I often write on Quora.com, where I am the most viewed writer on financial matters, with over 250.2 million views in recent years.
In the answers below I focused on:
- Can expats invest money on the Canadian stock market? Is it even a good idea in the first place?
- Should you use leverage when investing? I mention how Bill Hwang’s 20 billion loss should serve as a lesson for us all.
- Is the US stock market overvalued? Are non-US markets therefore undervalued? In any case, what should people do if they assume that any of these two statements are correct?
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Yes you can invest in companies listed on the Toronto Stock Exchange in Canada.
There are numerous ways to do this. Assuming you are outside of Canada, you can invest in Canadian stock markets directly and indirectly.
The indirect way is to buy MSCI World and get a small amount of exposure to Canada, or indeed a North American fund.
A direct way is to buy Canadian stocks and shares, or ETFs that track the Canadian market.
The bigger question is whether this is a good idea. Ultimately, if you are Canadian and plan to return to Canada, a strong argument can be made that investing some of the money in Canadian assets makes sense.
If you can do it in a cost-efficient and offshore way, you are limiting your currency risks.
If somebody is non-Canadian and plans to live in Canada in the future, we can also make this argument.
For non-Canadians or even Canadians who don’t know whether they will return, i don’t see the point.
Canadian stocks represent less than 1% of the market capitalization of the world.
They have performed relatively well historically, but not as well as the US and some other markets.
There are many reasons for that. One reason is that some of the biggest, and most innovative, companies worldwide IPO on the US stock exchange.
Look at Shopify. Originally Canadian with a HQ in Canada:
Yet they did an IPO in the US, and now sit on the New York Stock Exchange.
So, you can gain access to some of the best innovation from Canada, without having to worry about the potential tax implications of sending money to Canada, or buying Canadian-specific ETFs offshore.
Is it risky to use high leverage in the stock market?
You might have been reading about this man in the last few days – Bill Hwang.
He was the founder of Archegos Capital Management. At one stage he was worth $20billion.
Now it is alleged he lost it all in two days due to leverage. Let’s see what the exact fall out is, and the full details, as the media has a way of sensationalising things.
Nevertheless, it shows the dangers of leveraging yourself up. I have personally seen people with much lower net worths lose it all due to leverage.
Typically it is from buy-to-let property investments. People are usually cautious and sensible going in, but then one investment goes well on leverage.
Then the second goes well. After ten or more years of doing well through leverage, it is easy to assume that the future will replicate the past.
At this stage, big risks are taken with leverage, such as buying too many properties overseas in developing market economies, like what happened in the 2005–2008 period in Eastern Europe.
Many investors bet big on soaring property prices as these countries joined the Euro.
The 2008 Great Recession saw many formerly rich real estate moguls, and regular people, struggle. The ones who did the best didn’t over-leverage themselves .
You see the same thing with businesses who expand too quickly on leverage.
You don’t see it as commonly in stock markets because historically only the rich (especially institutional investors) could realistically use leverage.
These days, things have changed. Interest rates are 0% in many countries.
Investing has became more democratic. Now even many ordinary investors can use leverage.
Many assume they can further improve their returns by using debt/leverage.
It works on the way up. It doesn’t look so good on the way down. It took just three years for the stock market to recover from 2008, and a matter of months in 2020.
If you used leverage you might have never recovered, as leveraged ETFs and other instruments exasperate the downside as well as the upside when things are going well.
Let’s give a simple mathematical example. If you buy an S&P500 leveraged ETF this year, and the market goes up 10%, it is true you could make 30%-50% depending on the factor it is leveraged by. Sometimes much more as well.
Yet if the market goes down, and you are down by 90%, you are in trouble.
If $1000,000 becomes $50,000, you can just ride it out. Look at 2020. Markets fell 50%, but came back.The Dow fell from 29,000 to 17,000, and is now at 33,000.
Yet if $100,000 becomes $10,000, you now need to 10x your money to get back to where you were!
So, yes, it is very risky to leverage in the stock market, and indeed use it in many other situations.
It is also risky regardless of whether you use conventional debt to grow a business or real estate, leveraged ETFs or other instruments.
What is more, there isn’t a need to do it as well, considering you can make money in unleveraged positions as well.
I am not saying you can never use leverage. Many successful businesses have been grown using debt.
It merely has to be used in a sensible and prudent way.
