Benjamin Felix

October 2, 2018

Episode 13: Unaffordable housing

Benjamin Felix

October 2, 2018

Key Points From This Episode:

Getting into the DFA advanced conference [0:01:58]
Cancelling whole life insurance [0:05:05]
When permanent insurance makes sense [0:07:55]
Unaffordable housing in Canada [0:10:55]
Housing bubbles? [0:11:57]
Bridging the gap with a HELOC [0:13:00]
Undervalued financial advice [0:17:30]
Money does not buy happiness [0:17:57]
Defining a lifestyle [0:23:25]
Walking to work [0:24:10]
Active funds are still underperforming [0:24:34]
Missing out on the best stocks [0:25:15]

Read the Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision making for Canadians. We are hosted by me, Benjamin Felix, and Cameron Passmore.

Welcome to the Rational Reminder. This is our 13th episode and this week is just Cameron and I, we do have some great conversations with guests lined up for October and November. The podcast actually topped out at number 16 in the business category on iTunes about a week ago, which was pretty cool, we didn't really expect anything like that to happen when we started this thing.

Cameron Passmore: Incredible how much it bounces around though.

Ben Felix: Yeah, but we've kind of been staying mostly in the top hundred.

Cameron Passmore: Yeah, so-

Ben Felix: In business [crosstalk]

Cameron Passmore: How many downloads we have, or what it takes to do that, but it's been nice to see it move around.

Ben Felix: We're getting over 200 downloads per episode.

Cameron Passmore: So way more than I think we ever imagined.

Ben Felix: Yeah, definitely. So anyway, if you enjoy the podcast, please give us a rating and subscribe.

Cameron Passmore: So as Ben said, it's just us this week to talk about things that we kind of picked up during the week. Next week, we'll have a great, [inaudible 00:01:15] going to join us. I had lunch with Martin last Friday, and he's a retired banking executive who has a lot of experience in the credit card and debt space in Canada, and has a lot of opinions as to what has been going on. So I thought that'd be interesting to have Martin on to get his views since we get a lot of questions about debt and whatnot.

Ben Felix: So he's going to talk about how people are using debt in Canada, kind of thing?

Cameron Passmore: How they're using it, what he sees as trends, he's written a couple of white papers. So he sees some trends that he wanted to discuss with us. And he's also made some personal decisions about retiring, kind of like what Doug was talking about a couple of weeks ago. So I think it will be a really interesting discussion with a guy who's got a ton of very high level experience in financial services.

Ben Felix: That's going to be a great conversation.

Cameron Passmore: And also next week, you and I are off to Chicago for the annual DFA Advanced conference, which is an annual event, as I said, every October. We head South to their annual conference. This year it's in Chicago, which is home to the Booth School of Business at University of Chicago. So we're going to see Eugene Fama live and in-person, so he's certainly the big draw. And we're going to bring our microphones with us and maybe with some luck we'll get some big catch guests for the show, who knows.

Ben Felix: I have a feeling it's just going to be you and I nerding out about what we learned.

Cameron Passmore: But, these are great conferences and it's all educational and it's a special event to get to.

Ben Felix: The DFA Advanced conference, I've been here working with you for five years now, almost exactly five years actually, and I've never been able to get to the Advanced conference. So this is the first time in five years that I've gotten a seat. It's not easy at all to get into.

Cameron Passmore: Yeah, and as DFA gains in popularity, the seats are harder and harder to come by. And I know also people wonder who pays for this. This is all on our dime. [crosstalk]

Ben Felix: Yeah, I had the question recently because we talk about DFA so much. Somebody asked me if we have a financial relationship with them. Like obviously a lot of wealth managers would be getting paid by a mutual fund company to use their products. And the answer to the question is that we do not have any financial relationship at all with DFA. They don't pay us a cent.

Cameron Passmore: Correct.

Ben Felix: For anything. And when we go to their conferences, like the Advanced conference, like you said, we pay our own travel, we pay for our own hotel.

Cameron Passmore: That's right.

Ben Felix: They might give us a lunch. Do we get a lunch?

Cameron Passmore: We get a lunch.

Ben Felix: Well, I guess they're paying us a bit.

Cameron Passmore: Yeah. So it's October, October 1st today, and many people, as soon as you say October, in my experience, a lot of people remember the crash of 1987. I know where I was, unless you know where you were on the day of the crash in 1987?

