Tag Archives: investing

Will Budget 2022’s proposed tax hurt Canadian financial services stocks?

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By Ian Duncan MacDonald

Special to the Findependence Hub

In the 2022 Federal budget a surtax of 1.5 per cent on bank profits over $100 million was proposed along with a one-time 15 per cent charge on income above $1 billion for the 2021 tax year.  Canadian banks are already among Canada’s largest taxpayers.

The six largest of Canada’s banks accounted for more than $12 billion in tax revenue and more than double that in dividend income.  They contribute 3.5%, or over $65 billion, to Canada’s gross domestic product. Over 280,000 are employed by these banks.

When Toronto-Dominion Bank’s chief executive, Bharat Masrani, recently stated that a proposed corporate tax rate increase that targeted financial institutions ““could lead to unintended consequences,” you could see the battle lines being drawn.

The pawns in this high-stake battle looming on the horizon are the millions of Canadian pensioners, charities, endowments, mutual fund investors, bank shareholders, pension funds, RRSP investors and others dependent on bank dividend payments.  The banks will do their best at every opportunity to frighten their 34,000,000 customers with dire predictions of the harmful, personal financial consequences these proposed taxes will cause.

The banks have your phone number, your e-mail address, and your street address.  Every time you deposit or withdraw funds, I would expect them to remind you of how you are being impacted by the proposed taxes. Every bank statement could carry their message their message that the tax is hurting you more than them. They are far better organized and motivated than the civil servants.

The stakes are huge.  The Royal Bank of Canada (RBC) would likely pay the most, an estimated additional $334.7 million. The Toronto-Dominion Bank would pay about $285.5 million, the Bank of Nova Scotia (Scotiabank), approximately $191.9 million, the Bank of Montreal would owe about $137.9 million, the Canadian Imperial Bank of Commerce around $120.2 million, and the National Bank around $42.0 million.

The Federal government is already anticipating the pushback. It has stated they will not tolerate “sophisticated tax planning or profit-sharing” by the financial institutions to dilute the new measures. As well, new “targeted anti-avoidance rules” will be put in place.  The federal Financial Consumer Agency of Canada will be policing any “excessive” fee passed on to customers to offset the cost of the new corporate tax measures.

One thing to propose this tax, another to implement it

It is one think to propose such a tax.  It is another thing to implement it.

Canadians tend to take their long-established, successful banks for granted. They have no idea that out of the thousands of banks in the world, their banks are in the top 35 of the safest. These are banks that dwarf any of the banks that rank ahead of them. In North America they are the top six safest banks.  As commercial banks, they are in the top 18 of the safest banks.

What impact will the battle over the taxes have upon your shares in financial service companies? The taxes are still too hypothetical to base investment decisions on. All we can do now is work with the current financial information that is available.

In a March, 2022 an article that appeared in the publication Investment Executive, by Daniel Calabretta, was  headlined, “Financial services firms in a good position to weather expected market volatility.”The article was not directed at investors’ main concern.  Investors want to know ”For the long term, which Canadian financial service companies should  you consider adding to your investment portfolio?”

Charts in the Investment Executive article showed a comparison between 2020 and 2021 of “Assets, Revenues, Net Incomes and Earnings Per Share” for 40 financial service firms.  However, whether these figures went up or down from one year to the next does not really address which of these companies are expected to provide share price gains and an increasing dividend income for investors. Thirty-seven of the forty stocks did pay dividends.

Speculators only control share prices.  The experienced executives of these 40 companies, through their revenue and expense decisions, control profits.  From profits come dividends.

There are many financially weak, marginally profitable companies who can motivate speculators to buy their shares based only on promoting the potential for eventual profits and skyrocketing share prices. There are also many financially strong, profitable companies that are ignored by speculators.

That constant debate between thousands of optimistic speculators who think a share price is going rocket up and the thousands of pessimistic speculators who think the same stock’s share price is going to crash makes accurate predictions of future share prices impossible. A stock can not be bought by a speculator until another speculator who owns the stock is prepared to sell it upon receiving an attractivebid from a buyer. To accommodate such investment uncertainties, wise investors, diversify their share ownership among the stocks of different sectors to account for unpredictable speculator bids.

The Great Canadian Financial Stock Challenge

Which of the shares of these 40 Financial Industry stocks would you confidently buy if you could review an Excel spreadsheet with the following additional eleven facts that go beyond assets, revenues, and net income?  Continue Reading…

Investment fads and other destructive behaviours

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By Steve Lowrie
Special to the Findependence Hub

Chasing Investment Performance results in far more losers than winners

Would you like to improve your investment game?

Counterintuitively, you don’t necessarily need to master more fancy moves; it may be a more powerful play to simply reduce your biggest investment mistakes. It’s those false moves that usually cost you the most gained ground.

In particular, I’ve commented before on two common and costly behavioural mistakes, both of which stem from reacting to recent returns instead of patiently positioning your portfolio for future market growth.

