Many of today’s rising managers and executives come from a range of academic backgrounds, from anthropology to zoology. While this doesn’t diminish their intelligence or critical thinking skills, I have found that many middle managers lack some of the foundational learnings critical to a business education.
I still think that practical experience outweighs academic theory. However, many people growing their knowledge within a particular industry develop a closed, myopic view of their industries and business strategy.
For this reason, I believe it is important to familiarize (or re-familiarize, for those who once attended business school) oneself with core strategic training.
Below are two eminent articles by Peter Drucker and Michael Porter, which capture the essence of many business school lectures and books. Read and understand these two articles and you’ll quickly be speaking the language of MBA grads…without the ridiculous tuition.
An effective executive does not need to be a leader in the sense that the term is now most commonly used. Harry Truman did not have one ounce of charisma, for example, yet he was among the most effective chief executives in U.S. history. Similarly, some of the best business and nonprofit CEOs I’ve worked with over a 65-year consulting career were not stereotypical leaders. They were all over the map in terms of their personalities, attitudes, values, strengths, and weaknesses. They ranged from extroverted to nearly reclusive, from easygoing to controlling, from generous to parsimonious.
What made them all effective is that they followed the same eight practices.
The essence of strategy formulation is coping with competition. Yet it is easy to view competition too narrowly and too pessimistically. While one sometimes hears executives complaining to the contrary, intense competition in an industry is neither coincidence nor bad luck.
Moreover, in the fight for market share, competition is not manifested only in the other players. Rather, competition in an industry is rooted in its underlying economics, and competitive forces exist that go well beyond the established combatants in a particular industry. Customers, suppliers, potential entrants, and substitute products are all competitors that may be more or less prominent or active depending on the industry.
The state of competition in an industry depends on five basic forces…
I didn’t receive much guidance growing up. I fumbled my way through school not really knowing where I was headed. The only career advice I received was “be a doctor or lawyer”. I became neither.
I didn’t know much. But I did *know* (or so I thought) that working hard would pay off.
I busted my tail through college and university, and later two masters degrees while working full time. School teaches you that hard work is the key to success. It’s a reward system that I became addicted to and could manipulate to my advantage. Work hard, study hard and get my dopamine fix through my good grades.
I was a great student!
In school I was consistently near the top of my class and I figured I was on the right path to success. Unfortunately, school doesn’t really prepare you for the corporate world.
In the corporate world, hard work will only take you so far. In fact, it can be counterproductive at times. It is in the first phase of your career that hard work matters the most.
During the early stages of your career, you need to learn a lot and prove yourself. Nobody knows you so you must deliver a lot to succeed. This means taking on and learning as much as humanly possible. It means working long days until what once took you 3 hours to complete eventually takes 30 minutes.
Junior employees are ditch-digging foot soldiers. The only thing that matters is how well you can take orders and use the tools provided. Call this Phase I of your career.
Once you become a master of your tools (physical or intellectual), you start to add value. You generate your own processes, interpret and analyze information and communicate recommendations to senior staff. This is the point of your career where those who create value can progress quickly, often by jumping from company to company.
Call this Phase II of your career.
So now you’re a middle-manager in some corporate behemoth. This is where many careers fizzle out. Why? Not because people can’t handle their new positions. No, it’s because they keep applying the same strategies as they did in Phase I and II of their careers.
It is in this third phase that the marginal benefits of hard work start to decline. Sure, a hard worker will be valuable to the team. You will get a decent paycheque and occasional recognition. But working super-hard during this third phase of your career could counterintuitively limit your upward mobility.
When you’re working hard, your time is gone. You’re busy managing multiple projects at the same time with little remining time to think. And by the time you have a moment you’re too drained to be productive.
Doing a lot is not the same as doing the things that matter.
Often, time to ruminate is needed to prioritize the work that has the biggest impact. Executing on 3 high impact projects very well will get you noticed far more than doing 15 low impact activities moderately well. People are remembered for their pinnacle work, not for all the shit they shoveled for the firm.
Another reason to work less hard as you rise in the ranks is so you always have spare capacity. When the big boss has an urgent request, the person with spare capacity can more easily and quickly jump into action and save the day. Meanwhile, people bogged down by meaningless tasks miss those opportunities to shine in front of senior executives.
Perhaps most importantly, unfortunately for the introverts out there (e.g. me), managers who aren’t glued to their desks make connections and get noticed. I’m talking about facetime. Networking. Schmoozing.
Of course, meeting people for lunch or coffee requires time. But networking is critical to career progression so you better make the time. Namely, you better reallocate time from completing meaningless tasks to making meaningful connections with people in your company and industry.