Ben Felix: I was born two months later.

Cameron Passmore: So, I remember I was sitting in French class at McGill in Montreal when it was crashing. And of course there was no smartphones, so I actually don't remember how we found out, but it was in the middle of class we found out. One of my wealthy friends at McGill was so worried about his stock portfolio. I didn't really even know what he was worried about. I didn't grow up owning any stocks.

But Barry Ritholtz who we mention often on this podcast, put out a chart this morning on his daily email blast showing that actually on average, October has not been so bad. With the average monthly return for the past 20 years of almost 2.5%-

Ben Felix: This is for US stocks?

Cameron Passmore: For US stocks, it's actually the Dow index.

Ben Felix: Okay.

Cameron Passmore: And then for the past 50 years, the average monthly return for October's been 0.84%. And for the last 100 years, the average monthly return has been 0.4%. So even though you may be grounded in remembering that October '87 crash, the data doesn't necessarily suggest that it's that bad a month.

Ben Felix: October's not a bad month in general.

Cameron Passmore: No.

Ben Felix: That's interesting. Our Common Cents Investing YouTube series, a video we posted last week, was on permanent life insurance. And it sparked a lot of good conversation in the comments section on YouTube. So I say in the video that term life insurance is probably the most sensible insurance option for most people that have an insurance need. And in the comments, someone shared a stat for Americans, and this is not a Canada specific stat, but presumably the data is somewhat similar, but it showed that 80% of Americans who buy whole life insurance end up canceling the policy before they die.

Cameron Passmore: It's a staggering number.

Ben Felix: I couldn't believe it either, couldn't believe it. But it was supported by what appeared to be good data. I didn't dig too deep into it, but anyway. And that's a huge number, obviously, 80%. So 20% keep it until they die. The problem with that is that there are a ton of upfront costs when you're buying permanent life insurance, like whole life insurance. So if you end up taking your money out early, typically you're going to lose. You're going to lose money, right? Like it takes a while, maybe 10 years or more before you can actually cancel the policy and get your money back.

Cameron Passmore: But how much of the long-term benefit do you think comes from the fact that so many people do cancel early? Like, is this not an argument to, if you have one, or you're to consider one, because so much of your total return must come from that forfeiture benefit.

Ben Felix: Only if you're in a participating policy.

Cameron Passmore: Right?

Ben Felix: If you're in a regular whole life, you're going to get a guaranteed return. If you're in participating whole life, then we know how the experience of the insurance company affects the participating dividends. So you're right. If the insurance company sets premiums to reflect a certain cancellation rate and more people end up canceling, then the participating policy holders would get bigger dividends. But it's a weird asset class, participating whole life insurance, that we're not generally a fan of.

Anyway, somebody else in the comment section actually took the side of defending whole life, and their explanation is an explanation that you can't argue with.

Cameron Passmore: Right.

Ben Felix: But they basically said that they've got a paid-up 20 year pay. So they'll pay for their policy for 20 years and then it's in force until they die, no matter when that is. And they argued that sure, I might be losing out, but I'm guaranteeing this amount of liquidity for my kids. And I actually say that in the YouTube video, that's exactly why you might want to buy permanent life insurance, because it will give a specific benefit at the time of death.

Cameron Passmore: And I think they also reference that. When have you met a person who might be 50 or 60 years old with a policy like this who's actually upset they have it?

Ben Felix: Right, that's right.

Cameron Passmore: It is hard to argue with that.

Ben Felix: Very hard. It's like having a paid for house. Sure, you could have rented and invest the difference, but how many people complain when their house is paid off?

Cameron Passmore: Exactly.

Ben Felix: Yeah, anyway. So, I wanted to ask you, Cameron, when do you think, in your opinion, where are some cases where a permanent life insurance doesn't make sense?

Cameron Passmore: There's two that come to mind. One, we had a client who wanted to donate a certain amount to his church upon his passing. And he wanted to know how much it would take over the next 10 years to pay it off. So it was a perfect scenario. And we were able to get a guaranteed policy. He knows what he's paying for 10 years, then is done. And then another situation we did, probably one of the best ones we ever did, was someone who had multi-generational wealth inside their companies. So these are retained earnings of an active business inside their company and way more money than they would ever need, so we put in a permanent policy inside of the corporation. The corporation owns the policy, it's using pre-personal tax dollars to put into the policy. And when they do pass away, the money will be able to flow largely through the capital dividend accounts. There's some tax advantages to that where the next generation will be able to extract those funds from the company and pay a much lower rate of tax.

