There are really only three ways to invest; just like in math you can only add or subtract and everything else is just a more complicated version of these simple operations. NFTs, MEMEs, Cryptocurrency, and many highly engineered products are often incredibly complicated for investors to understand. Join us today on ThinkSmart as we discuss some of these newer products that have been developed and the difference between owning, loaning, and gambling with your investments.
Transcription
Rob (00:00):
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management, and this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing owning, loaning, and gambling. Mike, that sounds like a great title for a podcast. What got you thinking about this idea?
Mike (00:26):
Well, I’ve always been a mathematician, and the one thing I always go back when I’m teaching my kids about math is, there’s only two things you can do in math. Math seems very complicated, but you can only add a number or subtract a number. And if you talk about multiplication is add multiple numbers, division will be subtract to multiple numbers, but there’s really only two types of operations that you can do. And that’s where computers work, because that’s all there is in math, and they can do very complicated things. Investments are very similar, investments seem very complicated, but there’s only three real things you can do on the investment side of things. You can own a company, you can loan a company money, or you can take a gamble. So let’s talk a little bit about that and to you what’s an owner?
Rob (01:13):
So an owner I can buy shares in a company. So I can buy a publicly-traded company and I can buy shares on the stock market. I’ve made some investments in private companies. And so I had a brother-in-law who purchased a sauna business, and I’m an investor in that sauna business. So over the years I’ve made some private investments and those are ownership. You and I we bought our Florida property and that’s an ownership. We also bought up a property in Guyana. And so those are all what I would call owning.
Mike (01:58):
And when you own it, you’re going to collect rents or you’re going to collect dividends, and you’re also going to gain on if someone’s willing to pay more than you paid, you’re going to have a capital gain at the end of it too. So it has two real pieces to it that can make you money.
Rob (02:11):
I guess what I look at is I’m hoping to get a return, maybe there’s income coming from it from a business, whether it’s a stock, a business or the real estate, there’s some income coming in from it. And I’m also hoping that that asset goes up in value, whether it’s the real estate or the stock, I’m hoping that it goes up in value. So I’m an owner, I like being an owner. There’s a bit of risk involved, and the more diversification you do, the better off you are.
Mike (02:40):
And if you like the risk, you’re not concerned about the income, people do startups. They start a company from scratch, and you’re probably not going to be paid for a while, but has tremendous amounts of gains. That’s the one thing when we talk about owning a company, the great part about being an owner is, gains are unlimited, and you look at some of the stocks like Apples and Tesla, there’s no limitation to how much money you can make on them. So it’s the sky’s the limit. Sometimes they go too high, but eventually, you’re not going to be cut off at any point if you do things right. So that’s a great part about being an owner.
Rob (03:14):
What about loaners? So I think of loaning… what’s a simple example of loaning money?
Mike (03:22):
Easiest thing is hold a mortgage, everyone understands that. You go when someone wants to buy a house and you go and loan the money for that house. And they’re going to guarantee to pay you back what you’ve loaned them, plus interest based on whatever the current conditions are over a certain period of time. The only tricky part is when you loan, you’re going to get your money back, hopefully if everything goes correctly, but if that house doubles or triples in value, you don’t get any more than what you agreed on in the first place. So it does have a seal into its gains.
Rob (03:55):
So a private mortgage, so let’s say I had money and I had half a million dollars and I could loan you that money and you would pay me maybe three or four percent interest, and so I know I’m going to get back my interest, and hopefully one day I’m going to get back my capital. What are some other examples of loaning? Is it GIC alone?
Mike (04:17):
GIC is basically a loan, government bonds are a loan. That’s you loaning the government money for time period to use. Corporate bonds, also loans, that’s you going and if you look at even the banks, they still have bonds available. So you can loan TD Bank money, and they will pay you a certain interest rate over a certain period of time. And if you get someone like a TD Bank, most likely you’re going to get paid back at the end. And it will be on a pretty low-interest rate because it’s pretty safe. You can also loan money to highly risky institutions, and you’re probably going to get paid a lot more interest along the way, but the guarantee of being paid back at the end may not be as secured as being in one of the five Canadian banks.
Rob (05:00):
So what’s an example of an extreme loan? What would be an extreme, risky loan that someone might do?
Mike (05:05):
Well, that’s sort of how the mafia got started. So they were in the money loaning business and that was it. The people that needed money desperately, they get loan money at a very high-interest rate and bad repercussions if you didn’t pay it back.
Rob (05:21):
So you might be able to charge a loan shark, maybe able to charge 20% interest or higher, and the problem is it’s, if you don’t pay it back, you may lose a few fingers or more.
Mike (05:33):
Yeah. So loans have been around a long time. I think you can take loans back to Caesar’s time, and even before that, so…
Rob (05:39):
Let’s go to the next group, which we call gambling. So what is gambling and how is it different than ownership or loaning?
Mike (05:51):
Well, let’s start with the simplest in Vegas, you go to casino, you’re gambling. And there’s a chance you can come up ahead, there’s a chance you can lose, Vegas wasn’t built on winners, so there’s more people that lose than win. But again, you do have almost unlimited amounts of gains that you can make. So it has that excitement attached to it. But the only difference with gambling is sometimes there’s not the expected gains that you have in other things, it doesn’t matter expected ready return to it. It just, for every winner, there has to be a loser on the other side. And that’s where people get… on the stock market we talk about winners and losers, but if the stock market, if you look at S&P 500, and let’s say it average 10%, there’s going to be winners losers, but they’re going to be distributed around that 10% gain.
