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July 26, 2018 | In Praise of Many

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The sad, empty people who have no life and are addicted to this pathetic blog know the rules. Be balanced. Be diversified. That doesn’t mean owning two condos instead of one. Or having a spouse and a GF. And it sure doesn’t mean putting your faith in one stock, one asset or one house on one street.

The big lesson this week with the meltdown of FB. The world’s top social media platform was savaged by the markets Wednesday night and again Thursday – down 18% at the opening a day after reporting results. Ironically, the numbers were okay. Revenues up 42%. But the problem is FB’s hit a growth wall. Users are down. And with 20% of all the people on the planet signed up, there’s no place to grow. Poor Zuck.

While Facebook turned into Faceplant, the Dow was ahead more than 100 points and the S&P 500 was sitting on a year-to-date gain of more than 6%. Even one of the worst single-day stock plops in history by a global conglomerate was not enough to derail the entire index. The lesson: own all of them. Not one of them. Or even ten of them. Diversify, baby.

Here’s what portfolio manager Doug Rowat (the one without the Porsche) had to say when I asked him to parse FB for you:

“We think that because a company is well known, or even because we use their offerings every day, that they will never fall on hard times. But they do. Constantly. General Electric was down 45% last year even as the DJIA rallied 25%. What would be the odds of a blue-chip, industrial conglomerate getting hammered in the midst of a rapidly expanding global economy? But it happened.

JP Morgan actually researched the frequency of share-price collapses by examining the price action for securities in the Russell 3000 Index, a broad-based index of US equities. JP Morgan’s research showed that, over time, the odds of any one position experiencing a catastrophic loss—a decline of 70% or more from the peak with minimal recovery—were 40% and in some riskier sectors, such as information technology (hello FAANG shareholders), the odds rose to nearly 60%.

If you held a portfolio of only, say, 10 stocks, imagine how devastating it would be to have even just two or three of these positions plunge 70% at the same time?

And this trail of tears is not just a US phenomenon. Just ask Canadian investors who owned Nortel, BlackBerry (Research In Motion), Bombardier, Yellow Pages or Valeant Pharmaceuticals.”

Don’t buy US stocks. Or Canadian ones. Or Euro. Buy broad-based exchange-traded funds instead which hold an entire index. They are proxies for the economic growth of an entire nation or region, with the same liquidity and flexibility of an individual security, but far less potential volatility and risk. Companies can and do blow up, peter out, get distracted, lose focus, be outflanked or screw up. Economies, not so much. And the same ETF rule goes for bonds, preferreds, REITs and the rest of your portfolio. Don’t be a cowboy.

The average new condo in the GTA now costs $774,554. Seriously. That’s 23.5% higher than a year ago. At the same time, the average new detached house is almost 10% cheaper (at $1.13 million).

What’s going on here?

We’ll, it looks classic. When prices spurt higher on plunging sales it’s usually a precursor to collapse. Regarding new builds in the country’s biggest real estate market, the market is anything but healthy. New condo sales, the industry just revealed, have collapsed 61% year/year. Last June 5,290 units were snapped up. This year, barely more than 2,000 were sold.

Sales of single family homes, already crushed over recent months, were 19% lower than a year ago and (get this) 71% fewer than the 10-year average. And while just 421 singles sold last month, there is an unsold inventory of 4,848 units. As for new condos, the inventory is now 10,335 and last month alone 14 new developments broke ground.

So why are sales offices still jammed? Howcum half the new precons were snapped up in a few weeks?

Because there are still hundreds of thousands of moisters who want to indenture themselves for an eternity, throwing their entire net worth into a concrete box as a rite of passage into financial illiteracy. But the stress test and rising mortgage rates have thinned their ranks considerably. Sales are down, however delusion and naiveté are not. Now shut out of the new single market by the credit crunch this mob has turned en masse to condos, propelling prices to nosebleed levels. Three-quarters of a million for a highrise cube the kids could rent for a fraction of the carrying cost? Yikes.

If GTA condos were a stock, you’d know what to do.

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July 26th, 2018

Posted In: The Greater Fool

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