Investment
Why putting the investment odds in your favour is so hard
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Norman Rothery’s ranking this past weekend of the 250 largest stocks on the TSX pointed out the advantages of tilting the odds of investment success in your favour by focusing on company-specific financial measures (called factors). Mr. Rothery focused on both value factors, such as a low ratio of share price to earnings per share (the P/E ratio), and share-price momentum. As was pointed out in the article, combining value and momentum improves the chances of investment success.
Other factors that have been proven to improve long-term returns include size of the company and shareholder yield. The largest 20 per cent of companies in any stock market tend to underperform. And companies that pay healthy dividends and/or buy back their own shares are more likely to outperform.
Yes, of course there are exceptions to these general rules. In each case, this is only true on average when looking at a large sample size over time. But that is exactly how you determine probabilities.
When using factors, you are taking an outside view. Instead of looking at a particular business and forecasting its future, you are looking at a very broad range of companies and looking for connections between their financial characteristics and future increases in their stock price. Because there is a strong long-term correlation, as well as a logical causation, between certain factors and future investment returns, it is reasonable to conclude that by following this approach, you are increasing the probability of outperforming the stock market average.
The ability to think probabilistically is crucial. This is how Warren Buffett’s partner, Charlie Munger, has graphically described its importance: “If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.”
As you would expect, combining several factors has been proven to further improve returns.
Focusing purely on factor investing for both buying and selling stock has proven successful for tax-sheltered entities such as pension funds and insurance companies. If you pay taxes, however, the resulting high portfolio turnover (frequent buying and selling of stocks) would increase your average tax rate.
To avoid this, taxable investors can elect to use factors only to define which companies they will consider investing in – and not be in a rush to sell the companies they purchase. You might, by way of illustration only, say, “I will only consider buying companies that are trading at a P/E ratio of less than 20, that have a history of buybacks or dividends providing a shareholder yield of at least 2 per cent per year, have a market capitalization of less than $50-billion, and have a return on equity (ROE) of greater than 16 per cent.” Once the field has been narrowed to companies that are more likely to outperform, you can consider other characteristics, such as debt levels, historical growth in revenue and profits, and your view of the competence of management, before deciding whether to buy.
This approach will not result in outperformance every single year, but over time it has, and likely will in the future. Most importantly, in every given year, and for every given purchase, it tilts the odds in your favour.
Unfortunately, investing in this manner runs counter to human nature. People find it easier to think about a single example than about a large sample. A quote often attributed to Stalin identifies this, perhaps inadvertently: “One death is a tragedy. A million deaths is a statistic.”
Many people believe they can predict a company’s future, and often confuse anecdotes with evidence. “If we followed those rules, we would never have bought Amalgamated Consolidated Widgets, which was a winner!” Correct. But that doesn’t change the fact that following the rules would have produced a better long-term result for the portfolio. Or that buying Amalgamated Consolidated was somewhat like winning at the roulette table in Las Vegas. The odds were against you and the happy outcome was based on luck, not skill. Over time, anyone operating with the odds against them will be disappointed.
Just to hammer home how difficult thinking this way is for most people, let’s take another example from everyday life. Your friend Frank buys a lottery ticket. You point out that the purchase was a mistake because the odds were dramatically against him. He replies that either he’ll win or he won’t. And once he knows whether he won, the odds will be irrelevant. Perhaps you instinctively agree with Frank’s view. Most people see no reason why a sample size of one is not sufficient to draw a conclusion. However, if you don’t adjust your thinking about future outcomes to focus on the probable, rather than the actual, result, you will never enjoy the benefit of going through a long life with the odds in your favour.
All of us are hard-wired to think short-term. Most people who do adopt an objective approach and know rationally that the strategy will succeed over time will abandon it if it does not produce the desired result in the first year or two.
Identifying the correct evidence-based approach is important. What is harder is having the discipline to execute that approach and stick with it through hard times.
Biff Matthews is the chairman of Longview Asset Management Ltd., a Toronto-based investment management firm.
