All Things Investing

[Slava]

Well the thread title is a little misleading because we have the stock thread and I'd greatly prefer this not to focus on specific purchases. I posted in the "things you love to talk about" thread that I love talking about investing, and someone pointed out that I've got a sub-forum and could probably make some use of it (that second part is my addition!).

So, this thread is one where we can chat about investing strategies and ideas from that perspective, and even income generation and withdrawal strategies if people are so inclined. We could also talk about different types of investments, various asset classes and vehicles and that sort of thing if people are interested.

As usual, I need to say that nothing here is considered advice and is for entertainment purposes only, and you should do proper and thorough due diligence with a qualified financial advisor to assist you with your own personal situation.

[bizaro86]

One thing I've been thinking about lately in respect to investing is the potential for higher inflation and/or interest rates. Interest rates have been on a downward path my entire investing lifetime, and I think we're probably at the bottom at this time (arguments why that isn't the case welcomed!).

I've been thinking about portfolio construction in a higher interest rate world, and have had the following thoughts. I'd love other folks opinions as well.

-Higher rates are bad for growth type stocks. When interest rates are low, the discount rate investors use in a DCF is also naturally low. Take a fast growth company with zero earnings now but potentially huge earnings 10 years out. If you discount those future earnings at 2% they're worth a lot more than if you discount them at 8%. A company whose earnings are mostly short term is less affected. I think that could cause an even bigger rotation from growth industries (tech, biotech, etc) to dying industries (eg oil and gas, retail).

-Inflation seems to be hitting real estate prices hard, especially residential. Residential land developers seem like an interesting way to invest in that trend. I'm not sure about other forms of real estate. Offices and retail REITs are way cheaper than residential focused ones, but they have some obsolescence risk.

-Higher interest rates are generally good for financials, but even more than that is the yield curve steepening. The banks should benefit from a steepening yield curve (and the government is selling lots of long term debt which will raise long rates while the BoC is holding short rates low). I also like brokerages - they pay 0% on cash and lend it out at margin interest rates. Their spreads will rise as rates go up. Plus the huge volatility we are seeing adds to trading volumes.

[Slava]

I am "pretty sure" that we are at the bottom for rates, but I couldn't say that with full certainty. I mean truthfully, I thought that we were there in 2008-09, and then a few more times through the teens...and then we cut again and obviously dropped in 2020! I don't think that North America will go negative at this point, but that's not entirely off the table.

For Canada, the job of central bank Governor has to be horrible. I mean look at the current scenario: you have two main real estate markets that are flying, and finally some growth in others but probably not enough to be concerned. You want to raise rates in those few cities where it needs to cool off...but don't want to crush everyone else!

The CAD is getting too high against the USD for many peoples liking...so you could cut rates and bring it back. But when you do that (say drop by 15pts) you spark more real estate issues in those cities and that's basically untenable. I'm glad that someone else has to make these decisions!

I think that the financials should benefit from that rising rate environment that just has to be coming in the next few years. The growthier names will struggle and as you mention that's the discount rate as well as the leverage inherent in a lot of the smaller startups that will see that borrowing cost rise. There is a segment of the market that should do fine with inflation though, because they have the pricing power required to raise those prices as the inputs rise for them.

[DoubleK]

They were absolutely fawning over the BoC on Bloomberg last night. They really liked that they signaled tapering the bond purchasing and then leading to rate hikes.

[VladtheImpaler]

To bring crypto into this, I am buying BTCC within our TFSAs as a hedge/what if. Have not been convinced to buy actual coins.
I also wonder about the covid implications and policy going forward. Are we going to keep shutting down every time there are "cases"? I am sure that the vaccine(s) will not end covid, so what is the policy government(s) will adopt and how will it impact investment? I think there is fair chance it will affect kids more going forward as we cause it to mutate. I am also sure there will be strains unaffected by vaccines. There are theories the vaccination drive will make covid worse, which are at least scientifically plausible...

[DownhillGoat]

Originally Posted by bizaro86

(arguments why that isn't the case welcomed!).

I don't know if it's a valid comparison but Japan has been at 0% for over 20 years.

Originally Posted by Slava

For Canada, the job of central bank Governor has to be horrible. I mean look at the current scenario: you have two main real estate markets that are flying, and finally some growth in others but probably not enough to be concerned.

Are there no options (even outside of the BoC) to target specific areas? I mean they brought in a luxury tax, why not institute a 10% tax to any home purchased over 1M, or any homes in a "hot" area. Obviously that's one overly-simplistic perhaps not well thought out example, but there should be some other regional way to solve that.

Interest rate changes (or any policy) to deal with areas consisting less than 20% (likely a much lower % effected by home prices) of the country's population while effecting 100% of it seems like pure lunacy.

[Slava]

Originally Posted by DoubleK

They were absolutely fawning over the BoC on Bloomberg last night. They really liked that they signaled tapering the bond purchasing and then leading to rate hikes.

