Episode 321 - Evidence in Practice with Håkon Kavli

24:22You can try to reduce the noise in those estimates through a variety of methods. The most famous one is maybe Black Letterman, which tries to reduce the noise in expected returns. It's a very elegant solution where effectively they assume that the market is efficient and you back out from the market weights, what are the implied expected returns that would make the market weights the optimal portfolio? In order to back that out, you need to actually already have a view of what the market thinks the correlation matrix is. So it's very hard to back out. I worry that you put in noisy assumptions one place to remove them somewhere else and it doesn't get much better.

25:00But that is It's a very famous and very elegant approach, but it's not very easy to use in practice. You can shrink the expected returns or reduce the noise in expected returns even more aggressively by, for example, assuming the same return in all asset classes. Then you effectively optimize for a minimum variance portfolio. So the lowest variance portfolio. That happens to be very robust, much more robust than a mean variance portfolio. Actually, even more surprising in out-of-sample testing, a minimum variance portfolio tends to outperform measured by Sharpe ratio than a portfolio that's optimized for Sharpe ratio out of sample.

25:37So it is actually surprisingly robust. But that is also quite extreme. Effectively, you ignore all assumptions about expected returns, and you no longer have the objective function that might be your mandate. Our mandate in the net on capital is to maximize risk-adjusted return. And we would prefer a model where that is actually the objective function that we optimize for what our mandate is. And there are a lot of other methods that do that. You can shrink the correlation matrix. The most famous approach is the Lidois-Wolf shrinkage, which effectively just shrinks it towards the identity matrix, effectively then just reducing the correlations, making them closer to zero.

26:16In doing that, you do remove noise, but you might also remove some of the signal information in the correlation matrix. Marcos Lopez de Prado recommends combining that with other denoising methods. The one he recommends, which is also very elegant and I like a lot, is fitting. Let me just be technical for two seconds. You fit the correlation matrix or the eigenvalues of the correlation matrix to a so-called Marchenko-Pasture distribution. You can forget about why it works, but just what it does is that you can then see which eigenvalues most likely are associated with signal, with information.

26:50They will come outside of that distribution. And from those eigenvalues, you can reconstruct a correlation matrix, covariance matrix. that hopefully should have a lot less noise. In simulated data, that works extremely well. It's harder to evaluate how well it works in real data, but it appears to be very powerful. By having a less noisy covariance matrix, your optimization routine will also be much, much more robust. Man, there's all these different approaches to improving optimization. How different are the asset allocation outputs from these different approaches? There is a lot of variance in weights depending on method you choose.

27:26The purpose of the robustness exercise is to make that variance lower, to arrive at a more stable allocation. It still will depend somewhat on the chosen method, and especially on whether you optimize for a sort of minimum loss objective function or a minimum variance, or either have this minimax methods where you try to optimize for the best worst case outcome. Those types of optimizers will arrive slightly different weights than other robust methods that are, for example, more focused on resampling, which actually we use a lot in our approach. The resampling was very much favored by Michaud, who effectively actually trademarked a particular approach to do that, which then reduces noise by using Monte Carlo simulations or bootstrap resampling.

28:14The nice thing with those is that then you can still use the Sharpe ratio as your objective function that you try to optimize for. I think the whole goal here is that these robust methods should give you more similar weights than the classical version with just slightly variation in inputs. It's still noisy for sure. How do you guys take all that literature and actually implement it? How are you using optimization? We have tried to learn from the literature and we implement what we find. firstly, have good evidence of creating a more robust portfolio. And that is consistent with our mandate of maximizing risk-adjusted return.

28:53The nice thing about most of the methods I mentioned now, there are several papers that show that they can be combined in various ways. And the combinations typically are better than using just one solution on its own. And that we have really taken to heart. And we use the ones that effectively take our inputs without removing too much of the information that we believe is there. So we believe that our CMA has information in it, first of all. We believe that our expected returns are better than just expecting the same across all asset classes. So that information we want to keep. We therefore don't use the robustness solutions that just ignore expected returns altogether.

29:29That leaves us with the models that improve the correlation matrices. So we do use the approach that Lopez de Prado recommends, shrinkage and denoising. And also we use a lot of resampling, like Michaud and several other papers after that have documented that actually do reduce noise and inputs and also better handle the noise that is left. First of all, we try to make very robust CMAs that also have some model averaging in them to reduce noise. And then we use effectively resampling and shrinkage and denoising of the correlation matrices. Cool. Super interesting. You mentioned sharp ratio a couple of times as being the objective function or maximizing that being the objective function.

30:08How do you account for or how do you think about the effect of serial correlation on long-horizon stock returns? To be honest, we don't have a very direct treatment of that. I would say a few places where it has been implemented. Our 60-40 benchmark, first of all, is based on the risk tolerance of the owners. In that benchmark already, you had very explicitly a discussion about how risky will it be to have 60-40 versus a 50-50 or 80-20. In that discussion, serial correlation in returns was central. And also, the literature around this focuses very much on long-term returns being effectively less risky than short-term returns, either because you have negative serial correlation, so that loss of today, I'll earn that back tomorrow, or simply because of annualized returns by the law of large numbers, the arithmetic average at least, will tend towards the average over time.

31:04So on a 12-month horizon, equities are very risky. On a 30-year horizon, at least arithmetic returns will be closer to the average. One of the reasons that we haven't explicitly built this assumption into our optimizers is that I think it is not obvious that long-term is that much less risky. I made a point that arithmetic returns become more stable. Annualized returns become more stable. The geometric returns, cumulative returns, a lot of the risk can accumulate. The most extreme is if you think of compound return over one year in equities, for example, fairly certain it's going to be between minus 50 and plus 50 % over one year.

31:41Over a 100-year period, there's a chance it's zero because if it hits zero just once, I mean, okay, zero is extreme, but you will never recover from it. If you have an infinite horizon, the mathematics say it's probability of one, you're going to hit zero at some point, and then you'll never recover. So no matter how good the arithmetic return is, no matter how good the average is, you will be stuck with zero. So time does not remove all risks. It does remove risk from the arithmetic average, but it does not remove that sort of compound risk that is relevant. I mean, the dollar value in 30 years, that's really the number that counts, means much more than what the arithmetic average was over those 30 years.

32:17So the long term is less risky in some ways, but it's not obvious that it truly is less risky. Yeah, you get more variance for sure. What did you think about the episode with Scott Cederberg about the long horizon risks of stocks and bonds? I think he touched on some of those points, didn't he? I'm trying to think back now. I did re-listen to that just yesterday, I think. He does. Bootstrap with really long horizon data. And he did the block. The block sample, yeah. Yeah, we do the same thing, actually, especially on the correlations. That makes a lot of sense. I really think so. I'm a little bit more skeptical on this negative serial correlation.

32:50It's not so obvious to me that it truly is there. I think I love his approach, and I love the discussion you had about the survivorship bias that you have in those long samples. That's something that might be an issue in the way we have used it, to be honest. I mentioned earlier that the Austria-Hungarian empire had quite a high market cap weight in 1900. If we were to weight the basket by the weights it had back then and then cut the return over the preceding 120 years until today, you will get a very different return than if you use the current market cap weights and cut it backwards. Very good points.

33:23And there are definitely insights from that episode that I need to revisit in our work. I think there are weaknesses there in the way we have thought about some of that. It's super interesting to think about. For a family like the Raytown family, it's like their time horizon is presumably very long, like it's multi-generational wealth. So that thinking about the differences in risks over a hundred year horizon versus a 10 year, I think it's super interesting when it comes to asset allocation. And one thing I remember also from that episode, which was a very important point, well, I think it was that episode about domestic stocks versus international stocks.

