May 252020
 

What is driving Canadian FIRE?

Everyone is affected by the FIRE economy in one way or another. FIRE is an acronym that stands for Finance, Insurance, and Real Estate. Together, these 4 industries are growing over five times faster than the general economy and represent about 1/5th of Canada’s total economic output. FIRE is especially important in BC. Although it employs just 6% of the province’s workforce, it generates 24% of the province’s GDP.

Other industries such as manufacturing and mining produce things of intrinsic value so their growth tends to be linear. But FIRE industries can scale more quickly. Finance and insurance products often involve derivatives, annuities, and other intangible products. Banks and credit unions can literally increase the credit supply through fractional reserve banking – essentially creating money without actually producing anything material. The real estate industry can unlock value from existing land assets with re-zoning and densification. These advantages inherent in the FIRE economy allow for faster expansion and exponential growth.

Another tailwind for FIRE is population growth. Our charismatic leader wants to welcome 341,000 new immigrants into Canada in 2020, more than from previous years. All of those people will need homes. Many will require a mortgage and insurance – further expanding the FIRE industries.

 

How to invest in the FIRE sectors

FIRE should continue to outgrow the general economy in the future. The most direct way to capture some of this growth is by working in one of these fields. I have some friends who work in finance and real estate. They are all making a decent living. 🙂 If you are just starting school or considering a career change, this can be something to think about. But for the rest of us, investing in FIRE businesses that pay dividends should pay off well in the long run.

 

How safe is playing with FIRE?

The risk of investing in the FIRE economy is a slowdown in these industries. However policy makers won’t let that happen easily. Instead of allowing markets to naturally go up and down, government officials have proven through their actions that they intend to accommodate perpetual economic growth. A real estate crash could drag down all other industries. No governing body wants to be responsible for a housing lead economic recession, or worse.

Continue reading »

Feb 242020
 

Overcoming Challenges

Millennials have been dealt a rough hand. We face an unstable job security, a sluggish economy, crippling student debt, high housing prices, and record low bond yields. This all makes it tough to retire rich without taking on at least some form of risk. The good news is that we don’t need to make a ton of money to retire with a big nest egg. We just have to make saving money a priority. 🙂

American author Tony Robbins says you can either look at things negatively or positively. It’s up to you. He uses the example of a former UPS employee named Theodore Johnson who never made more than $14,000 a year. But a friend suggested early on that he should save and invest 20% of his income. At first Theodore complained that he couldn’t save that much. But he gave it a shot anyway and soon got used to a more frugal lifestyle. And after five decades, he finally retired and wound up with over $70 million in his investment account.

 stock market

But Theodore was a bit of a special case. He made other smart investments besides the stock market. And although his final salary was $14,000 before he retired, that was in 1951. So it would have been worth about $130,000 in today’s dollars. But the point still stands. Consistently putting away money early on can pay huge dividends down the line.

The Components of Wealth

Creating wealth can be broken down into three components: Savings + Investment Returns + Time.

It’s difficult to predict investment returns. We obviously want the best performance. And there are things we can do to mitigate risk and improve the odds of achieving higher investment returns. But market performance is largely out of our control. Fortunately we still have efficacy over the other two variables – Savings, and Time.

Improving our savings rate is a matter of increasing the difference between what we make and what we spend. We can either act rich or become rich. But very few of us can do both in one lifetime. Understanding this idea can help motivate us to spend less on frivolous items, and value long term savings.

Lastly, time is probably the most important factor of all. It’s comparatively more powerful than investment returns when it comes to building wealth. For example, a 10% annual return over 20 years will generate more money than a 20% return over 10 years.

Over the next few months I will write detailed posts on how to save more money, earn higher investment returns, and maximize one’s investment time horizon. 🙂

 

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Random Useless Fact:

In 2020 there are over 6 million articles written on the English Wikipedia site.

Mar 302018
 

Peter Munk 1927 – 2018

The founder of the world’s largest gold mining company passed away a couple of days ago at the age of 90. Peter Munk came from humble beginnings. He fled his home country of Hungry during WWII when it was invaded by Nazi Germany. Soon after he boarded a boat from England and came to Canada when he was 20 years old.

With no skills, money, or influence Peter and his family had to start from nothing in a foreign country. But that didn’t stop him from wanting to achieve great success. After graduating from the University of Toronto in 1952 Peter thrived in the business world. He helped to build multiple companies, including resorts, an electronic manufacturer, and mining companies. His biggest career move began in 1981 when he formed Barrick Investments, which would eventually become Barrick Gold (stock symbol ABX) the largest gold miner in the world. The company currently produces about 5 million ounces of gold per year across its many operations around the world.

Among other things, the billionaire entrepreneur is also known for being one of canada’s most significant philanthropists giving hundreds of millions of dollars to charity such as hospitals. He also established the Munk School of Global Affairs, the Munk Debates, amd was named a Companion of the Order of Canada, the country’s highest civilian honor.

Last year he was included in the New York Stock Exchange Wall of Innovators, alongside Warren Buffett, Jamie Dimon and Jack Ma. In a remark that captured the two leading pursuits of his life—business and philanthropy—Peter Munk said. “You can create wealth. You are entitled to the joy of this creation. But ultimately society makes it possible, and this wealth should flow back to society.”

Being independently wealthy is nice and all. But doing something meaningful with that money is more important. Having money doesn’t make our problems go away. It merely replaces one problem with another. For example Elvis Presley’s daughter inherited $100 million from her father’s estate in 1993. But that’s when the problems began. Through years of spending and mismanagement the funds have nearly dried out. This year only $14,000 remains of the initial $100 million fortune. Ouch. 🙁  Having a lot of money also created many problems for Jeane Napoles and her family. Peter Munk has 5 children and 13 grandchildren. I hope they can make their inheritance last longer. Financial management education is important for everyone, but especially so for children who come from wealthy families.