Investment
Bill Morneau slams Freeland's budget as a threat to investment, economic growth – CBC.ca
Finance Minister Chrystia Freeland’s predecessor Bill Morneau says there was talk of increasing the capital gains tax when he was on the job — but he resisted such a change because he feared it would discourage investment by companies and job creators.
He said Canada can expect that investment drought now, in response to a federal budget that targets high-end capital gains for a tax hike.
“This was very clearly something that, while I was there, we resisted. We resisted it for a very specific reason — we were concerned about the growth of the country,” he said at a post-budget Q&A session with KPMG, one of the country’s large accounting firms.
Morneau, who served as Prime Minister Justin Trudeau’s finance minister from 2015 to 2020 before leaving after reports of a rift, said Wednesday that Freeland’s move to hike the inclusion rate from one-half to two-thirds on capital gains over $250,000 for individuals, and on all gains for corporations and trusts, is “clearly a negative to our long-term goal, which is growth in the economy, productive growth and investments.”
Morneau said the wealthy, business owners and corporations — the people most likely to face a higher tax burden as a result of Freeland’s change — will think twice about investing in Canada because they stand to make less money on their investments.
“We’ve created a disincentive and that’s very difficult. I think we always have to recognize any measure that creates a disincentive for investment not only impacts us within the country but also impacts foreign investors that are looking at our country,” he said.
“I don’t think there’s any way to sugarcoat it. It’s a challenge. It’s probably very troubling for many investors.”
KPMG accountants on hand for Morneau’s remarks said they’ve already received calls from some clients worried about how the capital gains change will affect their investments.
Praise from progressives
While Freeland’s move to tax the well-off to pay for new spending is catching heat from wealthy businesspeople like Morneau, and from the Canadian Chamber of Commerce, progressive groups said they were pleased by the change.
“We appreciate moves to increase taxes on the wealthiest Canadians and profitable corporations,” said the Canadian Labour Congress.
“We have been calling on the government to fix the unfair tax break on capital gains for a decade,” said Katrina Miller, the executive director of Canadians for Tax Fairness. “Today we are pleased to see them take action and decrease the tax gap between wage earners and wealthy investors.”
“This is how housing, pharmacare and a Canada disability benefit are afforded. If this is the government’s response to spending concerns, let’s bring it on. It’s about time we look at Canada’s revenue problem,” said the Canadian Centre for Policy Alternatives.
The capital gains tax change was pitched by Freeland as a way to make the tax system fairer — especially for millennials and Generation Z Canadians who face falling behind the economic status of their parents and grandparents.
“We are making Canada’s tax system more fair by ensuring that the very wealthiest pay their fair share,” Freeland said Tuesday after tabling her budget in Parliament.
The capital gains tax, which the government says will raise about $19 billion over five years, is also being pitched as a way to help pay for the government’s ambitious housing plan.
The plan is geared toward young voters who have struggled to buy a home. Average housing prices in Canada are among the highest in the world and interest rates are at 20-year highs.
Tuesday’s budget document says some wealthy people who make money off asset sales and dividends — instead of income from a job — can face a lower tax burden than working and middle-class people.
Morneau, who comes from a wealthy family and married into another one, is on the board of directors of CIBC and Clairvest, a private equity management firm that manages about $4 billion in assets.
According to government data, only 0.13 per cent of Canadians — people with an average income of about $1.4 million a year — are expected to pay more on their capital gains as a result of this change.
But there’s also a chance less wealthy people will pay more as a result of the change.
Put simply, capital gains occur when you sell certain property for more than you paid for it.
While capital gains from the sale of a primary residence will remain untaxed, the tax change could affect the sales of cottages and other seasonal and investment properties, along with stocks and mutual funds sold at a profit.
A cottage bought years ago and sold for a gain of more than $250,000 would see part of the proceeds taxed at the new higher rate.
But there’s some protection for people who sell a small business or a farming or fishing property — the lifetime capital gains exemption is going up by about 25 per cent to $1.25 million for those taxpayers.
Freeland said Tuesday she anticipates some blowback.
“I know there will be many voices raised in protest. No one likes paying more tax, even — or perhaps particularly — those who can afford it the most,” she said.
