June 2020 SWM Letter – Performance Under Pressure

US$90 Million: 2000 KPH

With 2020 vision we find this a year of surprises and new records.  It’s the year we got a Japanese murder hornet in our Covid-19 mask while shovelling snow to retrieve a package stuck on a railway closed for protests, and FedEx suspended new orders after a barrel of oil fell to minus-$37.  Investment markets dropped 35% in four weeks, rose in ten weeks like an F-35 Lightning impressing crowds at a summer airshow.  The pilot will demonstrate various rolls and turns on this journey — up, down, and zig zag — while crowds gasp.  Still this Covid19 trip is entirely different than the tech-wreck of 2000-2002 or the pricked bubble of 2007-2009, which both took years to regain former altitude.  2020 was put on ice (an intentional economic coma) to reduce a calamitous death-toll.  Our world economy is surviving on unprecedented financial steroids:  interest rates at 150-year lows, government stimulus at all-new highs.  As for the bill … I’ll share some possible consolation below.

BEST NEWS IS IN BAD TIMES.

This leads to today’s first point.   Investments aren’t strongest when news reports are happy.  In fact they rise farther and faster on the anticipation of future good news even if the present is fearful.  Consider it in terms of “real assets” (the hard tangible variety) and an example of infrastructure.  Within our global portfolio we surely own renewable energy that nicely turns wind into electricity which is sold to the grid.  Clean energy is popular, gradually increasing beside other sources.  Returns may average 5-8% over extended periods, in a range of +/- 15%.

But what happens in recession or economic meltdowns?  You own this beautiful asset at a time when other people are selling everything in desperation, so even wind farms get marked down to firesale.  Not because they’re bad assets, but because people who were unprepared for bad times (even pension funds and hedge managers) were forced to sell good assets.  This causes your asset value to drop for a time, perhaps weeks, months, or a couple of seasons.  But you hold onto these precious assets, or even buy more while on sale.  Your portfolio team is also choosing top-class assets that until now were too pricey.  What happens next – to repay our patience – is the pleasant reward of rising values over seasons and years ahead, accentuating our growth and the income you’re earning.  Soon these assets will find new altitude, surpassing their prior worth.

SO, if news was forever dull and people never worried, the value of your wind farms might rise steadily 4% or 5% every year.  But since world news covers sunshine and storms, sickness and health, our investments are sometimes valued higher (thus reducing future growth) or valued lower (increasing future growth).  Ponder this for a moment because it shows why investing may be best when news media are stirring fear into the hearts of investors.  Those are “the best of times” to own solid value that accelerates your future earnings.   (Also see the “Cost of Market Timing” picture in last month’s letter.)

ASKING ABOUT REAL ESTATE.

Similarly consider Real Estate as clients have been asking me.   I am always grateful for questions because we can learn as we ponder the answers.   Real estate is another “real” or “hard” asset that clearly continues to carry value (even if prices fluctuate along the way).  As you already know we distinguish commercial industrial, office, retail, and multi-unit residential property.  Retail is least-preferred given rising e-commerce and raging Covid-19, yet as some tenants leave others with more thriving opportunities will come and pay higher lease rates.  Industrial enterprises like Magna, Amazon, and Costco sit on lands that pay substantial and rising leases – a perpetual cash-cow for investors who own such land.

Office space faces a question these days.  Will it lose value if people are working more from home?  Many however feel happier and more productive if their work/life balance includes a formal workspace (eg. partly but not entirely from home).  6-foot distancing also reduces office density, suggesting as much or even more space is needed.  In our own office for instance, Ben and Christine have both worked from home while taking opposite days or hours at SWM so we haven’t reduced our office space even while staff work from away.  Commercial offices thus remain viable and valuable as a source of leases to support your financial goals and life-income.

CONSOLATION – PAYING THE BILL.

Consolation usually means receiving comfort after a personal loss.  But here I’m referring to “consols” which Britain first issued in 1751 and later used to manage unpaid debts of fighting Napoleon.  Unable to clear the debt Britain issued these “perpetual bonds” which pay interest but never reduce the amount owed.  Surprisingly there are pension funds, insurance firms, and wealthy families who don’t care if a debt is paid, so long as they get complete certainty on the income that will continue in perpetuity.   (The Economist, May 23, 2020.  The US, Canada, Eurozone, and Japan may indeed find some consol-ation in this approach given the $10 Trillion price of global stimulus currently at work.

More likely or in combination with perpetual bonds is realizing that many enormous debts of the past were never paid.  Apparently the U.S. hasn’t paid its debts (to France, presumably) for the revolutionary war.  Canada hasn’t paid off the debt incurred in two world wars.  Debts were serviced by paying interest but never actually paid off.  The debt became a shrinking portion of our growing economy.  By similar token, U.S. debts already were reaching unfathomable proportions over the past twenty years, even more due to lost manufacturing and escalating costs of illness in an aging population … but add another $2 Trillion to that debt and keep % rates low, the U.S. can essentially treat this debt as a perpetuity that over time will become invisible.

I’ve said before, income taxes are destined to rise quite fearfully if we fail to control government debt while facing a tsunami of health costs for an aging population.  High debts, troubled debt ratings, and rising taxes could suffocate our business, threaten our employment, choke our national productivity, and effectively drown future generations in red ink.   Yet even if we hesitate to agree – it’s worth hearing that the total sum of debt is less critical than the growth of the national economy.  The World Bank quotes Canada’s productivity in 1920 at $100 Billion, but today at $2 Trillion.  If we continue growing our country like that, we definitively ease the drag and damage of a national debt.

FINANCIAL SECURITY FOR LIFE.

There are different approaches to invest and make money grow.  One is to only invest in good times.  Another is to invest in all seasons but especially in ‘bad’ times, for doing so will provide the profits of patient persistence.  You have specific goals in mind:  buying a home, changing cars, retiring early, increasing family wealth, and sustaining a comfortable and healthy life-income.

In my personal and professional experience I’ve found the safest approach must include well-chosen (global and domestic) dividends, real assets of infrastructure and real estate, high conviction growth, and managed fixed-income.  Over time this combined focus (Life Income Mandates) has greatly reduced volatility, recovered faster from downturns, rewarded with healthy returns, and paid valuable streams of income.  When markets tumble, our process loses less, optimizes better, and speeds recovery.  When markets find time to coast along pleasantly we also enjoy an increasing yield on our investment.  It works.  Over ten years or 100+ years, these principles remain true.

Summer Bonus:  Silver and Gold Magazine

Reach me with any questions, and connect us with anyone who needs help to secure financial goals, lifelong comfort, and a rewarding retirement.  Share this letter with anyone who can benefit.

Yours in Financial Security for LIFE!

Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500

627 Guelph Line, Burlington, Ont. L7R 3M7.  1-877-937-3500

Brian@SovereignWealth.ca

Author:  A Lifetime Of Wealth — And How Not To Lose It  (2013). Protecting Life, Loved Ones, and Future Dreams  (2013). Your Business, Your Retirement: Halton Retirement Study (2015).

** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Dynamic, Franklin Templeton.  Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.