“There is only one side of the market and it is not the bull side or the bear side, but the right side.” — Jesse Livermore
“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” — Peter Lynch
“The way I figure out the economy is literally from the bottom up and from company anecdotal information, knowing that housing leads retail and retail leads capital spending. From listening to the guys on the ground. When you talk to companies and to guys who run companies, you get a whole additional perspective on the economy.” — Stan Druckenmiller
“The whole world is simply nothing more than a flow chart for capital.” — Paul Tudor Jones
“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” — John Templeton
“The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.” — Jessie Livermore
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” — Peter Lynch
“The nature of the game as it is played is such that the public should realize that the truth cannot be told by the few who know.” — Jesse Livermore
“If you want to become really wealthy, you must have your money work for you.” — John Templeton
“Remember, things are never clear until it’s too late.” — Peter Lynch
“Every serious deflation I have looked at is preceded by an asset bubble, and then it bursts.” — Stan Druckenmiller
“The four most expensive word in the English language are ‘This time it’s different.” — John Templeton
“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” — Paul Tudor Jones
“Never invest in any idea you can’t illustrate with a crayon.” — Peter Lynch
“Looking at the great bull markets of this century, the best environment for stocks is a very dull, slow economy.” — Stan Druckenmiller
“At the end of the day, the most important thing is how good are you at risk control.” — Paul Tudor Jones
“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.” — Peter Lynch
Corporate executives have an ability to send ‘signals’ to the market about the health of their organization. One such signal is dividend policy.
In particular, if a company increases its dividend – particularly in a bad economic environment – it signals management’s confidence in the company’s future prospects. It also indicates the company has the cash to continue paying its dividend.
If I’m going to invest in a company right now, I want to know that the company’s executives are confident. While I wouldn’t rely on this single factor to make an investing decision, I believe it provides good corroborating evidence for an investing thesis that might already exist.
May of 2020 was one of the worst months ever for the US economy. Yet there are a handful of large cap US companies that are increasing their dividends, which I have listed below:
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May Dividend Increases (US Companies with Market Cap >$10b)
I’ve met many people over the years who love their dividend stocks. They buy Canadian staples like Royal Bank, TD, BCE and Enbridge for their consistent, growing (usually) dividends.
If you’re an income investor, there’s nothing wrong with this for the equity portion of your portfolio. But there’s a way to get the fixed income side working harder – by using preferred shares.
Preferred shares are hybrid securities that pay dividends (often fixed). Preferred share dividends must be paid out before common share dividends, making them a more reliable source of income.
In the event of a dissolution or liquidation of the issuer, preferred shareholders’ claims on assets are senior to common shareholders but behind debt holders.
The share price of preferred shares can change significantly but tends to be more stable than common equities. This is a positive and a negative, depending on how you look at it. Preferred shares don’t participate in the upside profits from ownership of the company and usually have no voting rights unlike common shares. However, they might decline less than common equities from the same issuer in down markets.
Because preferred shares are often redeemable at a specified par value and pay a fixed dividend, they can have similar characteristics to bonds. Namely, they are more interest rate sensitive than common shares. Because of this, at times the prices of preferred shares can move in different directions to their common stock counterparts.
A big benefit over corporate bonds for Canadian investors using non-registered accounts is certain Canadian preferred shares are eligible for the dividend tax credit. (I.e. a 5% yield on an eligible Canadian preferred share is worth more after tax than 5% on a similar bond.) Another advantage over bonds is the higher pre-tax yield. Of course, this is because bonds are ranked higher in a company’s capital structure and tend to be less volatile.
As you can see, preferred shares are an asset class that belongs somewhere between stocks and bonds. As such, they can be used to fine tune a portfolio potentially replacing some of the equity or corporate bond portion, depending on an investor’s individual situation.
Warning: Over the long-run you’d probably be better off NOT using preferred shares as an equity substitute. They don’t participate in the upside – that’s a big tradeoff for an investor with a long time horizon.
There is a lot to look for when buying individual preferred shares:
Credit quality
Yield to call/redemption
Liquidity
Term to maturity – perpetual vs retractable
Payment provisions – fixed, floating, re-settable
Dividend policy – cumulative vs. non-cumulative
Other features
Ideally, a portfolio of preferred shares is diversified by issuer and type. Quite frankly the dumb/lazy investor like myself has no time or energy for this kind of research and maintenance. Instead, I prefer to use an ETF.