Won’t people think you’re slacking?
Nope. You have to be pretty blatant about it to get noticed. So much work within a corporation is qualitatively measured, it’s almost impossible to keep track of individual capacity. In a corporate environment, determining whether someone is operating at 70% or 100% capacity is an impossible task. Usually, it’s not worth the time and effort to figure out to any degree of certainty. Moreover, if business leaders care about results (as opposed to busyness) the person operating with spare capacity will actually appear like they’re working harder than the rest.
Once you’re in that middle management phase of your career, my suggestion is to set your own agenda as much as possible. Without disregarding your boss’s requests, this means setting time aside for business and career priorities.
If X, Y and Z are critical to your company’s success, don’t waste too much time on A, B and C. Many people mistake activity for productivity. This is why bureaucrats love meetings. Meetings feel productive even though they accomplish nothing.
Many middle managers work like crazy without reward. If you prove you’re an indispensable shit-shoveler that’s who you’ll remain.
Many people point to the US stock market performance after the 1929 crash as evidence that stocks can go nowhere for decades.
The argument usually points to the chart below, which shows the Dow Jones Industrial Average failing to retake its August 1929 peak until November 1954. In other words, people make the argument that someone investing in US stocks at the 1929 peak would have had to wait until November 1954 just to break even.
This is false.
The above chart shows the commonly used Dow Jones Industrial Average – an index based on price-returns.
What people completely miss is that investors would have received dividend payments during this entire period. Below, I adjust market returns to include dividends.
According to the calculation below, when including reinvested dividends, an investment at the 1929 peak would have returned on average 5.58% per year ending November 1954. That’s equivalent to a cumulative total return of just under 300%.
While it’s true that the buy-and-hold investor would have ridden a financial rollercoaster along the way, even the worst market timer would have done OK if they simply invested a lump sum and did nothing.
Of course, it took time for dividends to compensate for price declines. It wasn’t until 1945 that investors started to experience a positive total return. That’s still a long time to wait – and still implicit evidence that stock markets can take a long time to recover.
However, the stagnation narrative is significantly undermined, as this shows it took far less than a quarter-century for the worst market timer to break even.
The above examples show a worst case scenario – someone who’s only decision was to invest at the peak of a stock market bubble and then sit on their hands. This isn’t a realistic scenario for most of us.
Most people invest periodically (i.e. not all at once) as they stash away savings over time. So the more realistic illustration would show how someone performed if they started investing in 1929 and added to their investment over time.
The following chart shows the portfolio value for someone who spread their investment over a 40 month period, starting at the end of 1929. In this example, the person invests a total of $20,000. As you can see, their account is positive (i.e. above $20,000) from the end of 1933 onward.
This more realistic scenario again shows the myth of secular stock market stagnation narrative is largely misleading.
After constructing a well-diversified portfolio of Canadian and US companies – using a combination of individual stocks and ETFs – you look at your portfolio’s currency exposure and wonder: “Should I hedge or not?”
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 […]
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 […]
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 […]
The world right now is overrun by opinions and people talking their book. What we as investors, decision makers, concerned citizens need instead are facts. Facts to form our own opinions.
It has been a long time since labor has had so much power
I believe there are reasons for and against hedging US dollar exposure, many of which investors fail to consider.
Most investors incorrectly base their decision to hedge US dollar exposure on their view of the US dollar. While it makes intuitive sense that if one is bullish on the US dollar they’d want unhedged exposure, I believe this is the wrong way to execute on this view.
Some Canadian investors might have 30, 40%+ of their equity holdings allocated to a diverse basket of US companies. They’ve committed a lot of time to ensure individual exposures aren’t excessive and spread across a range of sectors to reduce the risk of one individual weak holding making a significant impact on portfolio performance.
Yet, after all that careful effort they leave their entire US equity position exposed to a single factor: the US dollar. While there may be some nuances (e.g. some US companies will benefit from a weak US dollar), a decline in the US dollar would negatively affect the entire 30, 40%+ US equity position. This is a massive overexposure to a single risk factor.
By leaving a large portion of a portfolio exposed to a single factor investors are taking on significant risk. Many people fail to recognize this.
Historical Canadian dollar performance
If you were to ask Canadian investors during the mid 2000s about US stocks, most would say they stay far away. Why? Because during that time the Canadian dollar appreciated significantly against the US dollar, wiping out investment returns. At that time, currency risk was at the forefront of their minds because they had just experienced its painful effects. Between 2002 and 2007 (a 5 year period!) the Canadian dollar appreciated roughly 60% against the US dollar.