So that worked out beautifully. There's no way they'll ever need those funds, and they didn't want to give up the funds as yet to the next generation, so it was a great strategy in that case. And they would have to live the internal rate of return, even excluding, I'm doing this from memory, but even excluding any tax benefits. The internal rate of return into their 90's was two to 3% per year, internal rate of return. And when we gave that data to them, they said, "Well, there's no way we're going to live that long." I'd say, "Well, the insurance company looks at many people like you, and this is what their assessment is, so let's hope you do." And they said, "If we do live that long, we'll be thrilled." Right, it's not about the math, of course, at that point.

Ben Felix: That's interesting. Two to 3%, so that's kind of what we've talked about in the past, is that when you're looking at that specific play where you're using money that you're never going to need. And the argument for the holding company and for a high net worth individual, are somewhat similar because in both cases there are tax advantages. Obviously investment income in the corporation is taxed at close to the highest marginal personal rate, and then if you're at the highest marginal personal tax bracket, any personal investments are taxed at the highest marginal rate.

When you dump money into an insurance policy, it grows without being taxed.

Cameron Passmore: Right.

Ben Felix: Which is pretty attractive when you have a high income, but like the two to 3%, even with the tax benefits, I don't think that you could argue that a permanent insurance policy will outpace a 100% equity portfolio. But insurance can maybe be part of your fixed income allocation, if it's money that you're never going to need.

Cameron Passmore: That's exactly the rules that I've been using.

Ben Felix: Yeah.

Cameron Passmore: And then the accountant suggested that the tax savings on the other side are roughly 30 to 35%. So that internal rate of return I quoted is before we even considered that.

Ben Felix: Right. Yeah, it's an interesting play in very specific cases, but in general, like most people listening, you probably don't have a need for permanent insurance.

Cameron Passmore: Yeah. You want to talk about housing?

Ben Felix: Yeah, there was a lot of headlines about that last week.

Cameron Passmore: A lot of headlines, and I had a lot of conversations with people, so it's clear that housing is on the minds of a lot of people. So RBC had a report out last week saying that their housing affordability measure has not been as bad as it is now since 1990. The ownership cost to carry a home right now would have taken up 53, 54% of a typical household's income.

Ben Felix: Crazy.

Cameron Passmore: This is staggering. That's the Canadian average, correct?

Ben Felix: That's right. In Vancouver, it would take 88.4% of income. Auto was looking pretty good, 38.6%

Cameron Passmore: And Toronto, where I was last week, is 75.9%.

Ben Felix: Does this mean it's a good time to buy in Ottawa?

Cameron Passmore: What was the question you get, right? What does someone do? All I know of the discussion with people there said, if they came to Ottawa with the kind of budget they need to have in Toronto, they'd be able to buy just a phenomenal, phenomenal property.

Ben Felix: Right. Yeah, it's very interesting how all of the economics work on that stuff. So that data you were just citing was from an RBC report. UBS also had a report out last week talking about housing bubbles around the world. And in the top five, there were two Canadian cities, Toronto and Vancouver, in terms of being at risk for a housing bubble. In front of them were Hong Kong and Munich. And in their report, UBS actually did a really balanced job of describing a bubble, which of course, if you believe in an efficient market, you don't believe that a bubble can exist, but they kind of work that into their definition. So they say-

Cameron Passmore: Or at least it's only visible in hindsight.

Ben Felix: Well, that's why I say this UBS report was so balanced. They say price bubbles are a regularly recurring phenomenon in property markets. The term 'bubble' refers to a substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts. So there's that statement right there.

Cameron Passmore: Yeah.

Ben Felix: But historical data reveals patterns of property market accesses. Typical signs include a decoupling of prices from local incomes and rents. So that's kind of what we were talking about with the affordability from that RBC report. And imbalances in the real economy, such as excessive lending and construction activity, the UBS global real estate bubble index gauges the risk of a property bubble on the basis of such patterns.