  1. The first such blunder is to give in to a sense of gloom and doom, and sell out at low prices during down markets.
  2. On the flip side, many investors seem to love chasing after expensive trends in frothy markets. I’ve seen a lot of that behaviour lately, so let’s revisit why that typically doesn’t end well.

Fleeting Passions and Expensive Fashions

Admittedly, it’s tempting to chase investment fads when they are playing out in real time. Unfortunately, it’s only obvious in hindsight which lucky few will be long-run winners, and which of the far greater majority will end up as costly illusions, conjured up by an intoxicating brew of performance-chasing and FOMO (fear of missing out).

Here are four points to help you avoid following fads:

1.) Success stories abound. There is always a good story behind every hot investment trend. We humans are remarkable at devising new technologies, ground-breaking opportunities, and out-of-the-box ideas. A few of them pay off handsomely, especially for investors who manage to get in at the beginning of the run. However …

2.) By the time it’s in the popular press, it’s usually too late to profit on the news. Once a success story has gone mainstream, it’s too late to get in on its past exceptional performance. You end up buying high and hoping it will go even higher, despite the odds that it won’t.

A recent Canadian example was the full legalization of cannabis with huge amounts of fanfare on October 17, 2018. Trying to capture this trend, Horizons ETFs launched the Marijuana Life Sciences ETF (HMMJ) on April 4, 2017, holding a basket of North American stocks active in the marijuana business. From the initial $10/share price, the EFT skyrocketed to over $24 by September 2018. From there it declined to $22 by the October 17, 2018 legalization date, and then dropped further to $15 by the end of 2018. Currently, this ETF is trading just over $5. Its past performance is horrendous, –53% over the past 12 months, –32% for the past 3 years, and –5.63% per year since inception. So much for following what was garnering the most attention in the media!

3.) It’s easy to forget that there are a lot more market losers than winners. Think you can pick the ones with room to grow? Although markets in aggregate have delivered premium returns over time, those returns tend to come from a tiny minority of securities. For example, in a recent report on pursuing individual stock returns, JP Morgan looked at U.S. stock performance from 1980–2021. They found about 10% of stocks across all sectors proved to be “mega winners,” but 66% failed to outperform the Russell 3000 Index, and 42% delivered negative absolute returns. In sharing this and other data, Wall Street Journal columnist Jason Zweig observed:

“Winners like Walmart are vivid … Failures fade as if they were written in invisible ink — but they are much more common than successes.”

4.) Your investment attention is up for sale. Despite these points, Bay Street and Wall Street are always looking to capitalize on the next big investment trends. Trade brokers and product manufacturers are no fools. When they see opportunities to make easy money by selling hot hands, they’re happy to “help.” Whether you win or lose they can feast on fat commissions and tasty trading revenues.

Quacking Ducks

Who me, cynical? I’ve covered most of these points in my 2018 piece, Investing fads: Quack like a duck and you may get plucked. I described how there’s even a saying for these sorts of popular feeding frenzies: “When the ducks quack, feed them.” As one source described, “when investors want to buy something … that something is offered for sale. It doesn’t make any difference if Wall Street knows in its heart of hearts that that something (such as an IPO) is overpriced.” Continue Reading…

Tackling your Stock Market fears

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By Anita Bruinsma, CFA

Special to the Findependence Hub

Investing has become more accessible to more people over the years. The emergence of mutual funds, ETFs, online brokers and robo-advisors has given pretty much everyone the means to invest. So why are so many people still reluctant to invest, and in particular, why don’t they think they can do it themselves? Judging by the people I’ve talked to the answer is: they’re scared. 

This is unfortunate and unnecessary. The investment industry has made investing look so complicated. We are led to believe that we need an MBA, a Bloomberg terminal and a proficiency in Excel modeling to invest. This is absolutely not true. Investing can be simple when you buy and hold broad-market ETFs. 

Compounding the problem are the tales of fortunes lost in the stock market, either by gambles taken or being swindled by an unscrupulous financial sales person. These horror stories, although real, are uncommon, and like many of our fears, are bigger in our imaginations than in reality. 

Investing can be simple

Have you heard of imposter syndrome? That’s when you think you aren’t talented or skilled enough to deserve your job, your income, or the accolades bestowed on you. I had terrible imposter syndrome when I was hired as an equity analyst 16 years ago. I thought everyone around me was way smarter than me when it came to investing in the stock market. 

Over the years, though, I realized that so much of what people were talking about was irrelevant, and the excessive amount of information and analysis was unnecessary. The highly-paid “experts” who came to meet with us couldn’t simply say “The stock market goes up over the long term.” Why would anyone be paid to give that simple piece of insight?

The thing is, that’s all that matters. The fact that the U.S. stock market has, historically, always recovered from dips and crashes and continued the march upward is all that matters. Don’t let all the other market-related noise distract you from this point.

