Benjamin Felix

August 9, 2018

Episode 4: The Race to 0%

Benjamin Felix

August 9, 2018

Key Points From This Episode:

After a successful launch, the podcast will live on! Thanks for the support and feedback [0:00:00]
The longest bull market in history? [0:01:07]
Are we repeating the tech bubble? [0:01:53]
Why it still makes sense to hold bonds [0:02:18]
Rebalancing isn’t always easy [0:03:33]
The Lost Decade, sort of [0:05:16]
Is tax-loss selling worth it? [0:05:41]
Horizons’ marketing mistake [0:10:41]
One decision funds [0:13:14]
Index fund fees are finally at 0% [0:15:49]
Sec lending is the future of index fund revenue [0:16:32]
Charley Ellis on the history of active management [0:18:30]
There are less willing losers today than there were in the past [0:19:34]
The paradox of skill [0:22:32]
Active managers underperform consistently [0:25:37]
Daniel Kahneman does not believe active management works [0:25:37]
If you think you have intuition about stocks, you’re wrong [0:26:08]
Corporate DB pension plans are not risk-free [0:26:50]

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.

So the launch of the podcast was, I would say, a success. We recorded our first three episodes just as a bit of a pilot to see if anybody was interested. And in our little world, I'd say we had an overwhelmingly positive response.

Cameron Passmore: Feedback's been great. So nice to hear that people are interested, appreciated, and actually give us a feedback, which we like very much.

Ben Felix: Yep. We did have that.

Cameron Passmore: And maybe at some point we'll have clients on as guests to talk about their situation anonymously. Who knows where this can go. So if you have ideas, send them along.

Ben Felix: Yeah, definitely. We'd be open to any ideas like that. We had about 200 downloads of the episodes that we released, which is... Yeah. I thought it was pretty cool. So anyway, we will continue going with the podcast.

Cameron Passmore: So we're getting lots of questions lately with clients about the bull market. I don't know about you, but lately I've had, it seems like everyone raised the issue of what do you do now? How do you invest now? Market's been so good for so long, should we do something different?

Ben Felix: Right. I think we're about three weeks away from this being the longest bull market in history, surpassing that of the 1990s. There's some other stats out there that are interesting. I think the 10 year return on the S&P 500. So that's 10 years to date is just before Lehman Brothers failed. And we had the-

Cameron Passmore: Gosh, I remember that weekend. That was unreal.

Ben Felix: Yeah, you've told me that story.

Cameron Passmore: So 10.8% compounded including dividends, that's in Canadian Dollars.

Ben Felix: Nope. That's US Dollars.

Cameron Passmore: US Dollars. Okay.

Ben Felix: Yep. Yep. And so adjusted for inflation, Microsoft's 1999 peak value translates to about 950 billion today. So pretty close to Apple's trillion dollar valuation. But anyway, this article is on CNBC. It's kind of pointing at, this looks like then, which is kind of the question I think that you've been getting.

Cameron Passmore: Getting a fair amount. And we had some questions last week... My equities, yeah, that's been great. So you've done a good job managing that, but my bond returns have been low. So why don't we go do something and fix that? And it's like, well, you've experienced higher than expected returns on the stock side, and yes, lower than expected on the fixed income side. But overall, a balanced portfolio's had very respectful returns over the decade.

Ben Felix: Yeah. But you're right, that's when people start to get worried about why the bonds aren't performing well and they forget why they have them in the first place, because we haven't seen big crashes like we had in 08, 09.

Cameron Passmore: Yeah, and there's a lot of investors that have never really seen negative returns.

Ben Felix: That's right.

Cameron Passmore: Maybe for a quarter, which, was it two years ago? We had some negative returns in the quarter?

Ben Felix: Yeah.

Cameron Passmore: But to have a prolonged bear market like we had in 2008, which, going into 2009, I can remember people saying, "Just go GICs for now. I have enough in equities." Even though the equities had dropped by 20, 30, 40%, people felt they had enough at that point. So it was a lot of appreciation for bonds when things don't go so well.

Ben Felix: So back in 08, 09, did you have any clients pull the plug?

Cameron Passmore: I can think of two.

Ben Felix: And they told you, "I can't do it..."

Cameron Passmore: One was a partial and one was a full transfer out. Had a few people that came into new money then who decided that this equity ride was not for them. And they went to annuities, which in hindsight, the annuity rates are pretty good back then, in hindsight, given where interest rates have gone. But I can remember in early 2009, talking about rebalancing into equities, and we had to do it, and we did do it.

Ben Felix: What were those conversations like?