Below I’ve listed 3 of the largest preferred share ETFs that are traded on the TSX:
iShares S&P/TSX Canadian Preferred Share ETF (CPD)
This ETF provides exposure to a diversified portfolio of Canadian preferred shares and can be used to diversify sources of income beyond traditional government bonds and GICs.
Key facts (as at May 25, 2020):
Yield: 6.05% (trailing 12mth distribution yield)
Distribution Frequency: Monthly
Top 3 Sectors: Banks (35.83%), Insurance (20.98%), Energy (15.67%)
Management Fee: 0.45%
RBC Canadian Preferred Share ETF (RPF)
This ETF provides access to a diversified portfolio of rate-reset preferreds in a single ETF. The ETF is actively managed by investment teams with expertise in company-level fundamental research, credit analysis and interest rate forecasting.
Key Facts (as at May 25, 2020):
Yield: 6.81% (dividend yield)
Distribution Frequency: Monthly
Top 3 Sectors: Financials (59.70%), Energy (22.60%), Utilities (14.80%)
Management Fee: 0.53%
BMO Laddered Preferred Share Index ETF (ZPR)
This ETF is designed for investors looking for higher income from their portfolios. The ETF invests in a diversified portfolio of rate reset preferred shares and has lower interest rate sensitivity than the full preferred share market.
Key Facts (as at May 15, 2020):
Yield: 6.81% (distribution yield)
Distribution Frequency: Monthly
Top 3 Sectors (May 25, 2020): Diversified Banks (39.17%), Oil & Gas Storage and Transportation (21.43%), Life & Health Insurance (7.53%)
If you’ve watched CNBC lately all you see is doom and gloom. If it bleeds it leads, so naturally media has a bias to publish scary stories. And there have been plenty over the past couple months.
Many of these recent stories included high profile dividend cuts at companies with big brand names: American Airlines, Expedia, Southwest Airlines, Walt Disney Company, Estee Lauder, General Motors, Hilton Worldwide, Boeing, Ford, Macy’s, Gap, Nordstrom…just to name several.
This is enough to make a dividend investor want to wait it out on the sidelines.
Despite the negative news about dividend cuts, the number of positive (increases) and negative (suspensions and decreases) dividend actions is surprisingly balanced.
The negative actions make sense and there are undoubtedly more cuts to come. But the increases?
Put yourself into a corporate executive’s shoes. The economic shit-storm is no longer a surprise to any executive choosing whether or not to pay dividends. Many corporate executives now have enough information to determine whether their company can continue to pay – or even raise – dividends. So many companies are indeed in a position to raise dividends.
Consequently, since March 1st 40 companies in the S&P 500 have voluntarily chosen to INCREASE their dividends. Some by significant amounts.
For those relying on a dividend for retirement or investment income, a dividend suspension can be quite a shock. However, if you’ve been following my suggestions you are properly diversified and fairly insulated from the negative shock from a single holding or sector.
But that’s in the past. Like the executives leading these corporations, what you need to do now is think about the future. Executives typically don’t raise dividends when the see a dark future for their company.
Which companies increased dividends? Below I’ve listed them in order of % dividend increase. The average increase was 7.44%, ranging from 0.36% to 78.57%. Personally, I think any company raising dividends by 5% or more in this environment has to be pretty confident about the future.
Note that one company initiated dividends in May (Otis Worldwide Corp).
If you use an investment advisor, I’d bet that your portfolio is some derivative of the standard 60/40 allocation. That is, your portfolio is made up of 60% stocks and 40% bonds.
Yeah, you might be +/- 10% here or there and how you fulfill those broad allocations might differ from others, but ultimately most portfolios are pretty much the same. More specifically, most portfolios are exposed to the same general factors.
The 60/40 portfolio has worked fairly well over the past 40 years. After all, the world has experienced a once-in-a-lifetime secular disinflation that provided a tailwind to both stocks and bonds. In addition, the correlation between stocks and bonds generally remained low, helping to reduce volatility along the way.
Unfortunately, the 60/40 portfolio hasn’t always worked. The chart below shows the correlations within the 60/40 portfolio going back to 1883. There have been long periods during which stocks and bonds were highly correlated, largely eliminating the diversification benefits of the 60/40 portfolio.
