I am a big believer in investing in real estate as any of my frequent readers will tell you. It’s not because there is anything mystical or magic about investing in real estate. It’s because that really all that I know.
If you look at history, real estate has consistently proven the most solid investment out there. More people more demand!
But you got to “know when to hold them and know when to fold them” (as Kenny Rogers so adeptly put into a song).
My preference would have been to never sell any properties but unfortunately, the quality of product in my area of expertise (residential condos in downtown Toronto) proved so poor that I ended up selling most of the condo units that I bought.
I’m not a “flipper” (someone who speculates on a condo and sells it immediate at or before title registration). I’ve actually never “flipped” a condo unit.
My partner and I did sell units that we invested in Churchill Park Condos in Forest Hill (both were to be our permanent residences) just after title registration but that was because the construction quality was so poor that even keeping them as rental income properties was out of the question.
In the first three years after title registration owners had to absorb a 100% hike in maintenance fees. The developer (“Towerhill Developments“) had installed an inadequate sized boiler and installed the garbage chute separator system backwards rendering it useless, to mention just a couple of significant issues.
And it’s not like I buy and sell a lot of condos. Five in total in ten years, two of which I still own, living in one and retaining the other as an income property. Churchill Park was supposed to be the condo that I would in throughout my retirement years. Man, it had the greatest panoramic view of the cityscape!
But, remember the second half of Kenny’s song “know when to fold them“. My experience with Towerhill Developments was quantitatively “time to fold”. This is one developer in Toronto that I have no hesitation telling everyone to NOT BUY FROM!
So, about five years ago when I started blogging that the market in Toronto was passing its saturation point (too many condos at ridiculous prices and unable to cover carrying cost from rental income) I turned to investing in the stock market, which on the surface seemed like the next best investment solution.
At the time, I had already established a rather solid RSP account and had retained the services of Canaccord Genuity Wealth Management (my logic was, based on my philosophy of buying a condo . . . you should always hire a professional) but unfortunately, in a very short period of time my rep (who was a client for whom I had managed to make hundreds of thousands of dollars) through bad advise (like buying “yellow media” which went to $0, and “dumping BCE as it was a ‘dead stock'” in his words) I ended up down $40,000!
With those kind of results I simply figured I could do that bad a job myself so I notified him of my intentions to open a self-directed RSP account. From that moment on, this guy who had masqueraded as my friend and client and whom had visited socially with me in my home, dropped me like a hot potato never have communicated with me in any way since. That was almost eight years ago.
I really didn’t find speculating on stocks that difficult once I started paying attention to the market. I found TD Waterhouse an excellent resource as they would answer all my questions on a hotline. They did not give investment advise and I wasn’t looking for it so things worked out well and I managed to claw back that lost $40,000 and make another $40,000 in profits by basically betting on Apple (buying when it was low and selling when it was high). I also bought back into BCE contradicting the “vision” supplied by Canaccord’s sale guy who had sold me out of their stock (I’ve managed to pick up another $30,000 from BCE).
So I was very shocked and dismayed yesterday while reading an Associated Press Report titled “More ‘Phony Numbers’ in Reports As Stock Rise“.
The Report opened with what to me was a startling announcement, that “professional investors are warning that companies are presenting misleading versions of their results that ignore a wide variety of normal costs of running a business to make it seem like they’re doing better than they really are. What’s worse, the financial analysts who are supposed to fight corporate spin are often playing along. Instead of challenging the companies, they’re largely passing along the rosy numbers in reports recommending stocks to investors“.
“Companies are tilting the results,” says fund manager Tom Brown of Second Curve Capital, “and the analysts are buying it.”
Now, when I got into the game I was somewhat put at ease by the fact that there was so much oversight in the stock market especially after the financial meltdown experienced in 2007/8.
By “tilting the results“, apparently Mr. Brown means that “adjusted profits” that analysts site and “bottom-line earning” (“net earnings“) that companies are legally obliged to disclose are two categorically different things!
At one out of every five major companies these “adjusted profits” were higher than net income by fifty (50%) percent! And worst! Some companies that were being reported as profitable on an adjusted basis are actually losing money!
Folks! It is these reports that any investor relies on to speculate on a stock.
Lynn Turner, a passed chief accountant at the Securities and Exchange Commission, is quoted as saying that “companies are still touting “made-up, phony numbers” as much as they did 15 years ago, perhaps more and few experts are calling them out on it“.
Now, as an investor I find this quite disturbing! These are America statistics but I wonder if the TSX operates on the same model.
This apparent ‘slight of hand’ is usually built on “leaving out costs such as laying off workers, and/or a decline in the value of patents or other ‘intangible assets’, the value of stock issued to employees, and/or losses resulting from failed ventures“!
From my layman’s perspective all of these costs should be included in their financial reporting and can serve only one purpose which is to mislead investors to continue to invest in their company’s stock! I would call that “fraud”!
Here’s an example of the impact of this “slight of hand accounting” as I call it: Boston Scientific, a maker of medical devices reported adjusted profits of $3.6 billion in the five years through 2014. But the news changed significantly when they included a write-off for a failed acquisition, various “restructuring” charges and costs stemming from layoffs and lawsuits, it’s a different picture entirely: $4.9 billion in net losses!
Alcoa reported net losses of more than $900 million in the five years through 2014, but Analysts reported $3.1 billion in adjusted profits.
The value of stock awarded to employees is another “black hole“. Analysts arguments seem to say that “because this issued stock requires no exchange of cash it doesn’t affect the company’s earning power“. I read a good response to this illogic that suggests that if the company could offset its rent with stock or stock options “would rent then be excluded from the company’s financial reporting“?
Brian Rauscher, chief portfolio strategist at Robert W. Baird & Co., is quoted in the AP Report, saying “stocks can continue to rise based on an inflated account of company profits for months or even years, but not indefinitely”. He says “it’s like a bomb no one can see has been placed under the market: You know it’s there, but you’re not sure when it will go off. “We don’t know if the fuse is a few inches or a few miles,“.
With all of our retirement funds dependent on stocks, this is a very disturbing snapshot of the quagmire that is investing in stocks. With the real estate market already beyond the point of logical investing, and now stocks proving to be such a farce, you are left to wonder what is actually out there to invest in.
Wine, fine art, antiques, jewelry, exotic cars, gold, silver . . . . what?!
And if you do decide to give one of these a shot, who do you trust. With every street corner in Toronto full of FREE Condo magazine where innocuous page after page of editorial looking articles that are actually written by Developer’s ad agencies and not objective third party journalists, this question (“who do you trust”) takes on additional meaning!