Nov 042019
 

I hope everyone had a good weekend. Many people turned back their clocks 1 hour marking the end of this year’s daylight saving time. But time wasn’t the only thing that fell back. Economic growth in the U.S. pulled back to just 1.9% for the 3rd quarter of 2019, lower than the previous 2 quarters. Last month I wrote about anticipating this GDP number, and warned that if it continues to fall (which it did) then we may be close to a U.S recession. The Canadian economy is also in trouble, managing to eke out a 0.1% gain in the latest month.

Yet somehow the U.S. stock market reached an all time high at the end of October. Senior citizens must be thrilled to see their retirement funds performing so well. 😀

So economic output is slowing down, but investors have never been more optimistic – pushing stocks to record highs. How does this happen? It’s basically the result of the U.S. Central Bank’s monetary policy. In late October the Fed lowered interest rates again, trying to stimulate the overall economy. However, all it did was push investors to buy stocks over bonds because bonds now pay lower interest/returns. But a higher company stock price doesn’t improve business hiring, productivity, or employee salaries. The average American worker doesn’t see any direct benefit from the Fed’s monetary stimulus. Only Wall St. does.

The result is a diverging economic reality between two worlds; the working class that’s just one paycheck away from financial ruin, and the investing class who continues to see growing asset prices. Over the last 10 years, the S&P 500 gave investors about 13% annualized return. So the fact is if someone put $1,000 into a low cost index fund in October 2009, then today he would have $3,400 – assuming he reinvested the dividends. Wow. And all this required zero effort on the investor’s part. Amazing. 🙂

So the lesson here is simple. Focus on investing your savings, and be patient. Investing is like cooking a juicy steak; the less you touch it the better. Working hard at a job can only get you so far. But the real secret to financial success is to leverage the Central Bank’s policies, and invest in a diversified portfolio to build wealth the easy way. 🙂

Although October was a good month for stocks, I had a major expense (property tax payment for my farms) that stifled my savings. In the end, I was able to grow my wealth by $8,300 for the month. Not bad, but I didn’t reach the $1 million net worth milestone I was aiming for. Oh well. Better luck in November. 🙂

 

Liquid’s Financial Update

*Side Incomes: = $5,400

  • Part time job =$600
  • Freelance = $400
  • Dividends =$1200
  • Interest = $500
  • Farm rent = $2,700

*Discretionary Spending: = $3,700

  • Food = $300
  • Miscellaneous = $2,100
  • Interest expense = $1300

*Net Worth: (ΔMoM)

  • Total Assets: = $1,384,500 (+7,000)
  • Cash = $9,100 (+300)
  • Canadian stocks = $195,100 (+2400)
  • U.S. stocks = $134,900 (+1400)
  • U.K. stocks = $21,900 (+500)
  • Retirement = $137,700 (+1900)
  • Mortgage Funds = $37,100 (+200)
  • P2P Lending = $36,700 (+300)
  • Home = $367,000 (assessed land value)
  • Farms = $445,000
  • Total Debts: = $385,100 (-1,300)
  • Mortgage = $186,100 (-400)
  • Farm Loans = $162,400 (-500)
  • Margin Loans = $34,800 (-200)
  • Line of Credit = $1,800 (-200)

*Total Net Worth = $999,400 (+$8,300 / +0.8%)
All numbers are in $CDN at 0.76/USD

This will probably be the last year I pay property tax for my farmland. I have been in contact with a realtor in Saskatchewan, and have already instructed him to list both my farms for sale. 🙂

Agricultural land has not been immune to the wider real estate slow down across the country. But there does seem to be some interest in my farms so far. In terms of market pricing, my realtor says I can probably expect to sell my farmland for about $446,000 in 2019. That’s pretty close to the farmland value I’ve already been using to calculate my monthly net worth so I will stick with my existing number for now.

Farmland values have had a great run in Canada, but slowing economic growth, trade barriers, and changing local conditions suggest to me that it’s time to reduce my exposure to Canadian farmland.

 

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Random Useless Fact:

Oct 212019
 

Investing is a lot like dating. Low confidence can keep you out of the market. A good way to gain confidence is to learn from those with experience. 🙂

When you do an internet search for “famous investors” you might see a list of highly experienced individuals. Some are dead. Most are alive. But despite being from different backgrounds, all the investors from the search result appear to have one thing in common.

None of them are wearing hats. A piece of headwear can tell a lot about someone’s personality. However, there is one famous investor that didn’t come up in my search results but does like to wear hats: and that’s Hetty Green. There aren’t a lot of photos of her because she died in 1916, but she had an incredible investment career. Here are five lessons we can learn from Hetty.

