DEC 19, 2021

It’s who you spend your holliday’s with

BY KEITH THOMSON

Over the last few years it has been my tradition (usually) to feature a video from the British retailer, John Lewis. Despite their commercialism, I believe these videos truly reflect the Christmas spirit! My all-time favourite is still “Monty the Penguin”. Although this year’s version is pretty good, my daughter Kiera, brought to my attention a French telecom ad from a few years ago that is truly outstanding.

In the interest of full, true, and plain disclosure, ever since Kiera was born I have engaged in what I call my “Daddy dance moves". When Kiera was younger I liked to believe she thought my “moves” were cool. Now that she is 16 I know I just embarrass her … especially when I start bust’n my moves in public! In her defence, perhaps I do engage in a bit too much of the white man’s overbite, but if truth be told, her embarrassment makes me chuckle. 😊

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As this second pandemic year winds down, I sincerely hope that you have the opportunity to spend more time with your family and friends. Perhaps during these quieter times we can reflect on who and what brings significant meaning to our lives. It is with this parting thought in mind, and in the spirit of “dancing Daddys” everywhere, that I wish you all the best for the season and a very happy New Year.


Merry Christmas!

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Maybe Christmas, he thought, doesn’t come from a store. Maybe Christmas… perhaps… means a little bit more!
Dr. Seuss
from How The Grinch Stole Christmas

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OCT 30, 2021

Average for a very long time

BY KEITH THOMSON

I am humbled to have worked with a number of families for over 25 years. Their long-term returns have ranged from 7% to 9%*, which, on the face of it, seems fine, but not necessarily outstanding. But here’s the thing … 7% to 9%* returns compounded over a quarter century has resulted in some truly extraordinary dollar gains for these same families. One of today’s most successful institutional managers, Howard Marks, once spoke of an investor whose annual results were never ranked in the top quartile, but over a 14-year period he was in the top 4% of all investors. If he keeps those mediocre returns up for another 10 years he may be in the top 1% of his peers – one of the greatest of his generation – despite being unmentionable in any given year.

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When it comes to investing, so much of the focus is about what people can do right now, this year, or maybe next year. “What are the best returns I can earn?” seems like such an intuitive question. But, like evolution, that’s not where the magic happens. If you understand the math behind compounding you realize that the most important question is not, “How can I earn the highest returns?” but rather, “What are the best returns I can sustain for the longest period of time?”.
 
That’s not to say good returns don’t matter. Of course they do … just that they matter less than how long you are earning those returns. “Excellent for a few years” is not nearly as powerful as “pretty good for a long time.”. And few things can beat “average for a very long time” because average returns for an above-average period of time may lead to extreme returns.
 
To quote Howard Marks, “The only thing that matters is where you are in the long run.”

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Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.
Albert Einstein

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SEP 24, 2021

Simplicity is the ultimate sophistication

BY KEITH THOMSON

As I rapidly approach my 60th year I am increasingly convinced that, as in most things in life, simple is usually better than complex. And so it is with investing.

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As a wealth advisor I am on the receiving end of the marketing skills of individuals and companies that have “interesting and exciting” financial products which they would very much like me to make available to my clients. At the risk of generalizing, in this category I would include hedge funds, private equity, and marketable alternatives (or liquid alts). Unfortunately, once you eliminate the “interesting and exciting” parts and take into account their complexity and high fees, you are more often than not left with sub-standard performance. Nowhere is this more true than in the area of endowment funds. Curiously, the larger the endowment fund, the greater the chance that its investment committee would tilt a higher percentage of its holdings towards these types of products.  


In a well researched short post, Ben Carlson recently wrote about this simple vs. complex issue. I encourage you to click the link … you may be surprised by his conclusions. 

