The Goodwill Investing Journal - Issue #41

Hello everyone!

The word delight is fresh in my mind. Oxford defines it: to please (someone) greatly.

I listened to a wonderful podcast last week from Doomberg - an anonymous Substack blog that has grown to be one of the dominant sources of information on energy, finance, and the economy at large.

He discusses the energy complex, debunks the peak energy theory, and explains how nuclear power is at a common knowledge inflection point.

He also goes to town on the idiocy of the Canadian Energy Minister and the general stupidity of our politics in this regard.

There is so much wisdom in this podcast that it must be shared (and thanks to one of my regular readers for sharing it with me in the first place).

But I was also very engaged with the first 20 minutes of the pod that touched on his business, why he started the blog, and the incredible growth they’ve seen of which they now have 200,000 paying subscribers with a small team of 6 (at $400/yr per subscriber - you do the math).

Aside from finding a market need, he attributes Doomberg’s success to the extreme focus they put on delighting readers with every single publication.

I love that.

Hopefully, I am keeping up my end of this bargain, and that is to delight one, some, or all of you, every week.

Thanks for being here.

1. Personal Finance

I’ve sent out my trusty Excel budget template to a handful of folks lately so I wanted to be sure to offer to subscribers here.

Start tracking your incomes and expenses, identify what bad debt you have that needs attention and forecast your year ahead - including the upcoming Christmas season (and if you are looking for great Christmas gifts for the ladies in your life, be sure to check out MJ’s new collection at Casa Maria).

After one or two months of doing the exercise, you will be able to identify waste, increase your cash flow and ultimately feel liberated.

I do this monthly. It always helps.

Excel can sometimes be daunting, but I’d be happy to run anyone through it - just ask.

As an aside, I am testing the waters with an online budgeting application called YNAB.

I’ve heard some really good things about this product - it connects to your financial institutions so it can track your incomes, debts, and expenses, which leads to high quality budgeting and visuals of where you’re at now and going forward.

Some may be concerned about data privacy and what happens if they get hacked - these are good questions and I will report back what I find.

On the surface, it looks pretty great.

2. Stock Markets

TRUMP WINS - ELON CHEATED

KAMALA WINS - CAPITAL UNDER SEIGE

Two possible headlines from CNN in two weeks.

Obviously it's good to care about politics and how a country is led.

But don't let it affect your long-term investing strategy.

Best thing you can do with this mainstream media crap is simply ignore it.

Look at the chart below.

If you invested in the S&P500 and did absolutely nothing else, a $10,000 investment in 1950 is worth $32,000,000 today.

Oh and just to preemptively counter the standard rebuttal “the chart is so misleading because it’s not inflation adjusted!” - well fine, good sir, keep your money in cash and lose 75% of your purchasing power doing nothing.

Or this one: “now is a scary time to invest, we have to see what happens in the US election” - the truth is, if you have a long time horizon, not investing is the scariest thing.

Finally, the age-old: “this time is different” - these are the 4 most dangerous words in finance.

3. Real Estate

Central bank actions are becoming common discussion points, more so than ever.

I think more people know about the latest rate cut announcement than pay attention to the Super Bowl - and that’s saying something!

With that said, I’d like to share my own comment on the Bank of Canada’s widely expected 0.50% interest rate cut two days ago, which has lowered the policy rate to 3.75%, along with the expectation of further cuts ahead.

Let’s remind ourselves of the role of central banks: to promote the economic and financial welfare of a country by using two monetary policy tools - controlling the money supply and setting interest rates.

Basically, when the economy is overheating, inflation starts to increase, and they increase rates which restricts the flow of money before things get out of control - we’ve all lived this movie since the beginning of 2022.

When the economy is in trouble, however, they lower rates and let the money flow freely. As dark clouds form, lowering the cost of money so people can borrow to invest, making it cheaper to operate a great business and hire more people, or stimulate the housing market, etc might bring a ray of sunshine.

On the residential side, my friend Steve Saretsky has pointed out that there has already been a notable increase in activity:

As it relates to commercial real estate, it should spur new investment and transaction activity because - all else equal - lower rates make the cost of acquisition cheaper.

But nothing is ever equal, or at least not at the same time.

Lower financing costs might bring more buyers back to the table, and with more money competing for deals, prices may get bid up.

There could be, however, a time lag between those two. I think the next six to twelve months might be an interesting time to scoop up some high-quality deals before all the buyers come back to the table.

Moving on, a quick word on how interest rates tend to influence capitalization rates, the standard valuation metric in commercial real estate land. Indeed, on a broad basis, they do correlate with interest rate movements.

But definitely not 1-1.

Take for instance, what happened after Covid 19, when the central banks fired a bazooka of economic stimulus by printing money and lowering rates to 0% to get us out of that crazy situation.

What followed was a ‘broad’ compression in cap rates, meaning real estate valuations took off.

Notice I put broad in single quotes - yes, some retail, industrial, and multi-family followed that trend (depending on quality and location).

Office valuations, on the other hand, got destroyed because of a fundamental shift after work-from-home became commonplace and vacancy skyrocketed. As a result, the market is structurally impaired and cap rates in this sector have increased dramatically.

A perfect example of how cap rates don’t always move with interest rates. So anyone who says cap rates always follow interest rates, please refer them to this Journal entry.

Anyway, I have been seeing increased commercial activity in real time with new underwriting projects and opportunities starting to come into the fold.

We must remain prudent, however.

Rates are coming down due to inflation undershooting faster than expected amidst a cloudy economic outlook.

In other words, even the central bank - which arguably has access to the best data - has some concerns about the overall shape of the broad economy.

The knock-on question is, even though financing rates are cheaper to acquire new properties, do my tenants have the ability to withstand higher rents?

That is the million dollar question.

1 Quote

A Question

What is one thing that delighted you this week?

For me, playing golf with my mum and breaking 80 for the first time in 10+ years.

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Thank you

Eddie Gudewill, CFA

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