 

1. Start early

Wearing hats wasn’t the only trait that differentiated Hetty from other world class investors. With her grandfather’s encouragement Hetty had learned to manage her family’s financial accounts when she was just 13 years old. Born into the Quaker family (yes, the cereal name) Hetty was raised with conservative financial principles that would stay with her for life. The world was much simpler back in the days before Instagram and electric scooters. But while other kids were playing hopscotch outside, Hetty was busy reading financial papers and stock reports. 🙂

2. Practice delayed gratification

When her father bought her brand new clothes, Ms. Green sold her new wardrobe and purchased government bonds with the money instead. She eventually turned an inherited sum of $6 million into $100 million by 1916, which is the equivalent of $2.3 billion in today’s climate thanks to inflation.

3. Have an independent mindset and don’t follow the crowd

Hetty followed a contrarian investing strategy where she bought stocks and bonds when the market was full of pessimistic sentiment. She also had a knack for snapping up cheap real estate deals and trading railroad companies. In her own words she told the New York Times in 1905, “I believe in getting in at the bottom and out at the top. I like to buy railroad stocks or mortgage bonds. When I see a good thing going cheap because nobody wants it, I buy a lot of it and tuck it away. I keep them until they go up and people are anxious to buy. That is, I believe, the secret of all successful business.” She showed off this strategy a couple years later in 1907. After deciding that the market was overvalued, Hetty called in all her loans. Then, when the market crashed, she swooped in and bought them again at the lows. This line of thinking is very similar to Warren Buffett’s investment advice about being “fearful when others are greedy and greedy when others are fearful.”

Continue reading »

Oct 072019
 

How to spot the warning signs of a looming recession

Last year I wrote a blog post explaining that a recession may not be far away. A recession is 2 consecutive quarters of negative economic growth. The indicators at that time were still questionable. But fast forward to today and wow, the signals have become much clearer! Here are 10 economic indicators that strongly suggest a U.S. recession could be imminent.

recession indicators to keep an eye on

  1. Inverted yield curve
  2. Unemployment rate reaching an inflection point
  3. The long term unemployment is flattening out
  4. Declining GDP growth
  5. Lower expectations for corporate earnings
  6. Manufacturing index PMI falls to 10 year low
  7. Global uncertainty index at all time high
  8. Declining Cass Freight Index
  9. The Fed Bank of New York drastically raised the likelihood of a recession
  10. Rising auto loan delinquencies

Additional breakdown of each of the 10 indicators below.

The yield curve has inverted

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion cycle. The vertical gray bars on the graph represent periods of recession. How reliable is this indicator? Over the last 50 years, every recession was preceded by a yield curve inversion. 😮 The graph dropped to below 0% earlier this year in March, officially inverting the yield curve. According to Credit Suisse, a recession occurs about 22 months on average after a yield curve inversion.

US 10 year treasury against 2 year treasury yields from FRED

 

The unemployment rate is bottoming out

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. When we last looked at this graph in 2018 the unemployment rate was at 4% and heading down. Today it is lower at 3.7%, a 50 year low in fact. Practically speaking it cannot drop much more than this. Historically we can see in the chart that after the lowest point in each employment cycle, the unemployment rate shoots up abruptly, usually coinciding with a recession.

Unemployment rate cycle against past recessions. The correlation is very clear.

 

Continue reading »

Oct 012019
 

Tight Race Ahead

In a few weeks Canadians will vote for a Prime Minister to lead the country. Who knows what kind of chicanery will ensue. According to the CBC poll tracker, which aggregates all publicly available polling data, the Conservatives hold a narrow lead over the Liberals. Looks like it’s going to be a close call. 😮

canadian poll for 2019 election

Financial markets are always uncertain right before an election because policy changes can drive consumer incentives and business decisions. During the past quarter leading up to this month’s election the stock market has seen lower volumes of trading. Many companies put off hiring and investing until they know which political party is going to win.

Meanwhile south of the border, the United States economy is slowing down. Its 2nd quarter GDP growth dropped to 2%, down from 3% from the previous quarter. Manufacturing data also shows weakness and poor sentiment about businesses. Business earnings growth estimates have dropped from 7.6% last year to just 2.3% now. As a result the U.S. central bank dropped interest rates by 0.25% last month. This is good news for people who have floating rate debt in US dollars like myself. 🙂 So now my investment expenses are slightly lower than before.

Markets were slightly positive in September bumping up my net worth to $991K. It’s nearly at the $1M mark. 🙂 Below are my financial results ending September 30th.

