Episode 172: Is the debate over renting vs. buying a home really over? Featuring Rob Carrick

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making for Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to episode 172, and this is another episode where we have a guest join us for the main topic. A few weeks ago, we had Ben Rabidoux join us and this week we have from The Globe and Mail, Rob Carrick, and it was a great conversation. Rob’s a blast. We just had so much fun chatting because there’s so much in common interest.

Off the top, just a couple very quick recent contents. I’ve been watching with Lisa, the American Crime Story’s Impeachment. I don’t know if you’ve seen this or not Ben, but you have to buy it. We buy it on iTunes. It’s the story of President Clinton, the whole Paula Jones, Whitewater, Monica Lewinsky episode that happened a couple decades ago. I didn’t know all the details. It’s a reenactment. I find some of the acting not very appealing for me, but boy, what a story. You can just imagine what, like we’re watching now, what Monica Lewinsky went through when she was busted and called up by Linda Tripp. It’s crazy. So we’ve been watching that.

Another thing I want to give a shout-out to, this is a recommendation from our friend, Michael Goodman, in New York City is, he told me about a book called Capital: The Story of Long-Term Investment Excellence. I know I told you about this book earlier this week. Some would call it inside baseball for us in the business, but I would say it’s for anyone who is interested in business but especially for … I know we have a lot of advisors that listen to this. It’s a great book about a firm called Capital Group, and this is the company behind the American Funds, which is a very successful, very longstanding … They manage over a trillion dollars. They’re an active manager but very low-fee. This book was written by Charles Ellis, which many people will have heard of, and it actually has an introduction by Burton Malkiel. These are two giants in the world of indexation, so to get them to do this says a lot about the company.

What I find cool about the company is that it’s privately held, very much under the radar, no star managers. Very long-term focused, very rational, obsessed about their people. They talk about this at length. They say without their people, they can’t satisfy their clients, and without satisfied clients, at that point, if they do a good job with their people and their clients, then shareholders get rewarded. They’re very clear in their values. They have very strong, long-term values, an incredible culture, and they figured out how to do the multi-generational private ownership cascading to next generations. Hats off to them. It’s a really interesting book and highly recommended for anyone who’s interested in culture, in private ownership, transitioning to the next generation, especially if you’re in our industry.

Ben Felix: What’s their investment philosophy? Do you know much about that aspect?

Cameron Passmore: They’re active managers, they’re low-fee. I think it’s fair to compare them to, say, Vanguard on the active side. Where if you charge a low fee, fair fee and you’re disciplined. They’re very much multi-manager. They don’t believe in org charts. They believe in creating a job, because they talk about how they create jobs for great managers, like portfolio managers, and you create your own way of doing things. They team you up with other people who have great ways of doing things, so it’s not like this top-down management approach, so it’s very unique. The org chart, they say it creates rigidity, which is good for efficiency but not good for effectiveness.

They want people to be effective. To be effective, you shouldn’t be rigid. Org charts are very rigid and it causes consensus. The more a firm surrounds itself with a consensus mentality, you end up effectively training people to make the arguments to the middle. Therefore, you get consensus agreement, which means you don’t get outstanding ideas, and you need outstanding ideas to excel at active management. That’s my interpretation of it.

Ben Felix: Hmm, very interesting. I looked at one of their funds while you were talking just now. A quick five-factor regression. Not bad. Statistically insignificant positive alpha, a little market beta. Pretty neutral on size, bit of a growth tilt. Negative profitability and investment exposure, which you’d expect, I guess, from a … Well, you wouldn’t expect the profitability piece from a growth fund. It’s interesting. It sounds more like a Vanguard active management, which is kind of similar to like a Mawer type approach in Canada, right?

Cameron Passmore: Yeah, Mawer. Yeah.

Ben Felix: Mawer.

Cameron Passmore: Yeah.

Ben Felix: I think they pronounce it Mawer.

Cameron Passmore: Mawer?

Ben Felix: I listened to their podcast once.

Cameron Passmore: Okay. We’ll go with Mawer. Another book I want to shout-out to listeners. I highly recommend it. I’m about a quarter of the way through. I think, I knew I talked about this earlier this week, but it’s a book called Trillions by Robin Wigglesworth. The book was released just this past week. It’s a book about the history of the index revolution leading to trillions of dollars of assets under management, hence the title.

He does, so far, a phenomenal job of going back to the statistician, what was it? Bachelier in France in the 1830s, I believe, and linking the current-day, modern portfolio theory back through Markowitz, and Samuelson, and Fama, all the way back to Bachelier, and all kinds of really cool stories, like how Krisp was founded, which I know you and I have heard the story but he has parts of the story I had not heard before and it looks really interesting. He has agreed to come on the podcast in the new year. Highly recommend that listeners who are interested go out and start reading the book, Trillions.

Ben Felix: Very cool. I have a piece of content, like a Netflix show that I’ve been watching with Susan. It’s called Maid. Have you seen it?

Cameron Passmore: No.

Ben Felix: Yeah. It’s actually good. I’ve actually been able to pay attention to it, which is a rare thing. We did watch Squid-

Cameron Passmore: M-A-D-E?

Ben Felix: M-A-I-D.

Cameron Passmore: M-A-I-D.

Ben Felix: We also watched Squid Game, but I didn’t really watch it. I kind of had it on in the background while I was on my laptop, but Maid, we’ve actually been … I’ve been only looking at thing while it’s on and it’s kept my attention, which is not typical, so it’s good.

Cameron Passmore: What is it?

Ben Felix: It’s a woman who leaves an abusive relationship and then she’s navigating her way through whatever the system, I guess, and trying to find work. She’s got a young daughter. It’s very well done.

Cameron Passmore: I’ll look it up. There we go. Our need for talent on our team is increasing. I wanted to give a request, so if there’s any advisors out there who might be interested in learning more about how we operate, we do have openings for financial advisors. If you’ve completed your CFP or license for securities and think you might be a good fit, drop Ben or I a line.

Ben Felix: What are the roles, specifically, that we’re looking for?

Cameron Passmore: There’s two main roles right now we’re looking for. One is financial advisors. It’s a client-facing type role, exactly.

Ben Felix: Experienced, like they can meet clients right away kind of thing? Is that the hope?

Cameron Passmore: That would be the hope. We’ll see who’s out there, who may be available. That’s one of the interesting unintended consequences of this podcast is that we’ve met so many incredible people so if you do think there is a chance, reach out. We’re also looking for an office administrator in our office here in Ottawa, which will be a varied type role. General office administration, operating our merchandise store for the podcast, welcoming clients, and tons of other kind of EA type work. A bunch of nice reviews, lately, on Apple. Thuumhammer says, “Interesting information, minimal fluff.”

Ben Felix: We hear that quite a bit, minimal fluff.

Cameron Passmore: “Hard to find a finance podcast that’s full of useful information that isn’t unbearably difficult to listen to. This one walks the line well.” “The biggest boss thus far,” says Harmony of evidence and theory. “Ben and Cameron admit to sharing a belief system that governs their investment decisions. They continuously investigate the theoretical, empirical foundations of their beliefs. Even more importantly, they vigorously explore the theories and evidence that contradict their philosophy.” I think that’s a fair assessment.

“Not so terrible,” says Fantastic Content. I guess, that’s better than saying it’s not so terrible. “One of the best informational podcasts out there. You learn something new and interesting, and not even strictly related to finance in every single episode. Thanks for what you do.” Very kind.

Some phenomenal guests coming up next week. We have Antonio Picca, who’s head of factor investing at Vanguard. In three weeks, we have Robin Taub, who’s the author of The Wisest Investment: Teaching Your Kids to Be Responsible, Independent and Money-Smart for Life. That was a good interview.

Ben Felix: Mm-hmm (affirmative), that was really good.

Cameron Passmore: Then two weeks after that, we have Dr. Anna Lembke, who was introduced to us by Hersh Shefrin. She’s a professor and medical director of the Stanford Addictive Medicine Fellowship in Neurology. She authored the excellent book, Dopamine Nation, which I also highly recommend. In the store, tons of merchandise. Lots of the Talking Cents cards are in stock, so if you’re thinking of something for Christmas, get your orders in. You can connect with us on Instagram @rationalreminder. Both of us are on Twitter. I’m on Peloton at CP313. We also have a team #rationalreminder on the Peloton. I’m on Goodreads, which I love hearing from people on Goodreads. Anything else to add?

