All posts by Financial Independence Hub

Greed, Fear and Amnesia: The importance of Cycles

Image courtesy Outcome and positivemoney.org.

By Noah Solomon

Special to the Financial Independence Hub

Investment guru Howard Marks is the founder and co-chairman of Oaktree Capital Management, the world’s largest investor in distressed securities. Since launching Oaktree in 1995, his funds have produced long-term annualized returns of 19%. According to Warren Buffett, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.”

As indicated by the title of his book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor, Marks believes that “the most important thing is being attentive to cycles.” In particular, he discusses the importance of knowing where we stand in various cycles. He contends that most great investors have an exceptional sense for how cycles work and where in the cycle markets stand at any given time. Lastly, Marks insists that investors who disregard cycles are bound to suffer serious consequences.

We live in a World of Relativism

There is a great saying about being chased by a bear, which states “You don’t have to run faster than the bear to get away. You just have to run faster than the guy next to you.”

In the context of investing, outperformance does not necessitate perfection. Success doesn’t come from always being right, but rather from being right more often than others (or from being wrong less often). Whether picking individual stocks or tilting your portfolio more aggressively or defensively, you don’t need to be right 100% of the time; you just need to be right more than others, which by definition leads to outperformance over the long-term. To this end, we have outlined some of our favorite concepts and themes which serve as guideposts for achieving this goal.

It’s all about Fear and Greed: Valuation just goes along for the Ride

The factors that drive bull and bear markets, bubbles and busts are too plentiful to enumerate. The simple fact is that more than any other factor, it is the ups and downs of human psychology that are responsible for changes in the investment environment. Most excesses on the upside and the inevitable reactions to the downside are caused by exaggerated swings in psychology.

Many investors fail to reach appropriate conclusions due to their tendencies to assess the world with emotion rather than objectivity. Sometimes they only pay attention to positive events while ignoring negative ones, and sometimes the opposite is true. It is also common for investors to switch from viewing the very same events in a positive light to a negative one within the span of only a few days (or vice-versa). Perhaps most importantly, their perceptions are rarely balanced.

One of the most time-honored market adages states that markets fluctuate between greed and fear. Marks adds an important nuance to this notion, asserting that “It didn’t take long for me to realize that often the market is driven by greed or fear. Either the fearful or greedy predominate, and they move the market dramatically.” He adds:

Investor psychology seems to spend much more time at the extremes than it does at a happy medium. In the real world, things generally fluctuate between pretty good and not so hot. But in the world of investing, perception often swings from flawless to hopeless. In good times, we hear most people say, “Risk? What risk? I don’t see much that could go wrong: look how well things have been going. And anyway, risk is my friend – the more risk I take, the more money I’m likely to make.” Then, in bad times, they switch to something simpler: “I don’t care if I never make another penny in the market; I just don’t want to lose any more. Get me out!” Buy before you miss out gets replaced by sell before it goes to zero.

Without a doubt, valuations matter. Historically, when valuations have stood at nosebleed levels, it has been only a matter of time before misery ensued. Conversely, when assets have declined to the point where valuations were compelling, strong returns soon followed. But it is important to distinguish cause from effect. Extreme valuations (either cheap or rich) that portend bull and bear markets are themselves the result of extremes in investor psychology. Importantly, human emotions are both fickle and impossible to precisely measure. Noted physicist and Nobel Prize winner Richard Feynman articulately encapsulated this fact, stating “Imagine how much harder physics would be if electrons had feelings!”

Amnesia: The Great Enabler of Market Cycles

Another contributor to irrational investment decisions, and by extension market cycles, is the seemingly inevitable tendency of investors to engage in Groundhog Day-like behavior, forgetting the lessons of the past and suffering the inevitable consequences as a result. According to famed economist John Kenneth Galbraith, “Extreme brevity of financial memory” keeps market participants from recognizing the recurring nature of cycles, and thus their inevitability. In his book, A Short History of Financial Euphoria, he states:

When the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

Average and Normal: Not the same thing

In many ways markets resemble the swinging pendulum of a clock, which on average lies at its midpoint yet spends very little time there. Rather, it spends the vast majority of the time at varying distances to either the right or left of center. In a similar vein, most people would be surprised by both the frequency and magnitude by which stocks can deviate from their average performance, as indicated by the table below.

