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Insights - Q1, 2020

Note: Everyone has their own writing style and mine has always been to stay consistent with our Salute brand. Personal not corporate. Quality not quantity. Leader not follower.

A regular dilemma for most business owners is determining an accurate value for their business when they start to think about a possible sale. Each industry tends to have their own set of established multiples, and the ranges vary greatly. But this should not be left until that point. It is good information to have at all times. If you know the worth of every other asset that you own then you should know the value of your most precious asset. And don’t settle for the 20,000 foot view, get an accurate meaningful number. Besides a sale of the business, other reasons for needing a proper valuation include estate and gift tax planning, calculating a proper ROI, selling to employees, retirement planning, litigation, and obtaining financing.

The amount of regulation and compliance in the financial industry consumes a lot of our time. But more often than you think, there is a scallywag out there with a devious plot. A couple of months ago a scam took place right here in sleepy Kingston. A con artist was able to convince close to 900 investors that they could realize returns as high as 550% per annum investing with him. Their money was supposed to be put into the Foreign Exchange (FOREX) market with 50% of the profits returned to them in short order, while the other 50% was retained by his firm. A few months later when all was said and done 3.2 million dollars had disappeared.1 Corruption has been with us for 2,000 years and I do not see it going away in the near future.

We are proud of the performance of our pooled funds in 2019. At time of writing the Gilpin Fund (equity for growth) has 15 diverse holdings. Our Chinese investment was our best performer in the fund. As you know I have been very nervous on markets and we have had a 10% cash position in Gilpin for a while now. The Cactus Fund (income + safety) holds 10 different investments representing real estate, mortgages, private debt, and private equity categories. Our biggest current sector in this fund is private debt, an area that has really blossomed over the last few years. One of the most common private debt categories is called ‘factoring’. This is a form of financing that companies can use to advance their cash flow cycle when they need funds to keep growing.

The canny investor is always looking for the ‘next big’ opportunity. These do not come along very often, and when they do it’s not readily apparent. Recall the stock market bottom in 2009. The great majority of people were still locked into panic mode for 3 years after that. I was reminded of even a far bigger opportunity than that while watching a Netflix World War Two documentary. Parts of almost every city from England to Japan had to be rebuilt. No wonder they still talk about the glorious 50’s.

Real estate has always been a wonderful portfolio addition if purchased in a timely fashion. The focus of the news media and developers continues to be Toronto and Vancouver. However, a common mistake is arriving too late to the party. There might be a lot of investors looking back 5 years from now and wondering why they didn’t diversify. Many local investors have done well right here with some great Eastern Ontario properties.

Staying healthy is always a hot January topic and a popular new year’s resolution that seldom gets fulfilled. We make family plans, business plans, and vacation plans, but I have never come across an ‘aging well plan’. The study of aging has been around for a long time. But the topic of aging well is fairly new. And aging well means right to the very end. I have included this link in our newsletter for the second time. It features some interesting insight by Dr. Daren Heyland, who has also put together an information booklet on some medical options. I have purchased some of these and will pass along free of charge, so please let me know if you are interested.

Much has been written over the past couple of years about the fees charged by our industry. If asked ‘what is it you are paying for most investors would respond with ‘service and advice’. The service component is more straightforward and includes items like money transfers, tax information, and registered account management. But that advice word can be harder to put a value on. You aren’t really buying a drill when you go to the hardware store, you are buying a hole in the wall. And you aren’t really just buying financial help, you are buying expertise. A recent newspaper investment article used the wording ‘get access to experts’. But how does one become an expert? Renowned author Malcolm Gladwell defined this as someone that has put in 10,000 hours of work. Now being a curious fellow I had to break that number down a bit. Vacations, sick days, statutory holidays, time taken on administrative tasks, service activities, and break times all dramatically reduce available work time for everybody. I believe only 25% of working time is available to most people to actually accumulate real expertise. At this pace it would take someone 15-20 years to become an expert. I am fortunate to have served my time.

Where are we in the cycle is an often asked question. As with everything else in the art of investing, this is a much debated topic. You can’t trust the sellers of products for the answer to this because they are sellers of products. There will always be bears and always be bulls. Every Advisor has to develop their own indicators. A sign of the times for me is when startups and early-stage companies get way ahead of themselves. Valuations and targets may reach ridiculous levels but nobody wants to say so. Take the example of WeWork, a technology based office-sharing USA firm. They simply lease office space and then rent it out to small business owners. They don’t actually own anything. Cash flows could fluctuate wildly. Within months its value shrunk from $47 billion to $10 billion, and then their IPO (initial public offering) was cancelled. The founder is now worth billions and was reported to be on an island when his company was in hot water in the headlines. Opinions will vary but for me this seems similar to the internet bubble.

While watching a recent movie set in the depression era I began to wonder if there was anything that could ever bring us back to that point. There is usually some talk of ‘recession’ in the air but no mention of the D-word. All of our growth policies and banking controls have allowed the economy to stay strong for a long time. But I am starting to see how easily climate change could render these tools useless. Since we seem incapable as individuals of reducing our energy consumption, and the business world must retain a profit-oriented approach, the only possible saviour might be the government. Their mandate would become ‘to save us from ourselves’. If only a 2% reduction in fossil fuel consumption instantly starts recession discussions, try to picture big trouble emergency 25% reductions. Our comfortable 75 degree living room would become a 56 degree + coat experience. That successful trucking firm with 60 trucks would lose 15 of them. The Blue Jays would play 40 less games. Unemployment would sky rocket. Cash would be king again. A newspaper article was recently making the case to bring back rationing as a mechanism to save the planet. Wasn’t that a 1930’s program? We have not had to think about ‘having less’ for a long time. Perhaps I just needed to put these words on paper to scare myself into taking the action that is required. Today. If you would like info on what is known as ESG (environmental, social, governance) investing just let us know.

Two important words for successfully navigating life are discipline and consistency. These also apply to accumulating wealth. Get/help your children to start young. The sooner they learn about the power of compounding in life, the better. Plus there is that feeling that it is their money. Here is some surprising math. If they start at age 18, invest $6,000 per year to age 65, and make a 7% return, they would wake up at age 65 with 2.3 million dollars. Plus there’s the feeling that it is their money. The other half of a good plan is to loan them the money to get started. A real loan with a bit of interest will help to develop an early understanding of how money works.

In a world where it often seems that everyone wants everything instantly it can be hard to not be moving forward. You may have been told at some point to be patient. But it’s hard to practice patience and investors underestimate how long market and economic fundamentals can remain in no or low growth mode. Economics, interest rates, and energy prices are all connected to produce stock market movements. There is a great chart on our office wall that covers the last 100 years. In that time span there have been 3 periods (9 years, 11 years, and 16 years) where the often quoted American S&P 500 market remained flat. It is one thing to be advised to be patient, but quite another to actually have to endure it. One of the things that prompted us to create our Cactus Fund was the realization that the current long upward sloping curve will not go on forever. We will inevitably hit one of these flat low return periods, and will have to depend on interest-bearing investments outside of the stock market to provide desired returns. We believe, based on historical trends, we have positioned ourselves to be as prepared as possible if this were to happen again.

Randy Cleary


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