So basically they're saying that in Toronto and Vancouver, there's been this decoupling of economic activity within the city, so incomes and actual house prices. That's where that affordability issue becomes pretty serious. Rob Carrick had a post last week talking about the increasing use of HELOC's, Home Equity Lines Of Credit, in Canada. And he shows that the most expensive housing markets have the highest HELOC balances. And he kind of suggests that people might be using HELOC's as a crutch to get by in these more expensive markets.

Cameron Passmore: And this is exact kind of question we should cover off next week with Martin.

Ben Felix: Yeah.

Cameron Passmore: This is right in his wheelhouse.

Ben Felix: Yeah, that'll be great to talk about with him. For now, I'm pretty happy to be a renter.

Cameron Passmore: So when it was in Toronto last week, a person I was speaking with is looking to buy a property. And in one week he was outbid on three different properties by a significant amount. And he went over-ask, where it certainly suggests a bubble, but you have so many people flowing into Toronto right now, and many people want to avoid the daily commute to the suburbs. So I think that's the argument for wanting to live downtown and what's driving prices up.

But he sent me a really neat affordability study looking at 28 Ontario cities, and then after putting a 20% down payment, looked at how much salary you need to carry that mortgage compared to what the median income is in that area. So the number one city for the widest gap between what you need to have and what your median income is, Richmond Hill had the widest gap. You know, almost a $50,000 spread of annual income. Toronto came in Second. Most of the cities that were at the high end of the un-affordability index were in the Toronto area.

Ben Felix: The gaps are huge between what you would need to afford to buy and the actual average income. I don't really know what that says about, well, I guess that's kind of what the UBS report was talking about in terms of bubbles, that's a decoupling of prices with actual incomes.

Cameron Passmore: But look at the difference, like Toronto, 785,000 average price for sales in August, July or August, it's current data. Ottawa came in 26th out of 28, with 433,000 average price. That was the average sale amount.

Ben Felix: Good time to be in Ottawa, I guess.

Cameron Passmore: And the income needed is $26,000 less than the average incomes. There's a complete inverse here than what people living in Toronto.

Ben Felix: Yeah.

Cameron Passmore: But I tell you, Toronto is booming, it's unbelievable. Many people may have seen the Shopify announcement last week, where they're putting in, you know, half a billion dollars commitment to new office space. Other companies, and this is what I heard from many people last week, you know, companies like Google, Microsoft, Uber, Intel, Pinterest, Nvidia, LG, Samsung, all recently announced new offices in Toronto. So you got to think that's more people, more income, they like the urban lifestyle, they don't want to commute. To me, that suggests rising home prices right there.

Ben Felix: Would you say that, so we know that, based on current data, incomes are not high enough to justify prices, but with growth like that, do you think that the market is just pricing in the potential for rising incomes?

Cameron Passmore: I would guess so. We're not talking missing your offers by a little bit, we're talking about significant misses, like in the hundreds of thousands of dollars.

Ben Felix: We've seen that in Ottawa too.

Cameron Passmore: [crosstalk 00:17:03] data in Ottawa, I mean, nothing like that in Ottawa.

Ben Felix: We've seen that in Ottawa. Yeah, oh yeah. Same margins, same magnitude of out-biddings. I've heard two or three stories like that recently. Fama would say, I think, I'm putting words in Eugene Fama's mouth, but I imagine he would say that the market is just pricing in future growth, future income growth.

Cameron Passmore: That seems sensible to me.

Ben Felix: Because Fama would never say there's a bubble, obviously.

Cameron Passmore: So, one of our favorite podcasts is Ben Carlson, I thought had a really neat post last week on, he called it undervalued financial advice. He's basically making the point that so much financial advice that is out there these days, you know, is kind of, to me, throw away advice, like avoid buying fancy coffees and things like that, kind of on the spending side, which not that I'm suggesting you waste money, but you've got to keep your eye on the big picture.

Cameron Passmore: The four main points he made, one is avoid the allure of more. And we see that as people's income increases, you often get inflation creepage in their spending, it kind of keeps up with their income. And we're coaching more and more people now to figure out what sort of lifestyle you're happy in and try to stay there where you can, so at least you lag your increase in income and try to save more.

Ben Felix: We've had a lot of people say when they've had a major liquidity event, they've specifically said to us, you know, basically keep us in check, make sure we don't start getting out of hand with spending, because it's easy to do when the cash is there.

Cameron Passmore: It's easy, but boy, a lot of the young people we work with have not had the creep go on, remarkably. And once you get so close to freedom, even at a young age [inaudible 00:18:43], I've got freedom now. To me, the freedom is worth more than the increased lifestyle.

