Entries from May 2020 ↓

The benefit

First, the good news. Every little shred helps.

The blue bank is telling its customers not to worry about extra interest that will accrue as they defer their mortgage payments. “BMO will be refunding any additional interest accumulated on your deferred mortgage payments for the entire deferral period.” It says. “We will credit this refund directly to your mortgage within 90 days once your deferral period has ended.”

Not a big savings – on a $300,000 loan at 3% it amounts to about $50 after six months. But fifty bucks is fifty bucks. Of course all of the money you should have paid over those months will still be owing. Your lender might increase the monthly, or add it to the debt. But it’s not going away.

Speaking of deferrals, half the homeowners in Canada who have decided they cannot/will not make their payments because of the virus live in Quebec or Alberta. And the deferral rate is twice as high for those with non-prime mortgages – at about 30%. So, connect the dots. An inescapable conclusion is there will be a lot more houses coming up for sale this autumn when the deferrals end, yet the jobs have not returned. If you’re housing-hunting, wait.

Now, speaking of not paying, it would appear the Government of Canada is confusing the withholding of rent, which is a form of theft, with a ‘Covid benefit’ like the free money it’s dishing out by the billions. In fact, it seems Ottawa is condoning – if not encouraging – people to stick it to the owners, now that the virus has shut down landlord-renter tribunals across the country.

Just visit this simplistic web site to see for yourself. If you indicate the virus stole our job and you’re now having trouble paying the landlord, here’s what you end up with:

2 results
Based on what you’ve told us, the following help is available:
* Apply for the Canada Emergency Response Benefit (CERB)
* In most provinces and territories, you cannot be evicted for not paying rent

Apply for the Canada Emergency Response Benefit (CERB)
* $500 per week
* Up to 16 weeks if you keep meeting the eligibility criteria
* First payment within 10 days of applying

In most provinces and territories, you cannot be evicted for not paying rent
* Provincial governments are in charge of rental housing rules.
* In most provinces and territories, you cannot be evicted for not paying rent.

“Among benefits the feds tell you about is the advice to not pay rent,” says blog dog Scott. “This is crazy, from an official federal government site.” You bet it is. The T2 administration is not only informing you that screwing your landlord is an officially-sanctioned action, but that this constitutes a right, similar to the CERB cash.

On that note, this well-traveled blog whisks you to Vernon, one of the jewels of the Okanagan, where a young female doctor has just learned all about being a landlord. She rented out her rural property while in residency, and now wants to move home. Tough, says the tenant.

Here is her tale of woe, as reported in the local online rag:

“She states that I have no rights to my home during the state of emergency and I cannot evict her. Unfortunately, she is correct. I have called to discuss the situation with the BC Tenancy Board, who stated ‘your concerns fall on deaf ears’ and suggested that I take this up with the politicians who created this legislation.”

“The tenant has proceeded to conduct multiple and recurrent breaches of contract, including housing two cats and two dogs in the home – the lease states pet free. I had to enter the mechanical room in the basement and noticed literal actual piles of garbage and rotting food and animal excrement in the basement. Finally, this tenant smokes inside and on the deck of a log home on a wooded acreage, both a breach of contract and dangerous –which the Tenancy Act says is not dangerous enough for eviction.”

“I have tried to file for eviction with BC Tenancy Board, and it has been denied. I am sure there are others that are suffering financially and personally by the complete unfair and ridiculous BC Tenancy Act. It is named appropriately ‘Tenancy’ act as it really only serves and supports tenants and discriminates against landlords and our homes.”

“This is becoming all too common,” says Barb, our OK correspondent. “The principles here, if they can be called that, are nothing short of anarchy – like the ‘Keep your Rent’ guy on your blog. Indeed, it is just shy of being criminal.”

But, but, but… Not paying rent and stealing accommodation because nobody can evict you during a pandemic is now a Covid benefit, Barb. It’s okay. Mr. Trudeau said so – “you cannot be evicted for not paying rent.” Therefore not paying is the same as paying, because both of those things are, like, allowed. But only one is called a benefit, which is not paying. So it’s better. How is this hard to grasp?

Sheesh. Boomers.

Don’t be distracted

  By Guest Blogger Sinan Terzioglu


North American equity markets are down ~13% from all-time highs set in February and the US market is up year-over-year.  Many wonder how this is possible given the current environment.  A client recently asked me:

“Do you think it’s a good time to invest, after such a strong 30% bounce from the lows.  The economy’s a disaster and I don’t see much to be excited about over the next year, especially with a second wave of the virus coming in the fall.”

I hear this a lot.  Yes, there’s uncertainty right now.  Clearly, 2020 earnings will be down substantially but companies (and the equity market as a whole) shouldn’t be evaluated based on a single year’s numbers.  Investors should be modelling at least the next several years of cash flows and discount them at an appropriate rate, to derive a fair value.  The equity market has discounted the sharp contraction in earnings for 2020 and is now looking forward to 2021 and beyond, expecting a return to growth.  As in 2008-2009, the enormous amount of monetary stimulus being injected by the global central banks has brought back a lot of confidence.