Ben Felix: Should we mention the candle idea?

Cameron Passmore: Sure. Get some feedback.

Ben Felix: We know someone locally that makes very high-quality candles, and they do custom scents. We’ve thrown around the idea of doing one for the podcast. My idea, anyway, was to do a five-factor candle, where we pair a scent to each factor in the five-factor model. Then they get combined together, obviously, in the candle to make a five-factor scent. Yeah, I don’t know. If people are interested in that idea, then we’ll continue to pursue it further.

Cameron Passmore: We could do a cool voting, because the company, you go and pick your scent. They warn you when you choose your scents that what you get is yours, no sending it back. I did a custom scent for a very good friend of mine who loves popcorn and loves peaches. It doesn’t work together. I made a popcorn, peach candle.

Ben Felix: Yeah, that sounds gross.

Cameron Passmore: We could do a neat vote on the scents, the five-factor scents.

Ben Felix: Yeah, well, we could do a vote on a candle in general. We could put a poll in the community. If people would be interested in buying the candle, we can figure out the approximate price point and put that in there.

Cameron Passmore: I think it’d be cool.

Ben Felix: I would personally like to have the five-factor candle, so if enough other people are interested, we can do it.

Cameron Passmore: All right. Okay, let’s go to the episode.

Ben Felix: Welcome to episode 172 of the Rational Reminder Podcast.

Cameron Passmore: I want to kick it off with something interesting shared to us by our good friend and listener, James. He shared an article by Azeem Azhar that was in a recent of Wired, and it’s an excerpt from his book called Exponential. The Exponential Age. The title of the article is The Exponential Age Will Transform Economics Forever and how, “It’s hard for us to fathom exponential change, but our inability to do so could tear apart businesses, economies, and the fabric of society.”

Ben Felix: I don’t want to interrupt, but I’m doing it. I have not read the article or the book, but that phenomenon that has been laid out so far, and I’m literally just basing this on the title of the article, that is par for the course in every technological revolution, like that is part of the cycle. Anyway, carry on. Sorry.

Cameron Passmore: I’m glad you started with that because that’s what I wanted to … I wanted to get your input on that. Is it really that different this time? It starts out, the article starts out making the point that Amazon is now investing $36 billion a year in R&D. It has grown the R&D budget 44% per year for a decade. Its revenues now, its retail revenues are over 200 billion, and its other revenues from cloud computing, logistics, media, and hardware are another $172 billion. This amount of R&D, the $36 billion, is basically leaving other companies and governments in the dust.

The author argues that this kind of exponential thinking is absolutely critical to the success of Amazon, and that the old way of incremental thinking will not deliver the results that they need. He calls this the exponential gap, and that this is the exponential age. Companies that didn’t adapt to this exponential shifts in technology, much like the newspaper industry, don’t really stand a chance. The contrast he makes is to the rest of society. Most of the institutions in our society don’t follow an exponential kind of mentality. They’re following a linear, incremental trajectory. These could be old companies, could be NGOs, governments. They all operate incrementally, and this tension between exponential companies and the incrementalist society is widening.

He goes on to then talk about how most technological breakthroughs are going to happen from the private sector, and past services that were delivered by governments could be brought to us by an exponential age company. His argument is that this could completely blow up models of what we call normal. I agree with what you kicked off with. Is it that different than past technological revolutions?

Ben Felix: It remains to be seen, I guess. Like I said, I would have to read this book. I don’t have the data to say what other historical companies have invested in terms of R&D adjusted for inflation, all that kind of stuff. I distinctly remember from the Technological Revolutions and Financial Capital book that this phenomenon of divisions in society, divisions between private companies and the state, all of those are part of when a new technological revolution is being implanted into society.

After that happens, after all of those divisions come to a head, at some point, the period following that is referred to as the golden age, when all of those other companies that had been left behind because they weren’t thinking exponentially, they start adopting those technologies, or Amazon starts selling them to them, or whatever, and then everybody gets pulled along and there’s a period of prosperity until the cycle starts all over again. How does this compare to past ones? I don’t know, but in terms of the cycle, generally speaking, this is just part of it. It’s happened in all of the historical ones that have been documented.

Cameron Passmore: Just wonder if the size of some these private companies is so vast and their resources are so vast that the changes are different. I don’t know.

Ben Felix: It depends on their size. If we’re going to size by R&D budget, like I said, I don’t have that data point. If we measure size by market capitalization, we have that chart kicking around somewhere, the size of the largest companies, historically. It’s currently not a whole lot different than it’s been at times in the past, relative to the public stock market, so again, how different is it? I don’t know.

Cameron Passmore: Yeah, so he talks about different institutions such as police forces, churches, the UN. These are all systems that govern our everyday life, but they’re in an incrementalist world. Think about healthcare. Look at the impact of the Apple Watch on healthcare. So much of healthcare services or reading of your own medical information could be done by your watch, going forward. What’s the implication of that? Don’t know. Anyways, the end of the article states that, “We need radical thinking to prevent the exponential gap eroding the fabric of our society,” and that very much sounds like what you were talking about off the top.

Ben Felix: It happens, that happens. There are divisions, geographically or by employment. Like people that work for the companies are leading the revolution. That happens, and it has happened in every past technological revolution. It has eroded the fabric of the society until everybody reached the golden age and things were better for a while. Then it repeated, so to say this is some big different thing that’s never happened before, I don’t know how accurate that is.

Cameron Passmore: I was listening to the head of Netflix, so Reed Hastings with Reid Hoffman of LinkedIn on the Masters of Scale podcast that I know I’ve talked about too much. Anyway, it was an interesting interview. He talked about how the amount of investment per hour of content used to be one to $5 million. They’re now spending at Netflix, $100 million per hour of content, in some cases. In this era of binge watching, it’s worth it to put the money into those hours that get the people to keep paying the whatever, I think it’s $22 a month now I’m paying for my Netflix subscription, so it’s worth it. They know it pays. It’s just like a resource model that the old network television never would have considered 20, 30, 40 years ago.

Ben Felix: Yeah, that’s interesting. Can content get that much better? What does it even mean? For more money, or the stuff, is it getting more expensive to produce content?

Cameron Passmore: I don’t know, don’t know, but the content just keeps coming. There’s too much content now to watch. There’s too much content everywhere.

Ben Felix: Yeah, everywhere. Maybe we’re going through a content revolution too.

Cameron Passmore: Could be. You wanted to talk about renting, buying again.

Ben Felix: Well, there’s a report that came out, I think it was the day before or something we released our last episode where we talked about, are homeowners happier than renters? Royal LePage came out with this study. This study, air quotes, study. It was brutal and we’re going to talk about that in a second. It was an economist that did it, commissioned by Royal LePage, which is a real estate brokerage, I guess, whatever you call them, real estate company. They employ real estate agents. They commissioned this study showing that … What the study ended up showing that buyers, homebuyers or condo buyers, or whatever, are better off than renters in the vast majority of cases.

The cases were, I think it was 278 sample cases from across Canada. The data set that they were using was a proprietary dataset from Royal LePage that they stopped producing in 2014 and then the economist, Will Dunning, who wrote this report, he has kept this database up to date. That part’s really interesting, and I would love to get my hands on the data to play around with it, but so it’s an empirical study, I guess, in that sense. The data series has fair market value for properties, market rents, property taxes. Those are the big ones for communities across Canada, for seven different house types.

Will estimated the mortgage costs using special offer interest rates advertised by major lenders. There are, like I said, 278 different cases with different combinations of locations and types of dwellings. The point was to see in how many of those combinations were owners better off than renters. Now, the basis of the comparison, how do we define who’s better off? They were looking at the first month costs of the owner and the renter. Okay? First month costs, but they’re assuming that the 20% down payment for the owner is coming out of thin air. That’s not included in the first month’s cost. I guess that was month zero. It doesn’t make any sense to me. Anyway, so the owner has this magical 20% down payment, and then we’re seeing who has lower first month costs.