Cameron Passmore: It would be very different today. Today, I think people appreciate it and kind of know their religion. Back then, it wasn't a necessarily as easy a sell, per se. I think a lot of people decided that they were less prone to risk coming out of that. So we all know there's recency bias when everyone wants more risks now that returns have been good. Well, back then returns had been bad, so people wanted to kind of tone down the risk.

Ben Felix: Yeah. That's really interesting.

Cameron Passmore: And this is one of the reasons why I'm so happy to have so much money in the DFA global balanced portfolios where this rebalancing happens every day, no matter what happens.

Ben Felix: There's no conversation about it.

Cameron Passmore: And even look now, yes, it's been a bull market, but not all markets have been that strong. Canada hasn't been that strong. We talked about value underperforming lately.

Ben Felix: Right, we're talking about that huge bull market. It's really US stocks.

Cameron Passmore: Really US large cap growth stocks, and a handful of stocks have driven the majority of those returns. So to know that we have a value tilt in a small cap tilted global portfolio where you're being rebalanced every single day in the, what, 14 sub-asset classes. This is the message I give to people. So yes, it has been a bull market in the US, but there's not been a bull market everywhere. So the strategy made sense before, it continues to make sense today. So just keep on doing what you've been doing.

Ben Felix: Yeah. There's that great stat on the lost decade in the US, the 10 year period from, I think, 2000 to 2010, where if you were invested in US stocks, you actually lost money. You would have been better off in T-bills. But then you add in global diversification and small cap and value and all those different things, and you actually had great returns.

Cameron Passmore: Yeah. Eric Nelson does a great job of hammering those numbers at Servo Wealth Management. They even put that on their show notes. He puts out great data on the lost decade.

Ben Felix: Yeah, he does. So speaking about market volatility and stocks decreasing in value, one of the things that happens from a portfolio management perspective when assets decrease in price is something called tax loss harvesting, or tax loss selling. So that's the practice of selling securities that are a loss, so that you can actually use that loss to offset a current or future capital gain.

Cameron Passmore: Only capital gain. You can't use it against income.

Ben Felix: Yeah, that's right.

Cameron Passmore: A lot of confusion on that.

Ben Felix: Right. And there was a post on Enterprising Investor, which is the CFA Institute blog, where the author of the post was questioning how effective tax loss selling really is. And he points to a bunch of different issues. I think the most interesting ones are that, in order to claim a loss, you can't hold the same security for 30 days. So in Canada, that's called the superficial loss rules. In the US, it's called a wash sale rules. But what it means is if you, as an example, just because these are the numbers that I have an example for, if you take VCN, which is a Canadian equity ETF, and sell it at a loss, you can't own that same ETF for 30 days if you're going to claim the loss.

Cameron Passmore: Or a similar one, right?

Ben Felix: Well, that's the thing. And so CRA has their definition of identical property, which yeah, so you can't own identical property. It's a pretty legalese definition. But presumably, and this is the way that people who do tax loss selling with ETFs, presumably, as long as you own ETFs that are tracking a different index, that's different enough. At least that's how people are doing it. So you look at something like VCN, you sell it, but then you're not going to not have Canadian equity exposure for 30 days. So you have to find something called a tax loss selling pair, which is, as I just mentioned, a second ETF that tracks the same market without tracking the exact same index. So the risk that you're introducing is that the index that you switch out of does better than the index that you switched into over the 30 day period while you're waiting for your loss to materialize.

Cameron Passmore: Yeah, I wouldn't do it unless it's a pretty material loss. And there's not many material losses on the books anymore.

Ben Felix: Yeah, you're right. But if we have a crash or a downturn or whatever, then we could have some losses. You started looking at more material losses, then you're talking about bigger positions too, which means... So that risk scales up.

Cameron Passmore: Yes, it's in proportion, for sure.

Ben Felix: So I was kind of curious, what does that risk actually look like? So I just looked at the monthly return difference between VCN, so that's the Vanguard footsie Canada all cap ETF, and XIC, which is the I-Shares Canadian ETF, and the average monthly return, I went back to 2015, just arbitrarily, the average monthly return difference is nine basis points.

Cameron Passmore:.09%.

Ben Felix:.09%. So you're introducing this additional, well, average deviation of nine-

Cameron Passmore: For one month.

Ben Felix: For one month, yeah.

Cameron Passmore: The other thing too, is that if you trigger the loss, you can also carry that back a couple of years. So if you happen to have a big capital gain a couple of years ago, we had this happen this past year, and they had a loss somewhere else in their portfolio, so we were able to trigger that loss and go back.

Ben Felix: Yeah, that is nice.

