Podcast - June 13, 2023
If you’ve ever wanted to dive deep into the mind of Colin White, now is your chance! In this week’s episode, Josh is confronted with Colin’s stream of consciousness. Or perhaps it’s a river. A deluge of consciousness. Enjoy!
Announcer:
You’re about to get lucky with the Bare Naked Money Podcast, the show that gives you the naked truth about personal finance. With your hosts, Josh Sheluk, portfolio manager with WLWP Wealth Planners, iA Private Wealth, and Colin White, portfolio manager with Verecan Capital Management Inc.
Josh Sheluk:
All right. Bear Naked Money coming at you. Newest pod here, Colin and Josh. And Colin is going to give me his stream of consciousness today from the last couple of weeks.
Colin White:
Well, Josh has done a great job of the last number of podcasts on coming to me with a list and getting my reaction. Well, quite frankly, I’m tired of being the one doing the reacting, so I decided that we should flip it on its head. And I’ve taken over the last while to be a little bit more consistent with commenting things on LinkedIn. So there’s a public record of the stuff about my interest.
Josh is a busy guy. He doesn’t always get to see my LinkedIn posting, so I figured I’d go article for article with what it is I’ve noticed, and see if Josh triggers out what my comment would be, see how well he knows me. Are you ready, Josh?
Josh Sheluk:
I’m ready. Let’s do it. I think I know you really well, but I guess this will be the proof. Proof is in the pudding, right?
Colin White:
All right, well fine. All right, let me take a look here. So which one should I… Softball? You ready for a softball?
Josh Sheluk:
Yep.
Colin White:
All right. So there’s an article in the Financial Post, and I’ll just give you the title. I don’t have to give you any more context than the title, more than half of Toronto new condo investors are losing money for the first time.
Josh Sheluk:
Okay, well, this could go a lot of different ways. It’s not as easy as you think.
Colin White:
Ass. Oh, great.
Josh Sheluk:
My thinking is that you said the prize real estate is not always the greatest investment on Earth.
Colin White:
That was where I started, but I got a little bit more nuanced and a little bit more caring with my actual conclusion. Because these people are now in a tough spot, because the mortgages have renewed or they’ve taken out a mortgage or committed to a mortgage that’s in excess of what they can get in rent, because of what’s happened.
So I leapt to, here’s the problem. This is a difficult investment to get out of, because the environment has changed and it is now not in your favor. And it’s not you can place a trade on the market and get out of the obligation, because it’s a levered investment. And everybody was always so quick to dismiss. It’s an illiquid investment. That doesn’t matter because it’s so stable.
Josh Sheluk:
Right.
Colin White:
It’s so stable up until it isn’t. And then when it’s not stable, the consequences can last for years. There are people who are going to be stuck in this situation of the money losing investment for years. I’ve got clients who are stuck in these situations from previous moves in real estate markets.
So the danger is not that it goes wrong this year, the danger is it goes wrong and it stays wrong, because you can’t get enough out of the property in the current market to pay off the mortgage, therefore you’re stuck with it. So you continue to lose money month over month for a prolonged period of time.
Josh Sheluk:
Yeah. Being somebody who’s barely in tune with the Toronto condo market, having owned condos myself in Toronto, no longer anymore as I moved last year, a lot of friends as well, in the same market.
I can say anecdotally that there have definitely been people who, not just this last year, but multiple years running at a cashflow negative position with real estate investments. And I’ve seen this because I have, again, friends renting condos, and they can do all the math between what the person paid for the property, what the mortgage is likely at, what their cash outflows is on a regular basis, and they know what they’re paying in rent.
So if you’re bringing in less money every month than is going out the door, that’s cashflow negative. In my position and a lot of clients, asked about real estate investments over the last several years, is if you’re cashflow positive, I can see it as a viable investment. And then you get a little bit on the cashflow and then you get price appreciation on top.
