Monthly Archives: July 2017

Trends in the US Economy

Differences between the Canadian and US economy

I rather focus my attention on the US economy than on the Canadian economy.

I see the Canadian economy as huge gas station for the US and a huge ATM machine. The biggest drivers of the Canadian economy are the oil companies and the banks. You take those two sectors from the index and there is no Canadian economy.

Any Canadian investing his money in the Canadian index may think that he’s diversified but he’s not, he’s invested in two sectors: Financials and Energy.

The US economy is more diversified

On the other hand, the US economy is more diverse.

Generally, the easier way to invest in the US is to buy the S&P 500 index, this index represents the 500 largest companies of the US. This is one of the best set-it-and-forget-it strategies. Over the last 10 years, the S&P 500 index has increased in value 68 %. This time period includes the financial crisis of 2008 in which the US economy tumbled almost 50%.

If we look closer into the S&P index, we will discover that it is composed of many industries, all of them well represented in the index. Those industries are:

At a birthday party.
  • Discretionary
  • Staples
  • Energy
  • Financials
  • Health Care
  • Industrial
  • Materials
  • Real Estate
  • Technology
  • Utilities

But as you can imagine, not all of those industries grow at the same rate. Some go up, others go down and others stagnate.

The US economy is constantly changing. 200 years ago 90% of the economy was based around farming. Nowadays no one thinks of farming. 200 years ago, we didn’t have a technology sector, now we can not live without technology.

Who is the leader and who is the lagger

I went back and looked at the Spider Industry Sectors for the past 10 years to see which industries have been producing most of the gains for the S&P and which industries have been a drag. Here are the returns:

  • Discretionary + 145%
  • Health Care +133%
  • Technology +120%
  • Staples + 105%
  • Industrial + 73%
  • Materials + 42%
  • Utilities + 36%
  • Real Estate + 5% (This is a new sector, there is only 1 year of data)
  • Energy – 5%
  • Financials – 8 %

Here is a graphs which represents all those returns.

What narrative could we build from these numbers?

Reversion to the mean

There is the reversion to the mean theory which suggest that prices return to a mean average. If we believe this theory, Discretionary, Healthcare, and Technology, will either slow down or retrace. And Financials, Energy and Utilities will increase in value. People who follow this theory have a tendency to re balance their portfolio once a year, selling their winners and buying the losers.

I have news for these people: Agriculture will never be a major part of the economy. That time is long gone. Hunting whales to extract their oil to light lamps will never be a major player of the economy. Moby Dick is dead.

Following the trend

On the other hand, I see technology becoming a bigger player in our economy. I see healthcare growing as well. Medicine continues to advance, our life expectancy continues to grow, which means we will need more medicines, more doctors, more everything.

What to do???

It’s dangerous to predict the future. You never know which industry will go up and which industry will go down, that’s why we buy the index, to protect us from our incapacity to pick sectors. But if I had a little bit more money to play around, I would buy a bit more Healthcare and a bit more Technology.

If you had extra money to play with, which sector would you pick?



Global diversification, not always a panacea

Hanging out with friends

For years I have been promoting the advantages of global diversification.

My recommended portfolio

Generally, I recommend a portfolio of ⅓ Canadian, ⅓ US, and ⅓ international stocks. I claim that  different countries run at different economic cycles, this means that as some countries’ economies are growing other countries’ economies are shrinking.

Avoiding home bias

The advantages of having a diversified portfolio of different geographical areas is that we can reduce home bias ( the tendency to buy stocks from your home country). For example the Canadian economy is only 2% of the global economy, it makes no sense to have a portfolio of only Canadian companies.

Does it work?

It is believed that having investments from different countries, decreases overall risk and increases long term returns. But is this true?

It has been my observation that in time of crisis, most markets are highly correlated, they behave in unison, thus rendering diversification useless. At the exact moment when you need that benefits of diversification the most, it’s the moment when you can’t have it. At any other time, global diversification in a nice academic theory.

It doesn’t work when you need it the most

Two examples come to mind. The time when the Greek government almost defaulted on their debt. At that time all the international markets were moving in unison, they were tanking. The other example was the financial crisis of 2008. All the international markets went down at the same time.

This is the Canadian and US market. As you can see, at the time of the financial crisis of 2008, all markets when down, then all markets started to recuperate at the same time, then each country went about their own business.

Global investing is an idea that it’s nice in the textbooks but almost useless in real life. Yes, as the textbooks tells us. If we invest over a 20 year period or longer, our investments line are smoother when we are properly diversified. But as investors, will we have the stomach to see all our national and international investments tumble at the same time?

Lack of better ideas

In spite of all of its shortcomings, I will still champion my ⅓, ⅓, ⅓ portfolio of Canadian, US, and International ETFs. Not because I am a strong believer, but because I lack any better ideas.


Investing is like cooking, here is my favorite recipe

Investing is like cooking, you need a recipe, good ingredients and a watchful eye

There are a lot of similarities between investing and cooking a meal.