Cameron Passmore: Doesn’t that give you a 20% advantage right out of the gate?

Ben Felix: Well, it’s the 20% doesn’t come from anywhere. The owner would have pocketed that or not had it as an expense. If we include the 20% down payment in the first month, the owner loses 100% of the time, obviously. Now, here’s the interesting part. Will Dunning, the economist, finds that the … The guy that wrote the report finds that the costs of owning are higher than renting in the majority of cases in the sample. Okay, but that wasn’t the headline, so what’s going on here?

What he did is he took the position that the principal repayment portion of the mortgage is not actually a cost and therefore, should be removed of the comparison. Now I’ve got a renter paying for rent, a homeowner paying for a mortgage, property taxes, maintenance costs, all that other stuff, but we’re removing the principal repayment portion from their mortgage payment. That’s not part of the comparison anymore because, because.

That didn’t make any sense to me and that swung the result, so the headline that was reported everywhere … This article’s been criticized by other outlets. It’s not like we’re the first ones to point this out, but that swung the result from the majority of renters being better off, to the majority of owners being better off because we’ve magically made the principal repayment disappear.

Cameron Passmore: Was that because the argument is that you’re just moving money from your bank account to creating, reducing your mortgage therefore, shifting-

Ben Felix: Yeah.

Cameron Passmore: … your net worth across?

Ben Felix: Yeah. It’s because it’s forced savings. I totally agree with that, that’s correct but in the real case, in the cash flow case, where you’re comparing the actual cash flows, not netting out principal repayments for no reason, in the real case where the renter has the cash flow advantage, the renter is the one that’s plowing money into stocks, presumably, into something, so to completely ignore that fact, I think, is a pretty big miss. Then the other big one was the … Then that was totally ignored, the fact that the renter could be putting money into stocks, that’s throughout the report, completely ignored.

Then the other big one is in the sample case that he gives in the report, he shows a $60 per month maintenance cost on a $733,000 home, and in this example there was also a condo fee of $147. You take those together, that’s a 0.34% maintenance cost. Now that’s really low. Just as a homeowner, I spend more than $60 per month on maintenance costs, without question. I was talking to Brenda, our CEO, about this and she was like, “What is that? The cost of replacing the screws on your shed door?” I thought that was pretty funny, but it’s true. $60 a month in maintenance costs, that’s insane.

We actually talk to Rob about this later on the episode. If you’re paying $60 per month in maintenance costs, if that’s truly what you’re paying, hey, good for you but guess what? Your house is depreciating. Your house is depreciating because you’re not putting enough into maintenance. Homes are depreciating assets. We’ve talked about this in the past. There’s physical depreciation, just normal wear and tear, and functional depreciation, or obsolescence, where newer construction methods and materials are making the home less desirable, so that’s got to be updated continuously to maintain the value of the home. You either pay for it as you go, or you pay for it when you sell with a lower selling price, so what is that number? What is the depreciation cost?

The Rate of Return on Everything, 1870 to 2015 looked at a whole bunch of global real estate markets and they found maintenance costs or depreciation costs between 1 and 2%. That includes depreciation and all other housing-related expenses, but excludes interest, taxes, and utilities. Statistics Canada uses 1.5% of the home value. The home, not the land and the home, just the home value as depreciation expense in the CPI basket. They base that on a bunch of their own research, and other research, and other statistical agencies, and some academic studies that are all cited in their methodology.

We tend to use 1% as a maintenance cost, which adds a big old chunk to the .34% that this report was using for maintenance costs. Between those two things, ignoring the principal repayment to say, “Look owning is better,” and having an egregiously low maintenance cost, I think it’s a little bit ridiculous. Now, opportunity costs, so the idea that the renter could be investing, they’re kind of addressed later on in the study. There’s a section called Home Ownership as an Investment, where the author calculates the internal rate of return of home ownership by treating the down payment and closing costs as an investment, like a cash inflow into the internal rate of return calculation. Then any excess total ownership costs, so this is now including the principal repayment, so those total excess costs over a renter, those are also treated as investments into the internal rate of return calculation.

Now I didn’t have his raw calculations. He showed the output tables, but he finds that even if the property value declines by a total of 10% over 10 years, not annualized, total 10% decline in the property value, the average owner still comes out with a 0% IRR. Now that, I have trouble computing that in my brain. I didn’t try and recreate the model, but losing 10% on a leveraged investment over 10 years and still coming out with a 0% return, I don’t know. That seems strange to me, but I didn’t try to verify it. The other big problem with the internal rate of return analysis is that the commentary is suggesting that the fact that you can get a positive internal rate of return, even if home values don’t rise that much, and calculation methodology aside, the idea is, “Well, hey, if you can get a positive internal rate of return without house prices increasing a lot, hey, that’s pretty good.”

Nowhere in the opportunity cost analysis was there a comparison to, what if this same person had put those same cash flows into a different investment? I think that’s a pretty important consideration. That’s like the basis all the work that we’ve done on renting versus buying. You have to include that aspect, but again, it was completely ignored here, so I didn’t think it was a particularly strong study to make the case for home ownership. It’s made some really weird … It shows some really weird benchmarks for what constitutes owning being better than renting, and then used those weird definitions to make the case that owning is better than renting.

It’s a little bit embarrassing, to be honest with you. Now, Will, the author of the study, if you are listening, if you happen to listen to this podcast episode, we welcome you to come and join us and explain the methodology. I don’t want to shoot it down and not give you the opportunity to explain it, so feel free to get in touch. We’re happy to have you on to talk about it.

Cameron Passmore: Again, this ends up becoming something that will either likely solidify your opinion, probably won’t change many people’s opinion. Just more firmly entrenches you in your camp, would be my guess.

Ben Felix: I’m good with that. We’re going to talk to Rob Carrick in a second, and Rob talked about how he’s read 50 studies on this topic and it basically doesn’t matter. That’s fine. I agree, you can make different assumptions to arrive at different conclusions. In this case, I don’t think it was even about that. Stuff like ignoring the principal repayment to make owning look better than renting, to me, that’s just absurd. That’s not even making a different assumption on the capital appreciation expectation for real estate, or on the rental inflation increase.

We can argue about those assumptions, but why would you ignore the principal repayment? And why would you not show the fact that the renter would, in the sample cases in the study, where renters are coming out with lower cash flows, they would be investing in something? They’re not just going to be … Well, they might just be throwing the money away. That’s a discipline problem though, but for an economic model, you got to capture the opportunity cost.

Cameron Passmore: All right, so let’s go welcome Rob Carrick.

Ben Felix: Let’s do it. Rob Carrick, welcome to the Rational Reminder Podcast. I should say, welcome back to the Rational Reminder Podcast.

Rob Carrick: Thank you for inviting me back. It’s a sign that you did okay if you get a return invitation.

Cameron Passmore: We had a great chat last time, it was so easy and fun, so it’s super to have you back.

Ben Felix: All right. There are these new know your product rules that are coming out as part of the client-focused reforms that are coming into effect later this year. Three of Canada’s big banks are seemingly using this as a reason to disallow third-party funds for recommendation by the advisors in their bank branches, the financial planners in their bank branches to meet the KYP rules, but this also seems to be in conflict with the interests of clients. You’ve written a couple of great pieces about this. What are you hearing from consumers on what the banks are doing with these new rules?

Rob Carrick: Can I just start my answer by backing up a second and asking how odd it is that regulators have to tell advisors to know their product. Does this need to be told to them? Don’t you already know your product? I mean, how is this something that needs to be enforced? The banks will act like, “Oh my god, it’s so onerous. We can’t possibly know all the products. We can only know our little product shelf, and so that’s what will sell.”

Clients are noticing this because they’re getting letters from their advisors, and I’ve had a few sent to me from a few different firms being told that, “In the future, we will only be able to sell you in-house products, but it’s a win because we’ll really, really know these products.” A lot of them are disgusted and thinking of moving. I never know what the reaction … Usually, it’s, “I’m really angry” and then you start to realize that you’re going to have to find somebody else and that’s really the stumbling block. Yeah, I’ve had a few people. Not an avalanche, but definitely a few people, very early on in this, send me these letters incredulous that they were going to be stuck in these bank funds. They see that as amateur hour, just this menu of just bank funds and they’re rightfully asking questions about why they should continue.