A Wealth of Common Sense blog posting by Ben Carlson of Ritholtz Wealth Management “Simple vs. Complex, 2020 Edition”, posted August 3rd, 2021

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It’s taken me all my life to know which notes not to play.
Dizzy Gillespie

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JUL 21, 2021

What we don't know

BY KEITH THOMSON

At age 24, when I started in the wealth planning business I was about as naïve and ignorant as a young man could be. Unfortunately, I just didn’t know it at the time. Back then I wanted to be the guy who had all the answers for my clients who, for some reason known only unto themselves, had decided to entrust much of their wealth to a kid in his mid-20’s. Only as I got older, hopefully gaining a modicum of wisdom along the way, did it dawn on me that as long as I knew where to find the answers it was okay to say, “I don’t know”, and to feel comfortable saying it.
 
The image shown below sums up perfectly some of the wisdom I have gained over the last few decades. I would file this under the “Everything that we don’t know we don’t know” category, which seems to become larger with each passing year of my life!

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In my opinion, very few authors are more insightful and entertaining than Morgan Housel when it comes to financial commentary. He wrote a short article entitled, Expectations vs. Forecasts about what we don’t know and also discusses one of the critical keys to long-term financial success. Definitely worth a read.

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There are two kinds of forecasters; those who don’t know and those who don’t know they don’t know.
John Kenneth Galbraith

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JUN 16, 2021

The pyramid of investment success

BY KEITH THOMSON

What is the secret to multi-decade, inter-generational wealth creation? Fortunately, it can be summed up in one easy illustration I call “The Pyramid of Investment Success”.

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Having been in the wealth management business since 1985, I’m convinced that over 80% of one’s long term investment success comes down to a single variable … one’s individual behaviour. In other words, for many of us, our single greatest enemy in our quest for wealth creation is the person who stares back at us from the mirror every day! Somewhat counter intuitively it matters much less if you have the most scientifically determined asset allocation, if you have hired the world’s most successful money manager, if your fees are close to zero, or, if you have eliminated all tax consequences from your portfolio. If you panic sell just because the Toronto and New York Stock Exchanges have one of their temporary fire sales (also known as a bear market), then everything else just doesn’t matter. Think back to 2008/2009, or the most recent “Covid crash”, when so many individuals committed financial suicide by doing just that.

 

Once you have a handle on your behaviour and/or have a trusted advisor to help you through these periodic fire sales, (based on my experience, they occur about once every five years and take the markets down, on average, around 30%), then we can move on to the next level of “The Pyramid of Investment Success”. More specifically, an optimized asset allocation that is customized to your defined needs and goals. An overwhelming influence on your lifelong returns will be determined by what percentage of your net worth should be in real estate, GICs and other fixed income securities, Canadian, U.S., and international companies/stocks. As an example, if 5% of your portfolio is invested in a magical company whose stock goes up 20% every single year but the remaining 95% is sitting in a GIC earning 1%, then I’m afraid your fantasy stock is not going to move the needle very much on your portfolio’s overall return.

 

The next level of investment success focuses on owning a diversified collection of world class companies – it’s much better to be an investor in great businesses than a speculator in Bitcoin or GameStop Corp. Next, make sure you have done all you can do to minimize taxes and, finally, ensure you are receiving fair value for the fees that you are being charged for having your financial life professionally managed.

 

Paradoxically, the financial media tend to focus on the top levels of the pyramid. I believe this is because fees, taxes, and security selection are much easier to quantify. As important as these issues are, do not be fooled. One must remain ever vigilant in order to ensure one’s behaviour is helping and not hurting. Do this and 80% of long term investment success may inevitably ensue for you and your family.

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The single most important variable in your quest for equity investment success is also the only variable that you ultimately control: your own behavior.
Nick Murray

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JUN 1, 2021

Are you a pleasant, wealthy sociopath?

BY KEITH THOMSON

One of the ways I filter out 99.9% of the media noise we’re all exposed to on a regular basis is by using my RSS feed once a day. In this way I can access the wisdom of only those individuals who, over the years, I feel have something truly worthwhile to say. One of those individuals is Morgan Housel, a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He recently authored the book, The Psychology of Money. I had one of those “I wish I wrote that” moments when I read the following article.

PECULIAR TRAITS OF RICH PEOPLE

Three things the rich do differently.