The New Investing Paradigm
The modern asset management industry was built on the underlying assumptions behind the 60/40 portfolio. That’s because institutional memory tends to overweight recent history. Unfortunately, the next 40 years might look very different from the last 40 years.
From around 1980 to today, the world has benefited from a secular disinflation created by improvements in computing, communications and global trade. Consequently, inflation and interest rates steadily declined from the double-digit era of the early 1980s.
This long-term decline in rates was like a rising tide for all asset valuations, and provided the economic backdrop for the 60/40 (or similar) asset allocation.
Note: interest rates are a key determining factor when valuing securities. A higher interest rate results in a lower present value of future cash flows – i.e. lower asset prices.
The world is now facing a reversal of some of these trends. Massive monetary expansion, helicopter money and de-globalization are all emerging forces that could push inflation upward. While the last 40 years saw a continued decline in inflation, the next 40 years could see the opposite.
There are no guarantees of course, but this seems like it could be the next ‘black swan’. Nobody is expecting inflation. However, it has happened before. The early 1960s to about 1981 was a period of rising inflation and rising rates, as shown in the chart below.
If a long period of rising inflation and interest rates occurs again, both stocks and bonds will face major headwinds.
A Portfolio for a New Investing Era
If the 60/40 portfolio is dead, what else could investors do? Below I will examine four model portfolios using data (sourced from PortfolioCharts.com) going back to 1970 to see what allocation can withstand both investing eras:
1. All Stock Portfolio
As the name suggests, this portfolio is made of 100% US stocks. Aggressive? Yes. But many people under 30 run portfolios that are nearly all stocks.
2. Traditional 60/40 Portfolio
First proposed by John Bogle, this portfolio splits allocation between the total US equity market and intermediate bonds. While precise allocations and fulfillment methodologies may differ, the risk-return characteristics of most modern portfolios generally align with this model – don’t let all the bells and whistles fool you.
3. Permanent Portfolio
This portfolio was first proposed by investment advisor Harry Browne as a way to provide stability throughout economic cycles. To do this, he included growth stocks, precious metals, government bonds, and Treasury bills.
This is the first of the portfolios examined that goes beyond the traditional, potentially providing stability and growth in a new investing era.
4. Golden Butterfly Portfolio
Like the Permanent Portfolio, this portfolio is meant to perform well during all investing environments. This portfolio has the higher returns associated with the All Stock Portfolio, but the lower risk levels associated with the Permanent Portfolio.
The chart below summarizes the broad asset allocation for each of the four portfolios. Note, these are just models – guidelines investors might use when constructing their own ideal asset allocation.
The Risk Experience
Despite what you might have heard, investing isn’t just about chasing returns. First and foremost, investing is about managing risk. What risks? The risk of losing money, the risk of losing purchasing power, the risk of making mistakes caused by an emotional response to volatility.
An investment with high long-term average returns is pointless if investors sell every time markets decline by 20%. Unfortunately, it is extremely difficult to manage human emotional responses to market gyrations. So portfolios should be constructed to accommodate these emotions. That means, investors crave more stable portfolios that lose money less frequently and have shallower drawdowns when they do lose money. The first chart below shows this data for the four portfolios, with the Golden Butterfly Portfolio as the clear winner.
The second chart shows the longest time to recovery each of the portfolios ever experienced. Can you imagine being underwater for 13 years? That was the longest recovery for the All Stock Portfolio. Shockingly, the 60/40 portfolio’s longest period to recovery was a whopping 12 years!
Portfolio Returns
The four charts below show the rolling 10yr forward returns for each of the portfolios going back to 1970. For example, this means that the bar over 1980 shows the 10yr return an investor would have experienced if they invested from 1980-1990.
What becomes clear by looking at these charts is that the All Stock and 60/40 Portfolios break down in certain environments. In contrast, the Permanent and Golden Butterfly Portfolios provide a much more consistent experience across investing eras.
The following chart encapsulates the entire data set into a single average, worst and best return figure. While the Golden Butterfly Portfolio average return is 1.6% (160 basis points) below the All Stock Portfolio, it provides a much more stable experience. Indeed, the Golden Butterfly Portfolio’s worst 10yr return was POSITIVE 4.1%. It is much easier to manage emotions when that’s the worst case experience.
