- the source for market opinions


December 10, 2018 | ‘Stay Far Away’

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.

First the easy stuff.

“I’ll make it short,” says Toronto Paul. “33, single, 85k a year with 10-20% bonus potential. 230k saved, 35k in line of credit (carried me when I lost my job). Own a property in YYC that has 206k mortgage and I think I could get 230k for. Rented out for last 6 years, tenant pays 1300, costs me to 1400 a month. I paid 258k and have owned it for 8 years.

“Debating if I should sell my place or continue to rent? I don’t see the oil and gas situation in YYC getting any better that’s why I want to sell. Thanks – please please please answer! I am so confused as what to do. “

Seriously, Paul? You sound like an industrious guy, having saved about four years’ worth of after-tax income. So why the confusion? The condo in Cowtown is not an asset, but a liability. It’s worth thirty grand less than eight years ago. It loses money monthly. If you sell now the proceeds will barely cover liabilities. You walk away with zero. Less than zero, after eight years of red ink. And it’s 3,400 km away.

There are but two reasons not to sell. First, you’re a cowboy and selling for a loss is an admission you made a mistake. Cowboys would rather have an arm ripped off riding a brahma bull and walk home with a bloody stump than do that. Second, you think Calgary condos will rise in value. Pffft. Not happening.

Calgary housing is mired in misery. Month after month it’s the same story of declining sales, swelling listings and softening prices. Last month another 17% drop in deals, with prices down 4%. It’s been almost a decade now since the market crested, with no sign of recovery. Even the real estate board spokeslady sounds depressed: “Recent challenges in the energy sector have weighed on consumer confidence over the past month. Combined with weakness in the employment market and further gains in lending rates, this is impacting ownership demand.”

Of course, the NDP government just made things worse by announcing an OPEC-style production cap will be slapped on the industry starting next month. While that boosted the price of Canadian crude, it also sent a message to corps thinking about investing in the oil patch: Go away.

Give it up, Paul. You learned the lesson.

Now the hard stuff:

“I’m a daily reader, sporadic commenter and full time dog lover,” says Brandon. “I’ve sought your wisdom in the past and I feel like it’s lead me down a good path (thanks). I’ve said before this blog has really taught me a lot. In your ‘Trapped’ post from July 10th, yours truly asked about selling my Guelph condo. I figured the market would allow me to get 330k and I have since sold the condo. That’s one problem gone and a new one has surfaced.

“My plan was to manage the money myself.

“Insert Saturday night. By chance I had an opportunity to chat with a Professor of Derivative Securities at one of our major Universities. Something he said that stayed with me was ‘Stay away from the stock market. Stay as far away as possible.’ The comment took the wind out of my sail since this has been my plan for months. He explained that historically there’s a bear market/recession every 10 years and he’s currently short on the market. He mentioned the VIX is starting to indicate higher volatility and recommended I don’t risk anything.

“I respect this man’s opinion since he’s far more educated in this space than I am, he’s also a family friend so I know he wouldn’t intentionally steer me wrong. Now I’m left not knowing what to think. I was ready to pull the trigger on my plan and now the conversation I had is picking away at me. Maybe he thought I was going to pick individual stocks and dump all my money into cannabis. I understand that it’s talk and a lot of people talk. Is it noise? Am I reacting too much on emotion? Or is there something to what he’s saying? The money I’m using is every penny I have in the world so making the most educated choice I can make is important to me. Thanks for reading this Garth, and for running the best damn blog around.”

A professor of derivative securities? Who’s currently shorting the market? Does his mom know?

Hey, Brandon, if the guy was an equity-picking genius, he probably wouldn’t be spending his time hanging around a campus packed with young, nubile coeds. (I may reconsider that last sentence.) In any case, bear markets, in which stocks lose 20% of their value, do happen routinely. But they last an average of only 350 days, are followed by rapid recoveries and occur for a reason. Typically it’s a recession (several quarters of negative economic growth), or a rapid run-up in rates, a burst of inflation, mounting unemployment, commodity price shock or public policy mistakes. Bears don’t wander in on their own, or because there’s a cycle. There isn’t. The prof made it up.

Nor does volatility bring carnage. Ignore the Vix. Noise. Focus on the fundamentals. Unemployment is at the lowest point in 50 years. Corporate profits have been extreme. The economy of North American is robust. Inflation is subdued. Oil costs a third of what it did before the GFC. The US has slashed taxes while technology is making the world more productive and efficient than ever before. There’s no recession on the horizon and no bear lurking.

Of  course, there will be more turmoil thanks to Trump, China, Brexit, French Toast, populism, central banks and that woman George Clooney wed. More noise. So just follow the rules. Be balanced. Own safe assets as well as growth ones. Be diversified. No individual stocks, but ETFs instead. Spread exposure across Canada, the US and the world. No crypto. No weed. Be tax-efficient. Brim your TFSA. Get the proper weightings, then forget about the chatter.

Remember the odds are with long-term investors, no matter how much a shorting, lubricated academic might try to convince you otherwise. Over the decades the market has risen 78% of the time. In any ten-year period there’s an 88% chance of inflating values. I’ll take those odds anytime. In fact, during the worst bear of our lifetimes (2008-10) people with B&D portfolios averaged a 5% annual return while the stock market lost 57% and took seven years to recover.

Here’s the best advice I can give: if you invest, stay invested. Ignore the merchants of fear. But if you harbour doubts, don’t even start. You’ll panic, sell into a storm and lose. Hence the difference between knowledge and wisdom.

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December 10th, 2018

Posted In: The Greater Fool

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