By: Morgan Housel

The funniest thing I’ve noticed about rich people is how little their income has to do with their wealth. Mike Tyson earned $300 million during his career and went broke. An orphaned, unmarried administrative assistant died with millions in the bank. A lot of rich people aren’t exceptionally talented at what they do. They just have quirks and habits that let them think differently about money than the rest of us. Here are three I’ve noticed.

1. They are (mostly pleasant) sociopaths.
I’m convinced that nearly every rich person has the characteristics of a sociopath. Not in a cruel, soulless way. But sociopaths can disregard emotional events that cause normal people to worry and panic. Great investors can do that, too. They can watch stocks fall 50% and shrug their shoulders or see 10 million people lose their jobs and remain unshakably calm. In her book Confessions of a Sociopath, M.E. Thomas writes:
Sharks see in black-and-white. Scientists have suggested that contrast against background may be more helpful than color for predators in detecting potential prey, helping them to focus on crucial spatial relationships rather than extraneous details. I’m color-blind in a way that makes mass hysteria seem particularly striking in contrast to normal, expected behavior. My lack of empathy means I don’t get caught up in other people’s panic. It gives me a unique perspective. And in the financial world, being able to think opposite the pack is all you need.

Napoleon’s definition of a military genius was “The man who can do the average thing when all those around him are going crazy.” Rich people are similar. They remain normal when everyone else can’t.

 

2. They care about time periods most can’t comprehend.
There are four ways to invest:

1.     Unsuccessfully
2.     Long-term (varying degrees of success)
3.     Short term, successful due to luck
4.     Short term, successful due to manipulation/fraud


That’s the complete list. Nos. 3 and 4 eventually become No. 1.
Long-term investing is the only sane choice. But it’s unnatural. We’re hardwired to grab immediate gains and avoid immediate threats. That’s why we eat donuts and watch CNBC.

My friend Carl Richards made a great sketch that relates to this idea:

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As Carl notes, studies show that we have the same emotional connection to ourselves 30 years in the future as we do an unknown third-party today. Rich people have the rare ability to bridge that emotional gap. They are allergic to the short run. “If you look carefully,” Bill Bonner writes in his book Family Fortunes, “almost all Old Money secrets can be traced to a single source: a longer-term outlook.”

In August 1929, John Raskob wrote an article called “Everyone Ought to Be Rich.” All you had to do was buy stocks and hold them for a long time, he wrote. Two months later, the market crashed. It fell 88% over the next four years. To this day, people cite Raskob’s article as a sign of irrational hype. But was it? Anyone who bought stocks the day it hit the stands increased their wealth sixfold over the next 30 years, adjusted for inflation. Missing this is why everyone ought to be rich, but few are.

3. They don’t give a damn what you think of them.
Dilbert creator Scott Adams once wrote: “One of the best pieces of advice I’ve ever heard goes something like this: If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power.” 

The price of being rich is really simple: You must live below your means. But living below your means is hard. Most people want to be rich to impress other people. They do this by spending money, which is the surest way to have less of it.

The reason so many Americans are in dire financial shape is because their aspirations, desires, and wants have grown faster than their incomes. That’s why the size of the median home has increased by 30% over the last 25 years while the median income has barely budged. For every $1 raise most people receive, their desires grow by perhaps $1.10. This is the express lane to disappointment. Rich people avoid this trap. They care less about what others think of them than ordinary people do. They don’t give a damn, actually. They can get a raise without buying a new car or have a great year in the market and not blow it on a new watch. A lot of them are after control of their time, which comes from having a wide gap between what they can afford to buy and what they actually buy. They are more impressed with retiring early than $90 T-shirts or $20 cocktails. It’s classic Millionaire Next Door stuff.

Having the emotional backbone to drive an uglier car than you can afford, live in a smaller house you can afford, eat out less often than you can afford, and wear cheaper clothes than you can afford is rare. In my experience, less than 10% of people can do it in a meaningful way. It’s the cost of being rich, and most people have no desire to pay the price.

“A miser grows rich by seeming poor,” poet William Shenstone wrote. “An extravagant man grows poor by seeming rich.” I don’t think it’s any more complicated than that.