33:57In domestic stocks, there is just so much more risk. And also, if you look at the sample, there are 20 some countries in this sample. And yeah, you have a communist revolution in two of the countries and everything goes to zero. And again, compound returns, you have nothing. No matter how much returns are later, you have nothing to grow. So you will never earn it back. So those cases are super important. I think having a globally diversified portfolio almost eliminates that risk. Yeah, I think that's right. Makes it less sensitive. But it was a major lesson from that episode. Having a domestic equity portfolio is maybe home buys can be good for some reason, but 100 % domestic, which a lot of people do, that is unnecessarily risky.

34:37Yeah, and it's not just a total loss. It was the link between domestic inflation and poor domestic stock returns. That was another big piece of that. With foreign currency from international stocks, you don't get that at all, or you get some protection against it. The exchange rate is actually a major risk reducing factor for us. the Norwegian krona, it sells off in stress periods, meaning we get a lot more krona back for each dollar invested outside of Norway. Our equities effectively had canceled out quite a lot of our equity volatility. Interesting. I'd like to go back to something you mentioned earlier.

35:09And can you talk about how private equity is different from public equity? Yeah. We recently published a note where we effectively tried to review the entire literature on private equity. A year ago, I didn't know much about private equity at all. And then I spent a lot of time reading up everything I could find. And that question is great. I mean, it's the same, except the one is traded on a stock exchange and the other is not. And that was very much my view as I started this project. And then I have come to realize that the academic literature is very clear. The portfolio companies, the average portfolio companies in private equity, so that means private equity funds, and I'm really talking about buyout funds.

35:44The average companies are different. They behave different. And at some points, they are very important, actually. So So first of all, they tend to be drastically changed after they've been purchased. So they go through effectively a revolution, whereas public companies have a constant evolution of management, of strategy, of whatever. And the data is very clearly supporting this. There's a paper, quite a recent 2022 paper in the American Economic Review, literally number one journal in economics by Davis and some other authors. They go through five, six million US companies and look at the ones that were bought by private equity and the ones that were not, and look at how do they differ.

36:25The rate of investment in high growth areas of the business is twice as high in the private equity-owned companies than in the others. The rate of shutting down science factories, whatever, is also much higher in the private equity-owned companies than in the others. Employment growth in the high growth segments of the business is much higher in private equity-owned companies than in others. And effectively, that's true on average across the five, six million companies in America. They argue shows that there is a difference here. The companies are affected by being purchased by a private equity company.

37:00The company changes. It becomes a different type of company. It becomes a company that goes through more change. In their data set, they find that this actually does improve operating margins. There are other studies in top journals that find the same results. There's another Another famous one, Cohen 2022 and review of finance, that looks at one niche at restaurants. And then in their words, they become better, maintained, safer, and more profitable. I don't remember exactly how they phrase it. But this kind of surprised me because the industry has a bad reputation. It does actually create a lot of value.

37:34What also happens is that the GPs take pretty much all that value to themselves in peace. But that's beside the point. How is it different from public equities? Well, the securities are traded in one place and the others are not. But the portfolio companies actually do behave differently. And I think that is important to accept. It makes sense. Like one of the things that I've always found striking about the private equity literature is that if you can say that net of fees, you're getting roughly public equity returns. And we'll talk more about this in a second, I'm sure. If you can say that, but you can also say that they're charging ridiculously high fees, it means they're generating a tremendous amount of value.

38:08Yeah. That just has to be true. It's interesting. I mean, you have professors who are extremely skeptical of the industry, like Follipip, for example, who also listened to his episode. It was great. I love his research and I love the episode, but it's funny to me how his research also effectively accepts that they do create value, but the GP takes all of it. And he might be very critical of that part and therefore have questions about whether or not it makes sense as an investment. But the fact is that even the most critical voices, they agree that value is created and that is easy to forget actually.

38:40How much does it cost in terms of fees to the limited partner to invest in private equity funds? Yeah, it depends on a lot of assumptions. First of all, because the typical fee structure is you have between 1.5 % and 2 % management fee. 2 % is the most common, but the average is slightly lower than that. And then pretty much all funds have a 20 % performance fee. I can talk a little bit about how the different types of performance fees also, because it matters. And then you have this other more hidden fees. The performance fee can become a very big expense if the fund performs very well. And that creates some variability in what you should expect.

39:20The more hidden fees like transaction fees, monitoring fees, they are totally unknown before you invest. The monitoring fees, so that is effectively a fee that the portfolio company pays to the GP. Those fees are not known at all before each individual transaction is done. That's when the GP writes a contract, a service agreement with the portfolio company about what they can charge in the monitoring fees. You just cannot know at the time of signing an LPA, an agreement with the GP. You don't know. But on average, the literature, I really have based this on two major studies, Metric in Yisuda and Sensoy and Robinson, I think it was.

40:00If you combine these numbers from the two studies, our expectation is that you pay on average between 3 % and 4 % of net asset value every year for a complete portfolio of overlapping funds. But that is also based on relatively modest return expectations. If you expect the 25 % IRR that they present you in their material, well, then you should also expect to pay much more than 4 % fees because then the performance fee becomes a big element. Super interesting. And again, just to reiterate, If we're saying the total fees are 4 % and they're roughly delivering market returns, that's incredible. They have delivered more than market return, but they have also taken more risk.

40:38How risky is private equity compared to public? Another good question that should be easy to answer. And surprisingly, it's not so easy. If you measure the volatility of reported NAVs, it tends to be roughly 10 % volatility. And that's quite a harsh way of measuring it. But that is not the true volatility. That's not the true risk. I'm sure we've had other people on talking about volatility smoothing and all of that, and we can get into that a bit. But I think the most credible papers and the most recent papers seem to converge to a higher and higher number that's close to 30%, around 30 % annual standard deviation, annual volatility in the value of very broad private equity portfolio.

41:19And that is the assumption that we have made 30 % standard deviation in returns of private equity. That's our expectation. And that is twice as high as in public equities. Why should it be twice as risky? Why is that a reasonable estimate? It's not obvious either because, yeah, you could say they are more leveraged. They used to be very leveraged compared to public companies. It's not so much the case anymore. They are slightly more leveraged. And I mean, each transaction is clearly leveraged. But typically, they buy companies that don't have much of the leverage to begin with. And then they take some equity from LPs, add debt, and buy the company.

41:54After that acquisition, it is much more leveraged than it was prior to that. But they've already selected out companies that had less debt to begin with. So they do have more leverage, but that cannot at all explain such a high volatility. My own personal theory is that it's so risky because what I mentioned earlier, these companies go through a revolution rather than evolution. They go through a drastic change in strategy, massive pace of investment, massive pace of disinvestment, new management, a lot of change happening in these companies. It's just natural that their value will also be more volatile.

42:28That's purely an untested theory, by the way. That's not taken from any literature. We come in around the same. We don't publish our alternative asset class expected returns, but we do them internally. We're at about 30 % standard deviation as well. The thing that I've struggled with is how to model skewness or even just the much wider distribution of fund returns relative to public markets. We could say what the standard deviation is for private equity funds, great. But it's also really hard to get the average return of private equity funds because you can't invest in all of them. Yeah, exactly.

