“Ginsler Wealth Lunch Series”: Real Estate Edition

For this week’s “Ginsler Lunch Series”, I had a real estate focused panel with some of the country’s leading real estate experts.

Thanks to the following for joining: Rael Diamond (President & CEO, Choice Properties REIT), Sasha Cucuz (CEO, Greybrook Securities), Jamie Grossman (Managing Principal, Cresa), Evan Cooperman (CEO, Foremost Financial) and Jeff Appleby (Managing Director, Real Estate Investment Banking, CIBC Capital Markets). We discussed some of the key questions investors have regarding the real estate market.

Some of this week’s key questions and takeaways:

What is the future of retail?

Retail is not dead. People need a place to go, with much of Retail “necessity based”. Also, Retail is evolving to be more experiential, which will be critical to keep people visiting.

Is anyone ever going back to the office?

Yes, In fact, many are starting to go back to the office now and those at home may start to feel left out of “in person” meetings and office interactions. In time, offices will be full again and overall, the office environment may be the best place for instilling culture, training and collaboration.

Where do people want to live now?

There has not yet been a mad dash out of the Big Cities and we don’t believe that will occur. Student housing occupancy is currently challenged with uncertainty surrounding the start of the school year. Rent collections remain strong but as COVID continues, some cracks in rent payments are beginning to appear.

Which real estate sectors are “hottest” now?

Industrial is attracting the most demand and highest pricing right now. People need stuff and businesses need warehouses to manufacture, store, sort and ship.


In summary, expect people’s behaviour to revert to “normal” as COVID passes, albeit there is concern about weakening consumer strength the longer COVID persists.

What’s an investor to do now?

As of yesterday (June 8, 2020), the S&P 500 had recouped all its COVID-19 losses incurred in March, while the NASDAQ reached new all time highs. We all instinctively know that times are difficult, yet investors who are watching “the markets” could be forgiven for thinking that things may not be so bad.

The first question investors should be asking themselves now is: are these indices really the best indicators of the health of companies and markets?



Because both of these indices are “market-weighted”, it turns out that five companies: Microsoft, Apple, Amazon, Facebook and Google (Alphabet) make up ~46% of the “weight” of the NASDAQ and just above 20% of the “weight” of the S&P (higher than almost any point in history).

These companies have performed well this year, dragging up the performance of the “markets” but masking the true situation for the majority of public companies, where just over 60% of S&P 500 constituents remain down in 2020.

Why have these 5 stocks rallied throughout this crisis? No doubt they are fantastic companies, with sticky revenues and loyal and growing customers. But according to a Bank of America research report published on June 8, 2020, the rise of the S&P 500 and the FAANG stocks (the stocks mentioned above + Netflix) has been closely tied to the liquidity the U.S. government has injected into the economy during this pandemic.



I would also suggest the “piling in” to these stocks is a continued theme of investors chasing growth and comfort in the popular stocks, resulting in passive investors (via exchange traded funds) having to continue to buy these stocks, resulting in their stock prices increasing, resulting in investor greed and fear of missing out, … , and the cycle repeats.



Another indicator of investors’ current insatiable appetite for growth can be seen in the historical percentage of unprofitable IPOs (initial public offerings), which currently sits at an historic high and above the Tech Bubble levels.



So with that as a backdrop, the second question an investor should ask is: What is an investor to do now?

There are no definitive answers. The only magic bullet I can offer is as follows: buy and hold high quality companies, trading at reasonable (or ideally, discounted) valuations.

It turns out that what one pays for a company (valuation) is the most important determinant of long-term stock returns.



The chart below tells us a few key things:

  • Most importantly, when looking at the returns of the S&P 500 over the past 30+ years, generally, the higher the valuation (measured using price/earnings ratio), the lower the subsequent annualized returns have been.
  • Even during this COVID-19 pandemic, the market is trading at above-average valuation multiples.
  • When valuation multiples get above 30x P/E, subsequent 10-year returns tend to be negative. (Note that according to Yahoo Finance, Facebook, Apple, Amazon, Netflix, Google and Microsoft currently trade at P/E multiples of 32x, 26x, 122x, 85x, 29x, and 31x, respectively. And everyone’s favourite new stock, Zoom, trades at 1,234x earnings – not a typo).



You will also note from the chart above, that average valuations tend to cluster between 13-18x P/E. The challenge with sky-high valuations, is that companies either have to “grow into” their valuation to maintain their stock price, or suffer stock price declines.