S&P 500 Index: Deviation from Long-Term Average (1972-2021)

Over the past 50 years, the average annual return of the S&P 500 Index has been 12.6%. The Index fell within +/- 2% of this number in only three of these years, within +/- 5% in only nine, and within +/- 10% in 22 (still less than half the time). Lastly, the index posted a calendar year return of +/- 20% of its long-term average return in nine of the past 50 years (18% of the time).

Also, when a pendulum swings back from the far left or right, it never stops at the midpoint, but continues to the opposite extreme.  Similarly, markets rarely shift from being either overpriced or underpriced to fairly priced. Instead, they typically touch equilibrium only briefly before snowballing sentiment and resulting momentum cause a progression to the opposite extreme. Continue Reading…

New Equity-linked GICs offer equity twist on humble GIC

By Rachel Megitt, Vice President,

Term Investments & Savings, RBC

(Sponsor Content)

If you’re looking to grow your money, the future looks a lot different than it did even a few months ago, given the current volatility in the markets and intensifying inflation.

We often hear the adage “big risk equals big reward,” but what if you want the reward but aren’t comfortable taking the risk? This is where a new twist on a traditional investment is proving to be a powerful option: equity-linked GICs (Guaranteed Investment Certificates).

In the summer of 2021, we shook up our product line-up and added two new equity-linked GICs that also represented RBC firsts and proudly shared the news, including in a Findependence blog.

New GICs with an equity twist

Within the first six months, we saw client enthusiasm about these two new “GICs with an equity twist” surge well beyond our expectations. Our clients have been clamouring for these GIC options and we believe this reflects the overall desire of Canadian investors to tap into what equity-linked GICs provide: the appealing combination of a guarantee for their initial investment, plus the higher return potential that comes with an equity investment.

While we knew we had created two truly compelling and competitive GICs, we never imagined how strongly these new GICs would resonate across the country. The buzz surrounding these equity-linked options is helping reshape investment conversations in Canada. These GICs offer investors who are reluctant to buy individual equities the opportunity to step into the world of equity investing at both a pace and level of risk they are comfortable with. Continue Reading…

Is It time to start implementing Cryptocurrencies In your Business?

By Nonso Nwagbo

Special to the Financial Independence Hub

Considering accepting cryptocurrencies for payment? Here’s what you need to know.

Let’s face it. The use of cryptocurrencies in business is swiftly gaining ground, yet many business owners are at a crossroads on whether to implement them. Before you decide to accept cryptocurrencies, you need to know the benefits and risks.

Remember that if you need budgetary support to manage the transition, you can explore financing options like microloans.

What are Cryptocurrencies, and how do they work?

Cryptocurrency is a virtual currency that any central government does not regulate. Instead, it is supported by blockchain technology.

Blockchain technology refers to creating a shared ledger that cannot be manipulated. The technology uses sophisticated computer algorithms to record and track transactions and assets within a network.

The most popular cryptocurrency is Bitcoin, launched in 2009.

Cryptocurrencies are used;

  • As a means of exchange for goods and services
  • As digital assets that store value.

Pros and Risks of using Cryptocurrencies In your Business

Pros

●      Greater Acceptability

More businesses, particularly global corporates like Amazon and PayPal, accept payments by digital currencies and have greater adoption of cryptocurrencies.

Moreover, more people are aware of cryptocurrencies and how they work.

●      Superior Payment Security

Initial misgivings regarding the security of cryptocurrencies slowed down its adoption. However, cryptocurrency transactions offer enhanced protection superior to that credit cards.

Credit card payments require third-party verification, which makes them prone to fraudsters. On the other hand, cryptocurrency transactions do not require centralized proof but use sophisticated computer algorithms, making it nearly impossible to steal personal information.

