Report Updates
We have posted report updates on MTY Food Group (MTY), Primo Water Corp (PRMW), and Interrent Real Estate Investment Trust (IIP.UN). MTY is a franchisor of quick-service restaurants with a strong consolidation strategy, which has shown resiliency throughout the past few years. Primo Water offers bottled water to homes and offices and has begun to differentiate itself from its competitors. Interrent generates rental income from multi-residential properties and has already started to see rents increase to pre-pandemic levels. We see one company as facing some near-term headwinds but with a strong balance sheet to weather the storm, another company as a good defensive name, and the third company as innovating on its operations to growth organically.
Read the latest updates by logging in here!
Investor Sentiment Survey - NEW!
We have created a brief investor sentiment survey that we hope to build on over the coming months that we also think our members will find value in. We will be starting out by sending this survey on a monthly basis and reporting back to members on the results! The survey shouldn't take more than 5 minutes and no personal details are required.
Let us know how you are feeling about markets and the economy by following the link below! We will let you know the results in our next market update.
Investor Sentiment Survey Link
Market Update
The Canadian markets have mostly been flat over the past couple of weeks, while the US markets have begun to see an improvement. The stagnating price of oil has put downwards pressure on the Canadian markets which carry a higher weighting towards the energy and commodities markets than the US. The June inflation number for the US was released at a 40-year high of 9.1%, aided by rising gas, food, and rent costs, and the Canadian inflation reading for June came in at an elevated 8.1%, but still lower than the expected 8.4%. The Bank of Canada raised interest rates by 1.0% and the Federal Reserve is expected to make its interest rate decision mid-next week. In this market update, we are going to be talking about the benefits of having a low time preference and the importance of investing to protect one's capital over a long timeframe.
Deferring Consumption
As individuals and consumers, we have the choice of either using cash immediately to consume goods and services or to save/invest cash and defer the consumption of goods and services. One of the by-products of investing is deferring consumption, and this relates to the concept of ‘time preference’. Time preference is the importance that individuals place on consuming goods and services, whether the consumption is immediately or farther into the future. An individual with a ‘high time preference’ is more interested in consuming goods and services in the present, whereas someone with a ‘low time preference’ is more interested in deferring consumption later into the future, with the prospect of being able to consume more in the future than they are able to in the present.
Sometimes we have heard individuals say that investing in the market (maybe less so this year) is like getting money for free, but in reality, the trade-off is time. When an individual invests in a company expecting to share in the profits and economic value add from that company, they risk losing both their capital and their time, but they take part in an opportunity to safeguard their wealth against inflation. Whereas, if an individual decides to avoid investing in the financial markets and instead chooses to immediately consume their dollars via goods or services, they do not risk their time or capital, but they forego the opportunity to increase their wealth against inflation. By investing in the financial markets and choosing to have a low time preference, an individual can earn a return that allows them to consume more goods and services into the future, above the rate of inflation. This is at the core of investing.
The Effects of Inflation
Inflation, by definition, can be described both by as an erosion of the purchasing power of the dollar, or as an increase in the price of goods and services. By investing in the financial markets, individuals can earn a return over the long-term that is above the rate of inflation, and thereby having a low time preference and increasing their wealth after the effects of inflation.
Cash, or dollars, is the most liquid financial asset out there, and it allows individuals to have a safety net and emergency reserve, but it also decreases in purchasing power over time. Below we have analyzed the decline in purchasing power for both the Canadian and US dollar over the past 34 years, as well as the nominal (before inflation) and real (after inflation) returns on the TSX and S&P 500.
We can see that if an individual held one US dollar from 1988 until the present, it would provide that individual with ~$0.40 in purchasing power in today’s terms. Similarly, one Canadian dollar held from 1988 would be worth roughly $0.50 today. Conversely, one US dollar invested in the S&P 500 in 1988 would be worth ~$6.0 (after the effects of inflation) in purchasing power today, and one Canadian dollar invested in the TSX in 1988 would be worth ~$3.0 today. We have also included the nominal (before adjusting for inflation) returns of both of these indices to provide context of the erosion effect that inflation has on not only one’s ability to purchase goods and services but all financial assets that are priced in dollars.
US Markets
Source: Koyfin
Canadian Markets
Source: Koyfin
The Importance of Investing Even in the Tough Times
We can see that while both the US and Canadian dollars have averaged a low annual rate of inflation over the past 34 years (2.6% and 2.1%, respectively), these small erosions to purchasing power make a substantial difference over the long term. The same principle is applied to investing – while the TSX only returned a 3.1% annual real return and the S&P 500 a 5.5% annual real return over the past 34 years, this has amounted to a 6X (~$3.0 / $0.5) and 15X (~$6.0 / $0.4) outperformance, respectively, above the dollar.
This report is aimed at reminding our readers of the importance of investing in both the good and bad times because although the bad times can be temporarily damaging to one’s portfolio in the short-term, the long-term benefits of investing to preserve one’s wealth against inflation are clear and having a low time preference has led to significant outperformance in the long-run.
Upgrade to Portfolio Analytics!
Markets are moving fast and it can be hard to keep track of what is moving and how sector and asset allocations have changed. Portfolio Analytics gives an instant view into how a portfolio is set up, helping you quickly understand your exposures across the entire portfolio and by account.
Upgrade now to get a better understanding of your portfolio and if you don't like what you see, just let us know and we will revert you back to your original subscription.
Best wishes for your investing!
www.5iresearch.ca