Mike (06:35):
Even a loser might have a nine percent rate of return, and then where no might have 11% rate of return. When you start to go to gambling what happens is, the expect a return is zero minus the cost of whatever they’re taking away from you. So I think Vegas probably I’m guessing this number, but I think they make 18 or 20% of money, so that’s your loss, and you’re going to be a distribution around that lose a number. So that’s the gambling side of things.
Rob (07:00):
So examples of… and it’s interesting we’ve probably seen the commercial. We’ve got Wayne Gretzky now promoting a gambling site. And I never thought I’d see that. I didn’t want to ever see that in my lifetime, but unfortunately it’s happening. And I guess it got me thinking of all these gambling sites that are being promoted. We talked about crypto, it’s truly a gamble you’re buying, there’s no income coming from it. There’s no asset behind it, you’re just hoping it goes up in value.
Mike (07:32):
Yeah, it’s a problem, and everyone’s preying on the young. This is one of those things where they’re preying on all our kids that are between the ages of 15 and 30 years old, the advertisers are preying on that age group. And because they haven’t learned a lesson yet, and these gambling sites make a lot of money. Vegas makes a lot of money. So when you get into this, it gets very dangerous. And again, the crypto has been pushed into that side too. Crypto has almost become a gambling type of thing. People buy it. And when you look at these websites, they all pay in crypto. That’s the currency they deal with. So they’re relating the two together. So it’s become a gambling asset.
Rob (08:10):
Meme stocks, NFTs would fall into that category. So let’s go back to the concept of the owning, loaning, and gambling. And what I think to me is the interesting thing is let’s just look at owning. So we all understand buying a house, buying a stock, investing in mutual fund, but what happens is all of these products get engineered and over engineered, and they get sold as something else. And investors get so confused and understand the people that are engineering these products are making them look extremely attractive, downside protection, guaranteed income, all of the words that we’re not allowed to use in our profession, and yet marketers can use those words freely.
Mike (09:07):
Unfortunately, some of the smartest people in the world end up in finance because there’s high rewards. Wall Street has engineered things for years. They make a lot of money on Wall Street. And as we talked about every investment you can see can either be built on stocks, bonds, or speculation. There’s only three things that exist. And it takes while in doing this before you realize those are only three things, everything else is layering different products together and create different features around them. But that’s the only three things that anyone has to work with. There’s nothing else to work without there. It’s like when you work with the numbers, you can only add or subtract a number. When you look at computers, computers work on ones and zeros, that’s all they have. That’s all they can work on. They can’t do anything else.
Mike (09:49):
But they can do incredibly complicated things with that, the same thing with investments, they can do incredibly complicated things based on these three ideas, stocks, bonds, and speculation. So when you look at things like short selling and derivatives, they’re based on stocks, they’ll either bend, they’re going to go up or down. So they add some speculation onto the stock market. They put the two together, come up with these types of products. Leverage, again, you go and you take the person who wants to be involved in the bond market and the person who wants to be in the stock market, you gather them together, to create a leverage type investment.
Rob (10:19):
So it all sounds good. We’ve been doing this for a long time. And what have we learned about all this layering?
Mike (10:27):
Well, my dad always told me one thing. He says, “No one does anything for free. And every time someone’s adding one of these layers, they’re not doing it because they just like you, they want to find a way to make money.” So there’s a cost involved. So the ultimate return you’ll always get is from stocks and bonds, that’s your ultimate return. Every time we layer something on top of that to protect anything, there’s going to be cost attached to it, that’s going to have to take away some of the return along the way.
Rob (10:52):
Very early on in our career, we were recommending limited partnership, real estate products to our clients. And what I learned about those products after using them for a few years is… and some of them were okay, but there were too many hands involved. There were too many people involved, and there were too many layers, and layers cost money and layers reduce returns. So you always need to be careful when you’re looking at some of these fancy investments, how many layers have been added in, and those add costs reduce returns. And in some cases, not only reduce returns, but they increase the risk because the investment becomes so complicated. The person who created doesn’t even understand it.
Mike (11:39):
I mean, insurance companies have been great at reducing risk over years, but remember insurance companies, annuities are a bond product, in just a different format. And insurance companies when they do try to reduce risk on thing, what they do is remember they hold a basket of securities and usually their basket securities it used to be one-third real estate, one-third equities, and one-third bonds. That’s what the basket securities that they run the company. And all you’re really doing is be involved and invest in that basket of those three products. So again, packaged very differently with additional features and fees and costs on top of it. But it’s really, if you break it down, it gets down to the, they only have the same access to everything else that we have access to.
Rob (12:22):
So the lesson for our listeners is keep things simple, go back to what’s the fundamental asset you’re buying, or what’s the fundamental amount of money that you’re loaning, and always try and focus on investments that stick really close to that. That brings us to the end of another week. This is Rob and Mike with Think Smart with McClelland Financial Group of Assante Capital Management.
Assante Capital Management (12:48):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Ltd. Assante Capital Management Ltd is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Inc. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Ltd.