Ben Felix: Than the stuff.

Cameron Passmore: The stuff?

Ben Felix: You don't need stuff.

Cameron Passmore: Don't need more stuff.

Number two, envy is more expensive than gratitude. So no generation has ever had a higher standard of living than this one. So kind of message is be happy with what you have.

Ben Felix: Well, there's some, we've got a handful, maybe a couple, very affluent clients who actually systematically dumpster dive. There are stores that you can go to when they close, and I guess the store, it seems like it's this whole game. So a group of people will meet up at a store.

Cameron Passmore: Really?

Ben Felix: The store will dump stuff in the garbage, but they'll put it in like nice cardboard boxes so it's easy to-

Cameron Passmore: Retrieve?

Ben Felix: Yeah.

Cameron Passmore: You serious?

Ben Felix: Oh yeah. Because the store can't, they can't give it away or whatever, because there's regulations around that, I guess, and they don't want people to get sick and there's liability and all that stuff. So they "throw the food away", but somehow they've communicated, or people know to go to the store, and pick up this food from the dumpster.

Cameron Passmore: Time and health matter more than wealth. I think I saw a comparison between, let's say you're 20 years old with no money, and Warren Buffett with all his money, I guarantee he would trade his 60 years to become 20 years old and broke again for what he has now.

And the last one, the last tip, is stay married. Interesting, the stats on this, the median married household had 10 times the savings that a typical single household.

Ben Felix: Single, or is that divorced? Or did it say?

Cameron Passmore: Just said single.

Ben Felix: Okay.

Cameron Passmore: It said single. Ohio University research found that the wealth of an average divorced person falls 77%.

Ben Felix: Jeez.

Cameron Passmore: Yeah, because the few years leading up to the divorce and the subsequent years often cause financial strain.

Ben Felix: Wow.

Cameron Passmore: So, main message there is to find a financially compatible spouse.

Ben Felix: Crazy. I just finished listening to Fortune's Children, which is a book written by a Vanderbilt about the Vanderbilt family. And they were for a long time, the richest family in the world. Cornelius Vanderbilt built a steamship empire when steam ships were a thing, and then in his 80's I believe, or was it in his 60's? When he was getting a bit older, he stared a railroad empire and ended up controlling the New York Central, which was one of the largest, most profitable railways in the world.

So they're mega wealthy, but the book talks about three or four generations of the family and how they all ended up with no money left at the end. But the point you were just making, one of the biggest reasons that the money disappeared was that a couple of the grandsons of Cornelius Vanderbilt ended up marrying women who weren't bad people, and they weren't maliciously spending, but they wanted a certain level of lifestyle and a certain level of stuff and houses, and it just bled these last two grandsons dry. Then they ended up with very small estates.

Cameron Passmore: Isn't Anderson Cooper's mother a Vanderbilt?

Ben Felix: I don't know.

Cameron Passmore: I believe so.

Ben Felix: There are many, many descendants [crosstalk 00:21:48]

Cameron Passmore: I know he said that, I mean, his mother is wealthy, I believe, subject to correction, but I believe he said that he assumes he's getting nothing as an inheritance. Now I'm sure he's fine, obviously, but I believe his mother's a Vanderbilt.

Ben Felix: But in the book there's, so one of the other points that you mentioned, avoiding the allure of more, there was a quote in that book, in Fortune's Children, that really stuck out to me on that. And it's from William H Vanderbilt, who was the son, the oldest son of Cornelius Vanderbilt. So he inherited the majority of his father's wealth. I think it was like a hundred million dollars that he inherited. And he actually doubled that, but before he died. But anyway, so William H Vanderbilt was the richest man in the world by far. And he made this comment to a friend about his neighbor. He said, "He isn't worth one 100th part as much as I am, but he has more of the real pleasures of life that I have. His house is as comfortable as mine, even if it didn't cost as much, his team of horses I believe, is about as good as mine, his opera box is next to mine, his health is better than mine and he'll probably outlive me, and he can trust his friends."

But there's kind of a theme throughout the book that while these Vanderbilt's are so wealthy, they're not happier than anybody else. So the Vanderbilt story actually encompasses a lot of the things that you just said, because it does talk about avoiding that allure of more. And then it also talks about marrying a financially compatible spouse. So that's obviously an extreme story with many, many more zeroes than most people deal with, but the theme's remain true.