Just like every meal should be cooked according to the taste of the person eating it, investing should be done according to the risk profile of each investor.

So what are the ingredients.

The principal ingredients are:

  1. Low cost ETF, preferably from Vanguard (the lowest cost leader),
  2. Some bonds, if you are risk averse (but I don’t recommend this), this is like adding a block of tofu to your meal. It’s good for you but it’s tasteless.
  3. Some individual stocks ( I don’t recommend this either). This is like adding red peppers, a bit can add taste, too much it can ruin your meal.

My favorite investment recipe:

For Canadian investors I like to suggest the following recipe:

⅓ Canadian Index ETF,
⅓ US index ETF, and
⅓ International index ETF.

This a 5 year chart representing the US market, the Canadian market and the international market. If we do an average of the return, and investor might have gained over 9% per year.

Depending on how much time and how much interest you have in your portfolio, you could add subcategories. For example. The Canadian part could be subdivided into three subcategories: big companies, Medium size companies and small companies. The same can be done for the US part.

With time, some investors like to build elaborated portfolio which include many asset classes. On the other hand, other investors opt for simplicity. Both are legitimate ways to build a portfolio. For example, for someone in the US, they might buy one big broad index called “The total market index,” or they might opt buy all kind index subcategories individually.

Also, as investors reach their investments objectives, they may decide to add more safe assets or they may decide to add more risky assets.

For example, imagine that as a Canadian my objective was to accumulate one million dollars. I have built my ⅓, ⅓, ⅓ recipe. If I had an additional $100,000. I could say to myself.

I am on track for my retirement, I want to reduce volatility, I will put this new money in boring bonds. Imagine that you are adding a tofu block to you stake.

On the other hand, another person could say. I have met my one million dollar goal. If I had an additional $100,000 I would put it in the real exciting names that continue showing in the business news. If I win, I will be delighted, if I lose, I still have my one million dollars to take care of my retirement. Imagine that you are adding a jalapeno to your meal. Be careful, if you add too much you could ruin everything.

Feb 1. Hanging out with friends after a Toastmaster meeting. 🙂

The final touch

In cooking, you have to let your plate simmer for a little bit. In investing, you have to let it sit long enough to let the magic of compounding grow your portfolio. There is no shortcut to this… good investment takes time, there is no other way around it.

Bon Apetite.

Bitcoin and the South Sea Bubble

On top of the Mont Royal with my French teacher. 🙂

Recently my friends have been asking me about Bitcoin. The truth is that I don’t know anything about it, but I can tell you one thing, it does look like a bubble.

Thinking about Bitcoin made me think about the South Sea Bubble of 1720.

The South Sea Bubble of 1720

In 1711 the South Sea Company was founded. Due to its political connections, the company won a monopoly to trade with the Spanish colonies in South America.

750% increase in a few months. If this is not a bubble, then what is it?

The promoters of the company told the investors that South Americans were waiting in its shores with pots of gold to be exchanged for British textiles. After a few exploratory trips the imagination of the investors went wild, even the promoters of the stock started believing their own story.

On January 1720 the stock was worth 128£. On August it was worth 1,050£. That’s a rise of 750% in just a few months, in December it had collapsed back to 124£ and shortly after the company was closed.


On 2008 the cryptocurrency Bitcoin was created. It is supposed to be a peer-to-peer network where people can accept payments from this form of currency.

I am not going to argue for or against the merits of the currency, all I want to point out is that most people are buying Bitcoin not as a currency, they are buying it because other people are buying it and the end goal is to sell it to someone else. In short, the business plan is to buy it with the hope of finding another sucker who will buy it at a higher price. None of the current buyers are buying Bitcoin in order to pay for their groceries at the supermarket.

If anyone think this growth is sustainable, I want some of the stuff you’re smoking.

So far, since the creation, Bitcoin’s has grown more the 300% per year. To put it in perspective. Think of Warren Buffet, the richest investor in the world. He made his fortune by growing his investments at a rate of 20% per year. If we believe in the Bitcoin speculation craze, we all will be richer than Warren Buffett in less than 5 years. At a given moment we have to put our imagination on check and come back to reality.

Here are some amazing facts:

April 2010. 1 bitcoin = $0.003 US
July 2017. 1 bitcoin = $2,500 US

Five Steps of a Bubble

Economist Hyman Minsky says that a bubble has five stages: displacement, boom, euphoria, profit taking and panic.

  1. Displacement. Investors discover a new way of doing something, a new technology, a new paradigm.
  2. Boom. Prices start creeping upwards, but quickly gain momentum as people start spreading the news.
  3. Euphoria. People jump into the investment out of fear of missing out. Buy now and do due diligence later.
  4. Profit taking. At this time, some people realize that prices will not continue going up for ever and start cashing out their investments.
  5. Panic. As more and more people start cashing out, the rest of the people realize that current prices or growth rate is unsustainable and every one tries to get out before the next person creating a sudden drop in prices.

