All posts by Financial Independence Hub

Inflation: What is Normal?

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Outcome Metric Asset Management public domain CC0

By Noah Solomon

Special to the Financial Independence Hub

Just as beauty is in the eye of the beholder, what one considers normal depends on their perspective. One of the single largest contributors to booms and busts is the tendency of investors to suffer periodic bouts of long-term memory loss. During such episodes, people view recent market dynamics as being normal, regardless of whether such behavior is an aberration from a long-term historical perspective.

We cannot understate the degree to which the economic and investment climate that has prevailed since the global financial crisis of 2008 has deviated from its long-term historical norm. It is challenging to identify any other time in history when financial markets have been as influenced by ultra-low interest rates and vast amounts of fiscal stimulus.

Given the unprecedentedly powerful “wind” of governments and central banks at their back, it is no surprise that the best strategies for investors have been:
• Buy almost anything – stocks, bonds, real estate, cryptocurrencies, art, etc. (take your pick, it’s all good!).
• Buy even more during dips, which consistently proved to be good buying opportunities.
• Use maximum leverage to turbocharge buying power and returns.
It is fair to say that there by the grace of the authorities have gone corporate profits, asset prices, and investor portfolios!

The Phillips Curve has been sleeping, but it’s not Dead

The Phillips curve is an economic concept developed by A. W. Phillips, which describes the relationship between inflation and unemployment. The theory holds that there is an inverse tradeoff between the two variables. All else being equal, lower unemployment leads to higher inflation, while higher unemployment is associated with lower inflation.

Phillip’s theory proved largely resilient for most of the postwar era. Until recently, the one notable exception occurred in the early 1970s, when OPEC issued an embargo against Western countries, resulting in stagflation (both high inflation and high unemployment).

The second aberration covers the time between the global financial crisis of 2008 and mid-2021. Until rearing its head several months ago, the inflation genie has been dormant. It has calmly remained in its bottle in the face of monetary and fiscal conditions that in times past would have caused it to bust out full of fire and brimstone!

The combination of low unemployment and tame inflation provided a goldilocks backdrop for corporate profits and asset prices. But, to steal the tagline from Jaws 2, “Just when you thought it was safe to go back in the water,” inflation has returned, prompting central banks to slam on the brakes. This has changed the landscape in ways that have and likely will continue to have far reaching implications for investors’ portfolios.

The Kazillion Dollar Question

The laws of supply and demand can vary in terms of timing, but they cannot be eradicated. You can either eat your entire cake all at once or piece by piece over time. You can’t do both. The free money, one-way asset prices, all-you-can-eat risk party that has been raging since the global financial crisis of 2008 has given way to today’s hangover of rising inflation, higher interest rates, falling stock prices, and risk-aversion.

The kazillion dollar question is whether the current market malaise is merely a garden variety hangover involving Advil (i.e., a mild and short-lived bear market), or a case of alcohol poisoning that will entail a trip to the emergency room (a severe and long-lasting bear market).

Japan’s Addiction

Without a doubt, there are vast structural, economic, demographic, and political differences between Western economies and that of Japan. Nonetheless, the Japanese experience serves as a small “w” warning of the potential consequences when extreme levels of monetary stimulus are applied for an extended period. Continue Reading…

Why I Don’t Invest In …

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By Bob Lai at Tawcan

Special to the Findependence Hub

We are hybrid investors – we invest in individual dividend growth stocks and index ETFs. As of writing, we own 50-something dividend stocks and 1 ETF. We are doing a hybrid investing approach to capture the best of both investing strategies.

We invest in dividend paying stocks so we can collect stable and predictable income every month. It means we can live off dividends if we wanted to and not touch the principal. This, in theory, should give us more flexibility and increase the margin of safety when we are financially independent and not earning a steady paycheque every two weeks. Dividend income is also very tax efficient compared to employment income, especially if you construct your portfolio correctly, like holding REITs and income trusts inside of your TFSA and only Canadian stocks that pay eligible dividends in your non-registered accounts.

Index ETF investing provides asset and geographical diversification that we may not be able to obtain easily through holding individual dividend stocks. By holding an international ex-Canada ETF like XAW, we are able to easily tap into international markets like the US, Japan, China, UK, Taiwan, etc.

Some people may argue that capital gain is even more tax efficient than dividend income, but that’s a post for another day…

Ideally, I’d like our dividend stocks to index ETF allocation to be about 65/35 and we are slowly making our way to this ideal breakdown.

Continue Reading…

App-based banking: the ‘new normal’ for Canadians

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By Vineet Malhotra

Special to the Financial Independence Hub

It has often been said that necessity is the mother of all invention, and if there’s anything the world has faced over the past few years, it was a lot of necessity. Whether it was how we exercised or worked from home, the pandemic forced the world to reimagine old habits and reconsider our ways of doing, well, everything.

Banking was not exempt from this re-evaluation, as evidenced by a recent survey by the Canadian Banking Association (CBA) which found that 65% of Canadians used app-based banking in the past year, up from 56% in 2018, and 44% in 2016. These numbers represent a massive shift in less than five years.

With limited banking options throughout the pandemic, consumers further embraced online and app-based bank platforms: not only did they experience the benefits, but they were also forced to redefine what services they thought were possible through an app. It was delivering the unexpected and hearing our clients say, ‘I didn’t know I could do that online!’ that helped push and motivate our team at Simplii Financial to offer more.