The idea that rich people don’t have money problems is a myth. Everyone has money problems from the single parent living on social assistance to the CEO of a large company. The difference is the CEO just has better money problems. Or maybe worse, depending on your perspective. 🙂

 

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Random Useless Fact

 

Jan 192017
 

Meet the World’s Wealthiest

Charity group Oxfam recently reported that the world’s 8 richest people have as much combined wealth as the poorest 50% of the world’s population.

Here is the list of the 8 richest individuals, in order of net worth:

  1. Bill Gates: America founder of Microsoft (net worth: $75 billion)
  2. Amancio Ortega: Spanish founder of Inditex which owns the Zara fashion chain (net worth: $67 billion)
  3. Warren Buffett: American CEO and largest shareholder in Berkshire Hathaway (net worth: $60.8 billion)
  4. Carlos Slim: Mexican owner of Grupo Carso (net worth: $50 billion)
  5. Jeff Bezos: American founder, chairman and chief executive of Amazon (net worth: $45.2 billion)
  6. Mark Zuckerberg: American chairman, chief executive officer, and co-founder of Facebook (net worth: $44.6 billion)
  7. Larry Ellison: American co-founder and CEO of Oracle  (net worth: $43.6 billion)
  8. Michael Bloomberg: American founder, owner and CEO of Bloomberg LP (net worth: $40 billion)

The level of extreme wealth has become more concentrated over time. In the previous year, it took the net worth of 62 individuals to match the poorest 50% in the world. Here’s a look at the trend over time.

The middle class is feeling squeezed in many parts of the world. From 2000 to 2014 the number of households in the U.S. considered to be middle class fell significantly. A study from Pew Research shows that a majority of Americans no longer lives in the middle class. Median income of U.S. households in 2014 was 8% less than in 1999, according to Pew. For context, a 3 people household making $42,000 would be considered middle class.

One similarity shared by most multi-billionaires today is a focus on philanthropy. 🙂 Bill Gates would already be worth 12 figures today if he hadn’t given so much to charity already. He has been estimated to save over 6 million lives with his efforts to eradicate Malaria, end Polio, and help third-world countries grow rice. Warren Buffett wants to donate 99% of his wealth to charitable causes. Hundreds of other billionaires have signed up for the Giving Pledge, a campaign to encourage the rich to give away most of their money.

We all want to make money. But once we reach a certain level of financial success and become independently wealth, we have to think about how to use our excess wealth in the most meaningful manner possible. Helping other people in need is probably one of the best ways to achieve this. 🙂

I would be inclined to donate more money too if I were rich. I have already decided that if I ever win $1 million from the lottery, I will donate a quarter of it to charity because I am so generous. 😉
I still have to decide how I want to spend the remaining $999,999.75 though. 😄 j/k.

Continue reading »

Oct 242016
 

 What $300,000,000,000,000 Look Like

All $ amount in today’s post is in US dollars.

What would you buy if you had all the money in the world? According to British news site The Independent, the total amount of financial assets in the world is around $300 trillion. This is the total value for all the equities and fixed income, including company shares and both private and government bonds, plus all the other securities we can invest in. This $300 trillion does not include real estate or any derivatives.

If we had $300 trillion all in $5 bills and laid them out on the ground in a single layer, they would take up about as much space as all of Alberta.

16-10-300-trillion-visualize-spread-out

If we had a way to stack all these $5 bills one on top of another, the stack would measure 1.6 million km or 1 million miles high! Wow. That’s literally out of this world. 😀 That’s enough distance to cover a round trip to the moon and back, twice! By the way, have you guys heard about the new restaurant on the moon? The food isn’t bad. But there’s no atmosphere. 😄

Anyway, let’s take a look at how the allocation of financial assets in the world has changed over time. According to the MarketWatch chart below, it appears every type of asset class has become more valuable since 10 years ago.

16-10-financial-assets-world

As we can see, the stock market is the most volatile. Stocks lost nearly half of their global value during the financial crisis of 2008. However the graph also shows that equities do recover over time. This is why we should not sell our stocks in a bear market. In fact, lower asset prices may present an opportunity to average down and buy more stocks. 🙂

We can also see that the allocations haven’t changed much over time, with the exception of public debt securities. A lot of demand for public debt comes from Central Banks as they attempt to stimulate the economy. The act of quantitative easing creates trillions of dollars of wealth, but disproportionately benefits investors. That’s why the value of financial assets since 2008 has increased tremendously, but average income in the U.S. has not. Instead of working hard to get ahead, many investors like myself have increased our wealth by simply riding on the backs of central bank policies.

16-10-draghi-print-money-ecb

Central planners around the world will likely continue to print money for the foreseeable future. As the global population ages we can expect even more demand for fixed income securities. Dividend paying stocks will also be popular as investors look for higher yielding alternatives to bonds. The total value of financial assets in the world should continue to increase going forward.

$300 trillion divided by 7.5 billion people who are alive today means each person’s fair share is $40,000. This means accumulating $400,000 of financial assets would give us 10 times what the average person has. This is a respectable level of financial stability that can cover years of living expenses in case of long term unemployment or disability. Having $800,000 in financial assets represents 20 times the average. This would be enough for one person to claim financial independence, assuming the person knows how to manage his or her finances properly. 😉

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Random Useless Fact:

16-10-rip-off-medical-supplies-us-iv-bag