Moving Forward
Remember, the portfolio data above encompasses two distinct investing eras. The point is to show what might work across different eras, not what worked only during the disinflationary era of the past 40 years.
The Permanent and Golden Butterfly Portfolios performed well across eras because of their allocation to gold.
Gold’s investment characteristics are very different from traditional assets like stocks and bonds. In particular, gold tends to outperform during periods in which stocks and bonds underperform. This is important as the world enters a new investing era that may not be favourable to the standard 60/40 portfolio.
Free Guide to Surviving the Covid-19 Economic Crash
The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.
This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.
I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.
If you’ve managed to save a decent chunk of money over the years you’re probably wondering what to do with it.
Do you invest it? Buy real estate? Do nothing?
You’re watching the markets rise and you feel like you’ve been left out of the party. Everyone else is making money but you. FOMO (fear of missing out) is a natural reaction when you’re sitting on the sidelines.
Some people will act on that fear by opening up an investing account and putting the money to work. Over the long run that has worked for investors willing to ride out the ups-and-downs of the market. However, this is not a decision to be treated lightly.
What does your money represent?
There is a behavioural bias called ‘loss aversion’. It says that people react more poorly to losses than to gains of the same magnitude. In other worse, people prefer not to lose $10 than to gain $10.
While finance theory argues people should evaluate investments based on expected returns – the weighted average of all possible outcomes – in reality this is nonsense. Loss aversion is a behavioural characteristic grounded by millions of years of evolution.
In the past, losing a day’s worth of food could mean your family starves. In contrast, gaining a day’s worth of food (before we were able to store it) wouldn’t have an immediately positive affect on life. (Over the long-term, if an abundance of food consistently existed we’d simply add more humans.)
When it comes to your money, it makes sense to weigh losses more than you weigh gains. First of all, even a temporary decline in cash availability could lead to a missed mortgage or rent payment. This has a significant and lasting affect on your ability to enjoy life, especially if it results in homelessness.
However, losses have even greater psychological significance over the practicality of missed payments. Your savings represents all the time and energy you spent working over the years. If you’re like most people you’re not particularly fond of your job. You probably wouldn’t be there if you won the lottery.
Your savings represents all the time and energy you spent working over the years.
Your savings is what you have to show for years of pointless meetings, directionless projects, crazy commutes, stress and even physical pain. (Remember, not all jobs are at the comfort of a desk. People in the trades often have a limited span during which their bodies can handle their work.) This is time that you’ll never get back.
In exchange for sacrificing significant elements of your life, you were paid and you saved some of this money. So you can see why losing a portion of this money creates hugely negative psychological consequences. It’s your life’s work encapsulated into a single number. Watching this number decline by 50% is like losing half your working life – you might as well have spent that time playing X-Box.
What to consider before you invest.
When it comes to investing your money, unless you have a lot of time to make up for your losses (i.e. you’re young, in which case you probably don’t have much to invest anyway), you shouldn’t invest anything you can’t afford to lose. Assume your investments could decline by 50%. Would you be comfortable with that?
Of course, the wealth management industry will point to long-term average returns on stocks and bonds when pitching to clients. However, the reality is that these averages smooth out wide year-to-year fluctuations.
While it’s true that (historically) if you you simply bought-and-held the index you would have achieved these average returns, it doesn’t consider the journey that individuals experience. This is precisely why people sell their investment after losing 20, 30, 40%+. It’s a stop-loss strategy on their life’s work. Although the US stock market has never gone to zero, each double-digit decline makes that risk feel real, so investors take action.
Of course, what ends up happening is investors lock in their losses and end up underperforming the averages by a significant amount over the long run.
Final thoughts.
Forget about FOMO. Ignore your friends bragging about their gains. This should not be what drives you to invest.
Instead, consider the losses you are able and willing to handle. Could you ride through a 50% loss without worrying about funding your retirement or paying your bills? Could you handle the psychological shock of watching 30-50% of your life’s effort evaporate?
My suggestion is to start with the stash of cash you need to stay comfortable – financially and emotionally. This goes beyond emergency savings that covers a few months worth of bills. This cash stash is your backup plan in case everything else fails. The size of this stash is dependent on how you answered the questions above. A young person living at home will have a smaller stash than a breadwinner supporting a family of 4.