Netflix Example

As per above, assume the average high-quality S&P 500 company ultimately trades at a multiple of 15x earnings. Netflix currently trades at ~9x revenues and ~85x earnings. What would it take to grow into its valuation?



At its current market capitalization, if Netflix traded at a P/E of 15x, its net income would have to be ~$12 billion. For net income to be ~$12 billion, at its current operating margin, revenue would need to exceed $85 billion (a 4-fold increase from here, or >30% revenue growth per year over the next 5 years). Recall that Netflix grew revenues to $21 billion with little competition for much of its existence. And you know what they say…“the first $21 billion is always the easiest.”

Netflix’s current valuation combines comedy, drama, suspense, thriller and horror.

During the tech bubble, Sun Microsystems was trading at similarly lofty valuations before crashing spectacularly. In an interview in 2002, its CEO Scott McNealy famously stated:

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

So to repeat the second question again: What is an investor to do now?

Value over Growth

Using history as a guide, it may be time for “Value” investing to shine. According to Bank of America, Value led in 14 of the last 14 recessions, and by ~23% on average.



However, Since the fall of 2014, the gap between the price-to-earnings valuations of the S&P 500’s most expensive (“growth”) and least expensive (“value”) stocks has doubled. Expensive stocks have gone from 24x to 33x P/E while cheaper stocks have gone from 11x to 8x. Only 3% of the time in history has the gap been wider.


When valuations revert to their means, as they inevitably do, undervalued stocks have the potential to significantly outperform overvalued stocks, as they have in the past.

Warren Buffett’s 2018 Letter to Shareholders: “Buffett’s Greatest Hits”

Warren Buffett is widely regarded as the greatest investor of all time. His track record is astounding: since 1965 Berkshire’s compound annualized return has been 20.5% as compared with 9.7% for the S&P 500. In any other business, competitors and amateurs alike would be doing everything they could to get a peek “behind the curtain” to understand how one could be so successful in the hopes of emulating or recreating that success. Unfortunately, companies and management are typically highly protective of their “Caramilk Secret”.

Not so for Warren Buffet. He has been telling the world for decades exactly how he thinks and acts around investing, yet very few professional investors and even fewer individual (or, retail) investors pay him much heed.

The good news is that Warren Buffett’s 2018 Letter to Shareholders could be summarized as his “greatest hits” of themes he has been discussing for decades. So if you have ignored or missed Buffett’s advice over the last 5+ decades, you are in luck. What follows is a summary of the key highlights in his latest quarterly letter.


Hit #1: Buy Great Businesses at Great Prices

“…let me remind you of our prime goal in the deployment of your capital: to buy ably-managed businesses, in whole or part, that possess favorable and durable economic characteristics. We also need to make these purchases at sensible prices.”[1]

This really is Buffett’s #1 Hit but this year he understated his 50+ year message. So let me elaborate for him.

What does “favourable and durable economic characteristics” mean? I define that term to encompass companies with: strong competitive positions, essential service-type products, big competitive moats, strong balance sheets and superb management that operate with integrity.

What does “sensible prices” mean? Buffett is looking for both great businesses trading at great prices. Not just one or the other. Using the FAANGs (Facebook, Amazon, Apple, Netflix, Google) as an example, there is no doubt that all five are great businesses. They are world dominating in some cases. Buffett, however, has only determined that Apple trades at a reasonable or “sensible” valuation and therefore meets both his criteria. For reference, Apple currently trades at a P/E multiple of approximately 14x. Facebook trades at 21x, Google trades at 26x, Amazon trades at 81x, and Netflix trades at 134x[2].

An amazing company trading at an amazingly high valuation requires everything to go right and then some to keep the stock price moving upward. A great company trading at a great (i.e., cheap or discounted) valuation creates a large margin of safety for investors to absorb inevitable hiccups in the business or the economy.


Hit #2 Reprise: Buy Businesses, Not Ticker Symbols

“Charlie and I do not view [Berkshire’s common stock investments] as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour .”

This is a follow-on lesson from the first one – Buffett treats the businesses he invests in as just that – businesses that he understands that possess the fundamental characteristics highlighted in Hit #1 above. If one has truly done a tremendous amount of research and understands the investee company significantly better than the average manager, investor, journalist or other newsmaker, the noise generated from those individuals is generally of no consequence. Tremendous investment conviction comes from serious work that is not swayed by noise. Those that do an average (or less) amount of work have their weak conviction shaken fairly easily.