Cameron Passmore: hadn’t thought about that before. Does that mean they didn’t know their product before this?

Rob Carrick: Right, exactly. It’s just seems like it’s like telling airline pilots, “Know your aircraft.” It’s like, we expect that. Anyway, sometimes I stand outside the financial realm and look in, and that’s what I think when I see this KYP thing. It’s like I know it’s being touted as this great advancement. Frankly, I’d rather have a fiduciary duty apply to every advisor-client reaction, but KYP is one of the replacements we’re getting for not getting fiduciary duty, and it sounds kind of silly to me, to be honest, that it even needs to be spelled out. It becomes even more of a farce when you see the banks using it as this lever to crowd out third-party products.

Cameron Passmore: Do you think clients of these planners should be taking action?

Rob Carrick: Well, you know what? I think if you’ve got an ace planner, someone who’s actually planning and you think they’ve been a difference maker, you could challenge them to create a decent portfolio out of the bank funds, and if they’re an ethical person, they’ll say, “Here’s the best I can do, and here’s how it compares to peer products,” et cetera, et cetera, and you can make a decision. I don’t think it’s an automatic leave, by any stretch, but if you’ve got a product salesperson, and you’ve never had a real serious financial plan, and you feel like every interaction’s about trying to suck more money out of you, then I think it’s a great inflection point to see what else is out there.

Ben Felix: What about advisors? Are you hearing from the advisors at the banks that are being squeezed into using only bank funds?

Rob Carrick: I have not heard word one from them. Nobody has back-channeled to me. I’ve heard from disgruntled people at banks and other investment firms when they’ve not been happy about policy and they want to make sure that people know that, not specifically them, but others like them, are not following the party line, but I haven’t this time. I don’t really know if I’d put much stock in that. I know they must be smarting over this.

I think it’s embarrassing. It says that, “We only sell in-house product. We’re officially salesmen carrying a ball for the company’s products and we can’t look at anything else.” You can try to spin that as you’re getting more bespoke advice on the bank’s own products, but that’s absurd because these bank-owned products are pretty basic things, and how long does it take to study them? What, half an hour?

Ben Felix: Cameron, have we heard anything form advisors at banks?

Cameron Passmore: I’ve heard from one advisor, just in passing, not specifically, but an advisor we both know who’s active on Twitter has heard, apparently, from many advisors.

Ben Felix: What do you think a move like this does to the state of financial advice in Canada, Rob?

Rob Carrick: Undermines it. I think there is a steady, observable improvement in the professionalism of the advice business in Canada and I see it happening, and this sets it back. Because it tells people that, “Really we’re all about hustling product. We want to get our assets under management up. We make a lot of money on these mutual funds.” I mean, some of these bank-owned funds are giant. Like RVC has a few sort of wrap-type products with 50 billion or close to it in them each. It’s like, god, it’s like these icebergs. You see the name up there and think, “Oh, interesting.” Then you look under the water and it’s this giant hunk of mutual fund that’s holding billions of dollars. It’s a money-making machine for them, and they want to turn it up to 11.

Ben Felix: We saw the OSC push back on what the banks have done. Kind of say like, “Whoa, whoa, whoa. This is not what we hoped would happen.” Have you heard anything else about how this all might play out?

Rob Carrick: Well, it’s interesting. There’s a little bit of a power struggle, and it’s always like this. The OSC tries to move on this and usually, it’s during the consultative process, it’s not post-issuing of the final policy. The banks come in and they try to muscle the OSC back a few steps, and often they win. Now they’re trying it after the fact, and we’ll see who wins here. The OSC has publicly said that they’re not happy about this, so they’ve put they’re credibility on the line here. Let’s see if they can move the banks back.

They won’t go willingly. I’ve seen them. I’ve been at events. One event, particular, when there was a discussion among the advisor community about fiduciary duty, and I saw a lawyer representing one of the banks get up and trash the idea of fiduciary duty as if it was the stupidest thing anyone had ever suggested, and I thought, “Okay. I’ve learned a lot here. This is how they fight.” I expect, on a back-channel basis, that’s the kind of thing they’re doing here. They’re telling the OSC, “It’s going to be like this,” and we’ll see if the OSC has the wherewithal to push them back.

Ben Felix: Another thing I’ve heard or seen a little bit on Twitter is there’s a movement to try to move assets away from the brokerage where a lot of advisors have variable compensation, get them more toward salaried people inside the bank branches. Is that, do you think, a trend that’s going on also? Have you heard anything in that field?

Rob Carrick: No, I don’t know. You know what? The policies and what banks are doing with their various advice channels, to me, is like, it’s written in pencil. It’s here today and then someone decides, “No, no. We’re going to move it all around tomorrow.” I don’t really put too much stock in that. What’s interesting is I remember when the bank planners were introduced several years back and one bank in particular took great pride in saying, “We’re selling third-party products.” Of course, now they’re not and that just shows me that these things change.

Whatever they’re doing today may not be what they’re doing tomorrow. It’s all about extracting maximum revenue, so how do we want to distribute this? I don’t think it’s about how to maximize the efficiency and effectiveness of our advice providing and get good outcomes. It’s all about revenues, and profits, and dividend increases for the banks.

Ben Felix: One of the things that we take pride in at PWL is being an independent firm. Do you think a move like this should be a motivation in any way for clients to care about that, about independence?

Rob Carrick: I’m surprised that there isn’t already more of an open-mindedness to independent firms. It’s all, to me, part of this strange sort of zombie-like, “Must follow my bank” attitude that Canadians have. There’s just this … Here’s another example of it. There’s what? 180, 200, 150 billion in savings sitting out there. I was talking a guy who analyzes numbers, and it’s mostly sitting in big bank bank accounts earning nothing in interest.

Why is it there? Well, people know the banks, they’re comfortable, they like the solidity, and the banks are solid. I give them full props for being very financially strong and well-run, weathering crises, et cetera, but people are giving them the benefit of the doubt too much and they’re not shopping around. They seem to really draw a lot of comfort from the banks, and they’re giving them too much latitude to arrange the relationships product-wise and advice-wise in ways that benefits the bank ahead of the client.

Cameron Passmore: Do you feel the same about how slow Canada is to adopting indexing as a strategy?

Rob Carrick: I’m actually impressed with how quickly I think we are adopting. When I look at how ETFs have taken off and, of course, there’s a lot of freaky stuff in the ETF world right now, but we’ve embraced it. Not U.S. style, but we’re coming along, and I look at the money sitting in asset allocation ETFs and how successful they’ve been, and how big a lot of the plain, vanilla, big, broad index ETFs are, and I hear a lot of young people seem to be getting with it, and the fact that robo-advisors are building a toehold in the environment.

I think indexing’s come a long way. Now in terms of assets under management, it’s still a small fraction of what mutual funds hold, but I think it’s punching above its weight and doing pretty darn well. I actually, call me satisfied with how indexing is taking off.

Ben Felix: On that line of thinking, what do you think about Wealthsimple, starting out as, “Hey, look. We do low-cost index fund portfolios” to now offering trading, and crypto, and all that stuff?

Rob Carrick: Well, it says to me that the robo-advice business isn’t very exciting for being a startup and that, “We’ve got to do something else.” That makes me wonder about how all the other robo-advisors are surviving. I’m gathering information for my annual robo-advisor guide and I’m thinking, “Oh, they’re still around? They’re still around?” I keep waiting for like … I think I’ve got 10 firms this time. One was taken out last year. It was bought by an insurance company. I keep thinking, “When is there going to be like three or four?” That’s all we need. I imagine Wealthsimple … I don’t know the assets but I’m just going to hazard to guess that it’s the vast majority of the assets are held by them.

We start with that fact and then we say, actually what they’re really excited about is their stock trading business and their crypto business. Not this core business that they started out with. I’m disappointed, in a way, because I thought Wealthsimple has the muscle power to build up robo-advising, which is I think is a very, very good option, and I’m sad to see them putting their effort onto this more short-term play, the stock trading play.