“Tax policy is not only, or chiefly, the province of accountants or economists. It belongs to all of us because it is how we decide what kind of country we want to live in and what kind of country we want to build.”
Morneau had little praise for what his successor included in her fourth budget.
Morneau said Canada’s GDP per capita is declining, growth is limited and productivity is lagging other countries — making the country as a whole less wealthy than it was.
Canada has a growth problem, Morneau warns
The government is more interested in rolling out new costly social programs than introducing measures that will reverse some of those troubling national wealth trends, he said.
“Canada is not growing at the pace we need it to grow and if you can’t grow the size of the pie, it’s not easy to figure out how to share the proceeds,” he said.
“You think about that first before you add new programs and the government’s done exactly the opposite.”
The U.S. has a “dynamic investment culture,” something that has turbo-charged economic growth and kept unemployment at decades-low levels, Morneau said. Canada doesn’t have that luxury, he said.
He said Freeland hasn’t done enough to rein in the size of the federal government, which has grown on Trudeau’s watch.
The deficit is now roughly double what it was when he left office, Morneau noted.
“There wasn’t enough done to reduce spending,” he said, while offering muted praise for the government’s decision to focus so much of its spending on the housing conundrum. “The priority was appropriate.”
Investment
Saudi Arabia Highlights Investment Initiatives in Tourism at International Hospitality Investment Forum – Financial Post
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RIYADH, Saudi Arabia — The Saudi Ministry of Tourism is currently taking a prominent stage at the International Hospitality Investment Forum (IHIF), presenting a unique opportunity for global investors to dive into the thriving tourism landscape of the Kingdom. With the spotlight on the Tourism Investment Enablers Program (TIEP), that was recently announced, Saudi Arabia is aggressively pushing towards its Vision 2030 goal of being a top global tourism destination for investors and tourists alike.
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This strategic presentation comes at a time when Saudi Arabia’s tourism sector celebrates an incredible milestone of 100 million visitors in 2023, seven years ahead of schedule, marking a significant stride towards economic diversification and emphasizing the sector’s growing contribution to the national GDP. The flagship Hospitality Investment Enablers (HIE), one of TIEP’s initiatives, aims to leverage this momentum, planning an investment infusion into the hospitality sector of up to SAR 42 billion in key destinations, which alone is anticipated to create 120,000 new jobs by 2030.
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The IHIF audience is getting a close look at Saudi Arabia’s plans to expand its accommodation capacity dramatically. The Kingdom is targeting an increase in hotel rooms to over 500,000 and aiming to welcome 150 million visitors annually by 2030. The HIE stands at the core of these ambitions, designed to energize the hospitality sector by introducing a new wave of supply in targeted tourism hotspots, significantly enriching the Kingdom’s diverse tourism offerings.
The initiative is supported by a suite of strategic enablers, including access to government-owned land under favorable terms, streamlined project development processes, and regulatory adjustments aimed at reducing barriers to market entry and operational costs. This comprehensive approach is expected to catalyze a significant socio-economic transformation within the Kingdom, with private sector investments projected to reach SAR 42.3 billion and a forecasted annual GDP increase of SAR 16.4 billion by 2030.
Saudi Arabia’s active participation in IHIF aims to showcase the Kingdom as an enticing investment frontier for international investors, emphasizing the lucrative opportunities within the tourism and hospitality sectors. This global stage provides the perfect platform for the Ministry of Tourism to forge lasting partnerships and highlight the Kingdom’s commitment to elevating its tourism industry standards, fostering sustainable growth, and offering robust support to investors.
Through this engagement, the Saudi Ministry of Tourism is not just showcasing investment opportunities; it is inviting the world to be a part of Saudi Arabia’s ambitious journey towards redefining global tourism norms. Investors are encouraged to seize this unparalleled chance to collaborate with the Kingdom, as it paves the way for a new era of tourism excellence aligned with Vision 2030’s transformative objectives.
Source: AETOSWire
View source version on businesswire.com: https://www.businesswire.com/news/home/20240417879947/en/
Contacts
Najla Alkhalifa
Media and Communications
Najla@mt.gov.sa
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