If you’re cashflow negative, now you’re relying on the price appreciation. And after we’ve seen really a ban of two decades for the Canadian real estate market, it’s hard for me to justify that that price appreciation is going to be there consistently year in and year out.
Colin White:
And it’s difficult to commit to a negative cashflow for a long period of time, that’s going to impact your lifestyle in ways that you probably are not going to enjoy. But all of these risks aside, once you’re there and you decide you want to get out, that’s not an easy situation. You can get stuck in something like this for a prolonged period of time.
So back to when you’re assessing how great it is to invest in real estate, if you do a calculation based on aggressive assumptions that it’s going to give you a 6% or 7% return or 8%, and my question always back is, does that justify the level of risk that you’re taking? Because these things are material when they go sideways.
So it’s always a matter of, if you’re going to do it, keep it in the proper percentage of your overall net worth, rather than make it, this is the one thing that always works. No, it don’t. And this is, again, highlighting the… And I feel bad there are people underwater here, but again, I’ve got people in different markets. I’ve got a client, a couple of clients in the Calgary market who were sitting on properties who’ve just gotten back to what the mortgage is.
So they’re just starting to cross the threshold, if they really wanted to, they could get out, but it hasn’t been there for five years. And that’s a significant risk. Given the best situation. If you’re going to go into something and projected upside’s 30%, oh, okay, well, I’m willing to accept maybe. Having a tremendously bad outcome, like a negative cashflow for five years.
There’s a way to even that equation. Anyway, real estate’s not a bad investment. We have to keep saying that. It’s just not the be-all and end-all. And when it goes sideways, it goes sideways in a big way.
Josh Sheluk:
So I saw this article too, and I think one of the points was that rents needed to come up, and that could be bad for renters and it could be inflationary. So coming back to the whole inflation topic, that is so top of mind right now. But I remember about 10 years ago at the Year Ahead Investment Conference that company used to put on, it was Reed Anders and said, it’s the same thing. In more of an investment focused theme to it, is rents are X, prices are Y, that gap is historically large.
So his theory was prices need to come down. What I think, there’s two things that can happen, and in this case they’re arguing that rents go up. So either rents go up or prices come down, or both things happen to level the playing field a little bit more. Where would you put the probabilities of those two things? What do you think is more likely?
Colin White:
Well, I think the challenge of the system of acumen, because the problem is if rents go up, that’s inflationary, which is going to drive interest rates higher. So you’re almost chasing a moving target. Because if interest rates keep going higher, then the rent… So you get into that spiral, right?
Josh Sheluk:
Yeah.
Colin White:
So I don’t think this is as simple as you just do one or the other, just a combination of the two. It’s going to happen in concert with a whole bunch of other changes to reach an equilibrium, because otherwise on its own, this could turn into its own spiral. There’s the argument that we can see a wage spiral, where wages keep going up, which drives up the cost of goods, which drives up wages. That spiral could be contributed to by the same thing in the rental market, I don’t think it’s a simple two variable equation. I think it’s a matter of a number of things have to level out that reduces pressure on interest rates. It allows for somewhat increasing rents, but also allows for an easy interest rate environment, to allow that part to settle out.
So I think it’s a multi-headed monster for sure. Which can cascade into what I read just minutes before I came online, just minutes before this started. This is as fresh as… If this is a piece of fish, it wouldn’t even smell like fish. That’s how fresh this is.
Josh Sheluk:
Fresh out the sea.
Colin White:
That’s right. Like you just pull the fish out of the water and it doesn’t even smell like fish yet. So Josh, I don’t know if you read it, because you’re on the West Coast, and you may be ahead of me on the reading, but the GDP number came out for Canada, annualized rate of 3.1% in the first quarter. Exceeding analyst expectations, as well as projections.
So the increase was, the Bank of Canada was predicting 2.3% and it’s 3.1%. Now, guess what the headline is? Or maybe you read the headline?
Josh Sheluk:
Your headline or the headline?