Hit #3: Focus on Earnings & Cashflow, Not EBITDA or other Adjusted Financial Measures

“When we say “earned”, … , we are describing what remains after all income taxes, interest payments, managerial compensation (whether cash or stock-based), restructuring expenses, depreciation, amortization and home-office overhead. That brand of earnings is a far cry from … “adjusted EBITDA,” a measure that redefines “earnings” to exclude a variety of all-too-real costs.”

Owners of companies are entitled to a share of the earnings of those companies. One step further would be to look at a company’s free cash flow. Cash doesn’t lie. A business is either producing it (hopefully lots of it) or consuming it. Look to own companies doing the former.


Hit #4: Everyone Seems to Love Dividends. We Love Buybacks.

“All of our major holdings enjoy excellent economics, and most use a portion of their retained earnings to repurchase their shares. We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.”

Investors have been infatuated with dividend-paying companies over the past decade under an often false belief that dividend stocks are stable, less risky and less volatile than non-dividend paying stocks.

In 2018, the iShares Canadian Select Dividend ETF, a diversified “fund” of Canadian dividend paying stocks, fell over 16% while paying out an approximate 5% dividend yield. So on a total return basis, using this ETF as a proxy, Canadian dividend stocks’ 2018 performance was worse than the S&P/TSX’s overall 8.9% decline.

While companies paying a dividend may be strong businesses generating significant cashflows (although some use debt to fund dividend payments), investors should make no mistake about what receiving a dividend means: the company and its management cannot find a more attractive use for its excess capital…so it is giving it back to shareholders, along with an almost 40% tax bill for those (Ontarians) in the top tax bracket.

Consider investing in companies that most often use their excess free cash to buy back their own shares. In contrast to dividends, share buybacks typically provide a different message from management: our stock is cheap and therefore the best use of our excess capital is to buy back our shares, thereby increasing each remaining investor’s share of our earnings. For the taxable and long-term investor, share buybacks minimize the distribution of taxable dividend income. They enable each individual investor to decide when to sell units for their specific cash needs, thereby generating a capital gain which will be taxed at approximately 27% (in Ontario) versus almost 40% as noted above.

“When earnings increase and shares outstanding decrease, owners – over time – usually do well.”


Hit #5: When You Find All The Above, Hold On For Dear Life

“Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.”

These two simple sentences are two critical tenets of Buffett’s investment strategy.

First, because truly good businesses (selling at reasonable prices) are exceptionally hard to find, it stands to reason that it is not really possible to build a portfolio of 50 such companies (plus, how could you truly know the companies well at that level?).

Buffett’s letter shows that the top 16 public company holdings (if Kraft Heinz is included), comprise 88% of Berkshire’s public company investments. Put another way, Berkshire holds an investment portfolio with a market value of $164 billion that is 16 stocks in total![3] Oh…and the Top 5 holdings represent almost 63% of the total common stock portfolio[4].

The second sentence highlights Buffett’s long term focus. For those that have been reading Buffett’s letters for years, you will note that Berkshire owns some great businesses and brands (Coke, Amex, Apple, Goldman Sachs, etc.) and in most cases those companies appear over and over each year. In other words, Buffett buys, and rarely sells.

If you think about finding a fabulous business as similar to finding an attractive building selling at a reasonable cap rate, and where the owners can raise rents over time. It would be abnormal to see real estate investors buy and sell buildings even within a few years of their purchase.


Hit #6: Investment Performance Converges with Business Performance

“Charlie and I have no idea as to how stocks will behave next week or next year.”

“Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety…I expect [Berkshire’s equity portfolio] to deliver substantial gains, albeit with highly irregular timing… Over time, … , investment performance converges with business performance.”

Buffett has said over and over again that he does not have a crystal ball to predict what the future holds for the markets in general. Instead, he buys great companies that he can better predict will do well over time from a business performance perspective. Markets, in theory, are efficient. In practice, they are reasonably efficient, but are very good over the longer term at ensuring stock prices ultimately reflect what is going on in the underlying businesses (often with a bit of a lag relative to those who have studied the company thoroughly – like Buffett).


Last Hit: Invest Now. Markets Have Historically Climbed the “Wall of Worry”

“Since 1942 , we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home prices, a paralyzing financial panic and a host of other problems. All engendered scary headlines. All are now history.”

Investors (I mean, speculators) seem to be very focused on timing the market just right and getting in or staying out of the market with perfect timing. In December, speculators pulled huge amounts of money out of the market because it was falling (and missed January’s rally) and in February speculators are holding off entering the market because “it just got frothy again”. Trying to time the market has been proven time and time again to be a loser’s game. Similarly, dollar cost averaging (investing similar amounts over regular intervals vs a lump sum up front) has also been proven to be a poor investment approach.