Liquid’s Financial Update

*Side Incomes: = $2,700

  • Part time job =$700
  • Freelance = $400
  • Dividends =$1200
  • Interest = $500

*Discretionary Spending: = $2,200

  • Food = $400
  • Miscellaneous = $300
  • Interest expense = $1300

*Net Worth: (ΔMoM)

  • Total Assets: = $1,377,500 (+4900)
  • Cash = $8,800 (+1200)
  • Canadian stocks = $192,700 (+3200)
  • U.S. stocks = $133,500 (-1800)
  • U.K. stocks = $21,400 (+700)
  • Retirement = $135,800 (+1000)
  • Mortgage Funds = $36,900 (+300)
  • P2P Lending = $36,400 (+300)
  • Home = $367,000 (assessed land value)
  • Farms = $445,000
  • Total Debts: = $386,400 (-3,300)
  • Mortgage = $186,500 (-400)
  • Farm Loans = $162,900 (-500)
  • Margin Loans = $35,000 (-400)
  • Line of Credit = $2,000 (-2000)

*Total Net Worth = $991,100 (+$8,200 / +0.8%)
All numbers are in $CDN at 0.76/USD

Another month is in the bag. 🙂 The Canadian dollar got stronger which is both good and bad. On one hand Canadians have stronger purchasing power globally so we can buy more things for cheap. But on the other hand our assets outside the country are worth less when converted back into $CAD.

 

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Random Useless Fact:

The hamburger got its name from a cut of beef in Hamburg, Germany, and doesn’t contain any ham.

Sep 232019
 

The lump sum or monthly dilemma 

When it comes to investment timing there are generally two recommended strategies – either invest all the cash immediately, or break up the total amount to invest in regular installments. For example, if you receive a $12,000 bonus on January 1st, should you put all $12,000 into the stock market as soon as possible, or invest $1,000 per month over the course of the entire year?

The answer, statistically speaking, is to invest the entire amount right away. This is because the stock market rises about 3/4 of the time over a typical 1 year period. So a pattern of investing as early as possible, will over time, yield lower buying prices than dollar cost averaging which spreads the capital over the course of 12 months.

However, the difference in performance isn’t very dramatic. Investment management company Charles Schwab published a study comparing these 2 strategies along with a few other ones. They gave $2,000 at the beginning of every year to 5 hypothetical investors, each with a different timing style. They are as follows.

  1. Timing the market perfectly by investing the full $2,000 at the stock market’s lowest point of the year, every year.
  2. Invests the $2,000 at the very beginning of each year.
  3. Uses dollar cost averaging, dividing the $2,000 evenly by 12 and investing once a month.
  4. Timing the market in the worst way possible, investing $2,000 at the peak of the market each year.
  5. Investing in government T-Bills and other cash equivalents that are safe instead of the stock market.

Here is how much money each investor built up after 20 years.

how investment timing works

As we can see, investing a lump sum as soon as possible yields slightly better results than splitting up the amount and investing gradually month by month. 🙂 This is true using older periods as well. The study further analyzed all 68 rolling 20-year periods dating back to 1926. In 58 of the 68 periods, the rankings were exactly the same.

In conclusion, if you plan to invest in the stock market, your best move is to invest the entire amount immediately. Don’t split up your capital to gradually invest it over time. Dollar cost averaging will probably set you back instead of help you. The earlier you take the risk with your money the more time it will have to grow. 🙂

Here are some questions to sum up today’s blog post.

  • The TSX just reached a record high last week on Sept 17. If you have money to invest now, should you wait for a small pullback before jumping in?
    Answer: The data would suggest no. Believing that lower stock prices are just around the corner is a terrible mindset to have, financially speaking. As a case study, the Dow Jones index in the U.S. reached over 120 all-time highs just in the 2010s alone so far. It’s quite common for record highs to be followed by more record highs. The last investor in Charles Schwab’s study stayed out of the market and ended up with the smallest portfolio after 20 years. Many renters in Toronto missed out on the real estate boom over the last 2 decades because they were waiting for home prices to drop since 2000. Waiting for any correction is generally not a good idea.
  • Are there times when it’s better to dollar cost average rather than invest immediately?
    Answer: Yes. If you don’t already have a large pile of money saved, then dollar cost averaging (DCA) is better than waiting until you save up enough for a larger lump sum investment. The simple lesson is the sooner your money is invested, the better. 🙂
  • Does timing the market work?
    Answer: In most cases, no. In the study above, after a 20 year period, the perfect market timer amassed only 6.5% more wealth than the investor who put money to work right away. Market timing can easily go wrong. The worst market timer in the study ended up with 12.6% less than the lump sum investor. So the risk is not the worth the potential reward to time the market.

 

 

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Random Useless Fact:

The goal of golf is to play as little golf as possible.