By all rational and historical measures, isn’t the US stock market grotesquely overpriced as of Spring 2021? Why isn’t there greater concern about this? Where should conservative investors put their money now?
There are a number of points to make here. Firstly, the US stock market isn’t overvalued compared to the late 1990s and early 2000s.
The average CAPE ratios during that period of time was much higher and there was an easier alternative – bonds paid up to 6% and even cash produced 3% per year.
These days cash and bonds produce close to zero and there is more stimulus.
Remember as well
- Several markets including Mainland Europe, emerging markets and the U.K. are very undervalued If you look at CAPE. The US markets have only hit those levels on two occasions in the last thirty years, and one of those occasions was during 2009 when companies were struggling due to the Great Recession.
- Despite the last point, markets aren’t stupid. They aren’t always efficient but that doesn’t mean they are stupid. There are trillions of dollars in the market, and most of the money is now controlled by institutions. If certain markets look more overvalued, and others look grossly undervalued like some emerging markets, that is because markets are also factoring in the risk associated with those markets.
- Most importantly, I have never met anybody who can ‘market hop’. There is a lot of talk about how hardly anybody can find the right time to enter and exit markets (market timing), yet little attention paid to the fact that few people can pick the right markets to invest in. If it was so easy to sell US stocks, buy seemingly undervalued British and Japanese stocks, and then buy the next undervalued market in 2022, then everybody would have beaten the S@p500 in the last decades when few did. Almost everybody would have, for example, sold US markets in 2000, purchased Chinese and emerging markets until 2006–2007, then bought US markets again in 2009.
- If markets are stagnant for a decade or more, you should be delighted by this. Let’s put this another way. Imagine you have 30 years left to invest, and you are given three options. The first is a continuous decent return. The second is great returns in the next decade and then subpar ones. The first is stagnation for 15 years and then great returns from 2035 to 2050. The rational investor who isn’t retired should pick the final option. Why? A good investor should see themselves as a collector. The cheaper units you pick up = the higher your long-term gains. Nobody can know what markets will do, but you shouldn’t be afraid of a period of stagnation. It will only help you long-term.
- Reinvest dividends. It makes a massive difference if a market is stagnant like the U.K. FTSE 100 recently.Far more money has been lost historically from being too safe than investing in productive assets. The average bond and cash investor has lost out big time over the decades.
6. It is very easy in retrospect to say something looks undervalued or overvalued. In the real world it can be difficult, as each time period has unique circumstances, so historical normals aren’t usually reliable.
7. Far more money has been lost historically from being too safe than investing in productive assets. The average bond and cash investor has lost out big time over the decades.
So, the most conservative thing is just to buy the S@P500, together with an international ETF and a bond fund, every single month for decades.
Reinvest the dividends + rebalance. If you do that you will have good, bad and OK years.
Look at the last 50 years. US markets were stagnant from 1965 until 1982 and 2000–2010, and emerging markets and U.K. ones have also had periods of stagnation.
That hasn’t stopped the long-term investor making money though.
The average return of the s@p500 has been 11% since 1945 (over 7% after inflation), yet there have been many periods of stagnation and other periods of 15%+ yearly returns.
I fully expect the next decades to be similar. In other words, the average returns will be good but there will be periods of stagnation.
It is best to just ride the waves rather than to try to avoid them through market timing and the like.
As an aside, the same is true for a private business owner.
We know from history that there will be good and bad economic times, alongside unexpected events like black swans.
In the same way I have yet to meet somebody who can (consistently) time markets, I haven’t yet met any business owner who can enter and exit different industries and markets by looking at consumer trends.
I have met many business owners who have had successful operations for decades who have just rode the waves and adapted existing models.
With investing too it is far better to just make a plan and ride the waves regardless of media headlines and so on.
The perfect example of that would be the Nasdaq. The Nasdaq at the peak in 2000 was arguably the most overvalued index in history on a p/e and CAPE ratio.
Much more so than the Dow, S&P500, FTSE and other markets at that time.
Yet if a buy and hold investor had have invested a lump sum at the peak, they would have tripled their money in twenty years, if they reinvested dividends as well.
They would have needed to wait fourteen years to break even on 2000 but so what.
Needless to say, somebody who just enjoyed those lower valuations for fourteen years and kept investing every month, would have made much more than 300%.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 250.2 million answers views on Quora.com and a widely sold book on Amazon
In the answer below , taken from my online Quora.com answers, I spoke about the following issues and topics:
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