How’s Wealthsimple going to do when the market tanks? What we saw, the market tank, and then all these young people jumped in because, basically, governments around the world just started pouring money into the system and slashed interest rates. They basically picked the stock market up, and shook it out, and put it back on its feet again. That will not happen next time. When we get our next correction, my thinking is it’s going to be a doozy and it’s probably not going to snap back like an elastic, and are all these stock jocks on Wealthsimple going to keep on keeping on? I’m kind of skeptical they are.

I think a lot are going to drop out. I remember what happened in 2001. People got scared out of the market for 10 years. I’ve heard a lot of stories about how conservative the young investors were after the ’08-’09 crisis. They were kind of freaked out by it. Anyway, it tells me that the robo-advice business is kind of sleepy and maybe Wealthsimple sees it’s much more worth their corporate effort to exploit the stock trading rate as long as they can and see where it goes.

Cameron Passmore: That’s good for shareholders, but not their clients necessarily. Look at the market cap of Robinhood. You have to imagine the U.S. robos are looking at that and saying like, “Man, this is unbelievable.”

Rob Carrick: It’s so interesting. Robos are disrespected and overlooked, and I think they have such an important place in the ecosystem. I wish them all success, Wealthsimple and all the others, but no one’s excited about them at all. They never … You know what? They missed their fintech … I think if robo-advisors had launched in 2021, they would have hit a home run, but they came in this sort of sleepier time when people were less open-minded about fintech and new solutions.

Now our minds are wide open. We’re at home, we’re trading, or at least we were. I think if robo-advisors, if they had come out and had this burst of publicity as this brand new option, they might have really taken off, but as it is now, they’re struggling. This Wealthsimple story seems to prove it to me.

Ben Felix: Who do you think is picking up the serious, long-term money now? Where’s the net growth in the industry?

Rob Carrick: Well, I do know that … I’m sure it’s tapered off somewhat, but online brokers were basically, it was a Niagara Falls of new money and new clients during the trading frenzy of late 2020 and early 2021. It’s tapered off a bit. I was getting dozens of angry emails a day and tweets from people complaining about bad service at their broker. What is bad service at their broker? It’s a broker who is overwhelmed by new clients who need help. They need to talk to somebody.

It’s an online broker, and they’re probably trading on a mobile app and they want to find out how to work this or how to work that. You combine that will all the retirees you need to call and attend to their RIFs, et cetera, and you got gridlock. That’s new business. That went away. In a perverse way, that was great news story for the brokers because it represented how busy they were. I think if you wanted to track the money, look at the assets under administration at online brokers, and Wealthsimple Trade for that matter.

Ben Felix: Yeah, that’s very interesting. All right. Shifting away from investing in the stock market a little bit, you had an article recently in response to the Royal LePage study, which I’m putting in air quotes that showed that buying beats renting, most of the time, in their analysis. You came out with this headline that made quite a bit of noise. We heard about it a bunch. “The debate over buying a home versus renting is done. Renting lost and it was never close.” I’m sure a lot of people read that headline and didn’t read the article. I read the article, but what was the point you wanted to make with the article?

Rob Carrick: The point I wanted to make is that, forget the math. That report or that study by Royal LePage has some … Raises an interesting point but is no more definitive than any other previous study on buying verse renting, all of which I could poke giant holes in because I would make all these premises to begin with and then I would say, “You didn’t consider those so your study’s irrelevant.” You could do that on any study. Nothing’s definitive.

Why I say buying versus renting, is because everyone in Canada, except about five people, hate renting. They despise it, they hate it. It is a sign of lack of success. It’s a sign that you’re going to be left out of prosperity. You’re paying your landlord’s mortgage. You’re being shut out of 20% year-over-year price gains. “You’re going to raise a family in an apartment?” It’s like, “That’s just inconceivable.” It’s got, like when I say renting lost, it lost the PR war.

It’s pathetic, really. I mean, honestly, it’s economically inevitable that we will have a great number of renters in this country over the years. More than we’ve ever had before, and we need to help them achieve financial success, and show them a path for doing this. What does Royal LePage … I love your pronunciation, Ben, Royal LePage. That’s how my dad would have pronounced it. Very right on the French nuance of the pronunciation.

Cameron Passmore: That’s what I was thinking too.

Rob Carrick: Anyway, so what does Royal LePage do? They come out with this report saying that buying beats renting. That is like the most unneeded economic study of the past 10 years. Everyone always believes this. “Why are you piling on? You’ve won the battle.” It struck me as a bit of … I just thought it was really just not needed. Moreover, as I was saying, these reports are a dime a dozen. You know what? Ben, you’ve done some very conclusive work on buying versus renting, come up with different conclusions, and you have different premises, and feed in different data. I think everybody should read all these and come to their own conclusion.

To me, it is a loser’s game. Is buying better or renting better? Don’t know. It all depends on where we start, but can you be successful, financially, as a renter? That’s a much more important question we need to operate on. I think the answer is definitively, yes. Ben, I know you agree. I think I would rather see much more research done on how to extract the maximum wealth-building potential from your rental experience. That’s what I want to see reports on.

Ben Felix: Yeah. We did an article, earlier this year, together on the renter’s revenge portfolio with showing how tilting toward small cap and value stocks increases the wealth-gaining potential of a renter.

Rob Carrick: Absolutely. You know what? The general reaction to that was crickets because people are thinking, “Renter’s revenge? I’ll just own a house. That will be my revenge.” You can get zero traction talking positively about renting, and so it’s much more … You’re going to get much greater penetration if you write about the superiority of owning. I don’t even think it’s productive to say, “Is it better to rent or to buy?” If it is better to buy, okay, fine, but lots won’t be able to buy, so what then?

Cameron Passmore: Interesting.

Ben Felix: Yeah, that’s a very good point.

Cameron Passmore: You said there’ll be a lot more renters. Therefore, we need to find a way to help them build their wealth. What ideas would you have off the top of your mind?

Rob Carrick: Well, what about, I mean, I think there’s a lot of financial planning companies working on this fee-for-service basis, who are, they’re working sort of on an à la carte basis, so taking on younger clients. Clients who are at that formative stage where they’re working for a little while. They’re going to come to this fork in the road where they’re going to think, “Am I going to be a homeowner, or am I going to be a renter, at least for the medium-term?” I think there needs to be more of a formalization, “Okay, I’m going to pull out my renter’s template for you and we’re going to talk about, what’s your rent, what’s your salary, what’s your spending, and then how much is going to go into your renter’s revenge investment portfolio? What are we going to invest based on your timeline?”

I think we need to have more of a … Make that more of a routine sort of thing. Okay, here’s, everybody knows a renter’s portfolio would look like this. Find out what your savings are. Figure out how much of it, over home ownership, and why don’t we just talk for a second about what the savings are? How tired are you of hearing, “Well, I hear people’s mortgage payments are the same as their rent payments, ergo, home ownership is the same cost as renting”? Do any of those people actually own a house? Because there’s a lot more to owning a house than that sort of thing.

We’ve had some torrential rainstorms in Ottawa. I bet some people in the city are finding out about one of the home ownership costs is leaky roofs and leaky foundations, and all that sort of thing, and we’re talking about costs in the thousands. Incidentally, it was one of the strange details of that Royal LePage was the small, small allocation towards home maintenance.

Ben Felix: It was crazy.

Rob Carrick: Yeah. I’ve owned a house and I was joking with someone that I don’t think you could do maintenance on a toolshed in your backyard for that $60 a month, or whatever it was. It just seemed a bit low to me, and it’s onerous. Also, when you own a house, there’s an imperative to improve it. We’re not talking about maintenance or upkeep, fixing a leaky tap or fixing a blown electrical circuit. It’s, “I have to upgrade my countertop and put new cabinets in.” In a way, you could say, “But I won’t do that,” but you have to. You want to maintain the value.

You want to get like a ruthless view on how you’ve kept up your house, put it up for sale and have an agent come in and tell you what’s needed to be done to get a good price, and you will find out just whether you put enough money into your house or not. If you haven’t, you will have to to get it up to scale because if you don’t have features A, B, and C in this market we’ve got, you’re going to have to settle for less, and who wants to do that? It’s just such a massive financial responsibility. A renter doesn’t have that. There’s lots of takeaways to being a renter.