Note: Many investment practitioners argue that CAD/USD is a wash over the long run. The chart below shows that today’s level is close to where it was almost 30 years ago. What this argument fails to appreciate is that not all investors have a 30 year time horizon. An investor with a 5 year time horizon (note that many investors behave like they have 1 year time horizons) would have either experienced a massive tailwind or a massive headwind due to USD exposure. Not a gamble people should take as they approach real-world liabilities, like retirement. Also, the argument that CAD/USD is a wash over the long run erroneously assumes that exchange rates are mean-reverting and deviations are temporary. This is false.
Nobody knows where the USD/CAD exchange rate will head over the long run. Smart people have great guesses, but nobody truly knows. And it’s quite possible that CAD appreciates considerably again, for one reason or another. My point is the risk still exists and it always will.
By leaving a large portion of a portfolio exposed to a single factor investors are taking on significant risk. Many people fail to recognize this.
As with everything in finance and investing, there are multiple considerations. Nothing is black and white, and currency exposure is one of those things.
USD performance during crises
While overexposure to a single risk factor should be avoided in all portfolios, some exposure to the US dollar – due to its safe-haven status – does provide a portfolio cushion in times of crisis.
The chart below shows the level of CAD/USD during the recent crash. From December 2019 to March 2020, the Canadian dollar depreciated roughly 10% against the US dollar. This means that Canadians holding unhedged US assets would have benefited from a buffer.
Below, I’ve shown the performance of two TSX-listed US equity ETFs during that time period. Both are Vanguard S&P 500 Index ETFs, but VSP is currency hedged while VFV is not. You can see how the unhedged version of the ETF declined about 10% less than the hedged version, due to US dollar exposure. A similar narrative played out during the 2008 financial crisis.
So should I hedge or not?
Personally, when given the simple option I hedge. But overall, I might only be about 50% hedged.
My US exposure is attained using a combination of ETFs and individual stocks. Because it is much more time consuming to create my own hedges (e.g. using FX derivatives) my individual US stock holdings are unhedged. However, most TSX-listed US ETFs offer hedged and unhedged versions. In those cases, I buy the hedged ETF.
The blockchain is more than just Bitcoin. Companies across a wide variety of industries are developing interesting projects utilizing blockchain technology. Here are just a few:
Over the past year, the average house price in Toronto increased by almost $200,000! For those saving up for a down payment, they are another $200k behind.
Over the past several months, home prices in Toronto have gone vertical.
The IMF recently stated that overheating real estate is the greatest threat to Canada’s economy. The IMF provided their own fair value estimates for a variety of Canadian cities.
Toronto: Fair value is 28% below current prices
Vancouver: Fair value is 13% below current prices
Montreal: Fair value in line with current prices
Hamilton: Fair value is 30% below current prices
The proportion of median household income required to own an average home in Canada is approaching the Q2 1990 peak. Canadian real estate entered a long bear market in the early 1990s.
So when will Canadian real estate crash?
Or at least flatline for a while?
Honestly, who knows. People have been predicting a crash for a decade. Anyone who bought that narrative missed out on massive gains and is now likely priced out of the market.
Should I buy a house in Toronto?
I think most people should look at real estate as a rational purchase of shelter, not as an investment. This means taking a look at what you can truly afford relative to your assets and what you can earn while living in a certain geographic area. Compare that to renting (adjusting for square footage and perhaps some lifestyle benefits – e.g. a back yard) and you should have enough information to make a decision.
Unless you’re an investor, nobody should buy real estate with the hope or expectation that prices will continue to rise. Similarly, it is often foolish to hold off on a purchase hoping prices fall.
Of course, nobody wants to make a massive purchase only to watch prices fall 30% over the next couple years.
I don’t take any of this lightly. I understand that many people might run through the numbers and simply determine they can’t afford to live in Toronto, even if they must.
What’s quickly emerging is a two-tiered socio-economic strata – one with the financial means to afford a home and another that must resort to housing densification, cramming more family members into the same dwelling. The first group includes top decile earners and people with family money. The latter is everyone else.
Suggesting the latter group move to find more affordable accommodation is not the answer. The city needs tradesmen, social workers, waiters, day care workers, and so on. A city of lawyers and doctors doesn’t work (and would be a bore).
This is an urgent problem.
A huge portion of Canada’s economy is directly and indirectly connected to real estate. Real estate is the biggest risk to the Canadian economy and it is gutting the middle class. Either real estate prices collapse and hurl Canada into a massive recession or real estate prices continue to rise, further dividing the haves from have-nots.
The Federal and Provincial governments need to immediately create a task force to deal with this issue. While robust policy requires careful analysis before implementing, there are some obvious options that could quickly be executed. Namely, ban blind bids! People are bidding $100k, $200k+ over the next lowest bids driving prices artificially upward. Some people are even making offers significantly over asking not knowing there are no other bids!
