Categories
Investing

Peter Lynch: 75 Years of WISDOM in One Speech

If you can’t explain to a 10 year old why you own a stock, you shouldn’t own it.

You can’t forecast the future.

And more common sense investing gems.

Categories
Wealth

Why Aren’t Most People Wealthy Today Through the Passing Down of Wealth and Compound Interest?

Why aren’t you the beneficiary of generations of wealth accumulation by your ancestors?

The short answer is it gets diluted as the family tree branches out and as younger generations squander their inheritance.

Of course, for that to happen wealth must exist in the first place. Reality is that throughout most of history, most humans have been dirt poor peasants. Until recently, labor (because of its abundance) has never really been a way to build personal wealth, so preservation of wealth was only an issue for a small proportion of landowners.

Most of us don’t have to go far back along the family tree to find ancestors that either starved to death or had everything taken from them by an authoritarian government.

The idea of a middle class segment of society with the ability to create wealth is very new. This is because the economic (time, effort) surplus generated by inventions like the washing machine, running water, transportation, computing, refrigeration, etc. is a recent phenomenon. Without such inventions – plus relative post-war stability for much of Western society – we wouldn’t even be pondering this question.


For those with wealth in their family tree, where did it go?

Redditor r/Wrkncacnter112 explains:

My cousin is an economics professor. He did a study on rich families and found that it was extremely rare for any rich family to maintain its wealth status for more than a few generations. At least some of them may remain “comfortably well off” for many generations, but massive wealth and power almost inevitably dissipate unless there is a formal set of institutions to protect it from the rest of society (e.g., ruling royal families).

It’s kind of analogous to why string tangles easily — the untangled state is only one possible state, with infinite ways for the string to tangle. So the odds are very high that wadding up a string will cause it to tangle against itself somewhere along its length.

Similarly, there are only a few ways to preserve and grow wealth, and they must be practiced consistently and continuously in order to work. There are essentially infinite ways to screw that up, and the changeover in generations means people with highly varying personalities and experiences inherit the money.

Under those conditions, even if every generation is composed of an only child, the odds of someone dissipating the fortune within a few generations are pretty high, and they only increase when you add in multiple siblings, spouses, multiple offspring, cousins, etc., not to mention the vicissitudes of life such as illness, accidents, natural disasters, wars, etc.

Even most royal families have fallen prey to these things pretty consistently; the British one may seem perpetual, but their line has died out or been usurped several times (for example: Victoria’s replacement of the main Hanoverian line, the Hanoverians’ replacement of William III’s branch of the family, the Glorious Revolution, the Restoration, the English Civil War, the execution of Charles I, the replacement of the Tudors by the Stuarts, the War of the Roses, and so on forever).

The “British royal family” may be doing very well for itself, but how rich and powerful are the Stuarts or Tudors now? Not to mention an unending list of events that could have caused the destruction of the entire institution, such as the collapse of the British Empire, the Blitz and Hitler’s planned invasion of Great Britain, Napoleon’s planned invasion, the French Revolution, the Gordon Riots, the American Revolution, the Seven Years’ War, the Protectorate, and the Spanish Armada, just to name a few.

It is vanishingly difficult to maintain great family wealth (or even ongoing family identity that does not radically change) over multiple generations.


Wealth destruction is often a mundane affair

Most of us aren’t Royalty and the erosion of wealth is much more mundane affair. Here’s a practical example that is probably replicated hundreds of millions of times across society (by Redditor r/dmcevoy14):

This happened to a family friend of mine. Their mother inherited the family dividend portfolio of like 5mil. It made something like 150k a year I was told… was built up over like 40 years of investing… though she sold all of it and took the cash and spent the majority of it on a huge house, furniture and new cars. I think she said there is maybe 400k left and her mother is questioning if she now has enough to make it through retirement. Unfortunately, my friend will not see any of that money.

All it takes is one bump in the road to ruin multiple generations of family wealth.