I don’t want to make it sound like renting is a great thing. It’s very expensive. There’s rent evictions. You don’t have a lot of say in your environment. You can’t make a lot of changes, but I rented. People said, “Do you rent? Well, because if you don’t rent, don’t talk to me about renting.” Well, I have rented and I remember it fondly, to be honest.

Cameron Passmore: Do you see a lot of money, Rob, being shifted generationally? Like parents giving their kids down payments, taking out mortgages on their houses because their income might be higher, therefore, they can afford it, so they give the kids a down payment?

Rob Carrick: Very time question, Cameron, because I just wrote a column on … The other day, someone said, “I saw somebody tweeting.” They were at an event where an economist quoted some figures on how much money parents were giving their kids. There’s really been no coverage on this. It’s amazing that no one’s … There’s such a lack of curiosity among statistics gatherers in Canada. There’s so many trends going around. I’d love to be able to quote some numbers in my column, but there aren’t any, especially on parents giving kids money. Mortgage brokers say, “Yes, it’s very common. It always has been common,” but no one has the numbers.

Anyways, these numbers came out and there was a lot of buzz on Twitter about this, so I wrote about them and I think it was 19% of first-time buyers are getting help and the average amount was $150,000, so yes, a lot of money is flowing from boomers to millennial and Gen Zed kids to get into the housing market, and a lot of this is the unlocking of the pandemic savings. 150,000 is a lot. That’s not just pandemic savings. That’s people who have the wealth. I was saying that housing’s becoming a game of the well-off. A reader emailed me this morning to say he found it offensive that I said that but, to me, the numbers speak and it’s not even me talking.

It’s generational money is coming, and it’s altering the markets. You could say, “Oh, 81% are doing it on their own,” but almost one in five are getting this cash injection. I think that’s supporting this price increase that we’re seeing, and it is creating sort of a fault line between the buyers who must struggle on their own and the ones who’ve got help. If you get help and you have a big down payment, what does that mean? You have a smaller mortgage, lower payments. You’re better able to save. You’re better able to avoid debt. You’ve got a great headstart.

Ben Felix: It made me think. Back to that Royal LePage report. I looked through their methodology in the detailed report, and they made some interesting assumptions. They assume a 20% down payment, and like you just mentioned that lowers your payments. They were also comparing … The headline result that in 91% of cases, or whatever it was, owners are better off than renters. That was based on the monthly costs, but the other big assumption they made, other than maintenance costs, which I also noticed, they stripped out the principal repayment portion of the mortgage payments to show, “Look, monthly costs, if you remove”-

Rob Carrick: Yeah, no. I know, I know.

Ben Felix: “… the principal, they’re lower for owners.”

Rob Carrick: I know.

Ben Felix: It’s like, “What?”

Rob Carrick: I know. As I said in the column I wrote, that savings can not be monetized in any useful way in the day-to-day. It’s like you can’t pay for groceries with that or cover the daycare bill. It’s notional. Anyway, you know what? Like I say, I don’t want to slag this study or praise it, or anything. I put it on the shelf beside the 50 others I’ve seen over the years, and I encourage people who are interested in this to read them all and find out which one most closely approximates what their situation will be, because they’re all situational, right?

Cameron Passmore: Interesting. Are you good to stay with us for the rest of the episode? We’ll go through the-

Rob Carrick: You bet.

Cameron Passmore: … Talking Cents.

Rob Carrick: I got time for you guys Yeah, this is more fun than anything I’d otherwise be doing.

Cameron Passmore: Cool. Well, maybe Ben’s got other questions.

Ben Felix: Yeah. There was one more. We touched on it a little bit, but I want to ask it explicitly. What message do you think the Canadians who are struggling to buy a home and may end up being stuck renting whether they like it or not, what message do you think they need to hear?

Rob Carrick: Renting is a stand-up way to live your life, and you can be financially successful. As soon as Canada grows up, they’ll realize that. We’re still stuck in this housing for everybody phase, when our pricing has moved to a housing for only a few phase. We’re turning into Europe, which has high housing prices for historical reasons like populations that are denser and these societies are much older, and they’re used to renting. Here, we’re not. We’re not used to it, but we’ve got to accept that not everybody’s going to be renting. Not most people are going to be renting but more will do it, and can we please get over our prejudice about that, and embrace it, and learn to live that way if we need to?

Ben Felix: All right. I got one more question before we jump into the next segment of the podcast. You mentioned that the renter’s revenge article was received by crickets, and that made me think of, what is the most popular article you’ve ever written?

Rob Carrick: One of the most popular that has a lot of staying power, even today, I wrote in, I think, 2012, and I compared my situation as a graduate moving to the workforce with millennials and I said that I thought they had it worse off. I used about five different economic indicators, and that one had years of staying power. People are still quoting it, and people were asking me to do an update on it. Someone asked on Twitter the other day, so I actually did. That one, but recently, the most popular one was, I wrote … When I was writing it, I thought, “Run-of-the-mill column. I’ll run it and then I’ll be working on something else and I’ll never think about it again.”

It was addressed to all the recent homebuyers. It was done in the summer when things were starting to open up, and I was saying that some of the reason homebuyers are going to be in for a bit of a budget shock, because they’d been managing this new house they bought under pandemic rules, and they’ve never gone out for dinner, or bought concert tickets, or booked a vacation, or done fun stuff and had to crowd that into their budget.

I was saying, “It’s going to be a bit of a shock when you have a normal life and a normal menu of spending and that home mortgage.” I was just saying, “Get ready for it.” Anyway, that just went like nuclear viral and was really popular. That’s the most popular one I’ve written in quite some time. I was surprised. I never thought … These things are very quirky. You can never exactly figure out why, and you can never recreate it if you try, but it did. It showed me that it’s on the mind of people, like, “What did I buy, and how am I going to afford it?” For it to be as popular as it was, it had to be a lot of buyers and a lot of family members of buyers reading it.

Ben Felix: That is so interesting.

Cameron Passmore: It’s interesting you mention a shift from experience-type services that we were buying to things that we were all buying because people had excess cash flow. I saw an economist on U.S. News the other night talking exactly about that. His argument was that the supply chain actually did a remarkable job keeping up in the pandemic, but it’s just this massive glut of demand that’s causing the problems.

Rob Carrick: That makes perfect sense to me. I keep thinking, the pandemic caused all these weird distortions and they’re going to be rippling for years to come. All the people who are buying houses at today’s prices, what are their retirements going to look like? What are their RSPs and TFSAs going to look like in 30 years? Are they going to be able to fill them as required? I don’t know. How is retirement going to play out? How is people’s choices on long-term care and retirement homes going to play out? What about debt levels? It seems like … I was reading somewhere that HELOC borrowing was kind of flatlining in growth level in that. Now, all of a sudden, it’s trending higher and we’ve seen the most growth since 2019.

Are we going to basically have this spending celebration that’s where we just start buying stuff because we can? Like, “I’m not just going to go away this summer, I’m going to go somewhere great.” “We’re buying a car, but we’re going to get a luxury SUV this time, just because we’ve had this terrible year and a half and we’ve got this money, and we can borrow at low rates, and we’re just going to treat ourselves.” I don’t know, but I think a lot of those decisions, spending-wise, are going to have very far-reaching repercussions.

Cameron Passmore: Very interesting. You good, Ben, to go onto Talking Cents?

Ben Felix: Yeah, yeah. I’m good. I have one more thought. Sorry. One more thought.

Cameron Passmore: We could talk to Rob all day long.

Ben Felix: I want to hear Rob’s thoughts on this, what you were just saying about people who may have bought houses during the pandemic. We’ve had this period of rising prices. Someone sent me a paper that looked at Swedish house prices, historically, and what they showed is that there have been two massive hockey stick periods of growth in Sweden, and I think a lot of developed countries have probably been somewhat similar. From 1855 to 1887, massive price increase. From 1993 to 2018, massive price increase. For the rest of the period, so that’s 1855 to 2018, prices were basically flat for the whole time.

Rob Carrick: Very interesting.

Ben Felix: People in Canada seem to think that that hockey stick is going to continue forever, but if it doesn’t?