Cameron Passmore: I'm just thinking of this now, I was talking to a client last week and, you know, the classic big spend in retirement is, "I want to travel more." And then the realization, "You know what? We don't, we don't really want to travel more. Yeah, a trip or two a year, but nothing too crazy in this and we don't enjoy the crowds, we don't enjoy battling airports, we don't want to do the battling trains across Europe." And I'm not suggesting that's not fun, this was their opinion. They're just going to be happier in a lower cost retirement. So I think many people kind of paint this picture of what they think they should have in retirement, but when you actually think about what you want to do, it may not be as expensive as you think.

Ben Felix: That's very interesting. I don't know what I would want to do. What would you want to?

Cameron Passmore: Well, this sounds weird, but I love what I do. I just want to live closer to work so I can walk to work like you. I don't really want to stop doing this. I mean, a little bit of travel, but I'm not crazy about travel, but you have to have something to accomplish, you have to have some mission to be in. I couldn't imagine just a classic retirement.

Ben Felix: Yeah, I couldn't either.

Cameron Passmore: Maybe one day, but certainly not yet.

Cameron Passmore: Wouldn't be a podcast if we don't talk about active versus passive fund managers, of course. So you dug up a study that came out, I think it was in the Wall Street Journal, talking about US active fund managers and how this really wasn't a stock picker's year after all. So you would think that based on, you know, Trump and political uncertainty and PE ratios and whatnot, that this would be a year to shine for the stock pickers, which we always hear is going to be the year of. And I don't think it was so much this year or the trailing 12 months, only 36% of active funds in the US beat their benchmark index.

Cameron Passmore: Should it have been more? I'm not so certain. You have what, a handful of stocks responsible for a huge amount of returns, like Amazon, Apple, Microsoft, responsible for a quarter of the gains in the S&P 500 for the past 12 months.

Ben Felix: Ending June, yeah, that's right.

Cameron Passmore: So all you do is get those right or overweight those, you would have [inaudible] So maybe at 36% makes sense. What do you think?

Ben Felix: Well, there was a paper that came out in 2015 that mathematically showed with a sort of simulated market, why the distribution of returns, of stock returns, is probably much more responsible for active funds underperforming than fees, like fees often take the credit for active funds underperforming on average. But this study showed that because we know empirically a relatively small number of stocks in the market are responsible for most of the returns.

Cameron Passmore: And that's all the time?

Ben Felix: In a given year, right? This year has maybe been a bit more extreme, but in any given year, that is true. So this paper shows that that distribution, just based on active managers picking portfolios that are subsets of the overall market and knowing that the overall market has a relatively large proportion of its returns concentrated in a relatively small number of stocks, that makes it really, really hard for the average active manager to outperform, even before fees.

So that's, I mean, that is what it is. That makes it very hard for active managers, and when you have indexes which are CAP weighted, as those huge companies get bigger and bigger, as their evaluations increase, the indexes end up holding a higher weight in them, which again, it is what it is. If you get lucky and there's a run-up and you end up owning more of a stock that's doing well and it continues to do well, then your returns will be good.

Now, this has interesting implications for us in the way that we manage our client's portfolios, where we're obviously not active managers, like we're not picking stocks by any means, but our portfolios are different from the market. And that does show up in returns. So we obviously expect the return difference between a value in small tilted portfolio to be positive over the long-term. But when you have those large CAP growth stocks in the US that are really driving returns, not just in the US but they're really driving returns this year all over the world. Like international and Canadian stocks have not done much.

Cameron Passmore: No where near what the US has done.

Ben Felix: The US have had great returns, especially in Canadian dollars this year, but a lot of that's been driven by that small handful of companies. So I looked at the weights of those three companies that have been responsible for 25% of the S&P 500 return in XUU, which is the iShares US total market. So a CAP weighted ETF of US stocks, and 9.3% of its assets are in Apple, Amazon and Microsoft.

Cameron Passmore: Amazing.

Ben Felix: Yeah. So almost 10% of the total US market is these three stocks. And the DFA global portfolios, it's more like 4.4% allocated to those three stocks.

Cameron Passmore: Right, because we'll always have exposure to those stocks, we just underweight them because they're large CAP growth.