Your ancestors can do everything right, but all can still be lost

All it takes is one wrong turn for a massive fortune to be destroyed. It’s much easier to lose money than it is to make it. I love this hypothetical story originally told by r/JacobAldridge in 2009:

My ancestors gave their $1 to the Knights Templar shortly after they were founded in 1129. Using innovating banking techniques (for the early middle ages) that locked in exactly 5%, no more, no less, every year, that $1 grew to $5,630 by 1307 – when the Order was arrested by the French Crown.

Now by this stage, French Royalty had overthrown the Merovignian traditions, and the Carolignians had implemented primogenture, which prevented that $5,630 from being split among the heirs.

As such, growth continued (remarkably, at a consistent 5%), so that when Louis XIV ascended to the throne in 1643 my family had claim to $70.6 Billion dollars. Several key wars, the revocation of the treaty of Nantes, and the Sun King’s lavish lifestyle did not affect my 5% at all.

So much so, that by the time his grandson was beheaded during the French Revolution in 1789, my ancestors’ $1 was worth $834 Trillion dollars.

Now Napoleon, on crowning himself Emperor, probably should have used that money to buy Europe, instead of invading it. But mindful of the powerful miracle of compound interest he was manifesting for my family, he did not – in fact, his wars of conquest were largely driven by the need to find that 5% each year.

You can imagine the relief in France in 1940 when that amount (which by now had reached $119.8 Quadrillion) was handed over to the Nazis. US Troops located the amount shortly after the landing at Normandy, and decided only the great US of A was able to continue the miracle.

And so the money grew, through Kennedy, Nixon, Reagan et al, until by 2008 it was worth $3,149,637,318,314,090,000. In one of his final acts as President George W Bush handed control of the money into my personal safe keeping (as with Social Security, he firmly believed I would be able to do better investing it myself).

And so it was that on this day, 12 months ago, I invested that entire amount in Lehman Brothers stock.

I should probably check on that soon to see if the 5% came through for the 870th consecutive year.


Key takeaway: Don’t take your ability to build and preserve wealth for granted. You’re living in a rare time in human history and have an opportunity your ancestors would die for. And many did.

Categories
Work

Goldman Sachs and The 100 Hour Work Week

NEWSFLASH: Working at Goldman Sachs is hard.

This is according to a recent survey of Goldman Sachs junior analysts. I won’t go through the entire survey, but the following slide basically sums up the findings. Junior analysts work about 100 hours a week and don’t sleep. As you can guess, these working conditions have had a big impact on their social lives, health and well-being.

Are you surprised? I’m not.

This is Goldman Sachs. The premiere shop in one of the toughest industries, investment banking. Despite grueling working conditions, the company has fresh grads clamoring to work there. A two-year analyst stint at Goldman can set up a 22 year old grad for life. It’s a stamp of approval and proof someone has the stamina and intellect to do anything. This is why Goldman Sachs has no shortage of eager applicants.

What do analysts at Goldman Sachs make?

Junior analysts are paid well. According to data from Wall Street Oasis, Goldman pays its first-year investment-banking analysts an average of $123,500 a year, including base salary and bonuses.

A 22 year old kid isn’t going to make that kind of money somewhere else.

Starting at $100k+, if one continues down the path they would easily net $500k annually within a few years.

All of this information is well documented.

If you join the army don’t be shocked when you’re asked to wear a uniform.

Any business student applying to the analyst program at Goldman Sachs (or any i-bank, for that matter) should know what they’re getting into. These aren’t drunks crimped at naval ports to become crewmen on ships. These Goldman analysts voluntarily chose to fill out an application form, interview and sign on the dotted line. They are also smart, connected and educated. They knew.

And guess what? If it sucks so badly, they can quit. This is a free society.

Despite the working conditions of every investment bank being common knowledge within b-school hallways, every once in a while the press gets ahold of news like this:

“XYZ investment bank analyst working 100hrs a week and doesn’t have time for a life.”

Shock-the-Monkey News Corp.

