Entries from November 2019 ↓

All of the right moves

DOUG  By Guest Blogger Doug Rowat

Out of university I landed a summer job working the line at an office furniture factory. It was awful work—spraying industrial glue back and forth while standing all day next to an oven that kept the glue at a balmy 350 degrees. Fun stuff during the summer heat waves. It was also incredibly boring.

As a result, talking sports soon became the best way to relieve the boredom. One popular topic was “Name your best fantasy sports experience.” The answers ranged from the pretty cool (“Take some at-bats against Roger Clemens”) to the strange (“Take a punch from Mike Tyson”).

Up to this point if the veteran factory workers had any doubt that I was a nerd, my response removed that doubt: “Get a chess lesson from Garry Kasparov”. Suddenly, not fitting in at high school carried right through to the factory floor. I made the take-a-punch-from-Mike-Tyson guy seem normal.

However, my fascination with chess actually provided excellent training for when I ultimately ended up in the investment industry. Many of the skills that chess teaches translates well to portfolio management. In fact, it’s no coincidence that Kasparov has written a book about how chess informs successful decision making in other areas.

But Kasparov isn’t the only chess master to make this connection. Bruce Pandolfini, an author and chess teacher made famous by the movie Searching for Bobby Fischer where he was played by actor Ben Kinsley, has also highlighted how correct chess strategy can make for better business decisions.

In no particular order, here are a few of the Pandolfini lessons that I regularly apply to my own portfolio management:

  • Don’t overextend. I wish I had the ability of Scion Capital’s Michael Burry, who famously made an all-in bet by shorting the US housing market during the financial crisis, but alas I do not. Nor do any of you. Therefore it’s important not to make concentrated wagers. For instance, if I like US equities, but don’t like European equities, should I abandon Europe entirely? Never. This year is a perfect example of how such a strategy could backfire as the French and Italian equity markets, for example, have both strongly outperformed the US. Similarly, if I like the outlook for China, I might increase my portfolio weighting by one or two percentage points but not by, say, 10 percentage points. Being caught wrong-footed happens frequently in chess as well as investing. Always minimize the downside risk.
  • Seek small advantages. This is related to the above point. Winning chess is really a case of racking up more small victories than your opponent. The rule here is “slightly, slightly, slightly”. Small, winning moves accumulate and can result in the necessary overall advantage. Rack up enough small victories and you control the board or, in the context of portfolio management, enable your client to meet their retirement objectives earlier. Targeting small victories instead of massive wins also minimizes downside risk because the opposite becomes true—the number of big, costly errors are reduced. Capturing the queen is obviously desirable, but there’s absolutely nothing wrong with just winning a pawn.
  • Don’t look too far ahead. Contrary to prevailing wisdom, chess masters typically only look ahead by three or four moves, not the 15 or 20 that many believe. Thinking too far ahead is a waste of time. Too many variables are likely to be introduced as the game goes on, which will thwart future planning. Clients frequently ask me how the economy will perform over the next year. I will make an educated guess, but I’m well aware of the limitations of forecasting. Forecasts are unreliable. The International Monetary Fund proved as much when looking at the remarkable inaccuracy of consensus economic forecasts prior to recessions. For example, the first plots in the chart below show the average forecasts for US GDP growth made in the year before the financial crisis followed by those made in the year of the actual downturn. Needless to say, overreliance on the year-ahead forecasts was a big mistake. From a portfolio management perspective, knowing the fallibility of forecasts should result in a sensible long-term strategy: to always maintain balance and diversification amongst asset classes. In chess, your opponent will often do something you didn’t expect. Same with the markets.

Forecasting is Problematic: Consensus Forecasts for US GDP (2009)

Source: IMF, early plot points indicate growth forecasts one year ahead of recession

Ultimately, however, chess teaches discipline. It teaches the importance of not only controlling risk but, equally important, controlling emotion. Director Stanley Kubrick, who was himself a competitive amateur chess player, put it this way: “Among a great many things that chess teaches you is to control the initial excitement you feel when you see something that looks good.”

