Hello everyone!

As usual a quick thank you to all readers of the Journal as well as all new subscribers this week. 

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Personal Finance

The best personal finance strategy:

Pay yourself first

• Exercise - do pushups, run, etc

• Health - drink water, eat well, etc

• Money - pay yourself first, etc

Because money flies out the door for necessities (shelter, clothing, food, taxes) and fun (entertainment, trips, etc), you find it hard to save money at the end of each month. 

Instead, put yourself onto the top of the pecking order and pay yourself first. 

Implement an automatic "sweep" system: upon receiving your next paycheck, move a portion directly from your checking account to your investment account.

The key word here is automatic. Start with 10-15% of your monthly income, then adjust from there to suit your budget. Wealthsimple has a great automation features.

Once you've taken care of numero uno, you are healthy and ready to spend the money on housing, food, and fun with your loved ones without worry.

Bitcoin

Frequent readers of the Journal know that I spend 97% of my time discussing stock markets and investing using ETFs - because it is the most dependable long-term way to build wealth, period.

However, given a number of incoming requests, a ‘brief’ word on Bitcoin today.

It’s now sitting at a whopping $90,000 USD or $126,000 CAD.

In case you’re asking, while Trump winning may have boosted the crypto market, Bitcoin doesn’t care who is the sitting president. It will do what it does as always.

Nevertheless, eclipsing the prior all time high is a major signal: the heat is on.

But I warn you, the coming inter cycle CRASH will absolutely ruin people.

While I believe in the Bitcoin project, enough to have 20% of my net worth in it, I never recommend it. Because even though many theories predict it could get to +$1 million (Michael Saylor thinks $13 million), there is still a non-zero chance it ends up worthless - and that is something I am not comfortable recommending.

I only recommend people do some research and learn how it works, including the cycles.

My personal strategy with Bitcoin is exactly the same as with my ETF (S&P500) investments: to acquire and hold indefinitely, adding along the way, regardless of the price swings. Because the volatility is insane. I’ve ridden this thing since 2018 and, let me be perfectly honest, the wild upswings are joyous but the commensurate collapses are no joke. I look at it like insurance. If it goes to zero, I won’t be wiped out. If it truly works and ascends the gold market (and beyond), something else in the world isn’t working.

So IF you were to consider investing in Bitcoin, do so at your own risk. My biggest piece of advice is to understand in advance how quickly the price can collapse. Overtime, the volatility is fiercely upward (see chart at the bottom), but if you zoom in on short term periods, the inter-cycle crashes will test even the most emotionless person’s resolve.

The savage part is that this upside vol after handily breaking the previous ATH high will make people go crazy with FOMO.

Price could go to $100,00 or even +$200,000-$300,000.

Only then will the retail crowd truly pile in, and then as day follows night, it will swiftly fall something like -50% to -80%.

Bitcoin does this every cycle, breaks all time high - goes ballistic - then crashes down and tests and tests and tests the new floor. Sometimes, it even goes below that floor.

At that point, those recent entrants will then be thinking about selling after buyers remorse and confusion about their initial choice, selling out scared at a huge loss.

Trick is to learn the cycle and then ignore the greed and fear as best you can. Start with what you can that won’t implode you mentally, and add in measured ways throughout your time horizon.

Then you’ll be nicely buckled-up for the roller coaster ride to $1 million per coin and possibly beyond while the retail crowd get thrown off the top.

Eventually, the future return profile for Bitcoin will stabilize into equity-like-returns or less. But the path there will be brutal.

Just a word of caution before piling in with your life savings.

With anything, measured approach is key, sizing limits, etc.

Otherwise it could ruin you.

For more info, read the Bitcoin Standard.

PS. Below is a chart of Bitcoin since inception. I had to make it on a log chart in order to highlight the magnitude of the % gains over time.

My two cents: Early gains within a halving cycle of 100x or 30x are done. You can see this by the height of each box, they get smaller and smaller. However, notice the inter-cycle drawdowns. Rest assured, Bitcoin will get absolutely clobbered during and after this bull run. Probably in the realm of 70-80%. Be careful investing in this volatile asset, it will make a stoic person go nuts.

Bitcoin Price - Halving Cycles - Log Chart

Real Estate

Spoke with a nice fellow this week about real estate.

He is from Vancouver, 39 with three kids and has been investing in Real Estate since 2003.

Mostly in the multi-family space, turning single family homes into multi-plex’s and renting them out.

He has done very well and tripled his money over time.

The question was then asked - does it make sense to continue to own his rentals and be a landlord, or sell and redeploy elsewhere?

He didn’t explicitly say it, but I could get the sense he is concerned with valuations and also the thankless and intensive job of being a landlord.

Hard to answer his question in a 20 minute call, but here’s the gist of the discussion:

First, I would take a good look at what your net operating income is and compare that to the “likely” value it could fetch today. By likely, I mean, just be conservative.

Though you think your property is worth a number, the markets don’t care about your emotions and the blood sweat and tears you have put into the property. The market is the market, and it will take advantage of you if you let it.

So do some work and find some recent comparables for what product is actually worth.

Once you have the estimate of market value - there you have it - you can calculate your cap rate. Please see Issue #32, Issue #42, and Issue #43 for the series on Cap Rates.

Then compare the cap rate to your cost of financing - basically, can your net operating income cover the mortgage.

He wasn’t able to answer that question on the fly, but my knowledge of multi-family rental product in lower mainland BC tells me it’s likely a sub 5 cap rate, or even sub 4.

That is skinny cash flow and likely underwater with any ‘normal’ 65% loan to value at 5% interest.

Furthermore, also estimate the necessary capital expenditures / maintenance that you foresee - those expenses that fall below the “operating income” line but are in fact very real numbers.

Then consider, where can you take rents from here? Are they already fully cooked? What about rent control limitations? Also, what about your expense inflation and how do you control those costs?

If you think you have ‘extracted’ all the value under your stewardship, increasing rents on the property and managing expenses efficiently, maybe there isn’t much upside to income here on out.

And if that’s what you’ve determined, then maybe holding onto the properties at fully baked values is nothing else but a ‘hope’ trade that land values continue to increase.

That may be a satisfactory strategy for some investors with a long term time horizon, as evidenced by the large multi-family product that is selling for crazy low cap rates. After all, BC isn’t going anywhere, is land constrained, and is a desirable place to live.

But for us, we identify value add opportunities to increase value based on the line items we have more influence over - income and expenses. Simply owning a 4% cap rate deal isn’t in our strategy.

Once we determine we have improved a property to full value by managing it well, that is when we consider selling in order to recycle capital and invest in another deal that offers a larger potential return.

That is what we call opportunity cost. Essential to understand if what you own is the best and right fit vs the opportunities that are elsewhere.

Easier said than done, but that’s the jist.

Turns out he is interested in reviewing upcoming deal opportunities we have. You must be an accredited investor to participate and be able to invest a minimum of $200,000.

If there are any investors that fit that profile and want to learn more about it, let me know.

1 Quote

A Question

How do you keep calm in a world of chaos?

For me - 45 minutes in the steam and sauna just about does it.

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Thank you

Eddie Gudewill, CFA

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