“Warren Buffett didn’t actively buy stocks in the turmoil and his cash pile is over $130 billion,” another client says. “ Isn’t this bearish – he expects another significant pull back in the market?”

Sure, but Berkshire Hathaway is far more than just an equity market investor.  Buffett’s company is one of the world’s largest insurance businesses and owns dozens of companies in many industries – Geico, Dairy Queen, Duracell, Benjamin Moore, See’s Candy and the second largest US railway company BNSF Railway.  The value of these privately-controlled businesses totals hundreds of billions and when combined with the ~$200 billion equity portfolio the cash pile doesn’t seem as significant.  In fact, Berkshire Hathaway can be viewed like a balanced and diversified portfolio as it holds growth assets, safe fixed income assets (preferred shares, bonds) and cash/cash equivalents.

Berkshire is exposed to a lot of risk in its insurance business and various operating businesses so it must always keep a fair amount of cash on hand.  A number of years ago Warren Buffett said he’d always keep at least $20 billion in cash, just in case of catastrophic events and potential insurance claims.  Now that Berkshire is much larger the minimum cash balance he wants to keep is likely higher.  Also, over the last few years Buffett has said that he is looking for an elephant sized acquisition and recently indicated that he would happily spend $50+ billion if the right deal came along now.

During the 2008-2009 financial crisis I read a lot of Warren Buffett’s shareholder letters.  My favourite came in 1994:

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen.  Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles.  Nor did they render unsound the negotiated purchases of fine businesses at sensible prices.  Imagine the cost to us, then, if we had let a fear of the unknown cause us to defer or alter the deployment of capital.  Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak.  Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years.  We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results.

In the last 26 years we certainly have had shocks, yet the greatest businesses in the world continued to grow and become stronger.  Markets have endured the bursting of the tech bubble, the 2001 terrorist attacks and the 2008-2009 financial crisis.  Despite the roller coaster ride they recovered from losses and went on to make new highs.  As Buffett said, there will be more shocks over the next 30 years so we shouldn’t let a fear of unknowns delay investing our capital.

Our Canadian ETFs hold Canada’s largest banks which along with the market have come under a lot of pressure lately.  The banks have been paying dividends every year since the 1800’s – through both world wars, the Great Depression, countless recessions and all sorts of economic shocks they have never missed a payment on their common shares.  Our US ETFs own the world’s most profitable corporations such as Apple, Amazon, Microsoft, Alphabet (Google), Facebook, Visa, MasterCard and Buffett’s Berkshire Hathaway.  Most are still growing at above average rates which is incredible given their size.  Both Amazon and Alphabet were started out of garages a little over 20-25 years ago.  Alphabet now generates more than twice the revenue of IBM.  These sorts of companies are benefitting from the new normal and represent a large chunk of the US markets. The digital transformation is still in its early stages and many new companies will emerge and grow to become market leaders over the next number of years.

I was recently asked to speak with a few young adults about investing and where to start.  I asked them: “if I offered you a job for the next 30 days and you could choose between receiving $100,000 daily, or being paid $0.01 for your first day and doubling your pay each subsequent day, which would you choose?”

Earning $3,000,000 in a month sounds like a no brainer especially when one considers that option two would only result in earning $5.12 on day 10 and $5,243 on day 20.  But, when you look at the earnings of $2,700,000 on day 29 and $5,400,000 on day 30 the explosive growth is evident.  I believe you can make a world of difference for younger generations by teaching them about compound growth early on and ensure they focus on the long term.

Equities are the only asset in which a portion of your return is automatically reinvested for you.  Basically, companies do the heavy lifting for the owners.  As they earn, a portion is reinvested in the business, resulting in a rapidly compounding gains especially if a company is able to earn an above average rate of return.  Coupled with a lot of time and patience, this is what made Warren Buffett one of the wealthiest people in the world.

Approximately 80% of the gains in the S&P 500 over the 20th Century resulted from the collective earnings of companies in the index being reinvested.  Many think changes in valuation played a big part but if you bought the S&P 500 around the time the Spanish Flu started in 1918 during its lowest P/E multiple of 5.3 and sold it at its highest P/E valuation of 34 in 1999, the compound annual return would have been over 10% (including reinvested dividends).  Less than 3% of that came from the substantial increase in valuation while the remainder flowed from the reinvesting of retained earnings.

In October of 2019 Bank of America said 60-40 portfolios are dead.  The thesis was that because bonds yields are so low, portfolios would need more stocks exposure to make up for lower returns.  The report highlighted that there were over 1,100 global stocks paying dividends above the average yield of global government bonds.  Many of these high yielding dividend stocks are in the energy sector which has obviously come under significant pressure resulting in dividend cuts.

We argued then that we don’t hold bonds to collect interest but to protect investors. Clearly the market turmoil in March highlights why this approach works.  The most important thing in investing is risk management.  Balanced and diversified portfolios have this built into them and while they are not immune to periods like this they hold up much better than all-equity portfolios.  Like we said then, why mess with an approach that has always worked.

The world will move on and the global economy will grow again.  Keep your focus on your long term goals, continue investing when you can, ignore the noise and most importantly don’t be distracted.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.