Jul 272020

Stock picking vs index investing

There’s a common belief that attempting to outperform the stock market is futile. A thread on the r/investing subreddit asked if anyone can beat the market. Here are some direct replies from the community:

  • “I know I am statistically extremely unlikely to beat the market, and if I do beat it, it’s through luck, not skill.”
  • “The only way you can really beat the market is to hold a highly concentrated portfolio and hit it big in 1 stock”
  • “As a retail investor, if I beat the market picking individual stocks, it was mostly from luck.”

Even an investopedia.com article suggests that successful stock pickers like Warren Buffett may have just been “exceptionally lucky.” It appears the online investing community is generally against the idea of individual stock picking. This short comment from the forums of RedFlagDeals sums it up well.

But allow me to go against the grain and push back a little. 😎 I believe you can beat the market if you have the right decision making process. 🙂 My net worth today is largely built on my stock picking history.

Internet consensus: Amateur investors can’t beat the market over time. That’s why you should just buy index funds and forget about stock picking.


beating the index

12.87% is the annual rate of return on my TFSA portfolio over the last 9.5 years according to TD portfolio statistics. It’s one of my oldest investment accounts. As readers will know I share all my stock holdings publicly for accountability reasons.

It appears the couch potato method of index investing is very popular with netizens. In the subreddit, r/PersonalFinanceCanada even the moderators have admitted that, “the general consensus on PFC is that people should look for low-cost, passive index investments.”

Don’t get me wrong. The Canadian couch potato aggressive portfolio performed quite well over the last 10 years. I’m just saying maybe there are better investment strategies out there. 🙂

Source: https://edrempel.com/outperform/


Why index investing isn’t all that passive

Index funds may appear to be passive, but they are actually more actively managed than most realize. This is something the index investing community doesn’t like to admit because it undermines the strategy’s reputation of being objective, hands off, and untainted by human biases.

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Jul 202020

Let others make your mortgage payments for you

If you’re tired of paying your mortgage on your own then this post is for you. The MIC manoeuvre is a legal tax strategy that allows you to effectively get other people to service your mortgage, so you don’t have to. How does it work? You simply borrow money to purchase Mortgage Investment Corporations (MICs) which generate investment income. This income is then used to cover the cost of both your new loan and your mortgage payments. 😀

Get help with your mortgage payments for free.

A MIC is a Canadian investment that holds mortgages secured by real property. It’s similar to a mortgage REIT in the United States. Some borrowers can’t get a mortgage from traditional lenders. But they can still obtain financing at a higher interest rate from alternative lenders such as MICs. If you invest in a MIC, the mortgage payment of someone else becomes your income! 😎

Similar to its cousin the Smith Manoeuvre, both strategies make use of tax deductible debt and financial leverage to increase your net worth. But unlike the Smith Manoeuvre, the MIC Manoeuvre also increases your cash flow. It does this by removing the biggest expense from your household budget – the mortgage payment!


How to implement the MIC manoeuvre 

Why service a mortgage like a sucker when you can get others to do it for you instead?


To keep calculations simple let’s say your current mortgage balance is $100,000. According to TD bank’s mortgage calculator, your monthly mortgage payment in the current interest rate environment would be $379. This works out to roughly $4,500 a year.

Everyone knows the best way to get rid of a home loan is to talk to actor Mortgage Freeman. But if you’re not that well connected, using the MIC manoeuvre will still save you that $4,500/year in payments. Here’s how it works.

Step 1

Start by opening up a home equity line of credit (HELOC.) Then take out $150,000 from it and put the money into a discount brokerage account. You can generally borrow up to 80% of the value of your home. HELOC rates are about 3% these days, and payments can be interest only. This means the minimum payment you will have to make on your HELOC debt is $375 a month, or $4,500 a year.

So far your combined debt is $250K ($100K mortgage + $150K HELOC.) Your annual payment to service this debt is $9,000 ($4,500 + $4,500). 

Step 2

This is where the magic happens.😉 You take the newly funded $150,000 in your brokerage account and purchase a basket of Mortgage Investment Corporations, which can be publicly traded or private. In the past I’ve blogged about which ones I like and hold. Currently popular MICs such as Timbercreek and Atrium have yields around 8%. Disclaimer: I currently own both of them.

Using 8% yield as a benchmark, a handful of MICs worth $150,000 can expect to generate $12,000 in annual investment income.

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May 222017

Some people are so debt averse they even refuse to borrow money when interest rates are at rock bottom. They save up for a 30% down payment for a home instead of 20% because they want to save on interest costs. This is despite the fact that Canadian mortgages only cost about 2.5% currently, or sometimes lower like in my case. These people also refuse to invest on margin. I’ve explained in the past how anyone with at least $10,000 can open an account with Interactive Brokers, put in some money, and safely borrow modest amounts of money at just 2% interest rate, with practically no risk of getting a margin call.

Can’t have it both ways

Yet, many people who are debt averse and won’t borrow money under any circumstances also believe in the 4% rule of investing. But this kind of thinking is contradictory. It’s silly to make the argument that paying down their mortgage is a guaranteed rate of return, but investing is uncertain and they can’t be sure they’ll make more than 2.5% return in the markets. While at the same time, also claim that the 4% rule is valid.