A better approach, for those with long investment time horizons, is to simply get in “now” (whenever “now” is for those reading this paper).
Over the last 100+ years, on the whole, the markets go one way – up.

[1] Unless otherwise indicated, all quotes are from Warren Buffett’s 2018 Shareholder Letter dated February 23, 2018: http://www.berkshirehathaway.com/letters/2018ltr.pdf

[2] All P/Es are approximate and based on trading prices as of February 28, 2019.

[3] Excludes $22.4 billion of “Others” as we are not provided the composition.

[4] Total is $186.8 billion, which includes Kraft Heinz at a market value of $14 billion as at December 31, 2018 according to Buffett.

Hats Off to the New and Improved RESP

Brian Ginsler featured in The Globe and Mail article by Rob Carrick



This week’s federal budget took the already essential registered education savings plan and made it just a bit better.

There’s more flexibility for people in how much they invest in RESPs each year, and the government is increasing the annual amount of grant money it will put into a plan to match funds contributed by parents and others. But with these improvements come added complications that warrant a fresh look at RESPs.

That’s what this edition of the Portfolio Strategy column is all about. Consider it your RESP investing toolkit, with suggestions on how to manage RESPs and strategies for making contributions that reflect the changes introduced in this week’s federal budget.

There are three main changes in RESPs that take effect for the 2007 tax year when the budget passes in the House of Commons:

the $4,000 annual contribution limit disappears.

the lifetime contribution limit rises to $50,000 from $42,000.

the maximum amount of money that Ottawa will pay into an RESP annually through the Canada Education Savings Grant rises to $500 from $400.

Each of these changes should cause you to reconsider your RESP investing approach. For example, a lot of people put $2,000 per child in RESPs each year because the 20-per-cent matching CESG grant paid out no more than $400 per child (20 per cent of $2,000 is $400). Now, you’ll want to ratchet up your annual contribution to $2,500 at minimum to capture the maximum $500 per year in grant money.

Note that the total amount of CESG available to RESP beneficiaries remains unchanged at $7,200. What the government has actually done, then, is accelerate payment of CESG so you can get it into your plan sooner and start earning investment returns.

The new RESP rules also mean you can put as much as $50,000 in a plan right away, a move that would cost you $6,700 in grant money. The background here is that the government will pay a maximum of $500 in CESG annually ($1,000 if you have unused CESG from a previous year), and it won’t credit you with additional CESG payments in future years for a large, lump-sum contribution made in the past. The bottom line: A large lump-sum contribution will cost you grant money.

The CESG is government largesse at its finest, but if you have $50,000 to invest in an RESP then consider turning your back on it and making a single lump-sum contribution. Financial adviser Brian Ginsler of Northwood Stephens Private Counsel produced a spreadsheet for this column showing that $50,000 invested in an RESP would produce $216,739 over the 25-year maximum lifespan for a plan, assuming $500 in CESG was collected for the year the contribution was made and investment returns averaged 6 per cent a year.

Mr. Ginsler found that you’d end up with $155,713 if you annually put $2,500 in an RESP to get the maximum $7,200 in grant money and then, once the grant money stopped flowing, immediately topped up the plan with $15,000 to reach the $50,000 lifetime contribution ceiling.

Another approach would be to make identical $3,333.33 RESP contributions for 15 years, giving you the $50,000 lifetime maximum and the full $7,200 in CESG. Mr. Ginsler said this would give you $168,805.

Still another slant would be a 15-year strategy presented by Keith Armstrong, an individual investor who was responding to a column earlier this week on RESPs. You put $15,000 in an RESP in the first year, and then make annual contributions of $2,500 for the next 14 years. Mr. Ginsler’s spreadsheet shows you’d have an RESP value after 25 years of $185,633 if you did this.

Mr. Ginsler made the point that someone with $50,000 who wanted to collect federal grant money could theoretically invest the money in a non-registered investment account and then gradually move it into an RESP.

But his calculations show that even when you add the proceeds of the non-registered account and the RESP together, this approach yields less than the $50,000 upfront investment.

There’s a simple conclusion to be drawn from this tangle of numbers about the new RESP rules, Mr. Ginsler said. “If you have $50,000, you’re better off plunking it in an RESP right now and having the benefit of continuous tax-free compounding working for you.”

For those who don’t have $50,000 per child to invest in RESPs, there’s the gradual approach to building up a plan.