43:00That's a huge point. I mean, a lot of the risk comes from selection. In public markets, you can buy the broad market. In private equity, you take so much DP risk. I mean, you don't know if it's going to deliver average or not. I mean, if you're willing to pay the fees, you can build a very broad portfolio. So we looked at if you have a portfolio of overlapping fund of funds, for example, or just a broad internal portfolio, you will have thousands of portfolio companies at any point in time in your private equity portfolio. So yeah, you can create almost index-like returns from private equity. You need to have built up a program over a long time.

43:36Yeah, that makes sense. What's your view or what's Raytan Capital's view on how private equity fits into a diversified portfolio? We do believe that private equity has a role. And we believe that private equity, at least historically, has given you exactly the return you should require for the risks that you have taken, net of fees. And then I include liquidity as the risk collector here. That is based on other research. Actually, Falipu was a co-author with Ang and others on one of the major papers that we have based this on, where they look at the actual cash flows of all investments across a huge range of LPs.

44:13And from those cash flows, effectively can back out what's the implied loading to the value factor, to the size factor, to the market, and to liquidity and also to a private equity factor. They find that the private equity factor is significant on its own, which is quite interesting. It means that there might be some diversification, a new factor here that's actually interesting to have exposure to. I also do believe that private equity does, again, what I mentioned earlier about this revolution, as we call it, instead of evolution. I think that creates a different risk dynamic that might be interesting to have exposure to.

44:43But it is interesting to me that those studies have found that yes, private equity has outperformed public equities, but that is due to risks that you have taken. It might not be that it's literally due to the risks you've taken, but you have taken these risks, you got compensated for it. There's one thing here that again is untested, but I do believe that a lot of the returns you get in private equity comes from the value creation that has been proven to take place. The question is, did you get what you got because of the value exposure and the size exposure? Or did you get some of it from that other value creation?

45:19And the GPs just took to themselves as much as they could while still giving the LPs enough return to justify the risks they've taken. I don't think any individual GP has thought of what was the loading and how much do we need to give them. It doesn't work like that. But I think on average, just like efficient markets, it's not individual investors being super rational, but the market as a whole seems to equalize around something that makes sense. I suspect that's what happened there. And that means that you get paid for the risks you take in private equity. Those returns might be slightly more robust because they have one more leg to stand on, and that is the value creation that GPs do.

45:55And then it's another important point when you ask about, does it belong in a portfolio? The market portfolio, if you assume efficient markets, clearly has a lot of private companies in it. And if we just look at the companies that are owned by private equity funds that are directly investable for institutional investors, that market portfolio has, I think, a$7 trillion worth of AUM invested in private equity funds, of which public buyout is a big portion. I'm going to pull out the numbers here because I did not write them down here. Yeah, so buyout and growth equity is roughly 5.3 % of the total equity market, including public and perhaps 5.3%.

46:34A 60-40 portfolio like ourselves, that means that buyout and growth equity should be roughly 3.2%. If you want to be just market-weighted, have no view on it. If your own costs are higher than the average, you should probably have less. If you can access this in a cheaper way, or you have better skill at identifying good GPs, well, then you can have some more. And there is actually some evidence that at least identifying the bottom quartile appears to still be possible. And if you've managed to just weed that out, which literature seems to still indicate that that's possible, well, then maybe you could actually justify having slightly higher allocation if you do that and still end up at average cost.

47:13Yeah, I've thought a lot about both of the things you just said, that if I wanted to justify building a private equity program, you can do it pretty easily by saying, listen, if we can get access at below whatever, say it's below the 4%, if you can access private equity at 2 % because of your scale, and if you can avoid bottom quartile managers on expectation based on the literature, your expected return from private equity is quite attractive. It is. And it's interesting because I mean, it used to be the case, at least earlier papers found that you could also identify the top quartile based on past vintages.

47:44And again, you can't look at the most recent vintages because those numbers are just artificial, but truly fully mature past vintages. They did actually earlier have some information about whether or not this GP would be in the top quartile in the future. That doesn't seem to be the case anymore, at least not in the more recent papers. But the most recent papers still find and even find an increasing significance of the tendency of bottom quartile managers to remain in the bottom quartile. So that should be possible to identify just literally from looking at past performance. If it is, well, yeah, then you have reason to believe that you should outperform the average private equity investor.

48:22Yeah, yeah. I wanted to go back to something you said earlier about how GPs might be taking out the fees. So they deliver the returns to investors. So their returns are commensurate with the risk they've taken and then the GPs take out the rest.

48:37That's rational markets for manager skills. That's more in public stocks, I suppose, they look at their... They look at mutual funds. That paper was just theoretical too. Yeah. And it's funny. It's like when I read those, I struggle to think that I can't imagine anyone actually behaving in this way. But I think the market as a whole arrives at that point in the end anyways. At least it's quite a coincidence that the data pretty much confirms exactly what you should expect if you thought markets were efficient. There's no way the data will reject another hypothesis that the market is efficient.

49:08Let's put it that way. We talked about what the market weight is for private equity and how if you have skilled and selected managers or low fee access, you would maybe overweight. What about for a smaller investor or a retail investor? How do you think it changes for them? I don't think private equity makes sense for them, to be honest. It's hard to imagine that they could get... I mean, remember, average fees are not the fees that are advertised because few pay more than the stated fees. But quite a lot of big institutions pay less, or they do a lot of co-investments or manage it internally at lower total cost.

49:42The average fee is not$2.20. And then they start really with a disadvantage. And I don't think also they would have enough access to filter out the bottom quartile. It would be quite random which fund they ended up in. And I also think it's hard for retail investors to evaluate the LPA, the agreement that you write with the GP, even if you have enough capital. I mean, it's just like we talked about in Perry or performance fees. Yeah, it's above a hurdle rate of 8%, but is it 100 % catch-up or is it not? Do you pay really on everything above zero or everything above eight? It's not obvious. Or is it a European-American waterfall?

50:17There's so many intricacies. Why take that risk of being on the losing end? I don't know. For a retail industry, I just don't see it's worth it. I agree with that. Why do you think so many institutions and firms have such substantial allocations to private markets? Some of them, I think, are hard to justify from just looking at evidence alone. Certain endowments and certain pensions just have a strangely high allocation. But I think there are several potentially good reasons. One is that they might have actual skill at identifying top quartile managers, or at least rule out the bottom quartile.

50:54But I do believe that what I said earlier is that the evidence shows that you can't just rely on past performance to identify the top quartile. But there are papers that show that there is information in the marketing material, in the prospectus, that has some predictive power of future performance of that fund. So it's not impossible necessarily to identify the top quartile. It takes resources and it takes a certain skill. And it's very hard to evaluate if you have that skill yourself. If they believe so, well, that could justify for them having a higher allocation to private equity. At least if they think they have the skill to do that in private equity, but at the same time, don't have that skill in public markets.

51:32I mean, if you are that skillful, maybe you could pick out the best public market managers and outperform there at lower fees. I don't know. But I think it has to depend quite a bit on the belief that you can outperform. The other thing is lower fees. They might have genuinely lower fees than the average. Certain institutions do have very attractive fees compared to most others. And then you have the more sort of semi-irrational, semi-irrational reasons like volatility smoothing, which we mentioned earlier. That has a real value for at least for the, if you have a sort of principal agent problem where the principal is the owner of the asset and the agent is the manager.

52:06If the principal is not truly on top of everything, it might be very comfortable for the manager to go and show very smooth returns. And that might be a way of preserving their employment security. It's rational for the manager. And then assumes that the markets are not really efficient. That is bad behavior. But volatility smithing has also some true benefits. And if you do know that you have the risk tolerance to take the risk, but you also have a tendency to be jumpy and make rash decisions, well, then volatility or at least being locked in for a long time has some value. And then it's the FOMO.