The four percent rule is a widely accepted rule of thumb used by many investors and financial experts. There are slightly varying definitions of it, but for the purpose of today’s post we’ll define it as the maximum sustainable rate of withdrawal from a retirement account each year without depleting the account itself. This is because 4% is considered a “safe” rate of withdrawal over the long run for a balanced and diversified portfolio.

So if a person really believes in the 4% rule and uses it as part of his retirement planning, then it would only be rational to consider borrowing money to invest if the cost to borrow is lower. The 4% rule says that this person will make at least 4% return on his investments per year on average. So if he always borrow money at less than 4%, then he is virtually guaranteed to profit in the long run! assuming the 4% rule holds true.

This is why I always buy properties using very low down payments, and use controlled margin borrowing to invest. Since I believe in the 4% rule, it would be illogical if I didn’t try to take advantage of low interest rates. If my margin or mortgage interest rate were to increase to 5% or 6% some day, then of course I would no longer take out new loans to invest. At that point it wouldn’t make sense to use leverage anymore. Sometimes it may seem like being debt free is more safe. But there is risk in being overly debt averse, the risk of not seeing perfectly good opportunities to earn higher investment returns.

Obviously just because a rule has held up in the past doesn’t mean it will continue to hold true in the future. Whether or not you think the 4% rule is valid is up to you. 🙂 But this principal can work with any other withdrawal rate. If you believe you can safely and sustainably withdrawal 3% a year, then you must also accept that your portfolio will return 3% a year minimum on average. You can then use this number as your reference point when deciding when to use leverage and how much.


Random Useless Fact:

Some grocery stores have an aisle dedicated to strong, independent women. 😄


Feb 032015

Nobody likes to pay banking fees. But most monthly service charges can be waived if we sign up for additional accounts/services, or keep the minimum monthly balance in the account. (eg: maintain at least $1,500 in a Bank of Montreal chequing account to waive the $4 fee.)


My personal account is with TD Canada Trust, which charges $3.95/month unless a minimum balance of $1,500 is held in the account at all times. But sitting on unused money can be a waste of capital. 😕 So 3 years ago I introduced an alternative solution to deal with those pesky bank fees. Rather than pay the bank to hold my money, I made the bank pay me instead! 😉

Hedge Bank Fees with Bank Stocks

Here’s what I did in a nutshell.

  1. Transfer the $1,500 from my chequing acct to my brokerage acct and use it all to buy TD shares (38 in today’s shares)
  2. Receive dividend payments every quarter as a TD Bank shareholder
  3. Use said dividends to pay for the $3.95 monthly service fee associated with my chequing account

(see my original post from February 2012 for more details.)

Since it’s been a few years I thought I’d post an update to show how my strategy has turned out so far.

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Dec 172014

Flawed and Unreliable

The debt to disposable income (DTI) ratio represents the ratio of one’s total debt amount to his after tax income. But the debt to income flaw is not often discussed.

Debt” is a balance sheet item (net worth,) but “income” deals with budgeting (income statement.) Debt is simply a static number, while income requires the element of time in order to exist. One has a set monetary value while the other is a reoccurring event. Comparing the ratio of debt to income is like comparing net worth to spending. Or, for the engineers out there, like comparing a scaler against a vector. The two variables that make up the ratio are loosely correlated at best, but it’s not a very relevant measurement for any practical purpose. 😐

The other problem with this ratio is it’s heavily influenced by monetary policy. 30 years ago the typical mortgage rate was 18%. The cost of carrying a loan was extremely expensive, almost prohibitive. Thus the debt to income ratio was under 80%, quite low. But today, the cost of servicing a mortgage is only around 3%, so more Canadians can easily afford to take on larger mortgages. This increases our overall debt levels which skews the DTI ratio. We consumers will naturally increase our borrowing if the cost of credit is cheaper. But that doesn’t necessarily mean we’re at greater risk of insolvency.

14-12-debt-to-income-not-useful-gun, debt to income ratio canada

This is why the debt to income ratio isn’t a very reliable metric to use over long periods of time. It’s impractical to compare debt and income to begin with. The added effects of changing interest rates only makes the wonky ratio even less valid. 🙁

Statistics Canada recently announced that our average household debt to disposable income ratio hit a record high of 162.6% in the third quarter, which has generated a lot of discussion in the media. But giving so much attention to this insignificant ratio is like rearranging the deck chairs on the Titanic. Don’t we have more important data to study?

Alternatives to the Debt to Income Ratio

What can we use instead of the debt to income ratio in Canada? I believe a much better metric to measure consumers’ financial situation is the debt to net worth ratio. Debt to net worth (or equity) ratio is what businesses use to determine if they are borrowing too much. They use this ratio to determine debt related goals for themselves. Total-debt-service (TDS) ratio is another helpful way to gauge our debt default risk because it measures how much we pay each month towards debt against how much money we make over the same period. Actually, the Americans often use the TDS ratio, but they refer to it as their “debt to income ratio.” If you’re confused this comment should help clear things up.

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