Cameron Passmore: So if you have a big gain two years ago, this is the year to trigger that loss, if you have any, to go back and mop up some of that.

Ben Felix: Yeah, if you have losses. This becomes more of a relevant conversation if we have a downturn and people have losses. But even now, stuff's been going up for such a long time, it's going to be tough to have losses unless you're adding in new money now or on a monthly basis, I guess. The other big things about tax loss selling are that it depends very heavily on your current and future tax rates. So it's all about a tax deferral, where you can use the loss to offset a gain now, but you're also buying your security back at a lower cost base when you sell it, which means you're going to have more tax to pay later. So you're still paying the tax, you're just paying it in the future. So you're benefiting from the deferral.

That deferral is only beneficial if you're in the same or a lower tax rate in the future. And obviously, future tax rates are a complete unknown. So this is one of the challenges with tax loss selling is that because we don't know what future tax rates are going to be, either on a macro level or at each individual level, that makes the pitch that tax loss selling is a guaranteed way to add value. It's not, but it is still an interesting strategy.

Cameron Passmore: So this whole topic of zero fees has caught your eye, hasn't it, this week, and certainly caught a lot of people's attention on Twitters. There's a domestic story as well as a story in the US about the drive towards lower fees, so the horizons.

Ben Felix: Well, I don't know if the horizons one's an actual story about low fees. They wanted it to be.

Cameron Passmore: Well, the story was out there anyways. So they claim to have management fee, wrap ETFs. So portfolio ETFs.

Ben Felix: The product is cool. We're going to not slam the product, but the marketing was slammed on Twitter by a few people.

Cameron Passmore: Pretty harsh.

Ben Felix: Yeah, it was pretty harsh. Horizons came out and said that they have the first 0% MER ETF in Canada, which is true. They created a new ETF that has no fee at all, but it holds underlying Horizons ETFs, which do have fees, which the unit holders of the wrap ETFs still have to pay. So it's not actually a no-fee ETF, just the big overarching product doesn't have fees, but all the underlying products do. So I would call it a little bit of a misleading marketing. They wanted to get in on the no-fee hype, but they don't actually have no fee products. But anyway, the products are pretty cool. They're kind of similar to Vanguard's single decision ETF. So you're getting access to a globally diversified portfolio of ETFs by owning one single ETF. They came up with two, HBAL and HCON. So it's a 70, 30 portfolio and a 50, 50 portfolio. So 70 stocks, 30 bonds and 50 stocks, 50 bonds. And they're using their own total return index ETFs to create these products.

Cameron Passmore: So they're not paying any sub advisory fees to S&P or MSCI or somebody.

Ben Felix: Well, no, they... I don't know how that works because they're swap based, but they still track major indexes. They're still tracking the NASDAQ 100.

Cameron Passmore: Yeah, [inaudible] SWAT based anyways.

Ben Felix: I don't know how that works for the sub advisory fees, but investors do end up paying a swap fee. So on the Horizons website, it says the swap fee can be as much as 30 basis points. The underlying fees on these ETFs, so we said that the product has no fee, but the underlying ETFs do have fees, the weighted average MER ends up being between 15 and 16 basis points. But then you've also got the swap fee of up to 30 basis points. Now, for an apples to apples comparison, if we're going to add in the 30 basis points swap fee, you have to start taking into account the withholding tax on foreign dividends, because you're not getting any of that with these total return index products. But if you're using like a Vanguard international ETF, then you're going to have unrecoverable withholding tax, especially because of Vanguard... I think the Vanguard products are still holding US listed ETFs as opposed to securities directly.

Cameron Passmore: Maybe we should talk about that in a future podcast.

Ben Felix: I haven't checked that in a while. I know I-Shares is mostly holding securities directly now.

Cameron Passmore: As does DFA. [inaudible] the full credit for any taxes.

Ben Felix: Yep. Yep. That's one of the really cool things about DFA. And that put DFA ahead of the ETFs for a while. But the ETF providers, potentially spurred by our colleagues, Dan and Justin, I don't know if they have that much pull in the industry, but they made a lot of noise about withholding tax and the ETF providers have-

Cameron Passmore: But the point is, fees are coming down. It's a price war fare out there. And the one decision tools for individual investors are increasing all the time, which is good.

Ben Felix: I hope that this new Horizons product spurs someone like I-Shares to launch something similar. I think it's great that Vanguard did it. I wouldn't touch this new Horizons product, personally.

Cameron Passmore: Yeah. I'm not the biggest proponent of them. And I'd love to know how much money has been lost on their leveraged and inverse leveraged ETFs.

