Category:

Information

Clarifying Book Value

by Sylvain Lapointe 26 March 2019

written by Sylvain Lapointe

I often receive questions from investors about the usefulness of book values and whether it should be used in the portfolio performance calculation. I came across an interesting article written by Edgepoint[1] that explains very well the calculation of this value, its usefulness and the wrong conclusions that investors often derive from it. Exceptionally, I used the complete article that I find very well written.

Who would have thought “book value” was so confusing? Clarifying a common issue on your account statements.

When investors view their account statement, a common misconception is to compare the difference between the “book value” (also known as adjusted cost base, or “ACB”) of their portfolio vs. the market value, in order to determine how much money was made or lost in their account over a given period. It sounds pretty straightforward, right? At least that’s what Accounting 101 taught us. However, comparing these values usually leads to inaccurate conclusions regarding actual account performance.

The book value includes all your contributions to the fund. However, if you elect to receive the fund distributions in units, your book value is adjusted by the automatic reinvestment of distributions. In simple terms, when a fund pays a distribution you get taxed on it, but when the distribution is in fund units, the book value increases at the same time by the amount of the distribution to avoid double taxation. This information is reported on your T3 slip.

Therefore, your book value could increase even if you don’t contribute more money to your portfolio, making it a misleading metric to use to evaluate how your portfolio has done. Book value will also be impacted by your withdrawals.

Why can’t we just forget about book value? Book value is actually used for non-registered plans when calculating capital gains and losses for income tax purposes. Any capital gains or losses triggered by a redemption or a switch, are reported on a T5008 tax slip.

How can I tell how much I’ve made if I can’t use book value? You should look for the “amount invested” in your statements and compare it to the “market value” to calculate how much you’ve made or lost on a given investment. “Amount invested” excludes any reinvested distributions, but will include all your contributions and withdrawals. You can find this information on most dealer account statements.

I can’t believe I’m saying this, but show me the math!

Okay! Here’s a hypothetical investor. What was the client’s return?

– Client invested $40,000 on July 9, 2015

– She received three years of distributions totalling $11,000

– Book value is (40,000 +11,000) = $51,000

– Current market value = $51,880

Old me (wrong calculation)

Return = (Market value – Book value) /Book value

= (51,880 – 51,000) /51,000

= 1.73% cumulative return

New-and-improved me (right calculation)

Return = (Market value – amount invested) /amount invested

= (51,880 – 40,000) /40,000

= 29.7% cumulative return

The mystery of book value, solved!

Book value is not an appropriate representation of the total amount invested. Rather, it’s used to calculate capital gains and losses for income tax purposes. To calculate your true performance, use your market value and amount invested from your statement. While this information may not appear on your monthly statements, most dealers put it on their annual statement with the actual return. If you don’t have this information, please contact your advisor for assistance.

[1] https://www.edgepointwealth.com/downloads/Clarifying%20book%20value.pdf

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc., but do not form part of the advisor’s activities as an investment advisor; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities is a member of the Canadian Investor Protection Fund.

26 March 2019 0 comments

Investment

Why must the market fall?

by Sylvain Lapointe 21 December 2018

written by Sylvain Lapointe

I reread an interesting article written in August 2015 by Joshua M. Brown, which is really fascinating and applies perfectly to this past year, 2018.

His logic is that the market must experience a descent at times because without a risk of decline, there will never be gains.

Let’s try to imagine a world without stock market slumps. What price would you be willing to pay for a publicly traded company’s share knowing that it could never lose value? For what other reason except for the sake of liquidity would you sell this share?

In theory, an investor would be willing to pay an exorbitant sum for such an investment and hold on to it indefinitely. Eventually, the investor would certainly come into his or her money. Wouldn’t this be the ideal environment? According to the author, such a scenario would be a horror story and I quite agree with him. Stock market indices would deal in astronomical prices without any backing. They would remain high for very long periods of time without clear increases.

An equilibrium would eventually be reached, but in this reality, the market would have weakened because if there’s no risk, there’s no gain either. And investors would say: “I’m going to do other things with my money!”

The only reason shares gain value is because they can lose it. It’s this risk that keeps investors on the lookout to avoid paying outrageous prices for a company’s shares.

The return of volatility this year is undoubtedly a good thing because historically, when popular belief is that stock markets can’t fall, serious corrections result from this. And the technology bubble has certainly been one of them.

Fear is the most fundamental factor in the investment process. It must constantly be on investors’ minds to profit from any eventual increase.

The stock market investor is rewarded for braving this fear because many don’t dare to face it.

1 Investment advisor at Ritholtz Wealth Management LLC.

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc., but do not form part of the advisor’s activities as an investment advisor; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities is a member of the Canadian Investor Protection Fund.

21 December 2018 0 comments

A speculative bubble

by Sylvain Lapointe 17 October 2018

written by Sylvain Lapointe

As I begin my 21st year in stock market investing, I can tell you that I’ve seen my fair share of bubbles, starting with tech shares at the end of the 1990s and the American housing bubble of 2006-2007. After 10 years of good stock market yields, I thought the time would be right to cite an interesting article[1] that appeared recently on the subject.

As the author mentions, it’s easy to talk about bubbles after they’ve burst. But how many people are able to identify a bubble correctly as it happens? One of the problems with bubbles is that it’s often very difficult, even impossible, to predict when they’ll burst. I remember a comment from Alan Greenspan, the former American Federal Reserve chair, who talked about the irrational exuberance of markets in 1996. We had to wait another four years before seeing this exuberance deflate brutally.