Well, this isn’t news. The world of investment banking (and many other professions) has always been extremely intense and demanding. 100 hour weeks are the norm – especially when you’re green.

I know I couldn’t handle it and would hate it. I don’t believe in sacrificing my life for money. I’d trade my time for passion, but producing the next corporate spin-off, while interesting, isn’t my idea of pleasure. I’d prefer to limit that kind of shit to 10 hours a day max. Others have a different life plan, and that’s OK.

That’s why I never worked in i-banking. It’s also why I never joined the navy.

Categories
Life Real Estate Wealth

Canadians are Not Happy

A recent global happiness survey conducted by the World Happiness Report has shown that Canadians now rank 15 on a country by country scale. This is a 5 place drop from Canada’s previous rank of 10.

On an absolute and relative level, the conclusion is simple: Canadians are not happy.

You might argue that Canadians are happier than people in Moldova or India, and you’re probably right. The thing is, people don’t measure satisfaction based on how bad things could be. They compare their standing against others around them. And against their own experiences.

The whole world has gone through lockdowns, Covid deaths and massive lifestyle changes. So if everything were equal, you’d expect the rankings to remain constant. Clearly, Canada is going through something other countries aren’t. The right will blame the left. Left the right. There’s so much subjectivity in these kinds of surveys that who’s to really know.

One thing is clear though. The countries with the happiest citizens are socialist paradises: Finland, Denmark, Switzerland, Iceland and Netherlands. These are countries that take care of their people. Indeed, 9 of the top 10 countries were European.

The anomaly was New Zealand – probably the most European country outside of the EU. Canada used to fit that description.

So what went wrong? The most objective answer I can provide is economic. A growing proportion of Canadians can’t afford one of the most basic of Maslow’s needs: Shelter.

Rents and home prices across Canadian regions with the most jobs are higher than almost anywhere else in the world, in relation to median incomes. Moreover, the unaffordability gap is widening. Every day, housing prices are rising faster than most individuals’ ability to save for a down payment.

It used to be that a nuclear family could live quite well off a single blue collar wage. Today, many Canadians are abandoning the idea of ever having kids – they have nowhere to put them.

I’m not saying these Canadians are living on the street. They’re living with parents and sharing apartments. But they’re doing so way longer than previous generations. With the light at the end of the tunnel shrinking, this dependency on the kindness of others to meet a basic physiological requirement is stressful, and unusual for most Canadians throughout modern history.

When basic physiological needs – like shelter – are not met, people are unable to pursue safety, belongingness, esteem, and self-actualization. They are unable to develop as humans, therefore limiting their capacity for happiness.

Categories
Investing

Data Visualization: Railroad Stocks

Another set of data visualizations provided by AnrepViz.com. This time data visualizations feature railroad stocks such as CN Rail, CP Rail, Union Pacific, Norfolk Southern, CSX Corp, Wabtec Corp and Kansas City Southern.

Categories
Investing Wealth

Prepare for Food to Get Way More Expensive

Nothing in life – or the markets – is totally predictable. It was only a year ago that the world was totally side-swiped by a global pandemic. Did anyone see that coming before the first reported cases coming out of Wuhan? Hardly.

This is why I believe a big driver for wealth management is risk mitigation. Today, I believe we must prepare for the possibility that food prices rise significantly.


After toiling away for 40+ hours a week the last thing you want is for your hard earned money to be devalued. While most investors think about total returns, embedded within that expected return is a data point called inflation.

When you let someone else use your money (i.e. you invest), you expect to be compensated for the risk they won’t be able to pay you back, the general cost of money and the devaluation of that money when they do. Some investments have a greater risk premium than others. Some are simply linked to the price of an underlying commodity. These commodities – such as copper, iron, wheat – are the most raw form of prices in the economy.

Commodity futures markets are probably best explained by the Duke brothers in the 1980s comedy “Trading Places”, starring Eddie Murphy. (OK, there are probably better explanations, but when else am I going to get to include this clip in an article?)