It is my believe that Bitcoin has all the characteristics of a bubble.

  1. Displacement. Bitcoin is a new way to transfer wealth from one person to the other. Its blockchain technology is a revolution in the way people do transactions. There is a permanent record of a transactions without the help of attorneys, notaries, nor bankers.
  2. Boom. Prices started creeping up slowly and accelerated as the news spread.
  3. Euphoria. Now, everywhere I go, people ask me about Bitcoin, everyone wants in. They don’t really understand it but hell, if everyone is making money, why not?
  4. Profit taking. Eventually some players will say to themselves: “Hey I am happy with 100% or 200% return on my money, I will take this dollars home. As some smart players take their profit other will follow.
  5. Panic. Some people will see the smart money leaving and they too will try to cash out at the peak. People will be in a hurry to sell to the next idiot, but the supply of idiots will run out.

Time will tell. The only thing that I can tell you for sure is that the past growth rate is impossible to sustain.

How to use other people’s money to invest in stocks and real estate

Looking for great investments. 🙂

I have used other people’s money in real estate and in the stock market.

Other people’s money has catapulted me to out of economic stagnation.

Real Estate

Five years ago I heard about a website called Airbnb where people can rent their property to tourist and earn more than if they rented their properties to regular tenants.

After many sleepless nights, because I was constantly thinking about offering a property through Airbnb, I decided to give it a try.

I borrowed $50,000 from friends and family at 10% interest rate.

Then I went to the bank and used the $50 as a 20% down payment for a $250,000 property and I started Airbnbing. It worked like a charm. Usually, the rent for an apartment of that value in my neighborhood is about $1,200. But I was bringing home over $3,000 every month. Eventually, I was able to pay back my debt of $50,000. My friends were sad to see those 10% interest checks stop coming.

When I travel to other countries I see those international investors and getting into the real estate and the Airbnb game. There is a new project in every touristic part of every city. Sometimes, a person can buy the property while it’s still under construction so that they can get a good deal. They can turn around and sell to other people or start operating it as an Airbnb property. One of these days I will start investing overseas as well.

The stock market

For many years, I have been fascinated with the stock market. I drank the kool-aid. The rhetoric is that in the long run, global markets give a return of about 8%. The only trick is to withstand the short-term ups and down. I have read in a few places (but never done the research myself) that on any 20 year period, the stock market in the US has never lost money. So that’s my business plan. I borrow money for 4% then I invest it in the stock market with the hope of getting 8%. If everything works out, my profit would be 4% (8% – 4% = 4%).

Last year my global portfolio went up about 14%. After paying 4% for the use other people’s money, I made 10% without a single dollar out of my pocket. I don’t know how to calculate a return when I didn’t put any money out of my pocket. I guess that having credibility and being trusted is as important in business as having capital.

By the end of this year, I want to reduce my leverage to 10 to 1. This means that for every $1,000 of mine, I will borrow $10,000 from other sources. I will continue this process until I reach $1,000,000 at which point I will start paying down all my debts.

What I am doing, borrowing money and investing it, is extremely risky. It’s a combination of madness and naivete. I have endured many nights of poor sleep. I would not recommend what I am doing to anyone.

If you are interested in using other people’s money, here are some ideas.

How to use other people’s money

Before you start. Be aware that markets don’t go straight up. Know that they can go down by a lot. During the year 2008, the US market went down as much as 50%.

Be ready to think long term. It would take years to build a significant portfolio and build a track record which will give you credibility.

Most likely you will have to have skin in the game, which means that you will have to put your own money at risk.

Here it is:

  1. Margin account. When you have a broker’s account, the broker might lend you up to 50% of the value of a security to make your purchase. Imagine that you want to buy $10,000 of Royal Bank stock. You could put $5,000 and the broker will lend you the other $5,000. The broker will keep the stock as collateral until the debt is paid. If the value of the stock goes down, you could get a “Margin Call” informing you that you have to sell the stocks or put in more cash. On the other hand, the broker will be willing to lend you more money if the value of the stock goes up. Beware, this is not a free loan, the broker will charge interest, usually Prime rate plus 1% or  2%.
  2. A line of credit. If you have good credit and a stable relationship you’re the bank, the bank will be happy to lend you money through a line of credit. The interest rate for that loan in generally Prime Rate plus 1% or 2%. If you have a house or any other property as a guarantee, the bank could lend you money at a lower rate.
  3. Friends and family. This the most common yet most dangerous source of funds. Your family and friend know your character. They know whether you are the kind of person who will pay the money back no matter what or if you are irresponsible and always getting into financial difficulties. There is a lot more at stake than money. If you ever default on your margin account or your line of credit, the banks will write that off as the cost of doing business, but if you don’t pay your family and friend, the stigma will never go away. You will be always, a non-trusted person. The conversations at Christmas time and Thanksgiving can be awkward, and who knows, maybe there will not be a place for you at the table.