52:39I think FOMO is part of it. You see everyone else doing private equity. They talk about the great returns they get. And they talk about the great IRR. and don't want to miss out. I find that super interesting because it's not at all obvious that the large institutions with those large allocations to private equity have actually done any better than they could have with a lower cost portfolio, at least from what I've read on that. I did see that the Norwegian Sovereign Wealth Fund, the Ministry of Finance, I guess, rejected the addition of an allocation of private equity. I thought that was pretty interesting.

53:09Yeah. The final word has not been said, but yes, they have for now rejected it. the NBIM, the manager, state-owned manager, part of the central bank, have effectively recommended that private actors should be part of their universe that they can invest in. They would never go to allocations that you see in some other institutions, but a moderate allocation is probably what they would want, maybe in line with market rates, to be honest. And yeah, that has been for now turned down, but it is an actual ongoing discussion here. It is interesting. I mean, the nice thing for us, a small investor, relatively, is that But when they want to make a decision like this, they commission research from the best in the world.

53:49And they had MSCI write up a whole report to get a lot of data. And then they just publish it openly for everyone to read immediately. So we get a lot of free research that way. So it's a nice benefit. That is very cool. What's the most exciting research that you're working on right now? The private equity research that we just finished and published was for me an eye-opener going from not knowing much about private equity a year ago to now feeling like I have read the most important to have an actual true view and understanding. and some opinions about it. And I think that leads me to a continuation, which is to think about what's this all say about the future of private equity and the role in the current environment.

54:24Does it really matter that there has been so much more influence into private equity and all the dry capital? The research we did now, and which we have shared openly, is purely literature. We don't do any research. And we look at only the literature published in top journals, simply just as a filtering exercise. Otherwise, it's just too much. And if you want to look more forward, look at more of the current setting, it takes years to get published in a top journal. So that will say nothing about the current state. So that is one thing that we want to think about and what does it as a class make sense for us?

54:54If so, how should we approach it? The other is an optimization, as we discussed earlier. I'm actually very excited about the research that Marcos Lopez de Prado publishes. I am very optimistic that his nested clustered optimization makes a lot of sense for us. It's a way that... It takes in our CMA and our inputs in a way that I like and segments the portfolio into groups in a way that makes a lot of sense. I'm very excited to explore that further. But then overall, this is not in the immediate future, but the holy grail for us is to find a true source of diversification. An asset class that does not depend on discount rates as much.

55:31I mean, the problem is that everything is discounted cash flows. And when rates change, I mean, every NAV changes. Are there better ways of diversifying out that risk? And if not, at least finding asset classes that truly diversify, that don't just look like they're diversifying in smoothed data or bad data. This is what I'm asking everyone when I meet people is what's the most exciting diversifying asset class that I haven't thought about. Maybe you have some I should ask you now. I don't have any. If I did, I don't know if I would tell you. Yeah, exactly. You might ruin it. Yeah, no, that's a good point.

56:08I mean, if it becomes very popular, then it starts trading with the risk sentiment and then becomes correlated. It's true. You want it to be liquid, but you don't want it to be too popular among like-minded investors. Yeah, exactly. What can you tell us about the event that Cameron's speaking at in October? As I'm sure you do, we get invited to a lot of conferences and seminars and events where there's interesting presentations on the masterclass or some topical question, but it's always hosted by an asset manager or someone who has a product to sell. If you go to a private equity seminar, you know that there's going to be a private equity product offered by these companies.

56:43So you never know truly how unbiased is this really. We wanted something that really spoke to the most relevant problems that we are facing as asset owners. And we wanted it to be in a setting that has no sales agenda at all. And also where the presenters have no sales agenda. We wanted to focus on research, then applied research is actually relevant for asset owners or their managers. So we have invited senior investment professionals from the main asset owners in Norway, that is insurance companies, institutions, family offices, and so forth. And we have also invited academics, professors, and asset managers.

57:18The idea is to have some presentations. Cameron Passmore will be here, thank you, to talk about evidence-based investing, your experience with that, and also maybe helping us translate a bit of that research that's presented that day to the investors in the room that might not have the same skill at the more technical side. So let's think of what you guys are doing on this podcast. It'll be partly his role on that conference. And then we also have Antti Ilman coming to talk about expected returns on CMAs. We have Marcos Lopez de Prado, who I mentioned earlier on portfolio optimization. I think he is one of the most exciting researchers out there within quantitative finance.

57:54I think he's also literally the most read author on SSRN or something. And it's truly a scoop for us to have there. And I'm very excited to learn from him. We have also the multi-decade head of external mandates at the Norwegian Sovereign Welf Fund. I mean, they are one of the absolute largest asset managers or asset owners in the world. And he has been there for well above 20 years now. And they're evidence-based, to be fair. They don't say, use those words, but I mean, they get top professors from around the world doing research on topics that are relevant for them. And truly, truly great research being done there.

58:30So I was very, very excited to hear what he has to say. Cameron will be there and Katie Martin from the Financial Times will be moderating the event. So yeah, we're super excited. That's incredible. Sounds like a great event. Yeah. Thanks for the invitation. Very happy that you can come. And then, yeah, I want to add one more thing. It's not here in Oslo. It will be in Trondheim where the family owners of Breton Capital are based and where they started their company. It's at a historic homestead of the first Viking kings in Norway. That's literally their farm. No way. It's a historic setting also.

59:01It'll be fun to have everyone gather in that space. So yeah, super exciting. That's incredible. Very cool. Okay. Well, I guess that's it. And I look forward to seeing you in a few weeks. It's been amazing to have you join us. Learned a lot and it was a great, great conversation. Thank you. Thank you very much. I love being here. Very cool. Thank you. Well, that was such a great conversation with Håkon. Such a clear communicator, Ben. Wow, what a great idea to invite him on. Oh yeah, that was great. Now we're pretty excited to be welcoming Dan Bortolotti to join us for the first time, but not the last time.

59:32All right. It's great to be back. Thank you. Hey, Dan. The spud is back. The spud, yeah. So back when I was doing the Canadian Couch Potato Podcast, we had a popular segment called Bad Investment Advice. bad investment advice i used to look at articles videos blogs etc that offered truly awful suggestions for how you could manage your personal finances and we thought it would be fun to resurrect that segment because there's certainly no shortage of bad investment advice still out there it was an interesting segment that we used to sometimes look at advice from investment professionals. That was very obviously done for marketing purposes.

1:00:15It was manipulative. It was self-interested, something I really enjoyed calling out. Other times it was really just from amateurs. There was no ulterior motives or anything. It was just naive. But in many ways, I think it's just as harmful because a lot of these amateur DIY investors have a lot of followers. So that's the category of bad advice that we're going to target today. and the article in question is one called an interesting rrsp idea all in on qqq now i'm going to unpack exactly what that means in a minute but before we do i just want to say i'm not going to identify the author or even the website that the article came from because i have no interest in personal attacks here it's not about that it's really just that he's a diy investor that doesn't seem to be any ulterior motive but it's still pretty dangerous advice So I think it's helpful to pick it apart.

1:01:08Yep. So the main point of the article is he makes an argument that it might make sense to hold nothing but QQQ in an RRSP. Okay. Q. Another Q. A third Q and the Batman symbol. So let's clarify all this straight away. What the heck is QQQ? It's the ticker symbol for a very popular ETF from Invesco PowerShares that tracks the NASDAQ 100 index. So the NASDAQ 100 is an index of the 100 largest non-financial US stocks. So it includes companies in the banking, insurance, mortgage, investment sectors. So it includes or excludes? It excludes, I'm sorry. So it's made up of all of the other sectors in the economy, except for financials.