Keith here – For context, in this country, if you have $1 million in liquid assets you are richer than 95% of your fellow Canadians … congratulations! For more articles by Morgan Housel, please click here.

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I always want to say to people who want to be rich and famous: ‘try being rich first’. See if that doesn’t cover most of it. There’s not much downside to being rich, other than paying taxes and having your relatives ask you for money. But when you become famous, you end up with a 24-hour job.
Bill Murray

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APR 20, 2021

It's time to pluck the goose

BY KEITH THOMSON

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As we prepare for this year’s “plucking” perhaps the article below will help minimize the “hissing”. The article, written by Ryan Holiday, is directed towards an American audience (with a Stoic bent). However, if you change the date to April 30th, the message is no different for Canadians.

The Taxes of Life

Ryan Holiday, The Daily Stoic

 

As we prepare for this year’s “plucking” perhaps the article below will help minimize the “hissing”. The article, written by Ryan Holiday, is directed towards an American audience (with a Stoic bent). However, if you change the date to April 30th, the message is no different for Canadians.

April 17th is the day that Americans pay their taxes. It’s a day of mixed reactions depending on your outlook and politics. Some choose to focus on the good things their taxes pay for and have paid for since Roman times—the roads, the armies, services for the poor. Others focus on the waste (tax corruption and waste is also as old as Rome) or question the morality of the system altogether. Last year when we posted a note about taxes, a number of comments wrote angrily that “taxation is theft!” while others angrily responded to those commenters with defenses of their own. (All this anger being somewhat ironic for Stoics.)

In a way, this misses the point. What we should be doing is zooming out and looking at the larger picture: People have been complaining about their taxes since the beginning of civilization. And what has become of it? Taxes are higher than ever and they’re dead. Death and taxes. There is no escape. So let us waste no time and create no misery kicking and screaming about it. Let us not add to our tax bracket the cost of frustration and resentment.

Taxes are inevitable part of life. There is a cost to everything we do. As Seneca wrote to Lucilius, “All the things which cause complaint or dread are like the taxes of life—things from which, my dear Lucilius, you should never hope for exemption or seek escape.” Income taxes are not the only taxes you pay in life. They are just the financial form. Everything we do has a toll attached to it. Waiting around is a tax on traveling. Rumors and gossip are the taxes that come from acquiring a public persona. Disagreements and occasional frustration are taxes placed on even the happiest of relationships. Theft is a tax on abundance and having things that other people want. Stress and problems are tariffs that come attached to success. And on and on and on.

There’s no reason or time to be angry about any of this. Instead, we should be grateful. Because taxes—literal or figurative—are impossible without wealth. So what are you going to focus on? That you owe something, or that you are lucky enough to own something that can be taxed.

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The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.
Jean-Baptiste Colbert

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MAR 26, 2021

Why having all of your eggs in one basket makes sense

BY KEITH THOMSON

I was recently referred to a wonderful family who had come into a significant windfall as a result of a commercial real estate sale. I thought the potential relationship was moving ahead swimmingly well right up to the point when I mentioned that one of my “non-negotiables” was that I manage all my clients’ portfolios… or none of it. I have to assume that I was not very persuasive as they chose option “b”. 😳
 
This family believed that the prudent course of action was to diversify their sizeable investment holdings between more than one wealth adviser. I appreciate the apparent logic of this attitude, after all, is not diversifying your portfolio an effective strategy to reduce your risk? However, in much the same way you probably do not have more than one family doctor, lawyer, accountant, or car mechanic, this idea of having more than one wealth adviser is ultimately self defeating. 
 
The following are five reasons why.
 
1) Time – Referencing Buffet’s quote above, time is not a renewable resource. With more than one wealth adviser, the amount of time it takes to manage your wealth has increased exponentially. A few examples are (but not limited to) more meetings, phone calls, emails, tax slips, paperwork, and statements that need to be reviewed. 
 
2) Less Tax – Having your accounts in one place allows for 100% tax efficiency. As just one example, making sure that all your interest bearing assets (highest taxed) are in your registered plan accounts and your growth and dividend assets (lower taxed) are in your non-registered accounts.
 