Colin White:
The headline.
Josh Sheluk:
The headline. I don’t know. Go for it.
Colin White:
Bank of Canada more likely to raise interest rates.
Josh Sheluk:
Okay.
Colin White:
Instead of celebrating we had ban our economic growth, which pushes that whole recession thing further away. Rather than saying recession less likely now because the economy continues to grow. The headline was, oh my god, interest rates are going to go up now.
So there is no positive headline that’s going to come out. Either the GDP growth was going to be less than expected and oh my God, that’s terrible, the recession’s more likely. Or it’s robust and everybody’s making money. Oh my god, that means interest rates are going to go up. I don’t know that I have seldom ever been in a situation where the news is so locked in on a negative headline regardless of the information, and having a compelling story that it can revert back to that everybody is going to buy.
Josh Sheluk:
Yeah, I can’t really say I’m surprised that it’s a negative headline. We’ve been talking about this for a long time, and as you’re talking there, I’m just thinking, how long have we been talking about this recession happening, around the corner, this recession’s around the corner? It feels like a year and a half now. And I think it is really, it’s about that amount of time.
So to me, if I’m writing a comment for you to post on LinkedIn I’m going to immediately go to, this is why you can’t be that certain about the future. This is why economic predictions are so faulty. This is why you can’t rely on the so-called experts to tell you what’s going to happen next. Because here we are dragging ourselves along a year and a half into really strong economic growth when a recession was predicted all along.
Colin White:
Yeah. So it’s nice to have a conversation for recreational purposes. We can debate ideas. There are people who are on debating teams and they just pick things to argue about. If that’s what you’re doing, then hey, more power to you. If you’re trying to make investment decisions based on the outcome of a debate, come on. Just understand what’s investible and what isn’t.
Josh Sheluk:
What’s that?
Colin White:
All right. Well, let’s see here. All right. I must admit I went popular. I tried to pick something that was popular and relate it back and see if there was something to learn. So I became a Swifty, I jumped on the-
Josh Sheluk:
Oh my God. You are [inaudible 00:11:27] here. I don’t know why I was going to joke about it. I was going to say you are going to talk about Taylor Swift concert tickets. I can’t believe you actually went there.
Colin White:
No, no, no, not concert tickets.
Josh Sheluk:
Okay.
Colin White:
No, no. I had to be be more edgy than that. I read an article about Taylor Swift’s love life.
Josh Sheluk:
Oh, okay. You lost me. I’m out.
Colin White:
Exactly. So now you’re wondering, how do you tie that back on? How could you possibly have found something that was relatable to anything else in there? Is that the question, Josh?
Josh Sheluk:
Yeah, it is.
Colin White:
So the headline of the article in the National Post, Jamie Sarkonak: The mobs impossibly high expectations for Taylor Swift.
Josh Sheluk:
Okay.
Colin White:
Okay. Did that help you with where I might go with it?
Josh Sheluk:
Yeah. Well, impossibly high expectations. So when I think about the stock market and investing, there are some impossibly high expectations. So expectations that are so high and so crazy that they’re just impossible for the company, no matter how good to actually live up to those expectations.
And where my mind immediately goes, is today with AI, and specifically if you’ve read the headlines over the last couple of weeks, Nvidia, which has seen a tremendous run because they make chips for specializing in AI, I guess we can call it. It’s been a crazy year for that stock, and people have made tremendous gains. But I read or heard today that it’s trading at about 30 times its revenue.
So we’re getting into bubbly territory where these are some of the same numbers that you have that the tech stocks trading at, high-flying tech stocks in the early 2000s, which is a little scary for investors in that company.
Colin White:
All right. Well, because it’s public record, that’s not the comment I made, but you’ve taken it one step further, and I absolutely get how you got where you went. I was just reading it was a mob, all right. So again, the Taylor Swift fans are this rabbit fan base, who are absolutely fanatical with their support for Taylor Swift, which is neat and scary to see. But it’s a rabbit group of people who all have something in common.