Once you’ve stashed some cash you can then invest the rest. Although your investment portfolio will be smaller, your results might actually improve because you’re less inclined to sell after markets decline.
Your cash stash should help you get through market madness without emotionally reacting by preserving a significant portion of your life’s work.
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The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.
This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.
I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.
Corporate executives have an ability to send ‘signals’ to the market about the health of their organization. One such signal is dividend policy.
In particular, if a company increases its dividend – particularly in a bad economic environment – it signals management’s confidence in the company’s future prospects. It also indicates the company has the cash to continue paying its dividend.
If I’m going to invest in a company right now, I want to know that the company’s executives are confident. While I wouldn’t rely on this single factor to make an investing decision, I believe it provides good corroborating evidence for an investing thesis that might already exist.
April of 2020 was one of the worst months ever for the US economy. Yet there are a handful of large cap US companies that are increasing their dividends, which I have listed below:
1957/58 pandemic GDP experience saw a quick recovery after a sharp decline
Recessions are short. Expansions are long.
About a quarter of the recently unemployed are classified as temporarily unemployed.
Equities lead economies.
Markets end up doing alright a couple years after hitting their initial lows.
S&P 500 earnings scenarios
The lenders of last resort
Covid-19 case lines by province in Canada
Total debts of US states and municipalities
Massive contraction in Canadian manufacturing
Biggest decline in US consumer confidence since 1973
30+ million jobless claims in 6 weeks
US unemployment rate the highest since the end of the Great Depression
The world is dragging down China’s attempt at a recovery
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The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.
This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.
I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.
In the world of investing, there are tons of mistakes you can make. Many of these mistakes are so costly that people kill themselves over them. So please don’t take the following stories lightly.
The emotional reaction to watching a life’s work evaporate is stunning. Other than losing a loved one, I can think of no greater loss. It’s not the money that affects people. It’s the time, effort and mental anguish that the money represents. It’s the family time you gave up to deliver that project and make your asshole boss happy. It’s the meetings, company retreats, networking, backstabbing, stress and so on.
If you’re lucky, you make these mistakes when you’re young and have little to lose and lots of time to make up for it.
Below are three stories of great financial mistakes various Reddit users made in the markets. The first of which just happened yesterday:
u/optionsnewbie24
I went long on an oil etf Friday afternoon after oil took a huge hit Friday thinking it would recover. I had a 175k position. I’m looking at it today and it’s at 1885 dollars. I’ve lost it all. I’m not sure where to go from here. It was extremely risky and stupid and was my life savings. I’m 28 and make 45k. Most of that was money I saved from inheritance. Not sure where to go from here. I have proof of all the trades. This hurts. I also have a baby on the way and recently married. I was greedy and tried to increase my money and instead lost it all.
u/civgarth
I’m a former derivatives trader with ___. At 28 I found myself in a margin call of 300k. My fiance found me crying on the floor when she came home. We were due to be married in a few months. As a pro, I can’t frontrun and all my trades were shunted behind retail trades. I saw Nortel go from 120+ to 30. (I think though I could be wrong). This was in the year 2000.
Today at 44, with my wife (same lady), we’ve rebuilt our wealth many times over. As long as you learn what got you in your position, and are cognizant about the lesson each time you decide to do something, you will be fine.
Also, look for some help with the gambling. I was trained and paid to do this and still lost everything. It’s a zero sum game.
u/xenocidic
As a relatively new investor, I fell in love with a stock. I thought… Nutritional algae! That’s where it’s all going. (Narrator: It wasn’t.) So I bought. And I bought. And I kept buying, even as it kept going lower and lower. Dollar cost averaging, right? That’s what you do! Buy more…
All I have to show for it is the documents from the firm’s bankruptcy telling me my shares were cancelled and deemed worthless ($TVIA).
I don’t share these stories for amusement. Use them as lessons.
Lesson 1: Placing a massive bet on a single idea – no matter how confident you are – is always a bad idea. Treat each investment as something that could possibly go to zero. It doesn’t matter how much sense your thesis makes, how old the company is or how many people agree with you. Any investment can go to zero under the right circumstances.
Lesson 2: You can believe you’re doing the smart thing (e.g. dollar cost averaging) and still wind up losing money. Dollar cost averaging should be applied at the portfolio level, to ensure you remain fully diversified. It shouldn’t be used as a way reduce your cost base in a single losing position.