1:02:02In Canada, financials make up a huge part of our index. In the US, they make up about 11 % of the market, which is a relatively large category. But you might think that if you just excluded that 11%, it wouldn't make very much difference. But in fact, there's some pretty huge differences between the NASDAQ 100 and the larger US market. So tech stocks, for example, make up about 33 % of the broad market in the US, but they make up over 51 % of the NASDAQ 100. And of that, even the top 10 holdings, which as you can imagine, are Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet, the usual suspects, they make up half the index.

1:02:44So let's understand here, we're saying the top 10 holdings have the same influence as the other 90. Now, the US market is already very top heavy. The 10 biggest stocks in the S &P 500 are about 30 % of the index. So concentration is not really unique to the NASDAQ 100, but this ETF, QQQ, takes an already pretty significant problem and just makes it all that much worse. So if it's such a big problem, why is this author recommending that we go all in on this ETF for his RSP. And you've probably figured out we're talking about tech stocks. I mean, they've been the heroes of the last few years. And what we're seeing here is just flagrant performance chasing.

1:03:27I mean, he's pretty explicit about it. I'll just read from the article directly. He says, why would we consider going all in on QQQ? Because QQQ has done very well historically compared to the major US and Canadian indexes. In the last 20 years, QQQ has had an annualized return of 14.03 % and an annualized return of 18.12 % in the last 10 years now. So very tempting returns. I think we can all agree on that. So why not go all in, put your entire RSP into QQQ and expect another 14 % annually over the next 20 years. So this is really a great example, I think, of when you need to look at the period of performance that somebody is holding up as an example.

1:04:17Now, I don't know whether the author did this intentionally. I don't think so. But it's certainly convenient to say the last 20 years because that period would have started in 2004. And for those of you not old enough to remember, there was a little event called the dot-com bubble that occurred just before that. So to back up from the mid-1990s until around March of 2000, the tech stocks and the NASDAQ 100 had a tremendous run, even better than what we've seen in the last 20 years. And guess when QQQ was launched? 1999. Very close to the peak of the bubble. So it's not surprising for ETF providers to create products to exploit past performance.

1:05:02And I would not be surprised if more than a few people went all in on the NASDAQ in 1999. Well, we know what happened then. Over the next two and a half years, early 2000 to about 2003, the NASDAQ 100 lost more than 75 % of its value. So you were pretty close to being wiped out if you were all in on that strategy during that period. Now, let's be clear. I'm not predicting a tech crash. I'm not calling a bubble. I don't do that. But anyone who understands the most basic stock market history knows that individual countries, sectors, companies will enjoy a period of exceptional outperformance, but it's not sustainable indefinitely.

1:05:46So if you're going to make a recommendation to go all in on QQQ based solely on past performance, you can't really sidestep the decline that would have devastated people who had followed the same strategy. in the late 1990s and early 2000s. I do want to be fair to the author. He does acknowledge that QQQ, it's one of my favorite lines. He says, it's not all that diversified, which is an understatement to say the least. And he does note that even after the crash, the fund didn't recover for about 14 years. So it's acknowledged, but it's a token few lines. In fact, another of my favorites is he says that the biggest case against this strategy is that it would take a big hit to his dividend income because these tech stocks don't pay dividends.

1:06:36They say, I think the risks are a little more significant than a reduction in your dividend income. So look, there's no perfect investment strategy. We can all agree on that, but there are a lot of terrible ones. And I think at the top of the list of terrible investment strategies is choose one economic sector in one country that performed the best over the last 20 years, and then bet your life savings that it's going to be repeated over the next 20 years. You could have made similar bets with Canadian bank stocks, with Vancouver real estate, which a lot of people did. And it worked out really well over some periods.

1:07:11But it's very naive to assume that in the whole universe of investments, your best hope of success is to concentrate on a very small number of stocks in the same industry, in the same country, exposed to the same risks. So I want to propose another interesting idea for your RSP. How about diversifying across every economic sector, every investable stock market in the world? And while you're at it, maybe throw in some bonds and GICs as well. So just to give you a little bit of context and compare that strategy to the all-in on QQQ strategy, have a look at a fund like Vanguard's VEQT. It's one of the popular global equity ETFs out there.

1:07:54Holds over 13 ,000 stocks, large, mid, small companies, 51 countries. And yeah, it holds all those same big tech stocks too. two, nobody's saying those shouldn't be part of your portfolio, but it also has a 20 % allocation to financials. It has a 13 % allocation to industrials, consumer discretionary. Every other sector is in there as well. So as far as I'm concerned, instead of going all in on QQQ, I would rather go all in on global capitalism. Love it. VEQT and chill. Exactly. This is some of the most common bad advice though. It is everywhere. I see Reddit posts all the time of like, should I add some SPY to my QQQ?

1:08:40There is definitely a tendency to see people doubling up on holdings. Like you said, holding the S &P 500 and the NASDAQ, forgetting that all the NASDAQ stocks are also in the S &P 500. You're just buying more of the same. right i'm glad you referred back to the downside that happened back in the early 2000 that 75 drawdown it takes some conviction to stick with that 25 cents in the dollar to ride it back over the next 14 years just to get back to break even yeah i don't imagine a lot of people would have had the patience to do that and in fact i've talked to investors who are a little bit older who have said it took them a few years just to get back to the stock market period exactly after that point.

1:09:24They were so scared off the whole idea that they were all out for a few years. And of course, when that happens, you're going to miss the early recovery. You'll eventually get back in, but the early recovery is where some of the biggest gains occur. There's a 2007 paper in the American Economic Review by Ilya Dijev, where they look at the difference between buy and hold returns and dollar weighted returns for a bunch of different markets and indexes, including the NASDAQ. It's basically like the performance gap for these different indexes. It's older. They look at that ending in 2002 in the paper, but the return gap for the US market for the NYSE Amex was 1.3%, but for the NASDAQ, it was 5.3%.

1:10:10Annualized? Yeah, that's right. Big return gap. Yeah. It's not surprising. Dan, while you were discussing this, I just pulled up wide charts and looked at MSCI World, which essentially tracks in US dollars the entire, well, mostly the entire global stock market versus QQQ and just kind of shuffled the periods around looking at 20-year periods. And to your point, if you look at 2000 to 2019, MSCI World outperformed QQQ. Ben, Cameron, you guys have seen this back in like the mid-2000s, late 2000s. You have the lost decade in the US. Nobody's talking about going all in on US stocks or all in on QQQ.

1:10:44They're talking about, oh, if you're not 50 % emerging markets, then You don't know what you're doing. So it's just this flavor of the day. Like if it was only as easy as looking back at the last 20 years and buying what performed the best, then we don't be very wealthy people. It's just not that simple. Just need a time machine and you'd be the ideal investor. Can you imagine? There's a great narrative around this too, right? Like if you talk to people who are doing this, their viewpoint, I find this is totally anecdotal, but is that investing in technology can't lose. That all companies are becoming technology stocks.

1:11:15the stories, the narratives behind the Magnificent Seven are just so compelling and so obvious to people that these are the companies that are going to dominate for the next 100 years. And even if that's true, though, you have to look at price. If that's so obvious to everybody in the market, why would we expect higher returns from those stocks in the first place? And I would argue in that sense, too, it's not that AI or other technologies won't be transformative, because I'm sure they will be, but we don't know how. And it may not be that the biggest winners in this game are the technology companies themselves.