Commodities are inputs into much of what the world produces and consumes. If the price of a commodity rises, the cost to produce items using that commodity also rises. Those prices are typically passed onto consumers.

If the price of wheat rises, the price of bread in the grocery store will eventually tend to rise.

Agricultural commodity prices are determined by current and anticipated supply and demand (plus any related costs of ownership, such as storage). Commodity prices are also affected by the amount of money that exists within the economy and the value of the US dollar (since most commodities are priced in US dollars). At the moment – and for the foreseeable future – it appears that many of these factors are converging to lead to higher agricultural commodity prices.

Indeed, general agricultural prices are already at a 7 year high. Perhaps most concerning, prices have risen about 50% since just the middle of 2020.

Figure 1 and 2

We’ve seen these kinds of price rises before, around 2008 and 2012. These historical price changes have led to dramatic social and economic upheaval. Many argue that the 2008 commodity price pressure (this goes beyond agricultural commodities) helped tip the global economy into recession, ultimately leading to the Global Financial Crisis. Leading into 2012, many suggest skyrocketing food prices led to the ‘Arab Spring’ uprisings across much of the Arab world. My point is these surges not only affect our pocket books. They can have serious knock-on affects for the economy and society in general.

Since around 2014, we’ve benefited from relative agricultural price stability. This stability was assisted by surplus production in the United States, referred to by some as the ‘global food reserve bank’.

Unfortunately, this period of stability might be over. As demand (and prices) picked up throughout 2020 US producers have offloaded stockpiles to a worrying degree. Lower surplus reserves could exacerbate future price increases.

The world is always just days away from total anarchy.

Don’t believe me? Go look in your fridge right now. You probably have enough food to last a week. I’m not predicting grocery store shelves will go bare, but I’m pointing out the extremes to which food shortages can go.

We are all dependent on ample food stockpiles, and any deficiency will QUICKLY be priced to bring supply and demand back into equilibrium. Without a buffer, a weak harvest – perhaps in Russia or India – could send global food prices soaring.

The base case is for an orderly rise in food prices, but anyone that cares about their wealth and health must consider scenarios where food prices lurch higher.

One doesn’t have to look to Russia or other foreign nations to see supply risk. There are serious problems in our own backyard.

Weather patterns in the US have become increasingly unfavorable over the years. Currently, a massive portion of the US is experiencing drought. Climate change is only making it more challenging to reliably grow food.

North American’s only spend about 5% of their income on food, so we take food stress for granted. Of course, that proportion is not the same for everyone as income inequality polarizes spending patterns. That 5% figure probably doesn’t show the true nature of food insecurity across North America. The rise in food prices will hurt many.

My point is simple: the risk of food price inflation is real. People need to consider ways to mitigate that risk. This includes better grocery shopping habits, stockpiling non-perishables and allocating a portion of investment portfolios to assets that might benefit from inflation.

Categories
Investing

Why Have Rising Yields Hurt Tech Stocks?

Since the end of Q3 2020, there has been a marked rotation from ‘pandemic stocks’ (mainly tech) to ‘recovery stocks’ (industrials, financials, consumer discretionary, etc.). Many tech stocks – like Amazon, Facebook Netflix, Zoom – are flat-to-down while the broader market hits new all time highs.

While there might be some intuitive sense to this as return to normal approaches, many people are pointing to rising yields as the cause.

Why Rising Yields Impacts Some Stocks More Than Others

Many people understand that rising yields have a negative impact on the prices of bonds. A bond represents a series of cash flows in the future. The higher the discount rate (of which the risk free rate is a part) the lower the present value of those cash flows.

The sensitivity of a bond’s price to changes in yield is neatly wrapped up in a single data point called ‘duration’. Higher duration bonds have a greater sensitivity to changes in yields.

Duration can be sort of described as a weighted average of time to receive cash flows. The longer it takes to receive cash flows, on average, the higher the duration.