I do feel like the BoC has done a good job through this. They did give a lot of liquidity to grease the wheels and reducing the bond buying should help ease inflation fears.

Originally Posted by DownhillGoat

I don't know if it's a valid comparison but Japan has been at 0% for over 20 years.


Are there no options (even outside of the BoC) to target specific areas? I mean they brought in a luxury tax, why not institute a 10% tax to any home purchased over 1M, or any homes in a "hot" area. Obviously that's one overly-simplistic perhaps not well thought out example, but there should be some other regional way to solve that.

Interest rate changes (or any policy) to deal with areas consisting less than 20% (likely a much lower % effected by home prices) of the country's population while effecting 100% of it seems like pure lunacy.

I think there are other things that they could consider on a regional basis, but frankly those are political decisions (tax policy, for example) and that gets messy. With the BoC they make their decisions and are at an arms-length from the government.

[Slava]

Originally Posted by VladtheImpaler

To bring crypto into this, I am buying BTCC within our TFSAs as a hedge/what if. Have not been convinced to buy actual coins.
I also wonder about the covid implications and policy going forward. Are we going to keep shutting down every time there are "cases"? I am sure that the vaccine(s) will not end covid, so what is the policy government(s) will adopt and how will it impact investment? I think there is fair chance it will affect kids more going forward as we cause it to mutate. I am also sure there will be strains unaffected by vaccines. There are theories the vaccination drive will make covid worse, which are at least scientifically plausible...

Honest question, just because I'm curious, but what are you hedging against with the crypto-currencies? Is it the potential devaluing of fiat currency?

I think that going forward, Covid is a lot like the flu. We'll have a vaccine each year and hopefully they get the strain right. What I hope is that the mRNA vaccines combat all of the strains, and maybe by getting a "vaccine cocktail" of some kind we can be effectively inoculated.

[bizaro86]

The other thing that I thinjnis interesting is that the US corporate tax rate looks like it will be going up. That probably makes Canadian companies more competitive on average (unless our taxes go up as well, which is certainly possible).

[DoubleK]

Originally Posted by bizaro86

The other thing that I thinjnis interesting is that the US corporate tax rate looks like it will be going up. That probably makes Canadian companies more competitive on average (unless our taxes go up as well, which is certainly possible).

I think it makes EM look better.

[VladtheImpaler]

Originally Posted by Slava

Honest question, just because I'm curious, but what are you hedging against with the crypto-currencies? Is it the potential devaluing of fiat currency?

I think that going forward, Covid is a lot like the flu. We'll have a vaccine each year and hopefully they get the strain right. What I hope is that the mRNA vaccines combat all of the strains, and maybe by getting a "vaccine cocktail" of some kind we can be effectively inoculated.

Part of it is the inflation. The other part is that it seems the younger generation sees it as the new store of wealth, the gold of the internet age, as it were. I guess it is speculation on my part. Given the built-in scarcity of the good, and the widening adoption, it seems worthwhile to bet a smallish amount of money in a tax-free vehicle to see for myself. I am not convinced enough at this point to hold actual coin.

[GGG]

One question I have is do you see the counter cyclical nature of bonds and the stock market continuing to be effective hedges against eachother.

I see a rapid inflation interest rate rise destroying both the value of stocks and bonds at the same time.

[Slava]

Originally Posted by GGG

One question I have is do you see the counter cyclical nature of bonds and the stock market continuing to be effective hedges against eachother.

I see a rapid inflation interest rate rise destroying both the value of stocks and bonds at the same time.

To me, bonds are going to produce a lower return over the coming decade as opposed to the past couple of decades. That’s not purely based on inflation though. It will create problems for people who are looking for income and people who rely on these instruments for balanced mandates. It’s common for people to look toward a balanced fund and basically slot that in for ~7% a year over the long term and it’s medium risk, generally 60% equities and 40% bonds. That kind of thing has worked so far because the bond return has been high enough.

In looking at depressed fixed income returns going forward though, you need an equity return of over 9% to get to 7%. Thats going to be dicey (at best) for a pure medium risk mandate.

I guess to more directly talk about inflation, I’m not as concerned as maybe some others. A lot of the things I hear today aren’t that different from what was said after 2008-09; “there’s so much money in the system, they’ll never be able to get it out and it will lead to huge inflation.” But, they did get it out (only to put it back in), and inflation was never a concern. I also think that if inflation looks to be a factor, the central banks are going to act. Powell has already brought that up in the US and he was adamant that they’re not going to let it rise too much.

[bizaro86]

Originally Posted by Slava

To me, bonds are going to produce a lower return over the coming decade as opposed to the past couple of decades. That’s not purely based on inflation though. It will create problems for people who are looking for income and people who rely on these instruments for balanced mandates. It’s common for people to look toward a balanced fund and basically slot that in for ~7% a year over the long term and it’s medium risk, generally 60% equities and 40% bonds. That kind of thing has worked so far because the bond return has been high enough.

In looking at depressed fixed income returns going forward though, you need an equity return of over 9% to get to 7%. Thats going to be dicey (at best) for a pure medium risk mandate.