Lesson 3: Even pros screw up big time. You’re not a pro supported by a team of researchers and spending 10 hours a day analyzing investments. So stay humble and expect to make mistakes.
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Today, the price per barrel of West Texas Intermediate reached a low of -$40.32. That’s right: the price was negative.
West Texas intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
Everyone has the same question: How is this possible?
The reality is that there is simply too much oil being produced right now and not enough demand. Production is being curtailed globally, but that takes time. It’s not like a light switch that can simply be turned on and off.
The chart below shows supply and demand for the world oil market going back to 2000. As you can see, most of the time there tends to be minor variance between supply and demand.
In contrast, today the gap between supply and demand is extremely wide. This means there is a massive surplus of oil being produced right now.
That oil needs to be stored somewhere, and as storage capacity is maxed out fewer people are willing to take delivery.
With May 2020 WTI futures contracts expiring on April 21, oil producers are desperate to offload about 100 million barrels. With limited storage and plummeting demand, producers are now forced to pay others to take the oil off their hands. Nobody wants to take delivery and the oil has to go somewhere.
You read that right. Oil producers right now must pay others to take delivery of their oil. Of course, anyone taking delivery must have somewhere to put it and means to transport it. That all costs money.
As the Covid-19 coronavirus economic catastrophe rages on, it is likely that energy markets continue to implode – at least until supply and demand can be more closely aligned.
Vanguard Energy ETF (VGE), Exxon (XOM), ConocoPhillips (COP), Chevron (CVX) and Canadian Natural Resources (CNQ) are getting hurt badly today. However, the United States Oil Fund (USO) is down even more, more closely reflecting the maturing May contract.
Beware if you’re considering buying an ETF that buys oil futures like the United States Oil Fund (USO). These types of ETFs shouldn’t be used to get long-term exposure to oil.
Oil ETFs tend to invest by purchasing futures contracts (i.e. they don’t actually buy barrels of oil). When a futures market is in “contango” (see chart below) futures contracts expiring near-term have a lower price than those expiring farther out into the future. The oil futures market is currently in record contango. Indeed, there is currently (mid-day April 20th) roughly a $50-60 spread between the May and June contract.
Even if prices along the futures curve for Oil remains constant, when the market is in contango an oil ETF that buys futures contracts will experience a negative roll yield as future contracts approach expiry and converge with lower spot prices. This is a great way to lose money over the long term. Oil ETFs that invest in futures contracts are best used for very short term trades.
If you are brave enough to invest in energy right now as a long term play, I would instead choose an ETF that invests in actual producers.
If you found this article helpful, please forward to a friend or colleague you think might benefit.
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Bank of Canada forecasts an annualized decline in Canadian GDP of over 40% for its best case scenario. Over 70% for its most severe forecast:
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Home resales and listings in Canada. Listings are generally down with minimal impact on resales. Expect things to worsen over the next couple months:
What the Bank of Canada is buying:
Investing assumptions and market leadership has evolved over the decades:
World GDP decline today vs 2009. Worlds apart:
Most are still expecting a sharp but short economic contraction:
Change in employment by Canadian province:
Federal deficits as a percent of GDP are going to be huge in the US and Canada:
The beginning of the end or the end of the beginning? It will take a very long time to recover these job losses. And the losses have just started:
The scariest economic chart I’ve ever seen. Almost 17 million job losses in 3 weeks:
Air travel has ground to a halt:
Markets tend to bottom before the economy:
Travel in China is slowly returning to normal:
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The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.
This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.
I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.
RBC and CIBC CEOs recently publicly stated they do not intend to make any Covid-19 related layoffs in 2020.
Many are interpreting these statements in different ways. But I think most are missing the point.
The decisions by the RBC and CIBC CEOs actually make smart financial business sense.
The CEOs of Royal Bank of Canada and CIBC recently made public statements both suggesting their companies will not make Covid-19 related layoffs in 2020.
I’ve read the public reactions (e.g. comments on various news sites) to these statements and they vary quite widely. Many suggest RBC and CIBC doing the ‘right thing’ by being good corporate citizens. Others argue these companies are not charities and should do what’s right for the bottom line, and instead allow shareholders to decide how they direct charitable efforts.