In other words, chess forces thinking that’s methodical, restrained and emotion-free, which, of course, is also critical to investing. Emotion is the enemy of investors.

Bobby Fischer said the same thing a bit differently: “I don’t believe in psychology. I believe in good moves.”

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.


The target

You can hide a million bucks in your RRSP, and escape the long arm of the CRA. You and your squeeze can shelter almost $150,000 as of January in your TFSAs, and Bill Morneau’s sticky singers will never touch. Your investments can earn fat capital gains and the tax bill’s reduced by 50%. Or collect tax-reduced income from dividends. You can even go to cash or (shudder) crypto and bullion to disappear.

But your house? Nah, forget being anon. There’s a target on it.

This pathetic blog has opined of late about how real estate is the next Big Thing for politicians to Hoover. Carbon taxes are hitting homeowners hard. Property taxes are destined to pop – as is the case in Vancouver this week (8% hike). There’s the burgeoning rain tax. Transfer taxes. HST on closing costs and commissions. Crackdowns on speckers, flippers, Airbnbers and suite-renters. And don’t brush off that election-time revelation of Liberal plans for a phase-out of the principal residence capital gains exemption. They’re serious. This is why (as we told you when it started) personal tax returns now collect data on every house purchase and sale.

It’s relentless. And expanding. Canadians over the next few years will be paying for the property lust that propelled valuations higher, created untaxed windfall wealth and birthed an affordability problem that’s splitting generations and widening the divide. As stated, you can hide liquid wealth. You can’t put a bungalow in your pants.

So time for an update.

First to (of course) Vancouver. This was the debut North American city dumb enough to put a tax on houses politicians think should be used more. So second homes not occupied every month, condos used for business purposes, retirees’ winter abodes, occasional-use properties owned by Americans – all are taxed along with units held by evil Chinese satellite families, offshore investors or local speculators. The stated goal is to force under-utilized real estate onto the rental market. But it’s really a tax on wealth. Obviously. The city says it has siphoned off $39 million from sitting duck owners. Meanwhile the vacancy rate has not declined.

The latest? More tax. The empty-house levy will increase by 25% next year and (probably) by half again over the next two years. This is in addition to the provincial ‘speculation tax’ on second properties (another grab at the wealthy, and those damn Albertans who cross the line), plus a new uber property tax on higher-end homes (yeah, the wealthy again).

Toronto is studying the EHT and there’s political pressure to copy. It’s the hot new thing. The kids see it as an ok-Boomer tax. And now the Trudeau feds are about to bring in a national version. Foreign dudes first. Then, without much doubt, the locals.

During that piteous federal election campaign the Libs pledged for the first time to have a national government directly tax  residential real estate. Soon there will be a pan-Canadian vacancy tax – a levy equal to 1% of a property’s value per calendar year on any place owned by a non-resident, even if the property is rented to or occupied by the owner’s family. Expected to suck off $217 million a year, it would apply to all residential properties owned by individuals, corporations or trusts.

It comes atop the massive 15% tax on the acquisition cost of property being bought by any non-resident in the GTA, and the 20% whack charged by BC. Plus foreigners in that province also have to pay 2% annually in spec tax. The message is clear: go home. We don’t want you.

Conclusions: Taxes don’t make houses cheaper. The opposite, actually. The more politicians intervene in the market and the more that’s sucked from the private sector, the more costs increase. If the object here is to chase away non-residents, forcing them to sell to locals, they’ll certainly be looking to recoup their overhead in the process. The only winner is government.

Second, the incursion of the feds into taxing residential real estate usage and ownership – normally the preserve of cities – is a big step. A national vacancy tax on Chinese dudes can easily become one on your ‘luxury’ cottage or cabin. And if politicians have decided nobody can keep a condo void for six months without being taxed more, what about empty nesters and their two vacant bedrooms? Plus, how long do we expect real estate profits to remain completely untaxed? When every other asset producing a capital gain is whacked, why not this one? Hasn’t the exemption for houses been the overarching reason your daughter can’t afford one?

Most Canadian have most of their net worth in one thing. Their homes. Silly geese.