I compared it to Trump supporters and how rabbit that group is. But I do think that comparing it to the Nvidia followers actually is a more applicable take on this. Because what those groups do, and all three groups that we’re talking about, whether it’s Nvidia, or whether it’s Trump, or whether it’s Taylor Swift fans, they get so rabid about something they seize on the smallest of little details and elevate it to a level that just makes no sense, when the actual issue at hand is always nuanced.
So for the example, the Taylor Swift article was that she’s apparently dating this guy who said something five years ago that wasn’t very palatable. So the whole conversation is about the thing that this guy said five years ago, and how important that is and how that signals that Taylor Swift doesn’t care about her fans anymore. All of these extreme extrapolations being made on the smallest little thumb of information, and everybody is going at it with the same fervor, that they go at it with being a member of the tribe.
And so I think that there’s a lot of parallels between Taylor Swift and Nvidia. Look at me getting new audience right. Now that the Nvidia followers are probably seizing on the smallest little detail on the AI news front and using it to jack up their expectations for this amazing firm. So there’s something to learn pretty much everywhere. And I can get Taylor Switch fans to look at my LinkedIn profile now, because I tied Taylor Swift to actual other things.
Josh Sheluk:
Yeah. And for the record, I think Taylor Swift is a very talented artist, despite it not being right up my alley in terms of music that I usually listen to. But I wouldn’t pay $5,000 a ticket for floor seats, that’s for sure.
Colin White:
I wouldn’t pay $5,000 for a floor seat to see pretty much anything. But that’s just me being old and cranky and appreciating sitting in my chair at home watching stuff. But I digress. See, good job. See, you took my comment and even took it one further.
Let’s see what else was on my list here? Well, that’s not fair, we already talked about that one. We talked about that one. Ooh, there’s a great article in CTV news about a week ago, talking about mixed uses for office conversions, a possible future for the urban war.
So what I commented on is not all in the title. So let me give you a little bit more to go on. Right?
Josh Sheluk:
Yeah.
Colin White:
So it laid out the recent data from CBRE, Canada pegged the country’s overall office vacancy rate at an all time high of 17.7% for the first quarter of 2023. So that’s a actual number that was put out by a reputable organization.
And they go, the Toronto’s office vacancy rate hits their highest number of 30 years at 15.5%. And it gets into more detail. It then pivots to mixed use benefits. So they start talking about the opportunity to switch these office spaces over to more mixed use, which would include more residential and address some of the concerns in the residential space and building out the case for using into the residential units. So what do you think my comment would have been on that article, Josh?
Josh Sheluk:
It was a good question. I don’t know where you would’ve gone with this one. If I have to guess, and it’s not a very strong feeling for me, you would talk about the difficulty and length of time that it would take to convert an office building to residential.
Colin White:
Largely yes. But what I said was the pivot from fact to conjecture in the article. It gave a fact, which is news, and that’s newsworthy and that’s important to know. But when it gets into the space of projecting what happens next and what the opportunity is, now you’re building a fairy tale because there’s no reliable way to know what percentage of those real office spaces have any feasible business plan to be converted to a residential space.
Because there’s more than material differences between commercial and residential construction. And when they start talking about, hey, if X percentage of these offices are converted into space at this rate and yada yada, yada, you’re now speculating.
Josh Sheluk:
Yeah.
Colin White:
Now it’s interesting speculation. But to read that article and come out and say, hey, there’s a big investible opportunity here, which is I think what they’re hoping people will read that story as and follow for that reason. And there’s a huge economic benefit to those who want to portray that story. That’s where you run off the rails.
I think stating a fact, office vacancy rate is as high as it’s ever been, is very instructive in building a picture on what’s going on right now in the world. Because anecdotally, I would see that to be true, but to have it backed up by statistics. Okay, yeah, that’s fair. Office space has never been more empty than it is right now. For all of the contributing factors that we would know about, work from home and COVID, technology advancements over COVID, and all that kind of stuff.