1:11:48It may be companies in other industries who transform the way they do business because of those new technologies. And we don't know what those might be. Maybe they will be financial companies. Maybe they will be insurance companies. Maybe will it be automotive companies? We don't know. But if you hold everything, then you know that you're going to have the winners in your portfolio. Yeah. And Ben, you've done research on investing in technological revolutions, and it's just not that obvious that you should be always investing in the hottest trend. Yeah, it's more than not that obvious. It's usually pretty bad investment outcomes that people get for investing in the newest technology.

1:12:21I listened to a podcast this week interviewing an expert in the whole world of AI and LLMs. The difference between this revolution and the revolution in the late 90s, early 2000s is that the amount of investment it takes to continue to get the scale. It's at Moore's Law, that doubling of output issues, unbelievably massive if you believe that scale is going to continue. That's a big difference this time around. What that means for markets and returns, I have no idea, but it's a very different environment. Having said all that, I did buy TQQQ in my son's little test account that I have for him.

1:12:54TQQQ is triple leveraged QQQ. He's six, right? I have a little wealth simple account or whatever. where I'm trying to teach him about like volatility and stocks and stuff. And I was like, all right, let's amp things up. That may do it. He does have the time horizon on his side anyway. That's true. That's true. Shall we go to the after show? Dan, you're going to stick around? Sure. I think if you stick around, we might get the numbers up to what guys? Six, seven listeners? Poof. It's a big jump. Maybe eight. Okay. Someone wanted to talk about is taking GIS unethical. So what's the story behind that?

1:13:28I always feel so clueless after stuff like this happens where we'll talk about something I think is pretty benign and it turns out to be this massive trigger issue for a lot of people. And then the comments to an episode are I'm like, whoa, I just didn't expect that. So in the last episode where Mark talked about the RSP versus the TFSA, which by the way, it was like an all-star episode. People loved it. Mark made a quip about taking GIS if you're a wealthy person, if you have a high net worth, but not a high income and therefore qualify for GIS, that that's gross in Mark's words. And that upset a lot of people, but a lot of people also agreed with Mark.

1:14:03So I don't know. I just thought it was worth bringing up in the after show. Mark, any thoughts? I didn't even think of it when I said it. Like I didn't think of it as - I didn't either. And let me be clear. I didn't mean to judge any individual if that's the planning that they're doing. And I'm sure it came across that way. And from the comments in the forum, it did come across that way. I don't mean to judge any individuals. I find that type of planning, I use the word gross. I'm not going to walk that back. I don't want to double down here either. But I still don't like that type of planning.

1:14:28And I don't think that's the intended purpose of a program that is designed for specifically bringing low-income seniors essentially above the poverty line and people taking advantage of that program when they otherwise shouldn't qualify. Okay, personally, I'm not going to do that. I'm not going to plan for my clients to do that. If you want to do that yourself, that's fine. I will say that there were a lot of great comments and there were very respectful comments in the community. And some of them had me rethink that position a bit. And I think the main ones are whether the entire transfer system of taxes should be bucketed in essence.

1:14:59Like, should you look at those buckets? If we're all contributing to one pool, should you then parse those pools into different buckets when looking at who should be qualifying and who shouldn't? But I think the main one was around CCB, the Canada, the childcare benefit. One of the commenters said, well, how is this any different than making RRSP contributions to bring your income down to qualify for more of that benefit? and I thought that was a really great point. So it was a good discussion. There were people that agreed with me, people that vehemently disagreed. Like anything, good learning experience for me.

1:15:28I'm not going to walk my comments back, but at the same time, I think the forum made some good points. Yeah, we had a good discussion with some of the other financial planners that we know too, and the views there were also mixed. Oh, interesting. Some planners who we both respect a lot and are great planners said, there are cases where I would plan for this for a client if it makes sense to do so. Anyway, interesting. He seems more client demand driven. Well, in that case, the guy that we spoke to said there was a case where it just made sense to do this planning. The client had a high net worth, but for whatever reason, they had a low taxable income, so it made sense to do it.

1:16:01But they didn't have ethical issues with it. And that's really the core of the discussion is the system works the way it is. It's legislated the way that it is. Should you have ethical qualms about using it the way that it works, even if that's not necessarily the intent. Dan, any thoughts? It's definitely a slippery slope, right? I mean, if you're going to draw the line at GIS, and I don't necessarily disagree that shouldn't be a fundamental planning principle to try to get wealthy people to collect GIS, but we do it for old age security all the time. I mean, it's a fundamental retirement planning strategy to keep a client's income under 90 ,000 or so in order to maintain all the GIS.

1:16:41Many of those clients or individuals don't need, quote unquote, OAS. And a lot of it's just ending up in their bank accounts and piling up. But unfortunately, that's the way the system is created. And if you're going to criticize one tax reduction strategy, there are a dozen others that are equally questionable. But yeah, I think a lot of it for us, it just comes down to what feels right for you. And I agree, the GIS is probably at the extreme end of the spectrum. So yeah, I made a similar comment about there's a line somewhere, I think, and for everybody, that line might be in a different place.

1:17:15Me personally, I think my personal ethical line is drawn at GIS, but that's not the case for every advisor or every potential investors. And that's totally fine. I think one of the reasons people got upset about it, it was in particular because it came from you, Mark, probably, who was very vocal about the tax changes for physicians. And people are like, you're so upset about doctors having to pay a little bit more tax, but this is where you draw the line? Yeah, fair enough. To be clear, I walk back a little bit my distaste for the tax changes after we spoke with Professor Kevin Milligan. And also after I modeled these tax changes and realized that the impact over long timeframes was actually less than I expected, even for incorporated professionals, the impact is meaningful, but it's not the difference between meeting your retirement goals and not.

1:18:03So that's a fair comment. And maybe it's, again, cognitive dissonance on my part, or maybe it's just a gut feeling reaction to certain things. And I speak before I think sometimes, I'm like you, Ben, but here we are. The word of the day is nuance, perhaps. The other one that I wanted to touch on is average versus marginal tax rates. That was again from your talk, Mark, on RSPs versus TFSAs. What is that argument again? Yeah. And to be clear, this isn't an argument I necessarily fully buy into. I kind of lobbed that one out there because I do know there are a number of planners that I do respect that think of it this way and then others that I respected just can't wrap their heads around this and I don't really know where I stand.

1:18:40But essentially, the argument is that when you contribute to an RRSP, you are contributing at your marginal tax rate. You are reducing income from the top and you're getting a deduction on your income and a tax refund based on your marginal rates at the time of the contribution. But the argument is that when you withdraw from an RRSP, you can think about it as being withdrawn at average or effective tax rates, not at your marginal tax rate. I think the thinking there is that if you have other sources of income like CPP, old age security, obviously your RSPs, maybe a defined benefit pension, why are you intentionally stacking RSPs in that order throughout your marginal tax brackets?

1:19:16Why are you stacking RSPs at the top? You should think about all of those forms of income as being taxed at your effective or average tax rate. And my view on this was essentially that there's a marginal decision that you're making when you're contributing to an RSP that you're going to then defer the taxes to the future. So you can decide to or to not contribute to the RRSP. And that decision you're making, I think it's fair to compare them at marginal rates. Whereas other fixed income, old age security or CPP, for example, you largely can't opt out of those are true fixed income, whereas RRSP, you're actually deciding what to do.