Rob Carrick: The problem with saying it’s not going to is we’ve got this recency bias problem. We’ve got the handle of the hockey stick, the shaft, whatever you call it is all we know recently, all we know of housing recently. I have a spreadsheet of housing prices that Canadian Real Estate Association updates it for me every year, and it’s Canada and it’s a bunch of major cities, and I’m struggling … It only goes back, it goes back to, I guess, 1980. Toronto had its massive, crushing correction in the early ’90s, and Vancouver’s had a few blips, and Calgary’s been up and down with oil, but nationally, there’s never really been, since 1980, like a really …

There’s been some quiet periods, but there’s never really been a big sort of plateau or a big decline. It’s a steady grind, steadily high. Of course, it has gone parabolic lately, but I don’t know what’s … I’ve been waiting. I’m a traditionalist and financial assets, they’re all cyclical. Nothing can go up forever and housing is, if you experienced it, if you were born in the last couple of decades, housing has only gone up. It did crash badly in Toronto, but that was sort of a unique thing. I can’t find any other effect like that in any other city at any other time so I think, what about housing in London, and Paris, and New York? Does it crash? I don’t know. Does it continue to grow?

I think we’ve got to take our example more from those cities, at least from Toronto and maybe Vancouver and say that maybe we’re going to have to have a breather period. I don’t know if there’s enough living, breathing humans in Canada who have enough to buy houses at current prices. I realize there’s all this parental gifting going on, but aside from that, when I was talking to the economist who put together those numbers, he said he thought a lot of the activity in housing is being borrowed from the future. “Interest rates are low. I got my pandemic savings. Let’s do it now,” and that we’re taking away sales from the future, so maybe we’ll see that hockey stick flatten out in 2022 and beyond.

Interest rates will be higher. We’ll have maybe exhausted some of the people who can buy and some of the parents who can help. That might be a time when we see things slow down. That might be, if I was buying and desperate and needed something to keep my spirits up, that might be something to latch on to.

Cameron Passmore: Interesting. Okay. On to Talking Cents. These are cards from the University of Chicago Financial Education Initiative. Rob, we pull them at random, couple of cards every two weeks, so super to have you join us. Here’s one. I’ll let you go first, Rob. You have 10 minutes to leave your home. You can bring three non-living things with you. What three things would you take and what would you have no problem leaving behind.

Rob Carrick: I’d bring my wallet with all my ID and cards in it. Non-living. Okay, so I don’t have to worry about the cat. I’d be held responsible if I didn’t grab him up. What else? I’m really bad at these sorts of things. My mind doesn’t really come up with snappy answers. I’d have no problem leaving almost every physical thing I own. We recently moved to a condo from a house and we really aggressively downsized, and I learned that, you know what? You can get rid of things pretty easily. As long as I had something good, as long as I had something to wear and all my ability to participate in the economy, I think that would be enough for me.

Ben Felix: Yeah, I know exactly what I’d grab because I always have a mental checklist. Keys, wallet, cellphone. If I had those things and clothes, I could just go anywhere and function.

Cameron Passmore: What would you leave behind?

Ben Felix: Everything else. Does this assume that I can’t buy new stuff though?

Cameron Passmore: You know. We make it up as we go along.

Rob Carrick: Yeah. Is there a holocaust or a nuclear catastrophe overlay on this question? Or is it just sort of-

Cameron Passmore: I don’t know. I just read the question.

Rob Carrick: … the whole place is on fire?

Cameron Passmore: The only thing I would add is my Kindle and this is not a paid advertisement, but my Nespresso machine.

Rob Carrick: Really? Interesting.

Ben Felix: Wait, so wait, wait. What’s your third thing? Because then you’re leaving your cellphone and your wallet behind.

Cameron Passmore: My phone. My phone comes, so I got my wallet and my phone, so I put those two together, so my phone, my Kindle, and my Nespresso machine.

Rob Carrick: I have to amend my answer and add my phone too. I consider my phone my wallet though because I have Google Pay and I do use it mostly for paying for stuff.

Cameron Passmore: Okay. Question number two. What would you want to know about someone before lending them something important?

Rob Carrick: I guess, their credit score would do it for me. I think it summarizes their habit as a borrower. Basically it addresses, will I get repaid or not? How have they done that in the past?

Cameron Passmore: What if it wasn’t money?

Rob Carrick: I’d still go with the credit score. Because I think, it’s interesting, credit scores are being used in so many aspects of the economy now because it is considered a good indicator of behavior, and I’ll just go along with that.

Ben Felix: My brain went to, hmm, well I would want to know what their history in similar situations was. How would I find that out? Oh, of course, their credit score. That’s the only way to systematically answer that question.

Cameron Passmore: But what about lending your car or-

Ben Felix: Well, if it’s a car, then I want to know their insurance history, I guess.

Cameron Passmore: Yeah.

Rob Carrick: You know what’s interesting? Car insurers do use credit scores to decide on rates, so-

Ben Felix: Right, true.

Cameron Passmore: So it picks up-

Ben Felix: True.

Cameron Passmore: .. a lot of data there. Interesting. I don’t get fussed too much about lending stuff. I guess, if it was something financial, you’d want to know the score, but I don’t get too fussy. Want to do another one?

Rob Carrick: Sure.

Ben Felix: Yeah, do one more.

Cameron Passmore: One more, so let’s see here. Here’s an easy one for you, Rob. Does money make people happy?

Rob Carrick: Yes, it does. Of course, it does. You know what? We could pretend that it doesn’t. I know that it doesn’t guarantee happiness, but it greases the way for happiness like almost nothing else and I think, I don’t want to say money equals happiness but I do think it’s an important leading indicator of happiness.

Ben Felix: I was going to use the grease analogy too, Rob. You took it from me. I was going to say it’s like grease on a wheel. You can grease a wheel and it’s going to work better, but more grease isn’t going to continue to make it better once it’s at the point of grease satiation. I think it’s the same with money.

Cameron Passmore: When you went to your condo did you learn something about your need or happiness from possessions, Rob?

Rob Carrick: Yeah, to an extent I did. We got rid of a lot of stuff. Not enough stuff, I must add, but we didn’t have to have a storage locker, as most people doing this downsizing thing like us do have. In fact, what a commentary on our society that there are so many storage locker places and so many more are being built. Anyway, that’s a digression. You know what? I learned that almost everything you think is so precious really isn’t, if it’s an object. Like we kept a bucket of pictures. One thing I regret getting rid of, I got rid of a lot of books. I kept some. I wish I’d kept more. I really do, I wish I’d kept more. My wife says, “You can get them all electronically anytime you want,” and I agree you can, but I really like the tangibility of a book.

I read books in all forms, don’t get me wrong. I read them online, I borrow tons of books from the library, or online, but I like having some books and I wish I’d kept more of them. I kept two-thirds of my CDs, very happy I did that. It gives me a lot of pleasure to see them all. Yep. I love my CDs. I have a Spotify sub and I listen to music while I’m running on my Garmin, so I’m totally on the electronic music thing, but I love just being able to look at the album art, read the liner notes and flip it on the CD player. It just makes me happy to do that.

Those are two small things, but furniture and knickknacks, and all this stuff, it all just … We had a big home sale. We found this great company. They come and they basically … You tell them what you want to get rid of and they say, “We guarantee it’ll either be sold or carted out.” I was amazed when I saw what they had going. I thought we really, really carved off a lot of our physical footprint. Do I regret it? No, not really. Not at all. Just a few micro-situations.

Cameron Passmore: Fascinating. Shall we go on to bad advice of the week?

Ben Felix: Yes.

Cameron Passmore: This week, we had someone reach out. Greg in our community sent me a YouTube video. We won’t play the video but we’ll go through some of the highlights. You probably know about Robert Kiyosaki, Rob. Author of Rich Dad Poor Dad. I actually found an expose that CBC News did on him online. Anyways, he’s been heavily criticized this past week for coming out and saying that we’re on the brink of the biggest ever economic disaster this month. He tweeted that investors should load up on gold, silver, Bitcoin, Ethereum before the biggest crash in history. He said that he has lots of cash for life after the stock market crash. “Stock are dangers, careful.” That was a tweet. He’s published 25 books in total.

