad problem", then experts within respective fields in cooperation should consider what could and should be done about such problem. They should prepare recommendations how to address the problem. If it's difficult to decide whether prediction causes "really bad problem", then situation is more difficult. I would still suggest that experts within respective fields in cooperation should consider what could and should be done and what/how should be monitored to see if problem is getting worse or not. What you might be driving at is that ultimately "people" (non-experts) would have to make decisions within political/economic framework (In politics/economics it's much harder to decide who is an expert...). My hope would still be that governments or politicians would make these decisions based on expert opinions rather than trying to make their minds based on feelings, or non-expert understanding of the field. In reality, things usually happen quite differently from above picture.

Exactly my thoughts. This whole notion of middle class America being better off under Trump is laughable. This is a guy who's lived a lavish lifestyle boasting about his wealth. He couldn't care less about the other 99%. It all comes down to who he is surrounded by and how much or little influence they have over him. I'm pretty sure a large number of people realized that, when they stepped up to vote .... and yet millions of people still thought it the better choice. We just don't want to hear it. SD

Couple of thoughts here .. There a millions of people in the US, and the UK (Brexit), who are not seeing the benefits of globalization and trade. They see the 1% taking all the benefit, their own economic lives getting worse, and those of their children becoming even worse than their own (ie: precarious work). The current 'system' isn't serving them, they are a material portion of the population, and they feel they have nothing to lose by going with the wrecking ball. Good on them - for having the courage to back their conviction. We have repeated examples of elites in the US and the UK, clearly out of touch with the populations that tolerate them; and media unable to pick up on major change. A few hard swings of the wrecking ball through these elites, would very likely do the collective health of all of us - a great deal of good. We are entering a period of rapid change; where today's elites can only lose, and the impoverished can only win. The days of C-Suite staff making well over 25x that of the minimum wage janitor, and societal bailouts (ie: banking) of the elites, are rapidly coming to an end. SD

There is nothing wrong with FFH. Depending on your risk tolerance it may indeed be a fine investment. It is simply that there are alternatives. SD

We're great fans of how FFH generally goes about its business, but at this point we think the next few years are 'ho-hum' at best; primarily because the current price is so high. A double will require an enormous improvement, whereas even a fairly small error will hurt quite a bit. The same $ amount invested in any of Canada's big 5 banks would also earn quite a bit more, & for about the same (but different) total risk. We would also remind you that FFH returns are very 'lumpy', & 'compound return' is a smoothing mechanism. Nothing wrong in that so long as your cost price is low, you have a long runway, & recognise the limitations; many folks miss it. This board is prone to 'hero worship' over prized cows. Hero's are not always the 'best' investment, all the time - no matter how much we would like them to be. SD

Central Bank 'mistake'. The globe has been in the Great Recession II ever since 2006, we just haven't seen the dust bowls of the Great Recession because central bankers have been very good students of history; and their combined sustained efforts have been herculean. But even when an interventions risk of failure is small, it compounds UPWARD the more interventions there are; and there have now been a great many interventions. At some point a sneeze is almost certain, and we'll all catch flu. SD

You have be sure that you fully understand the 2nd and 3rd level drivers when you buy these things - and how you should be using them. Already pointed out is that these things are marginable. If/when you need money for personal use, you should be margining against them and taking the cash out of the account. After tax deductibility (Canada) the net interest cost is usually well below what you might have paid elsewhere. It’s the portfolios ATM. 1st level valuation is straightforward – simply plug the variables into your calculator. If it trades for less it should be either because dividend payments, or the principal repayment is under threat; if it’s true, by & large there will be a ratings downgrade before the event(s) actually occur. If you think this is unlikely, the pref is an opportunity. There are 4 2nd level returns; spread (pref yield – interest cost) on the margin used, pref yield on the equity contribution you’ve put up, discounted capital appreciation (face value – purchase price), and cash yield (dividend/purchase price). This is what you are managing. There are 2 3rd level returns; 1st level valuation, plus speculative spread (your view versus the market view on 1st level valuation). If the bulk of the pref buyers are primarily income seeking retail investors - with limited investment knowledge/experience; most of this board’s membership would have a positive spread. If the other side of the trade is primarily professionals (i.e.: GS in distressed prefs), the spread will be negative. Expertise/Experience pays. The good news is that the expertise/experience developed here, also helps on the equity side – where the same type of 3rd level spread is common. Look no further than many of todays oil/gas equities. SD

You may want to consider that these things are NOT linear; you do not have to make your $ first - then do something else. This is just the way that most people (that we have heard about it) have approached it, and survivor bias is a significant overlay. Most folks today, consider what they are going to 'do' in retirement - well before they get there. They also act on it, TODAY; typically through doing something extra-curricula - going back to school, volunteering, partnering in a small business, doing something different, music, etc. You make your $ and do something else AT THE SAME TIME - the strategic plan of work today, & figure out how you're going to do this four years from now. Most folks work in jobs they are at best indifferent to; it pays the bills & puts something away for retirement - but is soul destroying. In many cases 'retirement day' was 'freedom' - but you were dead in under 5-10 years because you didn't know what to do with it. Dead from boredom via drink, obesity, or drugs. Today, that 'retirement day' is now earlier than many would prefer - and having that 'something else' to do has become a necessity, not a luxury. Look around you at TODAY'S folks in their mid-50's, and outside of your social circle. I put it to you that a great many are NOT slowing down - IN ADDITION TO THE DAY JOB they are getting the bucket list things off the list, &/or are preparing for their new freedoms - as kids fly the nest &/or get pushed out. There aren't many years until the grand-kids arrive, you haven't had this degree of freedom since your kids were born, & most aren't about to piss it away. These things are of course generational, & reflect the attitudes/mores of the times. To someone in their 70's this is complete BS - because it wasn't what they did, to someone in their mid 30's its just plain 'duh'; different experiences. Your home country, &/or culture will also materially affect this. All good! SD