While I’m sure the impact to society and individuals was considered, the decision to retain employees is ultimately probably a good financial decision that benefits RBC and CIBC shareholders.
1. These are quasi-government entities.
Let’s make no mistake. As systemically important institutions tied to the lifeblood of the Canadian economy, both RBC and CIBC are highly controlled (via regulation), monitored and supported by the Canadian Government. There are so few large banks in Canada that it has to be this way. It is for the benefit of the country to have solid, stable banking institutions.
Given that, Canadian banks are not typical cut-throat enterprises that can simply eliminate thousands of jobs without political (and public relations) repercussions.
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While I have no evidence of this, I suspect the tacit need for a government backstop factored into the consideration for avoiding layoffs. I would argue it is part of an implicit (or possibly explicit) agreement that Canadian banks can’t receive taxpayer money with one hand and push taxpayers en masse to the unemployment lines with the other.
In fact, with the extreme volatility, I wouldn’t be surprised if over the past few weeks the big Canadian banks actually received some kind of direct or indirect support from the Federal Government and Bank of Canada. Assuming government or central bank support was delivered over the past couple weeks, I also wouldn’t be surprised if it came with clear direction from the Feds that banks cannot lay anyone off this year.
If you were running the government, wouldn’t you include this clause as part of the deal?
2. Layoffs kill morale.
Even if an employee survives a round of layoffs, they’re left forever wondering if they’re next. More personally, they miss their colleagues and the new void becomes quite apparent in the office.
Compound that with the fact that remaining staff must pick up the work of those let go. The work doesn’t stop just because there are fewer staff. Often, those remaining envy the departed.
By the time the dust settles after a round of layoffs, many remaining staff have one foot out the door. Many will also perform worse – either by choice (due to eroded morale) or by force (because so much additional work has landed on their desk). The remaining top performers will quit, leaving only those who couldn’t find anything better.
If you were running RBC or CIBC, is this the type of organization you’d want?
3. Laid off employees take value with them.
During a period of massive layoffs, the baby is often thrown out with the bathwater. Good employees are forced out with the bad.
As employees leave, they take massive amounts of intellectual capital, forever lost by the company. Worse, these employees are often eventually re-hired by competitor firms that benefit from the intellectual capital at the expense of the firm that originally conducted the layoffs.
Intellectual capital not only refers to knowledge of history, processes or functions. It includes client relationships and other forms of intangible goodwill.
When people leave a company things break, clients are lost and elements of value are forever destroyed. This greatly reduces a firm’s capacity to actually perform, delight clients and compete.
4. There will be a time to re-hire.
Layoffs tend fluctuate with the business cycle. When times are bad companies require fewer staff. However, when business improves more staff is needed.
Therefore, looking past the current economic recession it is inevitable that RBC and CIBC would have to re-hire staff sometime in the future, if they decided to let people go in the first place. At that time, these companies would be competing with every other employer for good talent. This would prove difficult and costly, likely impacting the ability to serve clients.
Ultimately, the solution (layoffs) to a temporary issue (recession) could result in long-term staffing and business performance problems. Given the choice, many companies therefore are better off retaining their talent throughout the cycle.
5. Layoffs are expensive.
This might seem counter-intuitive to many, but it costs money to conduct layoffs.
For example, the cost to layoff (and eventually replace) a full time employee earning $30/hour is about $20,000 (source: calculator). This estimate isn’t all-inclusive, however. The big missing variable is severance, which can be a hefty sum depending on tenure, age, common law precedent (these companies mainly operate in Canada), etc. Severance pay can add up to 1x, 2x+ annual salaries in some cases. This is why many big companies create a large reserve to pay for planned layoffs.
In addition, there are other potential costs related to lawsuits, administration, and so on.
Clearly, it is not cheap to let staff go. When all factors are considered, layoffs are a very expensive (financially and strategically) proposition and any benefit is quickly eroded.
Final thoughts.
So when do layoffs make sense? I would argue that the organizational structure of a large company should be relatively indifferent to the business cycle. Of course there are some variable elements, but I think, whenever possible, staffing should align to long-term strategy. If a certain level of staffing isn’t required to achieve long-term goals, it might make sense at that point to cut staff.
Given these 5 points, I think the decisions made by RBC and CIBC go beyond virtue signalling and social responsibility. They make smart financial business sense.
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