What comes next is completely a different story because I know that there’s all kinds of pressure on construction right now in residential space. So there’s not a plethora of crews up there who would be able to jump on an opportunity like this. And again, I don’t think it’s clear at all that, that’s what’s going to happen, whether we’re just going to knock these down and build new buildings, I’m not sure.
Josh Sheluk:
Yeah. So we did talk about this as an investment committee probably a couple of months ago. Because I think it is an interesting idea, and this is what holds us in more than these high-flying Taylor Swift stories, it’s more so that this thing is beaten up. It looks really bad right now. How can there be a path to better things in the future? Because that’s all that needs to be, better. Doesn’t need to be back to what it was in 2019. It just needs to be better.
And I think there is a path there, and we’ve talked about this amongst ourselves. We think there is a path there to either converting to residential, which I have a good friend in the real estate’s development business, and he said, yes, this is the real thing, it can happen. But his company is investing in some of these projects for 5, 10 plus years.
They have that luxury of having that timeframe. And so that is a very long time to think about as an investor. Not really. That’s how people should be thinking, but it’s tough to say, well, I’m going to acquire something today. It might be garbage for the next five years. And then you’ll start to see some turnaround after we throw a whole bunch more money at something.
And to your point, it is still very speculative at this point, and there’s not a whole lot of clarity on how you can move from point A to point B, because not only does it take time and money, it also takes a lot of government intervention and regulatory approvals, which that is not the most fast-moving space, as we know.
Colin White:
No, they’re reliable. The government can rule for or against something depending on whims of where the most votes are going to be at any point in time. But again, B was a great example of a news article that had some very good facts in there, which were very informative and could inform somebody on what the current situation is for sure. And then rode it right into the ditch with some fairly detailed speculations and straight line projections such as, entertaining, Yes. But reliable enough to make investment on me.
Again, our conversation internally has been how can you possibly identify the good ones? What are the harbingers of the good ones? And it gets into being geographic specific, because geographically it’s not a homogeneous thing across any country or any geography. There’s going to be winners and losers. Well, are we smart enough to pick the right geography? Are we smart enough to pick the right municipality from a regulatory standpoint? But there’s a lot that goes into that. And to date, I don’t think any of us are tremendously excited about any one opportunity we’ve seen, but it doesn’t mean we’re not looking.
Josh Sheluk:
Yep, that’s true.
Colin White:
All right. So let’s go back up here. This is one that I just put up today, and I don’t know if you’ve heard me rant about this or not, Josh, this might not be a fair one because this is more in the planning world than it is in the investment world. So this may not be as fair.
So I’ll grade you on a curve on this one, all right? So if you get anywhere close to my thoughts on this one, it’s going to be an A+, right?
Josh Sheluk:
Okay.
Colin White:
When your child isn’t fit to be your successor for passing down the family business.
Josh Sheluk:
Okay.
Colin White:
So it’s a whole idea about passing down the family business to the next generation and how beneficial it is and how wonderful it is and the challenges in doing that. But basically building up the idea that passing the business on in a family is a positive thing.
Josh Sheluk:
Yeah. Well, I’ve heard you talk about this a couple of times. One direction you may have gone is, does your child even want to work in the family business? The second way that you could have gone, which I’ve heard you say a couple of times, I believe, is it takes three generations to basically destroy all the wealth, is what some statistics have shown. So I don’t know. Am I in the ballpark, Colin??
Colin White:
You are. And I guess yes, you do have the right to use what I’ve said in the past, and we’ve spent a lot of time together. So yes, you probably have heard me rant and rave about this a little bit. No, I pointed out the idea that somebody who’s able to start a business from nothing, get it up and running and have a stable enough relationship that results in kids, that’s a pretty small group.