3) Lower Management Fees – Given the sliding percentage scale that most advisers make available to their clients, you also lower your annual fee when you consolidate your accounts.
 
4) Poor Portfolio Design – Given the likelihood of little to no co-ordination amongst your competing wealth advisers, it will be impossible not to experience duplication in your investment portfolio. You may own the same stocks, the same investment style (all value or growth), market cap size (all large or small stocks) or be over or underweight in specific sectors. As an example, too much in technology or too little. Even more important is having an accurate, customized asset allocation, which is one of the keys to successful investing and impossible to facilitate amongst competing advisers.
 
5) The Wrong Incentives – When working with new clients my focus is to maximize their returns for the amount of risk they are willing to take on. When you have two or more wealth advisers managing your money you will inevitably be comparing their respective returns. This puts into place a “performance derby” incentive structure whereby each adviser will try to outperform the other in the short term. The possible result of this? Your portfolios could be much riskier than if you were working with only one adviser.

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I’m a great believer in diversification by asset class, geography, industry, investment style (growth and value) and size (large cap stocks and small). If you do not wish your financial life to look like the image on the left, consider working with one trusted financial planner instead of juggling multiple wealth advisers. In this way you will be able to develop a comprehensive wealth plan and investment portfolio where all the pieces fit together like the  jigsaw puzzle on the right, saving you time, money and headaches down the road.

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The rich invest in time, the poor invest in money.
Warren Buffet

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FEB 24, 2021

There's no place like home?

BY KEITH THOMSON

I do appreciate that for most investors one of our behavioural “ticks” is to invest primarily in what we are familiar with. As a result, time and time again, I come across portfolios that are significantly over invested in Canadian companies. RBC Global Asset Management reported that as of May, 2019, while Canada represented only 3.1% of the MSCI All Country World Index, Canadians held a whopping 59% of their portfolio in domestic stocks. Even more challenging is the fact that our market is incredibly under-diversified with over 70% of the Toronto Composite Index made up of “rocks, trees, and financials” … otherwise known as natural resource companies and banks. (Source: https://www.msci.com/acwi

This state of affairs is sadly reflected in the opportunity cost that shows up in the chart from the Visual Capitalist shown below. It goes into more detail through this excellent graphic  “Charting the World’s Major Stock Markets on the Same Scale (1990-2019)”. As you can see, since 2011, the U.S. has significantly outperformed the Canadian market

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Instead of clicking one’s heels and whispering to oneself, “There’s no place like home” may I suggest that, at least when it comes to one’s portfolio, “home” is not necessarily the best option when it comes to the diversification of your portfolio.

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The only investors who shouldn’t diversify are those who are right 100% of the time.
John Templeton

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JAN 25, 2021

It all goes back in the box

BY KEITH THOMSON

Growing up I was never really a fan of board games. However, there was one game that did intrigue me … Monopoly! Created 86 years ago, and currently published by Hasbro, it’s now licensed in 103 countries and printed in more than 37 languages. I’m not sure what attracted me about the game. Perhaps it satisfied my subconscious capitalist urge for acquisition. Regardless, I do vividly recall how disappointed I was when, at the end of the game, win or lose, all the pieces had to go back in the box. 

 

As an adult, and reflecting back on the rules of Monopoly, I’m not sure “grinding your opponents into dust” was necessarily a positive life lesson. Having said that, and perhaps counterintuitively, I believe the best lesson I learned from the game was that, in the end (and it always ends), it all goes back in the box.

 

As we reflect back on 2020 and look forward to a much improved 2021 (hopefully!), I encourage you to watch this insightful and moving four-minute video featuring the voice of John Ortberg. Pastor Ortberg helps remind us that, ultimately, everything in life goes back in the box.

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Thank you … and all the best for 2021!

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You have to ask yourself: When you finally get the ultimate possession, when you’ve made the ultimate purchase, when you buy the ultimate home, when you have stored up financial security and climbed the ladder of success to the highest rung you can possibly climb it, and the thrill wears off – and it will wear off – then what?
John Ortberg

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