What are the underlying conditions of a bubble? Although each one is different, there seem to be recurring elements:

– The feeling that “this time, it’s different.”

– A craze for a new technology, a new way of doing things or a change in legislation. Most of the time, bubbles are formed based on rational premises before getting carried away by the craze and excitement of price increases.

– A bubble is like a party. Everybody wants to be part of the action, but the day after is not always easy!

– Prices that shoot up and the sense of missing the boat if you don’t participate. The fear of future regret can be a powerful force that pushes many into buying in a bubble. “Yes, but everyone does it. My brother-in-law, who doesn’t even know anything about it, is getting rich from it.”

– Problem evaluating the demand for the popular asset. During the tech bubble, most Internet companies weren’t making profits (some of them practically had no revenue), but some analysts were evaluating Internet shares as a multiple of research and development spending!

– People only see the potential for appreciation and there’s a tendency to forget risks.

– Which brings me to the last point: a valuation which is disconnected from economic reality.

A bubble can continue for a long time and often, the farther removed the price is from economic reality, the greater the potential for a bull market. But any financial asset will have to be evaluated at its real economic value one day or another, that is, in terms of its current and future profits.

The media also play a role by discussing the subject extensively. Now, with all the elements mentioned, can you see a bubble in the current stock market?

[1] Les Affaires newspaper of 28/09/2018 written by Philippe Leblanc.

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc., but do not form part of the advisor’s activities as an investment advisor; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities is a member of the Canadian Investor Protection Fund.

17 October 2018 0 comments

Information

How much proximity would you like to have when you retire?

by Sylvain Lapointe 22 June 2018

written by Sylvain Lapointe

I read an interesting article written by Rob Carrick from the Globe and Mail. The story makes us realize that the majority of our waking hours while employed are spent away from our spouse or partner. And then comes retirement.

Most people dream about retirement, however, it is not rosy for everyone and can be the source of a breakup for couples. We move from a situation where we spend the majority of our time separated from our partner to being together 24/7.

The author of the article recommends that we not wait until retirement to find out how we are going to react when faced with this new situation. Couples should discuss their vision of retirement well in advance of closing up shop. It is important to share your vision of retirement – with regard to travel, social activities and sports. Another point to clarify is how much proximity do we want to share with our partner. One expert even suggests staggering retirement dates so spouses will be able to adjust their schedules their own way.

Most experts on the subject seem to agree that it is men who seem to have the most difficulty adjusting to this new reality. Many men begin their retirement with a very vague idea of what it will be and then break down.

One interesting solution is to draw up a list of things to do once you retire. Below are several ideas:

Live according to your means
Travel
Renovate your home
Move to the country
Teach
Volunteer
Visit friends and family
Become a mentor
Spend time with the children and grandchildren
Read or write a book
Return to school
Learn a new language or learn how to play an instrument
Practise a new hobby
Sit back and relax!

As you can see, there are many things you can do, all it takes is proper preparation and planning with your spouse. Happy retirement!

The information contained in this article were prepared by Sylvain Lapointe, an Investment Advisor registered with: PEAK Securities Inc.; they were obtained from sources we believe to be reliable but are not certified and may be incomplete. The author is not responsible for readers’ financial decisions following this reading. The views expressed here do not necessarily reflect PEAK Securities Inc. PEAK Securities Inc. is a member of the Canadian Investor Protection Fund.

22 June 2018 0 comments

Financial System Information

Passive investment income

by Sylvain Lapointe 19 April 2018

written by Sylvain Lapointe

We know to what extent small and medium enterprises (SMEs) in Canada contribute to economic growth and job creation. To encourage people to start their own businesses and take certain risks, governments have for a long time relied on tax benefits as incentives. But with the current federal government, the trend is changing. Justin Trudeau’s government seems to want to considerably reduce all Canadian-controlled private corporation (CCPC) tax incentives.

In its latest federal budget tabled on February 27, 2018, the government is penalizing all CCPC passive investment income above $50,000. For years, many entrepreneurs chose to forgo RRSPs to allow benefits to grow within their companies. But now, the new measures will have a major impact on the retirement of many entrepreneurs.

Normally, the CCPC benefits from a reduced tax rate on the first $500,000 of the company’s active income. These new changes reduce access to the preferential small business tax rate for CCPCs with a passive investment income between $50,000 and $150,000. Changes will be enforced after 2018 and will have the effect of reducing the deduction limit for small businesses by $5 for every $1 of investment income exceeding the $50,000 ceiling. This means that any CCPC whose passive investment account is $150,000 or more will see this deduction completely eliminated.

Here’s an example: if a CCPC earns a passive investment income of $75,000, the first $50,000 will be exempt and will not affect the deduction for small businesses. For the remaining $25,000, this will reduce the deduction limit by $5 for every $1 above $50,000. As it happens, the deduction will be reduced from $125,000 onwards. So, private businesses can benefit from the preferential small business tax rate only for an active business income of $375,000.

It is always unfortunate to see the rules of the game changed along the way. I sincerely hope that this new measure will not have too negative an impact on economic growth, job creation and entrepreneurs’ desire to make Canadian SMEs flourish. What’s certain is that the tax impact of financial decisions have always been significant, but with this reform, they become even more so.

The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc. ; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. Securities PEAK is a member of the Canadian Investor Protection Fund.

19 April 2018 0 comments

Newer Posts

Older Posts