Simply eliminating blind bids would cool the frenzy. Let’s start there.
Typical ESG investing (aka socially responsible investing, SRI investing, responsible investing, etc.) is a waste of time. It doesn’t achieve what many hope and believe.
ESG investment funds may be counterproductive and actually worsen the issues they are meant to fight.
Instead, many ESG funds only serve to pacify anxious investors who wish to decorate their portfolios with feel-good products. It’s sad to say because both ESG investment product manufacturers and investors usually have the best intentions. They want to do the right thing. Unfortunately, many fail to recognize their efforts are probably counterproductive and likely worsen the issues they are meant to fight.
As global interest in ESG investing rapidly grows, it is critical that investors understand how many ESG investment funds fall short of their implied objectives.
ESG funds are investment products (like mutual funds or exchange traded funds) that are constructed to feature environmental, social and corporates governance factors into their investment process.
Many ESG investment funds attempt to do this by excluding certain categories of sin stocks: guns, tobacco, porn, and so on. With growing concern about climate change, oil is increasingly at the top of the sin list.
The first problem with oil company exclusion is it’s very limited in scope. Oil companies don’t operate in a vacuum and are highly integrated within all sectors of the economy. They are financed by banks. They supply petroleum to chemicals and plastics manufacturers. Plastics are used in the production of millions of products. If boycotting oil companies, why not also their best customers and financiers?
It’s true that oil companies are at the heart of CO2 emissions and shutting down oil companies would stop the flow of petroleum based products throughout the economy. But excluding oil companies from ESG portfolios fails to shut anything down.
Companies have always had to work with various strata of investors who exclude certain investments based on a variety of characteristics. Value investors shun momentum stocks. Most of the world doesn’t invest in Canadian companies. Tobacco and gun stocks have been excluded from many large portfolios for decades. Yet, tobacco stocks, gun stocks and Canadian stocks have continued to perform as expected. Altria (formerly Phillip Morris) has a stellar long-run track record.
Is ESG investing profitable?
The exclusion of companies or sectors doesn’t affect performance. Research from South Africa’s period of Apartheid has shown that boycotting certain companies, sectors or countries is ineffective at altering share price performance.
Companies simply don’t need 100% of investors to be interested in their stock. There will always be a class of investors who don’t care about what they invest in as long as the returns are good.
In fact, the exclusion of certain companies from ESG portfolios may actually improve return prospects for those excluded companies. Perversely, if 80% of investors shunned Altria, for example, causing its share price to decline Altria’s expected future return would rise, attracting the remaining 20% of investors. A smaller pool of potential investors doesn’t change a company’s business prospects, and thus its intrinsic value. There will always be investors willing to capitalize on this. Moreover, without the burden of ESG-related business expenses, Altria’s intrinsic value may actually rise relative to other ESG-friendly companies.
Does ESG investing make a difference?
As conscientious investors abandon a company, the remaining class of financiers care less-and-less about the company’s practices. All things equal, this leaves the offending company to continue as it pleases, perhaps even creating a disadvantage for the ‘good’ companies that must operate under greater constraints.
Investors looking to force change would do better by adopting methods used by activist investors, like Carl Icahn. Activist investors take large stakes in companies they want to change. Shareholders, as company owners, have a right to board representation. The board hires company executives who then run the company.
To create change, investors must not distance themselves from companies with weak ESG practices. Instead, they must directly engage the companies they wish to change.
We study the nature of and outcomes from coordinated engagements by a prominent international network of long-term shareholders cooperating to influence firms on environmental and social issues. A two-tier engagement strategy, combining lead investors with supporting investors, is effective in successfully achieving the stated engagement goals and is followed by improved target performance. An investor is more likely to lead the collaborative dialogue when the investor’s stake in and exposure to the target firm are higher, and when the target is domestic. Success rates are elevated when lead investors are domestic, and when the investor coalition is capable and influential.
Given this perspective, ESG scores for investment funds (provided by various rating agencies) can be totally misleading. Based on current methodologies at many ratings agencies, to get a high score a fund must have minimal exposure to offending companies. As shown above, this can have a counterproductive result.
Don’t divest. Engage.
None of this is easy. However, if institutional investors (which represent individual investors) combine efforts and own enough of a company to engage the board they can enact real change. This is not an unusual practice, as investors have banded together many times in the past.
As public concern over climate change grows, there will likely be enough energy to make a real difference. However, it is critical that efforts are directed correctly, away from feel-good ESG products and into activist ESG funds.
Dumb Wealth 