1:19:47That's what the argument is. And again, I'm not convinced one way or the other. But again, people I respect on both sides of that argument. I don't know. I didn't think it made any sense when you're talking about it during the episode. One of the guys that you respect who made this argument to you and convinced you of it, or at least had you willing to believe it. I wouldn't say I was willing to believe it, but I thought that this person is what I would consider to be a walking financial planning executopedia, one of the brightest people I know. And if that genius thinks about it this way, what am I missing?

1:20:15He changed his mind. You were there. Were you there for that conversation? I was. Yeah. I don't know that he changed his mind, but I think he changed the framing of it maybe a little bit. Regardless, it wasn't that I believed it. It was like, what am I missing? How is it that this genius thinks this way and everyone else doesn't? I must be missing something because it's not him that's wrong. I don't think you can look at average tax rate on one side and marginal on the other side to make an argument for or against the RRSP. How it affects your overall tax rate is what matters on both sides. Any thoughts on that, Dan?

1:20:43Have you heard that idea before? I heard it when you first discussed it. I'm trying to get my head around it too. I would agree with you, Mark, that the decision to make an RRSP contribution is a decision. You can do it or you can not do it. But once the funds are in the RRSP, especially after age 72, the decision to withdraw it is no longer optional. So there is some logic in considering marginal tax rate on the way in and average tax rate on the way out. And that's even a stronger argument for contributing to an RSP in most situations, is it not? If your marginal tax rate is always going to be higher than your average tax rate.

1:21:19Yeah, and that was just it. That's an argument in favor of the RSPs. I might've made this comment on that episode that I could potentially see that argument being stronger for just the minimum withdrawals that you're required to take from the RIF. But any excess withdrawals from the RIF, I think it's then hard to argue, harder to argue, I should say that it's average tax rate. Because again, that's a decision you're making on the way out with the RIF. I think that's correct. Yeah. Anything beyond the minimum is a conscious decision and has to be thought of as a withdrawal at your marginal rate.

1:21:48Yeah. Choice in and choice out at the margin. You guys want to talk about the FHSA. I thought I would just bring this up quickly. It was a really interesting question that I got from somebody. I wasn't sure of the answer at first and I had to do a bit of digging on this. So somebody emailed me asking if I knew the answer to this question. They talked to some CPAs, some accountants who I guess didn't know the answer. And so they emailed me a follower of mine, I think on some social media platform. But the situation for them is that they have an FHSA, a first home savings account, which is an account, a new account that we can use to save for a home.

1:22:20If you're a first-time homebuyer, great little account. You get the tax deduction for contributions like you would with an RSP. But if you withdraw it for a qualifying home purchase, then it's tax-free on the way out, like a tax-free savings account. So it combines benefits of both plans. And when that works out, it's one of the only pure tax-free pass-throughs that we have in this country. So great little account. Now their situation was they were going to enter into an agreement to purchase a home from their parents at below market value. And they were going to move in in about three years. That's the plan.

1:22:53They couldn't move in right away because of something to do with their children's schooling. They needed to stay where they were. And this home is in a different city. So they were going to move. But the timeline for moving was around three years. So there's two things. One, buying the property from the parents below market value. And it was significantly below market value. The home was valued around$2 million. And they had an agreement to purchase for$800 ,000. So the question was, can you use the first home savings account or the homebuyer's plan as a qualifying withdrawal for a home that you do intend to move into, but not for three years?

1:23:23And where this gets interesting is CRA's language around qualifying withdrawals says you must occupy or intend to occupy the residence. So when you look at the government website for qualifying withdrawals for an FHSA, you must meet a number of criteria to qualify. And there's an interesting timeline here. This is straight from CRA's website. It says, you must have a written agreement to buy or build a qualifying home with an acquisition or construction completion date before October 1st of the year following the date of the withdrawal. So if I withdraw from my FHSA today, we're recording this on August 29th, I have until October 1st of next year, which in this case is more than 12 months, to have a written agreement to buy or build a qualifying home.

1:24:09And then the second timeline is you must occupy or intend to occupy the qualifying home as your principal place of residence within one year after buying or building it. So in this example, now we're looking at October, 2026, or actually more than two years from the withdrawal, and you can potentially still qualify. Now, in this case, this individual needed three years, so they still wouldn't qualify based on this timeline. And so I reached out to a friend of ours, Aaron Hector, who is by far the most knowledgeable person I know on the First Home Savings Account. And first I asked him, is this timeline correct?

1:24:43And he said, yes. And then I asked, how do they qualify the intention to move into a home? And he sent me a tax interpretation from CRA around this. Of course he did. Of course he did. Yeah. And I was Googling for hours and I never found it. He probably had it screenshotted from yesterday because he was reading it. And I don't have it in front of me. But essentially what CRA came out and said is that, Yes, there must be an intention to move into the home. You have to declare that intention when you withdraw from the FHSA. I haven't personally seen an FHSA withdrawal. I don't know, Dan, if you have, or Ben or Cameron, if you've seen one, but I guess you declare when you make the withdrawal that you're either moving in or have the intent to move in.

1:25:18But CRA has then said that you don't actually have to move in. If there's some circumstance that then prevents you from moving in, they won't disqualify the FHSA withdrawal. But if it was obvious that at the time that you made the withdrawal, you weren't actually going to move in in that let's say you've got a family of six and this was a one bedroom condo like there was something that would actually constrain you from moving in then they can look at disqualifying but they don't actually force you to prove that you did move in later on so in this case i mean i'm not suggesting anybody does this like you're clearly misleading cra if you declare that you intend to move in when you don't but it was interesting to see how cra might look at a withdrawal in this individual's case where there is absolutely an intention to move in they're going to actually spend a lot of time in this property because they're buying it from their parents they've got bedrooms set up there they're going to be visiting a lot they will have eventually move in.

1:26:03So that was the one interesting part. The second interesting part is buying the home below market value. I've written about this on Twitter, but there's this tax function called inadequate consideration, which applies when you buy property from somebody who's not at arm's length, which is generally a family member, and that transaction takes place below market value. Now, in the case of principal residences, this is usually not an issue because the principal residence is tax-free. But in the case where there's a rental or vacation property, this can become a problem. Or if you then turn a property into a rental or a vacation home later on, it can be a problem.

1:26:36So here's how CRA sees this. In this case, the value of the home is$2 million and the kids were going to buy it for$800 ,000. CRA will deem this transaction to occur at$2 million, regardless of the fact that it was an$800 ,000 transfer of cash. But for the buyer, in this case, the kids, their cost basis on the property will be$800 ,000, which is the value that they actually exchanged. So if this were a secondary property, no principal residents were to apply, the exemption were not to apply in this case. CRA would deem this to be a$2 million transaction. If any capital gains applied at that time, they would apply to the parents who were selling it.

1:27:13But the son who's buying it would have a cost base of$800 ,000 on a property that's actually worth$2 million. So if they went to then sell it down the road, they would incur another capital gain on that property. And so you get taxed twice potentially in scenarios where you're transferring property below market value to non-arms lengths parties. Again, principal residence exemption will largely solve this, but if they then moved out and turned it into a rental years from now, they might have an issue with capital gains taxes. So just a really, really deep, interesting question that took a lot of research and me talking to good folks like Aaron Hector to sort it out.

1:27:45That's really interesting. Can you name that guys? Nope. Not to that. Wanted to highlight, we have a meetup coming up in Ottawa in a few weeks. There's going to be a lot of people in town around then, so late September. In fact, it's Wednesday, September 25th. We're going to have a meetup in Ottawa for our listeners and friends of ours, who I think will be in town, who I know will be in town. Also hoping to get our friend Dan Solon out that day, which would be super fun to see him and get him a chance to meet a lot of local listeners. Yep. I'll be there, making the trek across the country. Ben will be there.