I guess to more directly talk about inflation, I’m not as concerned as maybe some others. A lot of the things I hear today aren’t that different from what was said after 2008-09; “there’s so much money in the system, they’ll never be able to get it out and it will lead to huge inflation.” But, they did get it out (only to put it back in), and inflation was never a concern. I also think that if inflation looks to be a factor, the central banks are going to act. Powell has already brought that up in the US and he was adamant that they’re not going to let it rise too much.

If they raise interest rates to head off inflation that'll hurt bonds and stocks at the same time, imo.

[Slava]

Originally Posted by bizaro86

If they raise interest rates to head off inflation that'll hurt bonds and stocks at the same time, imo.

Yeah, it could. I guess I also feel that rising inflation isn’t all bad for stocks though. Depends on the business and how they’re stricter though.

[bizaro86]

Originally Posted by Slava

Yeah, it could. I guess I also feel that rising inflation isn’t all bad for stocks though. Depends on the business and how they’re stricter though.

Yeah. I think quality, capital light businesses will be fine. Anything with significant reinvestment requirements is hurt by inflation.

Classic piece on this is Buffett's article from Fortune. This is the best copy I could find, but the first couple pages are hard to read.

http://www.tilsonfunds.com/BuffettInflationSwindle.pdf

[pseudoreality]

I'm curious about what your thoughts are for the average individual investor and leverage? Right now I'm at about 1/3 of my assets, concentrated in a mortgage at 2%. Although I recently renewed my mortgage, part of me feels like I'm being too cautious and should have refinanced my house to 80% to free up more cash for investing. I'm still 15 to 25 years from retirement and I feel like I'm not taking advantage of these low interest rates.

[Slava]

Originally Posted by pseudoreality

I'm curious about what your thoughts are for the average individual investor and leverage? Right now I'm at about 1/3 of my assets, concentrated in a mortgage at 2%. Although I recently renewed my mortgage, part of me feels like I'm being too cautious and should have refinanced my house to 80% to free up more cash for investing. I'm still 15 to 25 years from retirement and I feel like I'm not taking advantage of these low interest rates.

Leverage is a double-edged sword and it can be awesome or a nightmare. It's hard for me to say whether it's a good idea for the average person, because there's not question that the risk tolerance for the person has to be higher. Let's face it; if the investment works out poorly (and some do), the consequences of that are magnified. If you have gains those are also magnified with leverage, but no one is particularly concerned about that side of things.

The problem comes when you leverage into a losing investment. You still have interest/loan payments and it can be painful. Part of the problem is that you can't just decide to "invest better" or whatever and suddenly things turn around. So you have these funds borrowed which have a negative value, and you're paying for that into the loan or interest, and the cure could well be time. I can't determine whether that makes sense for most people in this setting. If you want to discuss this, you could reach out though and we could definitely talk about your particular situation and that sort of thing.

[pseudoreality]

Originally Posted by Slava

Leverage is a double-edged sword and it can be awesome or a nightmare. It's hard for me to say whether it's a good idea for the average person, because there's not question that the risk tolerance for the person has to be higher. Let's face it; if the investment works out poorly (and some do), the consequences of that are magnified. If you have gains those are also magnified with leverage, but no one is particularly concerned about that side of things.

The problem comes when you leverage into a losing investment. You still have interest/loan payments and it can be painful. Part of the problem is that you can't just decide to "invest better" or whatever and suddenly things turn around. So you have these funds borrowed which have a negative value, and you're paying for that into the loan or interest, and the cure could well be time. I can't determine whether that makes sense for most people in this setting. If you want to discuss this, you could reach out though and we could definitely talk about your particular situation and that sort of thing.

Thanks for your response. I guess I should have clarified that all my investments are VBAL and VGRO. The only risky single asset I own is my house. I'm not talking about leveraging for Bitcoin or weed stocks here.

For me, I don't see market index funds as being risky, more just subject to short-term volatility. If I don't need the money for 15 years and do not panic sell, being down the odd year doesn't bug me.

The thing is, I find it less risky than say taking out a second mortgage for an investment property, but the average person would rather borrow the money for a single asset than a diversified portfolio.

[Slava]

Originally Posted by pseudoreality

Thanks for your response. I guess I should have clarified that all my investments are VBAL and VGRO. The only risky single asset I own is my house. I'm not talking about leveraging for Bitcoin or weed stocks here.

For me, I don't see market index funds as being risky, more just subject to short-term volatility. If I don't need the money for 15 years and do not panic sell, being down the odd year doesn't bug me.

The thing is, I find it less risky than say taking out a second mortgage for an investment property, but the average person would rather borrow the money for a single asset than a diversified portfolio.

Yeah, you probably have a pretty good assessment of the risks there, but of course I can’t say that with certainty without knowing anything about you and on a public forum. (It’s a regulatory issue and not me trying to be difficult). Just be aware that even a lower risk investment becomes more risky when you add leverage.