Therefore, a zero coupon bond will have a higher duration than a coupon-paying bond. All things equal, a 30 year bond will have a higher duration than a 10 year bond. And so on.

While many people understand how duration impacts bond prices, they forget that the same concept applies to stocks.

You can look at a stock like an infinite-term bond. In doing so, it becomes clear that a non-dividend paying stock (like most tech stocks) have a higher duration than more traditional dividend-paying stocks.

Going even further, because many tech companies don’t generate positive EBITDA or cash flow they trade on the expectation of a potential cash flow in the future. In comparison, most recovery stocks are tried and true, generating reliable cash flows quarter-after-quarter. So when considering the cash flows generated by the firm itself, a business that might generate cash sometime in the future clearly has a higher duration than a business generating cash today. For these reasons, most tech stocks have a higher duration than most traditional stocks, and are therefore more sensitive to rising yields.

Bonus Point

Yields are a component of the cost of capital. A rising risk free rate raises the cost of capital for all businesses. While tech stocks operating on promises of future cash flows might do well when money is virtually free, they face rising challenges when capital becomes more scarce or expensive. In comparison, businesses that can fund capital investment via retained earnings and current assets (i.e. through realized earnings and cash on hand) and don’t have to tap into capital markets to stay afloat may start to outperform when yields start to rise.

With all that said, let’s be real. As a proportion of where they were last August, yields have risen a lot. But in absolute terms, yields are basically near the bottom of a 10 year range. The 10 year US Treasury yield is essentially where it was a week before the pandemic started.

Categories
Life Work

UBI: A Modern Day Utopia?

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Categories
Real Estate

Toronto Housing Bubble Shrinking Talent Pool

I recently hired two people to join my team, which is domiciled in Toronto. Both of my new employees live miles and miles away from the GTA. One jetted to Montreal when the pandemic started, and honestly I don’t know if he’s coming back.

Who can blame them? These are well-paid individuals, but who can afford to live in Hog Town? Certainly not people in the early stages of their career.

And those that do live in the GTA require a premium to make it all work. Wage growth overall has fallen behind housing price increases, but those in demand can hold out for higher wages. Want a highly-skilled Toronto employee? Then better be prepared to pay Toronto wages! Of course, it doesn’t work that way for all. Low-skilled workers are sharing apartments and living with their parents, as Toronto is now a city that is only accessible to the wealthy.

It’s a sad state of affairs. But one to which employers must adapt.

Highly skilled people are moving further and further away from the Big Smoke, simply because – even with decent wages – they can’t afford to live in Toronto.

If Toronto is to remain a business hub, three things must happen: 1) housing stock must increase to dampen housing price appreciation, 2) demand from speculators and money launderers must be squashed, 3) regional transit must improve to allow suburban dwellers to quickly commute to the city, 4) companies must embrace remote working beyond the pandemic, 5) companies must decentralize head office work by setting up offices across a wider region and 6) companies must raise wages to attract talent that is leaving for cheaper cities.

Hiring skilled employees is a highly competitive marketplace. If a prospect has multiple options, they will go with the company that is more flexible and willing to let them work from a location that doesn’t put them in debt for several lifetimes or pays them a premium for coming into a Toronto office.

  • Charts: Berkshire vs Tesla, Canadian Housing
    Fact 1: Over the past 12 months alone, Tesla’s market capitalization grew by more than a full Berkshire Hathaway! Growth’s outperformance is well known and documented, but the speed of this outperformance is jaw-dropping. Fact 2: Residential investment as a proportion of GDP in Canada skyrocketed during the pandemic and remains at extraordinary levels. The Canadian economy […]
  • Vacant Homes and the Bank of Mom & Dad
    Fact 1: According to the OECD, there are millions of vacant homes around the world. Houses sit empty while prices appreciate aggressively and are in dangerous bubble territory in some places, like Toronto. Fact 2: As a proportion of the housing stock, Japan has the highest rate of vacant homes. In North America, over 11% of homes […]
  • Bottoms, Bulls and BlackRock
    Fact 1: Corporate insiders have historically had a knack for buying near market bottoms. Fact 2: Investor bullishness has declined during 2021. However, sentiment has recently recovered. Fact 3: Over the past decade, small cap tech stocks have underperformed small cap cyclicals. Technology leadership has clearly been limited to big cap indices. Fact 4: A sign of a liquidity […]

Many companies are dealing with this problem by shoving their heads in the sand. Executives don’t realize how big this issues is because they tend to hire more senior employees earning $150,000+ salaries who have been on the property ladder for 10+ years.