Now If you want to take that and make it even smaller, is do those kids have any interest in taking part in a business when they were raised in a household with somebody who was starting a business? Or do they just want a government job? Having a kid that is remotely interested in the family business, that’s another hurdle to get over. So If you get through those two hurdles, you get to the hurdle of… Do they have the skillset?
Now the parent who raised that child knows how to get the part of the development of the business that they were alive for, may not have any of the skills needed to take it to the next level to keep it going. People who start businesses tend to be terrible at running them. So do you even have the skillset that you could pass on to the next generation?
And there’s the whole old generation wants a cure, new generations got a new idea. So you have to be in constant conflict, constructive conflict and reach conclusions in order for you to work together successfully, to pass off the business. You start drawing all these circles and you keep weeding out another percentage every step of the way. The idea that any family business success stays within the family is an absolute miracle, the number of things that have to line up.
So I bristle at the idea that it’s obvious, the business to stay in the family. That should be everybody’s first instinct. That makes no sense, only to the completely uninformed who have never run a business or been part of a business would think that way. Because if you actually take a look at it, I’ve had more people cry in my office over family business issues than all the other issues put together. And that’s over 30 years.
And I’ve seen some very, very, very hurt feeling over exactly that’s going on. I’m a huge cheerleader when I see it happening, when I see people trying to make it work, I’ll jump in with both feet and help. But starting from the standpoint of having a stable enough home life while you’re starting a business, to have kids alone, there’s a lot of people that can’t even manage that step, much less raise a kid that’s not horrified about the prospect of working for themselves or being a boss. Because it doesn’t always look pretty.
Josh Sheluk:
Mm-hmm. Is this speaking as somebody who’s built a business and has a child that it wants the government job or…
Colin White:
Well, that’s part of it. And that was a very interesting conversation. Because I’ve got a son, he’s graduated from Queens with a master’s in economics. I love him. I think we’ve got a great relationship. I love talking with him and I think he’s doing great in life. But he has nothing to do with the family business at this point. And I couldn’t be happier for him.
But if he came back to me and wanted to get in, we could have the conversation. But part of it was him watching me be at the front of the room and what comes with that? There’s no interest in it. And that’s fair ball. There’s absolutely fair ball. I completely respect that. And I’ve talked to other people, there’s other people in my orbit who could have been part of this business or wanted to be part of this business.
But no, they grew up in a family where people owned businesses and they just want nothing to do with that mindset at all, because it left a scar on them at some point. So no, owning a business and trying to pass it off with the family, again, complete respect for it when it works, but expectation that this is a possibility you should hope for, plan for or try to force when it doesn’t fit, can do way more damage than anybody could really calculate. So if it happens, be happy. If you’re expecting it or planning for it or trying to make it happen, take a breath because you can put yourself in a world of hurt.
Josh Sheluk:
Makes sense.
Colin White:
All right. So, we had the… I don’t know if you commented online, Canada Pension recorded a 1.3% return to the 12 months end of March. We had this conversation. So you know what?
Josh Sheluk:
Yep.
Colin White:
Do you remember what I said?
Josh Sheluk:
I don’t remember specifically what you said. I know you asked me how does that compare to us? And I said, why are you asking how it’s done? Because you always talk about how we shouldn’t compare ourselves to a pension plan.
Colin White:
No, absolutely. And it was a good answer to my question. Curiosity, it’s not as if it’s going to provide my self-worth if we do good or do bad or something like that. But no, I took it as a chance to reiterate the idea. You should not invest a pension fund. You don’t have unlimited mortality. You don’t have. The Canada Pension plan still has strong positive cash flows from contributions coming into it. So that pension fund is being run with an infinite timeline and under the situation having strong positive cash flows, you can do it.