Graeme McPhaden, a certified financial planner (CFP) with Armstrong & Quaile Associates Inc., has some simple advice in this regard: “Definitely be aggressive with your investing, and do it monthly.”

All of Mr. McPhaden’s clients make automatic monthly RESP contributions rather than scrambling at the end of the year to find some money. This ensures a steady, uninterrupted flow of money into an RESP, and eliminates any year-end scrambling to find the necessary cash. It also helps shield clients from the grief caused by investing a big chunk of money into a market primed for a fall.

That said, there are studies suggesting you’ll get superior returns with a big one-time investment as opposed to dollar-cost averaging, which is the term for spacing out your investments over time. Here’s yet another vote for lump-sum RESP investing.

As for being aggressive, Mr. McPhaden and others use an investing approach that focuses on equity funds for the first and middle years of an RESP, and then shifts into more conservative balanced funds (a mix of stocks and bonds) five years before the plan beneficiary is to start college or university. The idea is to build capital, and then preserve it while also achieving a little growth.

Mr. McPhaden’s fund of choice for starting an RESP is Ethical Special Equity, which focuses on smaller, riskier stocks. This is a socially responsible fund, which means it avoids certain sectors and looks for standout corporate citizens, and its performance over the long term is very good. The 10-year compound average annual return is 13.8 per cent, compared with 10 per cent for the average peer fund.

Kevin O’Brien, an adviser in Ancaster, Ont., said he uses two widely held stalwart global equity funds to start an RESP, Trimark Select Growth and Templeton Growth. Then, with five years to go until RESP withdrawals commence, he directs new RESP contributions to balanced funds like Trimark Income Growth. When it’s time to start making RESP withdrawals, Mr. O’Brien starts with the global funds.

The rule changes in this week’s budget will prompt lots of rethinking about RESP investing, but Mr. O’Brien has his own idea for helping families build up the savings they need to afford the cost of postsecondary education. “I’m hoping to get more grandparents involved,” he said. “If they want to leave a legacy, what better way?”

Go for the Grant?

The All-At-Once Approach

How it works: You contribute $50,000 when you open the RESP

Total amount of CESG: $500 (paid on the $50,000)

End value: $216,739

The Step-Up Approach

How it works: You make $2,500 annual contributions for 14 years to qualify for the maximum annual $500 in CESG, then a lump-sum $15,000 to bring you to the $50,000 limit.

Total amount of CESG: $7,200

End value: $155,713

The Step-Down Approach

How it works: You put $15,000 in a plan, then contribute $2,500 annually for 14 years.

Total amount of CESG: $7,200

End value: $185,633

The Steady Approach

How it works: You make 15 annual contributions of $3,333.33.

Total amount of CESG: $7,200

End value: $168,805

The ABCs of RESPs

The basic concept: Save for your child’s university or college education in a tax-sheltered plan, and have the federal government match every dollar you contribute up to $2,500 per year with a 20-per-cent grant. Withdrawals from RESPs are taxed in the hands of the beneficiary student, who would typically pay little or nothing in income tax. You do not get a tax deduction for making an RESP contribution, as you do with registered retirement savings plans.

History: RESPs have been around for decades, but they only took off after the introduction of the Canada Education Savings Grant in the 1998 federal budget.

Different kinds: There are three types of RESPs — individual, family and group. Individual plans are for a single beneficiary and can be set up by anyone (you can even set one up for yourself to return to school at a future date). Family plans, which can only be those related to a beneficiary by blood or adoption, are ideal for a group of siblings. If one doesn’t pursue a postsecondary education or takes a particularly long or expensive course of study, there’s flexibility in the family plan to allocate resources where they’re needed. Group plans, also called scholarship trusts, pool client money and invest it in a portfolio of bonds, GICs and such.

Where to set one up: Banks, financial advisers, investment dealers and discount brokers all offer RESPs, as do a variety of scholarship trust companies.

Pitfalls: The obvious one is where you have an RESP set up for someone who does not pursue a postsecondary education. In some cases, you can select another beneficiary to receive some or all the benefits. Alternatively, you can withdraw RESP assets, subject to taxes and repayment of CESG. You can also transfer up to $50,000 in RESP earned income to your registered retirement savings or a spouse’s, providing there’s contribution room.

Some other things you should know: A child needs a social insurance number to have an RESP set up on his or her behalf; the maximum life of an RESP is 25 years; CESG is only available to those 17 and younger, and the lifetime maximum amount is $7,200; the annual CESG maximum is $500, but you can receive an additional $500 to make up for grant money you didn’t claim in a previous year.