For middle-managers and supervisors in the trenches, the prospect of hiring a junior-level employee for $55,000 is laughable. Anyone willing and able to accept that salary either lives with their parents or lives 100 miles away. And when a business is able to hire someone at this level – knowing the housing situation at hand – that person will quickly seek to move up the ranks. That means far less loyalty from junior employees than what companies might have seen in the past.

Due to the housing bubble, the war on talent in Toronto has evolved dramatically over the past year or two. Businesses that ignore the problem will lose talent. Businesses that embrace the challenge will become attractive places to work.

Categories
Income Investing

Cargojet Increases Quarterly Dividend by 11.1%

MISSISSAUGA, ON, March 4, 2021 /CNW/ – The Board of Directors of Cargojet Inc. has declared a cash dividend of $0.2600 per common voting share and variable voting share for the period from January 1, 2021 to March 31, 2021, an increase of $0.0260 or 11.1% per share from the previous quarter.

“In recognition of our 2020 results and our strengthened financial position, our Board has voted to increase the dividend” said Dr. Ajay Virmani, President and Chief Executive Officer. “We remain committed to prudently manage our cashflows and will continue to strike the right balance between investing in growth and returning cash to shareholders”, he added.

Cargojet has a long history of providing value to its shareholders through regular dividend increases. This also marks the 16th consecutive year Cargojet has paid dividends or cash distributions.

The record date for determining shareholders of the Corporation entitled to receive payment of the dividend of the Corporation shall be March 19, 2021 and the payment date for such dividend shall be on or before April 5, 2021. These dividends will be eligible dividends within the meaning of the Income Tax Act (Canada).

Cargojet is Canada’s leading provider of time sensitive premium air cargo services to all major cities across North America, providing Dedicated, ACMI and International Charter services and carries over 25,000,000 pounds of cargo weekly. Cargojet operates its network with its own fleet of 28 cargo aircraft.

Notice on Forward Looking Statements:

Certain statements contained herein, including statements related to the completion of the Offering and use of net proceeds of the Offering, constitute “forward-looking statements”. Forward-looking statements look into the future and provide an opinion as to the effect of certain events and trends on the business. Forward-looking statements may include words such as “plans”, “intends”, “anticipates”, “should”, “estimates”, “expects”, “believes”, “indicates”, “targeting”, “suggests” and similar expressions. These forward-looking statements are based on current expectations and entail various risks and uncertainties. Reference should be made to the issuer’s public filings available at www.sedar.com and at www.cargojet.com, including its most recent Annual Information Form filed with the Canadian securities regulators, its most recent Consolidated Financial Statements and Notes thereto and related Management’s Discussion and Analysis (MD&A), and the short form prospectus to be filed in connection with the Offering, for a summary of material risks. These risks are not intended to represent a complete list of the risks that could affect the issuer; however, these risks should be considered carefully. Actual results may materially differ from expectations, if known and unknown risks or uncertainties affect our business, or if our estimates or assumptions prove inaccurate. The forward-looking statements contained herein describe the issuer’s expectations at the date of this news release and, accordingly, are subject to change after such date. The issuer assumes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reason, other than as required by applicable securities laws. In the event the issuer does update any forward-looking statement, no inference should be made that the issuer will make additional updates with respect to that statement, related matters, or any other forward-looking statement. Readers are cautioned not to place undue reliance on these forward-looking statements

SOURCE Cargojet Inc.