Which is way different than if you are 78 years old and living off your RRIF. To take investment advice from a pension fund at that point in life is wrongheaded at best. Again, it’s the whole, I’m going to work out like Sidney Crosby, oh, shut up. Stop doing that. I’m going to manage my money like Warren Buffet. No, you don’t have 50 billion. This whole equivalency that we set up, if smart people are successful, people do it, then it must be good for everybody, just doesn’t fly. It just doesn’t work.
Josh Sheluk:
Well, a lot of people looked at Elon Musk for a lot of years and said, he’s the pinnacle of success. I should do what he does. And then he bought Twitter, and I heard that’s worth about a third of what he paid for it just a year ago. So even success, you make mistakes and you shouldn’t model your life after them, because next thing you know could be in a position where you’re spending way more money than you have on something you don’t need.
Colin White:
Look, and Elon is making his own movie. Good for him. Maybe he’s fine with having lost all that money investing in Twitter because it’s accomplishing a bigger goal in the Elon Musk empire. Who knows? This may work out for him as well, the halo effect. If it eventually works out that it was all a good idea.
But yeah, you’re right, idolizing people or taking a look at institutions or people and saying they’re successful. Therefore, if I want to be successful, I have to do that. That’s dangerous. It’s just flat out dangerous. And it’s used all the time. And it’s a very compelling argument. Don’t you want to invest like Warren Buffet? Most people go, well, he is the richest man. I’ve got something to learn from that. I shouldn’t disagree with him.
You should be smart when you disagree. It’s, yeah, I’m not going to invest like Warren Buffet, I’m going to go buy Bitcoin. Okay, no, you just ran into the ditch. Doing the opposite of what these people do is not the right thing either, right?
Josh Sheluk:
Yeah. That’s true.
Colin White:
There’s another answer in between, right?
Josh Sheluk:
Yeah. Don’t do what they do, but don’t do the complete opposite of what they do either.
Colin White:
Yeah. Again, if you’re reading it for entertainment’s purposes, then keep going. If you’re reading it because you think it’s going to be instructive as to what you should do with your own personal life, it has less value. It has less value.
Josh Sheluk:
Yeah. All right. Give me one more. Get us out of here on one more.
Colin White:
Do you want to go really nerdy?
Josh Sheluk:
You know me. The end is almost here.
Colin White:
All right. I’m going to do this for you. All right, I’m going to bring this one up just for you. Because this is something nobody else will be paying attention to until we bring it forward on a big platform like this.
So they are trying to lock down the implementation date for T+1 settlement. One year from now, and they’re trying to get everybody on board with T+1 settlement. For all securities across all platforms. That was the news article today. What’s your comment, Josh?
Josh Sheluk:
So we went to from T+3 to T+2, I don’t know when… Was that five years ago now?
Colin White:
That’s a good guess.
Josh Sheluk:
It was that range. We went from T+3 to T+2. On our end it was a pretty much non-issue. You didn’t even really think about it. You just woke up one day and you’re, everything settles in two days now instead of three days. So I’m sure there’s a lot more moving parts behind the scenes with the actual brokerages and the money movement and all that fun stuff.
But I go back to my first boss in this business, his first job in finance was riding a bike in downtown Toronto, delivering share certificates from one financial institution, from one investment brokerage to another. That’s why we have T+3, because it takes all the bikers quite a lot of time to move from one end of the city to another. And this is why you could also argue why all the financial firms are so close in proximity to each other. Because people literally needed to walk things or bike things from one office to another back in the day. This is probably late ’80s, early ’90s.
So that’s where we’ve evolved from. And there’s a lot of legacy reasons why that system was in place. But my expectation, now that everything is digital and settled electronically and money is moved from one place to the other, and stocks certificates don’t even exist anymore in physical form. My guess is that this is going to be a non-issue from anybody that’s a little bit removed from the very nitty-gritty operational detail.
Colin White:
And that’s historically accurate. But you’re missing one really valuable perspective here that I can offer. Because of my inquisitiveness or pain in the assiness, just depending on who you talk to over the years of paying attention how things work. There was a company, you may remember this name, M.R.S. Trust. You remember that?