1:28:17I'm sure Angelica will come out. Okay. You want to dive into some reviews? Ben, you want to kick it off? We have a bunch of reviews. Yep. Rare from Canada says, simply the best personal finance podcast. I love personal finance. And after going through dozens of podcasts on the subject, this one is by far the best balance between variety and complexity of subjects. I also love the fact that your content is always backed by academics or data. This podcast is always the first resource I share with friends, family, and colleagues that are looking to educate themselves on the subject. Thanks for the outstanding opt-in Canadian content you put out there.

1:28:48Hope to be hearing from you again for a while. Awesome. Here's one, Olivier from Gatineau, which is just north of Ottawa. Hopefully, we'll see Olivier at the meetup. Great podcast. The content is extremely relevant. The information is based on empirical studies and not opinions and anecdotes. I studied finance at university and worked in the field, yet I learned a lot of information that changed my vision of finance and influenced my personal portfolio management. The topics also influenced my personal view of finance and helped me in my decision-making. This is a podcast to listen for anyone looking for quality content.

1:29:21Mark? Yeah, this one's from Alec Landgraf from the US. I'm here for the aftershow. People are here for the aftershow, Cameron. I first came across Ben on YouTube talking about small cap value and came to enjoy his mix of academic and pragmatic approach to investing. This podcast grew to include so much more. Goal setting, the role of financial advisors, the intersection of happiness and wealth. I find myself recommending this podcast weekly. If you ever opened an office across the border, I'd be your first customer. from Alex, a mid DIY investor. Amid. Yeah. I had a text from a long-time client and good friend of ours in the pod, Bruce, who just wanted to let us know that he is another one of the after show listeners.

1:30:00Anyways, Ben. That's kind of why it's the joke. I think a lot of people really like the after show. So it's funny to say there's only three people left, but we had a guest episode with Asya Billig from Canada's chief actuary. After that episode, there were people commenting either in YouTube or in the community saying, hey, there is no after show. and I had to explain that Mark and I are both confused about our episode formats. I was trying to explain this to Dan earlier too, that we have like a format for guest episodes where we ask the guest questions and then that's it. And then we have a format for episodes without a guest where we have like the intro and the after show and stuff.

1:30:31Guest episodes don't have an after show, but then sometimes in a regular episode, we also have a guest. Like still follow the format for like today. Anyway, it's all very confusing. I still don't know the difference between guest episodes and episodes like today. I have no idea. I've been listening since 2017. No idea. There's a lot of broken eggs in the background. And Dan, as you know from your time making the podcast, it's a lot of stuff goes on to have this come out. It's hard to piece all those segments together and do it in a consistent format because sometimes you have good content with one category and not with another.

1:31:04And so you just try to put out a good episode every week and not worry too much about consistency. Yeah. Okay. Lucas from Germany says, best podcast about financial topics by far. I've been listening for several years now and I really love your podcast and the high quality information you provide. What really makes you special is you pursue information before everything else. So guests with different opinions to yours are invited and you allow them to communicate their arguments. The questions you ask are then to get a better understanding of their viewpoint and not to falsify it because it's different.

1:31:34This combined with your nice personalities and the resources you link for deeper dives into the topics is just awesome. Big thanks from Germany. Nice. And we've got one more from Brian in Sacramento, California. RR is a national treasure. You guys bring me peace. You bring a meditative quality to rational discussions around academic thought process. And it's getting funnier too. I literally laughed out loud for a long time when Ben read aloud that he's a hot national treasure. Global treasure. Still the greatest review of all time. It's perfect. P.S. I'm not jumping ship from factors over the Andrew Chen interview.

1:32:08He might be helping to preserve the premiums by scaring some folks away. Just kidding. Big thank you for all you guys do. I don't know. Mark is mid is still pretty funny from Eugene Fama. Oh, I don't even remember what they said. Oh, they said I was mid, right? Cameron and Ben are 11 out of 10. Mark is mid. Yeah, and then they said it was from Eugene Fama. Have you guys seen this mid graph account that follows me around Twitter? No. I don't know why I'm talking about this now publicly, but there's this account called Mark. Why are you promoting it? Bleep that out? It's pretty funny, but there's an account called Mark Mid Graph.

1:32:40path. Hilarious, I know. And the only thing they do is post the word mid on my content. That's it. Nothing, no context, no nuance, just mid. But the profile itself is hilarious. So my profile on Twitter, my banner says financial planning for Canadian physicians. That's been sort of my niche for a number of years. This individual, their banner on Twitter says, I think financial planning for Canadian naturopaths. Their profile picture now is literally just a zoom in on my mustache. And I also do this thing on Twitter where if I use a third party tool for writing, And if a post of mine gets, I think it's something like 100 likes, it adds another post with a link to book a meeting with PWL.

1:33:16And it says something like, if you want to see what real financial planning looks like in Canada, click here. And they've put the same thing in their bio. It's a very funny ripoff of my account. And I was certain I knew who it was because there's a friend of mine who always chirps me on Twitter. But this individual has now confirmed and sworn to me it's not them. I have absolutely no idea who is behind this account. See what you're missing, Dan, on Twitter? It's great. I'm okay, actually. I'm comfortable with my decision. You're smart, Dan. You're smarter than all of us. You're smart. Twitter's terrible.

1:33:48Yeah, I haven't posted in a long time. I'm almost done with it. Are you guys getting swamped with marketing companies reaching out and saying they can help us build their profile and generate leads and also people want to help us find guests? I don't know if you're getting it or just me, but my LinkedIn is just full of this stuff. No, I don't get that. I get the impersonation accounts on Twitter though. Oh yeah. Oh yeah, you do. Lately you've had quite a few, eh? People send me messages every day saying, hey, just so you know, this person's impersonating you on Twitter. I'm sorry. I can't stop them all.

1:34:18I don't know what to tell you. Yeah. To be clear, any of us here on Twitter are never going to reach out and try to sell you something crypto or anything like that. So that's usually a pretty good indicator that you're being spoofed is when they DM you after they follow you with some message about, hey, how's your trading going? Yeah, that's what they do. They ask about your trades. Yeah, yeah, yeah. yeah one other thing before we ship off i have this running joke about our friend jason perera on the podcast heard of him i pretend like i don't know who he is see i don't know why this is so funny to me the name someone rings it makes me laugh every time dan do you know him you heard of him it sounds vaguely familiar but i can't figure out who you're talking about go ahead mark sorry it's still hilarious to me i will absolutely continue to run this joke where i pretend I don't know who he is.

1:35:04I just want to be clear, Jason Pereira is one of the brightest financial planners in the country, massive advocate for consumers. He's a friend of ours. Great, great guy. So when I'm joking about Jason Pereira, it is absolutely a joke. He's fantastic. I will continue to make this joke. And if we ever get him on the show, I'm going to really double down on those jokes, but I just wanted to clear that up. He's far too shy, Mark. He's way too shy. He would never do this. Of course. I just wanted to get that off my chest. Anything else on your minds, guys? Dan, great to have you. Super fun to have you back on the airwaves.

1:35:38I think it's great. Yeah, it's great to be back on the airwaves. Thanks. And you'll be a regular guest going forward. Looking forward to more. Absolutely. Once we figure out the format. Oh, geez, don't. It's the eternal, eternal hunt. Stress me out, Dan. Okay, any final thoughts? Nope. That's it for me. okay everybody as always thanks for listening