Through the pandemic, consumers saw firsthand just how much banking technology has evolved and experienced how easy it was to do things online like sending money abroad with Simplii’s Global Money Transfer or applying for a mortgage. They quickly came to realize that online banking was not just for simple money transfers, or deposits, but rather for more sophisticated financial transactions as well, all right at their fingertips.

Why the surge in app-based banking specifically?

The two main reasons for the rise in app-based banking come down to convenience and time.  The desire and the need for convenience have taken over our lives: more than ever we expect we can do things from wherever we are, whenever we want.  Whether it’s depositing a cheque, transferring money, or making bill payments, many Canadians now understand that an app makes all those tasks easier and faster. Even more complex services are starting to move into the digital space – like mortgage applications which can now be completed digitally, or by phone.

Who is driving the surge of app-based banking?

App-based banking now comes second only to digital banking in use and we expect it to grow. According to the CBA, the surge is largely due to Gen Z and Millennials. Nearly half of Gen Z (46 percent) and well over one-in-three Millennials (37 percent) are using app-based banking as their primary banking method. Continue Reading…

How to avoid the 7 Biggest Mistakes that Entrepreneurs Make

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Why picking stocks is so hard: Lessons from a stock market analyst

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By Anita Bruinsma, CFA

Special to the Financial Independence Hub

Picking stocks is really hard.

If you’re a DIY [Do It Yourself] investor, buying individuals stocks is risky. Even if you own 15 or 20 stocks, which will give you some measure of diversification, you have to choose the good ones. Which stocks do you choose from the 1,500 available on the Toronto Stock Exchange and the 2,400 on the New York Stock Exchange?

There are so many factors that influence how a stock performs and the average investor doesn’t have the time, skills, or inclination to consider all of them, or even most of them.

Casual stock pickers appear to focus on the current trend or outlook for the company’s product. For example, electric cars (Tesla), at-home workouts (Peloton), and e-commerce (Amazon).

It might feel “easy” to pick a stock based on this trend factor. You can see that electric cars are getting more attention and are part of the solution to the climate crisis. When Beyond Meat was gaining new restaurant customers like McDonald’s with its Beyond Burger, excitement and optimism was high. Seems like an easy decision: go with a company that has momentum.

The temptation to buy stocks on this premise is understandable. You can make a lot of money over a very short period of time. Easy riding. But often these stories die out and reality sets in. It could be that the cost of making the product is too high, demand for the product slows, or the company over-extends itself and runs into cash-flow problems. When optimism meets reality, stocks plunge.

After becoming a public company, Beyond Meat rose 400%. It subsequently crashed from US$234 a share to about $25 today. It’s down 83% over the past year alone. Similarly, Peloton rose by 550% during the pandemic due to the frenzy around at-home workouts, but has fallen 90% since its peak at sits at about $11 a share. Reality set in.

Professional stock analysts and money managers with long-term perspectives look beyond this surface-level excitement. It’s important that demand is there, but there are a myriad of other factors to go deeper on.

In my 15 years picking stocks for a large Canadian bank, I learned an incredible amount about equity research. Here are just a few of the things that professional analysts consider:

Demand: The demand for the company’s product is one of the first things to look at since revenue is the lifeblood of any business. Whether the product is women’s clothing, running shoes, fast food, oil, electricity, or credit cards, you need to have a view on what future demand will be. Although you can develop a theory, nobody actually knows what will happen, making this seemingly simple metric unknowable.

Profit margins: How does the company’s profit margin compare to peers in a similar business? Are margins expanding or contracting? What are the main drivers of profit margin and are there risks to those drivers? For example, how would a 10% rise in fuel prices impact the margins of Air Canada? How do currency fluctuations change the profits of importers like Dollarama?

Balance sheet: There is a lot of crucial information to be gleaned from a balance sheet such as inventory levels, cash in the bank, and how much is invested in hard assets like factories. Most importantly, the balance sheet shows you how much debt a company has and how it has changed over time. High levels of debt have taken down many companies.

Track record: Investing in a company with a track record reduces your risk significantly. Looking at revenue growth over a period of 5 or 10 years will tell you how sustainable the company’s product sales are. Analyzing the change in profit margins tells you whether the company has a scalable business and whether the management team is properly managing its costs. Newer companies lack this information and looking at only two or three years’ worth of data does not give you enough information.

Qualitative information: Companies that trade on the stock market are required to publish certain documents like the Annual Report and Annual Information Form. These documents have a ton of information about how the company operates, the risks it faces, and how it reports its earnings. These documents can reveal risks that you might not be comfortable with. For example, you might learn its main manufacturing facility is in an unstable country, or that it gets one of its main inputs from just one supplier.

Taking all of these factors into consideration (and allowing for a plethora of wildcard factors), an analyst will come to a conclusion about the quality of the company. If they like the outlook, it goes on the “maybe” list. But that’s not the end of it: the analyst then needs to decide how much the stock is worth. This is the realm of valuation, and valuation is a combination of math, art, and clairvoyance.

And finally, there’s all the stuff we don’t know. Despite regulatory requirements to disclose all “material information,” there are a lot of things going on within a company that we will never hear about. When talking with investors and the public, the management team’s objective is to pump up its story to get more people to invest – always apply this lense when you hear a CEO or CFO talking.

Let me share my experience with two companies that demonstrates the importance of doing proper research before buying. This is a story of two companies that made their sales numbers look great using fraudulent tactics: Valeant Pharmaceuticals and Luckin Coffee. In one case, I did extensive research and analysis and decided I didn’t believe the numbers, and in the other, I didn’t do the required work and chose to believe the story. Continue Reading…