Josh Sheluk:
No, not, no, I don’t.
Colin White:
They were a standalone trust company back in the year 2000s, I believe they still existed. They ended up getting purchased by the Power Corp and Mackenzie, rolled in. Anyway, so their standalone job was offering self-directed RSP plans. That’s all they did. So you could open up a self-directed RSP plan and they charged the same $125 that everybody charged for a self-directed RSP plan.
And for the $125, they ran their whole back office system. They produced monthly statements, they did all of the tax slips, they did all of these things. And I sat one of the guys down one day and I said, how can you guys possibly have a business model based on that revenue stream? That doesn’t make sense to me, that you could charge that little and do all this? Because I was in their offices, huge offices in Toronto, and I said, I don’t get it. What’s your business model? And you’ve heard me say this before, whenever I see anything, what’s your business model? I finally got one guy to tell me and looked around the room. He said T+3. We get to hold onto all of the money for three days every time a trade happens, that’s our entire revenue stream.
Josh Sheluk:
Yeah.
Colin White:
That’s where they made all their money. So you’re right. You’re absolutely right. It started where you’re talking about, because it took that long to move stuff around and then technology kicked in. We could be same day settlement right now. Technology has the tools to do that right now, but it’s all of the systems that are built on. That’s how we make our living. And if we don’t make our living that way, we’re going to have to charge a fee. The business models got to evolve, in order to support these T+1 and same-day settlement that we’ll eventually get to.
But it’s a business model that’s holding back the adoption of these things, far more than technology. But the business models are important, I guess, not to dismiss them. Because again, the system has reached some kind of an equilibrium right now that it functions. And if we take away economic incentive for some of the settlement players to do their job, it’s got to get replaced with something in order for the system to work. So I’m not diminishing and saying that it’s terrible, it just needs to adjust, and those things tend to be slower to adjust, in my experience anyway.
Josh Sheluk:
Yeah, I’d be interested to know in current times how much of a brokerage’s revenue is actually driven from some type of delayed settlement. My guess, and this is just a wild guess, I really have no perspective on it, is that it’s not that significant. But I could be surprised, I guess.
Maybe now that interest rates are higher, there’s a little bit more of a benefit for them, holding a bit of cash for a day or two. But I would also imagine that this is the same principle as charging transfer out fees, in my opinion, is you charge a transfer out fee, the clients that leave, and then that institution charges the transfer out fee when that client leaves them. Because if you’re not getting the cash in your doors for two days either as it is today, then that’s delaying money coming in. So it just depends on what’s the net flow for you as a brokerage to determine if you have more cash than you would otherwise if it was a shorter settlement or less cash.
Colin White:
Yep. Yeah. No, I do know that and having been in the room when there’s conversations with custodians, it is part of the cash carry and that is part of the calculation. And then again, it’s less material when interest rates are really low. It’s more material when interest rates are higher. But it is part of the calculation. And again, I’m not calling it good or bad, it just is.
And if you’re going to take that out of the equation to make things flow more efficiently, the system’s going to have to continue to make a certain margin, otherwise people won’t invest in it and you won’t have a functioning system. Because the system has to function at a very high level. It’s zero downtime. When markets go down, that’s bad. So it has to be a error-free or very, very robust system for sure. So that people in there have got the incentive to make enough money to make proper investments, to make it work.
Josh Sheluk:
Yep. You’ve got it.
Colin White:
Well, there you go, Josh. Hey, this is probably… I hope Catherine leaves it all intact? This is one of our longer pods, or maybe it’s going to be two pods.
Josh Sheluk:
Yeah. Hey, it was fun. I liked it, react in real time.
Colin White:
There you go. Took all the pressure off you this time, Josh. Next time you have to come with a list for me to react to.
Josh Sheluk:
Okay. No, no problem there, Colin. Looking forward to next time.
Colin White:
Thanks everybody.
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