●      Lower Transaction Costs

Cryptocurrencies are way cheaper when compared with banks and digital payment platforms such as PayPal.

Cryptocurrencies charge a near-nil to no charge for transactions.

What’s more, cryptocurrencies are convenient for settling international payments in about 10 minutes. This facilitates international payments from your customers abroad.

●      Customer Acquisition Strategy

Cryptocurrency as a payment option is cheaper and more appealing to the tech-savvy younger generation.

Cons

●      Volatility

Compared with government-issued currencies, cryptocurrencies fluctuate in price widely.

The volatility can challenge businesses with substantive amounts of crypto in their reserves. For that reason, companies that trade in crypto often convert cryptocurrencies into fiat money to mitigate against the risk. Continue Reading…

Top 3 benefits of investing in Real Estate

Image by unspash/Blake Wheeler

 

Special to the Financial Independence Hub

Learning how to invest your money at an early age can set you up for success in the future. One of the most popular ways to invest is through real estate. This will allow you to earn a cash flow outside of your regular 9–5. However, many take this up as a full–time gig if they find it more appealing or successful than their typical job.

The benefits of real estate investing are almost countless, but there are a few that stand out from the rest. Let’s take a closer look at the top three benefits of real estate investing:

Buying is Cheaper than Building

If you plan to start your investment route in real estate, you’ll find that buying a home is typically much cheaper than building. Start by figuring out how much house you can afford and then apply for the proper mortgage. The process is relatively simple, especially with the help of a real estate agent.

The waiting game starts here, but compared to the length of time a home build is, this process is much shorter. Once your offer on the home has been accepted, you can then decide what you plan to do with the house; whether it’s to earn passive income, live in it, or both. Either way, your home’s equity will begin to grow. The only difference between the two is making money on the home on a consistent basis or collecting the equity of your home once you sell.

Earning Passive Income

In recent years, finding new ways to earn passive income has been a very popular side hustle. Especially for young adults, this is a great way to earn money while also working a full–time job. Check out our top 3 ways to start real estate investing to help you choose which route you want to take. Whether you choose to rent the home out monthly or are considering the flip and sell method, you can earn a significant amount of passive income. Continue Reading…

An income strategy for new retirees: HDIF

By David Kitai,  Harvest ETFs

(Sponsor Content)

One third of recently retired Canadians surveyed by RBC insurance said they retired sooner than they planned because of the COVID-19 pandemic. That same survey found that retirees, especially new retirees, are increasingly concerned about affording their retirement.

More than 78% of survey respondents said they were concerned about the impact of inflation on their savings. 47% said they were concerned about a lack of guaranteed income and 48% said they worry about outliving their savings.

All three of these concerns come down to income. New Canadian retirees, many of whom retired early due to COVID, are worried that they don’t have a stable source of income that can overcome the rapidly rising cost of living and last for their whole lifespans.

One income asset class can help with those worries.

Inflation worries come after years of low-yielding bonds

The income concerns discovered by the survey should come as no surprise. For the better part of a decade income yields from fixed income investments have been at or near historic lows. Retirees used to live on the income these investments provided but yields at sub 2% levels have been unsustainable.

More recently, rates have begun to rise as central banks attempt to reign in inflation. However, with inflation in spring of 2022 hitting levels above 6%, those rising bond yields are still paying negative real income.

That trend is reflected in the fact that 78% of survey respondents said they were concerned about inflation. Many traditional income sources seem incapable of matching what inflation has done to ordinary retirees’ balance sheets.

Many income sources, but not all.

Equity Income ETFs for retirees

An equity income ETF takes a portfolio of equities — stocks — and uses a combination of dividends and a covered call strategy to generate consistent monthly cashflows for unitholders. This results in an ETF with a target annual yield that can be as high as 8.5%, paid in the form of a monthly cash distribution. These assets can still participate in market growth opportunity, like an ordinary equity ETF, albeit with some growth opportunities limited due to the covered call strategy. The end result is a product paying consistent income with exposure to market growth opportunities. Continue Reading…