I went to grab something to prop up my laptop. I told you guys this earlier. The book I pulled off our bookshelf in the office, which I didn’t know was here is, Why We Want You to Be Rich: Two Men, One Message. Donald Trump and Robert Kiyosaki. Who knows where it came from, Ben. I have no idea, but I’m going to prop up my laptop here, shortly. Some of the tweets that he put out lately, “This is going to be the biggest crash in world history. We’ve never had this much debt pumped up. When it does crash, I’ll be loading up on gold.” He has, get this, 1.7 million followers. I went through a lot of his tweets. They’re unbelievably rude and nasty, political. “Buy Bitcoin, silver … Buy gold, silver, Bitcoin, and bullets while you still can. Take care. Kamala will soon replace Biden.”

Rob Carrick: A personal finance guy’s advising people to get bullets? This is Robert Kiyosaki doing this?

Cameron Passmore: I just read the tweets, Rob.

Rob Carrick: Yeah, you know what? I read that as a story that is not personal finance-related. That is somebody’s mind wandering in directions that have nothing to do with this, and this is a symptom of that thinking. I hope that investors and readers of his reach that realization. This is not a financial story he’s telling. It’s about “me,” him thinking the world’s unraveling, and because of that he’s coming up with these ideas of what you should do with your finances. I don’t think that’s … You know what? In the bigger picture, I see people and have seen people try to make their rep on a key call, and you can live for about 10 years off that, well, maybe a little longer. Like the person who called the tech crash, the person who called ’08-’09. The person who … Well, no one called the pandemic.

Anyway, obviously, he’s going for that as well, but this strikes me as a story about Robert Kiyosaki’s politics, not his identity as a personal finance expert. I know a lot of people, I’ve heard readers say they found him to be a difference maker. Good for him, and good for them, but here I would have to advise maximum caution. There’s one thing that’s missing from this, why? Why is this crash going to happen? What will cause it?

Ben Felix: You know what the scary thing is, Rob? Is I occasionally, it’s been a while now, but I occasionally see comments on my YouTube channel where people say, on renting versus buying, “Well, you’re saying this but Robert Kiyosaki said I should buy a house.” Or on gold, “Well, you’re saying this but Robert Kiyosaki said I should buy gold, and who are you to be disagreeing with Robert Kiyosaki?” I think that’s scary, when he comes out and says stuff like this.

Rob Carrick: Yeah, agree, agreed. He does have a lot of followers, but we have to remember that he is a U.S. figure, and so he has a lot of followers because it’s a big country and there is more of a follower culture down there. I will throw that out there, and that’s fine. I think most of his followers are intelligent people who make their own decisions, and will weigh this and realize that, “Okay. There is some challenges out there, but there just doesn’t seem to be anything that suggests that the system will crash in a way that it never has crashed before.”

Moreover, the system’s proved incredibly resilient over the last two crashes, and frankly, if I could draw one lesson out of the past two disasters, it’s don’t do anything. Stocks will come back, they will. They’ll come back quicker than you think, and you’ll be making money again in no time, and that the worst mistake you can make is to sell and anticipate. Because then you’ll be thinking, “Oh, should I buy back in? No, it’s not safe,” and the next thing you know, you’re buying in and nine-tenths of the gain of the next upswing are gone.

Ben Felix: Look at the number of people that wanted to get out when Trump was elected.

Rob Carrick: Oh, and it’s funny. The financial industry, the financial advice complex out there will pick any news event and try to spin out a story about what you should do with your portfolio. “Trump is the president. What should you do with your portfolio? There’s a pandemic. What should you do with your portfolio? Inflation’s coming. What should you do with your portfolio?” The answer’s always, nothing. You should do nothing. If you have a portfolio that’s well-constructed, it anticipated these events and it will be fine.

When we get to, this just used to be more of that. This idea that we see things coming and we think, “What should you do?” You could be a big hero if you are the one who told people to do the right thing, and Robert Kiyosaki will ascent to demigod status if he gets this one right. I wonder, if he gets it wrong, how much that will stick to him, because there’s not really a mechanism for sticking bad advice to people who offered it.

Cameron Passmore: What do you think, Ben?

Ben Felix: Yep, no, what Rob just said, I totally agree. When people miss calls, nobody really remembers that. When people get the call right, people remember it for decades.

Rob Carrick: Yeah, you know what? The internet age with social media, it’s like we don’t even remember what we saw or we heard five minutes ago. The bad calls and the someone says something and gets criticized for it, these things pass. If he’s wrong about this, I don’t think people will ever remember those tweets, unfortunately, because I think those should be added to the mix of things you look at when you consider the credibility of someone.

Ben Felix: Totally agree.

Cameron Passmore: Any final comments, guys?

Rob Carrick: My final comment is, what a great time it is to be in finance now. It’s so interesting. We see things we’ve never seen before. Where will it all lead? I do not know, but I’m really enjoying watching it all unfold. Like the housing market and the stock market over the past 18 months, the rise of cryptocurrency, inflation’s taking off. I’ve been doing my job a long time, but I’ve never really seen inflation. Cryptocurrency’s brand new. The housing market is just completely off its rocker, I think. All these things aren’t going to land softly on a cloud. Some of it’s going to end with a bang. I’m really enjoying the ride watching it all unfold, I really am.

Cameron Passmore: People’s behavioral issues never change, right? All this is whipsawing people’s emotions all over the place.

Rob Carrick: Fear and greed. Fear and greed, greed and fear is what I was going to say. Yeah, it’s always that way, but the pandemic has added this extra level of tension to it. I feel like there’s more intensity in a lot of these trends than I’ve ever seen before. Like the investing trend. The frenzy of investing was like, it completely blew away the tech thing in 2000.

I remember that well. I remember the taxi driver would say, “Yeah, I’m buying Nortel,” and people sort of laughed at the idea of these common people investing in stocks, but in the pandemic, everybody was doing it. You just get a real simple app, and you’re off to the races. It penetrated into the population in a way I’ve never seen before. That’s just an example of why I think the pandemic has really been a game changer, and it’s not over yet.

Ben Felix: The time we live in though, Rob, like you’re saying, the field is changing so quickly and the amazing thing about it is that we have so much more data now. In the Robinhood example where everyone starts trading in the pandemic, all of a sudden, within a year, there are five or six published academic papers looking at that, at what happened using the data from Robintrack, I think that just adds to the fact that being in finance right now is absolutely amazing. Things are changing quickly, but we have the data and people are analyzing it in real time.

Rob Carrick: Yeah. It’s true, but what does the data tell us about what will happen? Is it backward-looking or forward-looking as well? That I don’t know. That, to me, will be the great unknown of what’s to come. Are the trends built to last, or it’s just this democratization of investing? Or will that get shaken … I don’t know. I’m not making a call, but I’m watching closely to see how that happens.

Ben Felix: The research that I mentioned, what it showed is that the people who are trading on the mobile apps, they have much more of a tendency to act like gamblers, to invest in stocks with extreme skewness, or cryptocurrencies and not own diversified portfolios.

Rob Carrick: Yeah.

Ben Felix: I don’t know if that’s quite a democratization of investing. It’s a …

Rob Carrick: Well, what I’m talking about is who’s doing it, not how they’re doing it. I think a lot of people … See, you know what? That gambling behavior is very self-reinforcing because once I do it … You’ve probably noticed this, but investing is a weird game because you often have success early on. I can’t tell you how many people say, “Oh, I did my first blank, and wow, did it go well. I obviously know what I’m doing.”

Then you dive in and, inevitably, it goes south because it’s so hard, right? We’ve only had 18 months of people doing this, maximum, and that’s like the maximum period. Some probably got in later. “Wait. You have not been through a true, fire-breathing stock market crash.” Then we’ll see what happens. One where it’s economically caused, not caused by a pandemic, that sort of thing. Then we’ll talk and see who’s good at this.

Ben Felix: Yeah, great insights. Rob, thanks a lot for coming back on the podcast. It was great chatting to you.

Rob Carrick: I really enjoyed it, guys. Anytime.

Cameron Passmore: Yeah, we should have you back more often. It’s been a blast, so thanks for joining us, and everybody, thanks for listening.