Fewer decisions, better outcomes

Here’s how to de-complicate investing: don’t make predictions. The smartest investors on Bay Street don’t try to guess where the market is going: they buy their investments and hold onto them for the long term. The more decision-making you remove from investing, the better off you’ll be. This means don’t pick stocks and don’t choose when to get in and out of the market. Buy ETFs or index mutual funds that mirror the broad market, buy when you have the money, and sell when you need it.  Continue Reading…

The Rear-View Mirror and U.S. stocks: A Contrarian Indicator

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By Noah Solomon

Special to the Financial Independence Hub

As we have written before, sentiment and emotions can have an outsized influence on investor psychology and investment decisions. Relatedly, there is a powerful inclination among investors to perceive markets that have outperformed as being less risky than those that have underperformed.

Interestingly, this tendency exists not just among individual investors, but is also prevalent in the professional investment community. A 2008 study by finance Professors Amit Goyal and Sunil Wahal explored the performance of investment managers who had been fired by institutional investors. The analysis compared the managers’ performance in the three years before being fired with their subsequent three-year performance.  The results of the study are summarized in the following graph.

The Selection and Termination of Investment Management Firms by Plan Sponsors

On average, fired managers had poor performance in the three years preceding their termination, with average annual underperformance of 4.1% vs. their benchmarks. This figure should come as no surprise, as you wouldn’t expect that they were fired for knocking the lights out! However, what may be counter-intuitive to many is that these managers tended to subsequently outperform, with average annual outperformance of 4.2% over the three years following their termination.

Clearly, not only does looking in the rear-view mirror fail to prevent you from hitting something that is in front of you but may in fact cause it!

The other takeaway is that even seasoned, institutional investors can be swayed by short-term performance, which in turn can lead to decisions which are both ill-timed and economically perverse.

Beware the Mean Reversion Boogeyman

Last year saw a continuation of a long-established trend of U.S. stock outperformance, with the S&P 500 rising 28.7% as compared to 8.3% for the MSCI All Country World Index (ACWI) Ex-U.S.  From the end of 2008 through the end of last year, the S&P 500 rose at an annualized rate of 16.0%, producing a cumulative return of 587.3%. In comparison, the ACWI Ex-U.S. Index rose at an annual rate of 8.6% and delivered a cumulative return of 190.7%.

The outperformance of U.S. stocks argues for actively reducing U.S. exposure and increasing allocations to other regions, as the mean-reverting, contrarian nature of investment manager performance can also be applied at the country level. The following chart covers the period from 1970-2021 and includes the U.S., U.K., Germany, France, Australia, Japan, Hong Kong, and Canada. Specifically, it illustrates the results of investing every three years in a portfolio of country indexes based on their trailing returns over the previous three years.

3-Year Performance of Countries ranked by Trailing 3-Year Performance

The chart brings fresh perspective to the standard regulatory disclosure language in the marketing materials of investment funds, which states that “Past performance is no guarantee of future returns.”

Outperforming countries tend to become subsequent underperformers : those that have had superior returns over the past three years tend to produce relatively poor results over the next three years. Conversely, underperformers tend to subsequently outperform: those that have lagged over the past three years tend to outperform over the next three years. Continue Reading…

Gen Z is Canada’s most engaged generation for tracking Financial Goals

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Move aside, Boomers: Gen Z is coming through!

According to BMO’s annual Investment Survey, Gen Z is now Canada’s most engaged generation for tracking financial goals.

Younger Canadians are flexing their financial savvy by evaluating their financial goals and plan more frequently than any other cohort: including Boomers!

According to the survey, 62% of Gen Z (aged 18-25) and 54% of Millennials (age 26-41) review their financial goals at least quarterly, with 41% of Gen Z and 29% of Millennials doing so monthly. In comparison, only a third (36%) of Boomers (aged 58-67) review their financial plans at least once a quarter and only 15% of them do so monthly.

“It’s exciting to see the next generation of Canadians building solid financial habits and establishing a foundation early” said Nicole Ow, Head, Retail Investments at BMO, in a  press release, “Real financial progress is a lifelong pursuit as our goals and circumstances change throughout our lifetime. We encourage Canadians of all ages to consider ways not only to grow their wealth and work towards immediate financial goals, but also to ask their advisor how they can align their investments with their values, define their longer-term goals, and protect and share their wealth with their loved ones and the causes that mean the most to them.”

Social media a big influence

While the survey found the majority of young Canadians rely on advice from a professional when making financial decisions, what’s more interesting is the additional sources they are seeking out for guidance. Many are currently working with a financial advisor, and 47% of Gen Z and 32% of Millennials say they were referred to their advisors on the advice of a trusted friend or family member. The impact of social media on the financial habits of young Canadians also mustn’t be overstated. A third of Gen Z and 22% of Millennials refer to financial influencers and social media for their investment decisions. In comparison, only 7% of Canadians over 55 utilize these sources.

Barriers to Entry

Among younger Canadians with savings primarily held in cash, half of Gen Z and close to two fifths of Millennials say the primary reason for this is that they do not know how to invest. Whether it’s not knowing where to begin, or being unsure who to trust with their finances, a lack of basic financial literacy skills being taught in schools may be partly to blame for this. Thankfully, the previously mentioned alternate sources that young Canadians seek out can help to educate those feeling overwhelmed. Continue Reading…