Gradual Change
According to the U.S. government, the country only grew 1% in Q4 of 2015. But that’s still better than Canada. Our GDP up here only increased 0.8%. It doesn’t feel like the economy in either country is going to pick up any time soon. Personally I don’t mind slowing down or even contraction. Slow economic times is a natural part of the market cycle because it helps with the price discovery mechanism and prevents bubbles from becoming too big. But of course politicians want to encourage more growth all the time which means investors have to be smarter and more cautious about where to deploy capital.
One concern that affects everyone in the world is an aging global population. Japan is leading the charge on this one. Many Japanese couples grow fruit trees and live to a ripe old age. According to the World Bank, Japan has the oldest demographic with 26% of its population being age 65 or older. We all know what happened in Japan for the last 20 years. It’s GDP is basically unchanged from 1995 to 2015. Same goes for Japan’s stock market. Any money thrown into the Nikkei 225 index 20 years ago would have produced virtually no gains as of now. The couch potato method of index investing doesn’t always work for everyone.
The percentage of Canadians who are 65 or older is about 17% today. In the U.S. it’s about 15% of the population. We are still a long way off from Japan’s 26%, but it’s worth noting that 17% of Japan’s population was 65 years or older in the late 1990s.
I would continue to invest in large, profitable companies. But high quality stocks have been bid up so much that there isn’t much room for them to go higher in the short term based on fundamentals. This is why I look at alternative places to invest as well.
So earlier this month I added $7K to my Antrim Mortgage investment, bringing my total account balance for this one investment to $17,913. I had to dip into my Line of Credit to help come up with that cash. Canada’s population may be aging, but everyone needs a home so I expect this mortgage fund to continue delivering 6%+ annual returns to unit holders. I think mortgage investments are a good balance between risk and reward until better opportunities present themselves. Unlike buying a traditional REIT, if the housing market falls by 30% my mortgage fund wouldn’t lose any value. The borrower whom I indirectly lent money to still has to pay me back in full or else they risk foreclosure on their property. 🙂
As fewer working people are supporting more retired people I may have to branch out more in unconventional investments such as riskier fixed income and private equity options to hit a decent return with my investments. 🙂
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Random Useless Fact:
If you were to take a regular sheet of paper that’s 0.1 mm thick and fold it in half 42 times, it would reach the moon.
Dude! I’m totally with you on the aging population shift, which is why I’m long on biotech (as a sector in general, I’ve got no tolerance for the volatility of stock-picking). I see a huge boom in demand for new high tech health services in the coming decades. Your mortgage investment looks intriguing as well!
Biotech and healthcare both hinge on government-supported non-legal monopolistic practices — the reason healthcare costs so much in the first place. Without govt allowance the firms are not nearly as profitable, thus reflected in their stock price. As our population ages into a state of ill repair over the next couple of decades, the high and wide-spread cost of health care heaped on the backs of a decreased wealth “middle class” (coupled with low-return equity markets), the govt just might decide to negate some of that monopoly money with more competition and actual adherence to law. Could be a turbulent ride for bio and health until all the Boomers are dead and buried.
I wish Canada had a bigger biotech sector. A lot of Canadian have to look south of the border to find all the big biotech players. 🙂 If I were starting college again I would certainly consider going into the health care industry. But Anon makes a good point too about political uncertainty.
“But high quality stocks have been bid up so much that there isn’t much room for them to go higher in the short term based on fundamentals.”
Can you expand on that? I also feel that the prices of stocks are high, but don’t know how to prove it. The only number I really know is about the P/E ratio. Apparently around 8 is historically a good number, and we’re up in the 15-20 for most companies. What other types of indicators do you look at?
Thanks
Good question Bricks. I will go into more details as to why I think the stock market is overvalued in my next post, but here’s a summary.
Other than the P/E ratio I also look at the following metrics. 🙂
CAPE ratio – This compares the S&P 500 index to trailing 10 year average earning. Historically this is between 10 and 25 times. Right now it is about 25.71 times. Here’s a chart. http://www.multpl.com/shiller-pe/
P/S ratio – The price to sales ratio compares a stock’s market cap to its revenue. It’s currently 1.79 times for the S&P 500. This is even higher than in 2008. Here’s a P/S ratio chart. http://www.multpl.com/s-p-500-price-to-sales
EV/EBITDA ratio – This metric takes into consideration a company’s debt level so we can see how its doing from a leverage adjusted perspective. Chart. http://media.wallstreetdaily.com/charts/0116_MedianSPChart.png
Each ratio has it’s usefulness and weaknesses, but together they provide an overall sense of what’s happening in the markets now, which seems to suggest that the market is overvalued.
I read somewhere that you can only physically fold any piece of paper 7x. Must have been fun calculating the above. :O)
As to your mortgage fund, yes, they can be foreclosed on but if that happens in a down market, the properties would lose value. Couldn’t that drastically affect your return?
cd :O)
Anything can happen to any business, to think otherwise would be foolish. Look at what the US banks did during their housing collapse — mortgage owners stopped paying because they were either underwater or couldn’t afford the new ARM payments so they got foreclosed on…house values plummeted but banks didn’t sell because they would have had to put the loss on their books. So you had companies holding onto depressed assets generating zero income. What kind of return do you think you’d get in a situation like that?
I did the folding paper math myself and it checks out. 🙂 And folding the paper in half 50 times would reach all the way to the sun.
It’s hard to say how much it would affect my return when a property gets foreclosed on. According to the last company letter to investors I received, Antrim says its average loan-to-value on the portfolio continues to hold in the 60% range, providing investors with a wide margin of safety. There was one major foreclosure last year which ran up some legal and transaction fees that shaved off some profits, but the CEO said he doesn’t expect anything like that to happen for this year going forward.
Oddly enough I haven’t put enough thought into investing into the aging population. I also think a lot of the bigger companies have been getting increasingly expensive lately and maybe it’s a good idea to look at mid-cap stocks more to get that sweet mix of growth and safety.
Yup, diversifying into mid-cap and even being very selective about some small-cap companies may prove to be worthwhile in the long run if people can’t handle the short term volatility. 🙂 I would personally still keep most of my holding in large-caps though of course.
I hope that’s not your tfsa account number there! Assuming it’s the blacked out bar!
Nice catch. I’ve blacked out the tfsa number as well now. It’s a good thing my actual money is held in an account with Canada Western Trust and not with Antrim. 🙂
Echoing a few of your comments here. I’m long Biotech and Assisted Living. Gilead Science, GILD and Amgen, AMGN are my two favorite Bio stocks. In the Assisted Living space I’m long Omega Health Investors, OHI.
I haven’t looked into those particular stocks yet. I might be inclined to just buy an ETF of biotech companies.