I think we, collectively, are confusing cause and effect. The stimulus programs are a blunt instrument response to the slowing of the economy. The slowing of the economy started long ago in relation to the aging demographic. Because of all the noise from the tech run up, the twin towers and the war afterwards, the pre-2008 China expansion, and the financial deregulation crisis, we didn't see the slowdown happening. It started in Japan, and Europe, in the 1990s, and moved on to include North America, and parts of Asia. It has now moved into the rest of Asia, and is now encompassing the bulk of the worlds GDP. The governments and central banks are only reacting. There is really nothing they can do. Japan has shown what the long term will look like. Interest rates will settle at the lowest they have ever been. Governments will continue to try and fight deflation. The next thing they will attempt is infrastructure programs. Since the demographic tap has been shut off forever it is an entirely new paradigm for the world. The future is one of much slower economic growth than the past. The major markets have barely made positive territory in the last 15 years. It is not all bad though. I have been investing for 20+ years, during the slowdown, and have done very well. +1 It's useful to take a page from nature, and recognize that nothing grows forever; everything eventually either runs out of nutrients, or dies from its own pollution. Yeast in a sugar solution (grape juice, malt, etc.) comes to mind. The fuel for all economies is demand (buying power); lots of people, with ability to pay. The people side is driven by demographics, ability to pay is driven by monetary and fiscal policy. If you don't have the people you need mass immigration, the immigrants need to be of child bearing age, and they have to be able to establish once they reach your shores. It also means you have to recognise that your home culture is going to change, and that it's a very healthy thing. Canada's iconic dress 'Mountie' used to only be male, 6' 1" or taller, and wore a Stetson. Today, he (or she) is a lot shorter, also wears a turban or a hijab - and is frankly just as good, if not better. Cultural change is part of life. SD

It's much more basic, & primarily demographic. We know from supply/demand that as long as there is 'excess demand' price will go up. We can get that excess by raising the number of buyers, getting them to spend more, or cutting back the supply. The average person spends far more in their 30's through 50's (kids, house, etc.) than they do in their 20's & their retirement. Folks in their mid 50's to mid 60's are generally anomalies as spending is more influenced by saving for retirement, retirement packages, and 'crossing things off the bucket list' - before they retire. On top of this is annual inflation and growth, which may or may not be positive. NA markets are primarily influenced by the baby boom - their peak is entering their mid 50's, but the early boomers are retiring - in growing numbers. Hence the current flow of new saving $ (excess demand) into the market is about as good as it's going to get. As aging continues we really need inflation & growth to offset lower net contributions - & retirees starting to sell down to fund their retirements. Japan has very few young people, & their economy reflects it, same thing for big parts of Europe. It's also hard to 'make' inflation when there are annual declines in the underlying buying need (growing numbers of retirees), and growth when there are few folks to man the factory. You can import labour (Germany), but at some point it's easier to just move the factory to the labour. In any given quarter a particular NA sector may outperform, but it may not be sustainable. SD

Value = (FCF(1+k)/(k-g))/(1+r) where FCF = Free cash flow at end of year 1, k = Return on Equity, g = growth rate, r = CAPM market rate of return. You are mistaking Earnings for Free Cash Flow, IRR for Return on Equity, & not recognizing r. Assume no change in FCF k could be high because of high debt, operating leverage, or tax effects. Look up the DuPont breakdown. g could be high simply because the base is small, versus lots of new business r could be low because of QE efforts by local central banks. Assume FCF of 2, k = 10%, g = 8%, r = 3% ( A growth company in a 'risk off' market) Value = (2(1.1)/(0.02))/(1.03) = 106.80. A high valuation because its a growth stock. Assume FCF of 5, k = 8%, g = 3%, r = 3% ( A more 'mature' company in a 'risk off' market) Value = (5(1.08)/(0.05))/(1.03) = 104.83. 2.5x the FCF & a lower valuation - because it isn't growing. Growth stock investment is all about understanding k-g; what's causing it, changing it, & its sustainability. SD

Yeah, there is that side but the question was about financial, not holistic. I have always wanted to play music live. Call it a work in progress. Dont know about SDs brothel idea... maybe a meth lab. Could meet some interesting characters as Heisenberg North. Both these women were French, & Paris based - so completely different to start with. They were both very strong minded, did their own thing versus what was societally expected of them, & very adventurous. Not shy either. There had also been a few previous husbands, but they had kept dying on them - apparently, it's very frustrating. The old lady 'knew somebody' & publicly told him off over the poor treatment of his girls. Unable to extricate himself - he 'bet' her that she couldn't do any better. If she could, he would make her a partner; 3 years later she was. The end result was nothing like what anyone would have imagined, was very effective, & was very good - but could not have been replicated outside of Paris, or perhaps Berlin. Turned out that one of my grandmothers knew the old lady from times past, & that they would share a few beers over the 'store' every time she passed through Paris. Needless to say both of them were very swift, & very colourful. Retirement is what you make of it. SD