Ben Felix: Correct. So you've got about half the exposure relative to a CAP weighted index, which over the long-term we expect to be obviously a good thing, but over this specific time period, the DFA US equity allocation year-to-date, as at the end of September, had been 9.23% in Canadian dollars, while the Russell 3000, so total US market is up 14.62% in Canadian dollars.

So obviously you see that spread. So what happens in portfolios when that's happening, kind of I guess, the opposite of what would have been good over this time period. Because what would have been great is just loading up on those stocks that have been doing really well, because they continued to do well. But the reality is that in portfolios, they're being rebalanced back into those value stocks that have been underperforming.

Cameron Passmore: So you're selling the large CAP growth stocks high.

Ben Felix: That are doing well, yeah.

Cameron Passmore: And you're going and buying other, at the other extreme, small CAP values of the beaten up small companies.

Ben Felix: Exactly. So rebalancing into the pain, buying what's-

Cameron Passmore: That happens all the time around the world, this had the portfolios.

Ben Felix: And that's what any index portfolio should be doing the same thing. Like any index investor this year will probably be like a couch potato investor, for example. Well, a couch potato is three ETF's now. A regular ETF investor with multiple ETF's for different allocations would be selling off some US stocks to buy international and Canadian, which have been either flat or negative.

Cameron Passmore: In emerging markets, for sure.

Ben Felix: Yeah.

Cameron Passmore: Speaking of Amazon, did you see the new Amazon force? It's a 4 star store in Soho.

Ben Felix: It's crazy. Such a cool idea.

Cameron Passmore: Cool idea, live pricing I understand, that are based on demand.

Ben Felix: Such a cool idea.

Cameron Passmore: And reviews, their views show up live on these little screens, very cool.

Ben Felix: Well, we got to tell people what it is. It's a store that is only selling products with a 4 star or higher rating on Amazon.

Cameron Passmore: Yeah. A physical store for Amazon.

Ben Felix: It's very cool.

Cameron Passmore: Very cool.

I had a good weekend of reading. I think I mentioned to you, my leaf blower, my grass trimmer and my lawnmower all died at the same time. I said, "Fine, at least I'm not destined to do yard work." So I went inside and read for most of the afternoon yesterday, which was great. So one of the books I actually finished off, I don't know if you read it or not, but your sister, Tessa, recommended it. Is called The Four Agreements by Don Miguel Ruiz. Have you read it?

Ben Felix: No, Tessa's told me about it, but I've never read it

Cameron Passmore: I'm sure many listeners have heard of it or even read it, but it's a really great read, simple read. It comes over the four agreements you have to have with yourself. Be impeccable with your word, things like avoid gossip and empty promises, say what you mean and realize that by saying things that may not be nice can cause problems.

Number two, don't take anything personally. People's behavior is a reflection on them, not on you, and opinions are very subjective and everybody has biases, so don't take it personally.

Number three, don't make assumptions. So, the point they're making is, is there's going to be much stress caused by making assumptions about something or someone without actually checking with the other person.

And lastly, always do your best, and then you have no regrets in life. I realize these are simple, straightforward points, but the book is really well done, it's a quick read. So I highly recommend it.

Ben Felix: A lot of life lessons there today, from the Ben Carlson post in that book.

Cameron Passmore: That's what we're all about, right? Life lessons.

What have you been reading lately?

Ben Felix: Well, I just finished listening to that Vanderbilt book. I mentioned last week, the Charles Duhigg book, I believe it's called Smarter Better Faster. Better Faster Smarter, something like that, about productivity. So I picked that one back up rather than read the Vanderbilt book.

The Vanderbilt book, it was cool. I mean, some of the stuff they talk about is like just the celebrity status of the richest people and how they had ... Some of them, they have their own newsletters and you think it's just, it's exactly the same as having a Facebook feed or an Instagram feed, or whatever. People would write, like famous rich people, would write newsletters about what's going on in their lives. I was like, "Man, the world hasn't really changed that much, we just have better technology."

Cameron Passmore: Yeah, my next one I'm on now is Mindset, which was mentioned in the Shane Parrish podcast a couple of weeks ago with Toby. It's a very, very good read. I'm about a third of the way through.

Ben Felix: Oh, that would be good, I might have to pick that up after you. Anything else?

Cameron Passmore: That's it, talk to you next week from Chicago.

Ben Felix: All right, talk to you later.