Ben Felix: Well, we looked at their, they had a managed futures product a while ago, which I wrote a post about that a couple of weeks ago. I wouldn't touch that as a strategy anyway, but Horizons did have a product like that. And it closed down because performance was so bad. That's not their fault. That's just managed futures happen to do poorly while that fund was open.

Cameron Passmore: So the other zero fee story was Fidelity, which is the huge company out of the US, $2.5 trillion of assets under management. Believe their main bread and butter is on the active management side, huge fees generated there.

Ben Felix: Active management, they've got brokerage, they've got financial advisory. 2.5 trillion, just to put it into context for our Canadian listeners, the Canadian mutual fund industry as a whole is a little bit over a $1 trillion. And ETFs, they don't add much to that. So 2.5 trillion USD is substantially bigger than the whole entire Canadian investment fund market, including mutual funds and ETFs.

Cameron Passmore: So they are truly not charging a management fee on their index. And I know there's no sub advisory, no S&P fees, no MSEI fee. They have their own index, that I'd say, is by three to five basis there. But you've got to follow the money. They're not doing this for nothing.

Ben Felix: Yeah. So speculation is two things. One, that they're going to get sec lending revenue, which everybody's getting. And there was an article written, I think it was either by Vanguard or about Vanguard, probably a while ago, three or four years ago, where the author of the article, I don't remember who wrote it, but the author wrote that ETF fees will eventually go to zero because of sec lending.

Cameron Passmore: Okay. What is sec lending? We can't just fly over that term.

Ben Felix: Sure. So when an ETF has assets held in trust, they can lend those assets out, and they receive a fee for lending the assets out.

Cameron Passmore: So who would want to borrow that asset?

Ben Felix: Short sellers.

Cameron Passmore: Because they think the stock's going to go down, they borrow from you, pay you a rent, fully collateralized rent, so there's very minimal risk to the unit holders of the Fidelity fund or whatever fund it might be.

Ben Felix: Yeah. It's very, very little risk.

Cameron Passmore: It's very common in the industry to generate sec lending fees by lending out these shares to hedge funds, I would presume, who want to short a stock.

Ben Felix: And everybody's doing this. And with MDRs as low as they are now, I think in a lot of cases, fund companies, so that's the I-Shares, the Vanguards, probably the Fidelity's too, with their index funds anyway. They're getting more revenue from sec lending than they are from their actual MERs, because MERs are so low. The interesting thing about fees going to zero, I think, is that it doesn't really matter. We look at ETFs now, they're 10 basis points, five basis points. Going from five basis points to zero basis points doesn't really matter. It sounds nice, I guess.

Cameron Passmore: We've already dropped 95% of the old fees anyways. But you can only get that fee if you buy directly from fidelity, I believe. You have to vote on their website or through their service. So if you want advice, there's going to be an extra margin for the advice.

Ben Felix: That's right. So I mentioned two things, that they're probably doing this for, one, is the sec lending, or that's where they're going to get revenue from. The other one is exactly what you're saying. It's a financial advisory.

Cameron Passmore: But look at what this is costing them. I found the data point. So they've picked up $36 billion so far this year in their passive index type products, but they've lost $27 billion of active funds this year that they transferred out. That's a massive hit on revenue.

Ben Felix: Yeah. That's where all their revenue is coming from. Absolutely.

Cameron Passmore: So I'd love to know how much that sec lending fees are actually shared with unit holders. I guess we could dig into their filings to find out. I don't know what their policy is.

Ben Felix: Once they filed, yeah. Yeah, I don't know.

Cameron Passmore: Because some companies share that revenue with unit holders.

Ben Felix: Well, somebody wrote about that this week too, or last week. Was it this week? Anyway, somebody wrote about how we might get to a point eventually where ETF companies are actually paying unit holders to own the funds. So the MER is zero and their sec lending revenue that's going back to the unit holders, you're ending up with a negative MER, where you're actually getting paid to own the fund, in excess of the investment return, obviously.

Cameron Passmore: Well, we know in the DFA world, you can look at their filings and see how much sec lending revenue is generated for unit holders.

Ben Felix: Any company. You can look at it from...

Cameron Passmore: …back to see what it is as a percentage compared to...

Ben Felix: It's very close. I looked at I-Shares and DFA a few weeks ago, it was very close. DFA does... They've negotiated more of a payout. So there's a fee that the fund company has to pay to lending agent, and DFA gets to keep more of the revenue. I-Shares ends up paying out more to lending agent and they act as their own lending agent, so they're kind of splitting it with you, I guess. DFA has to pay it out to RBC, I believe, is their lending agent. So they've managed to negotiate a little bit of a better split for the fund holders then I-Shares has.

Cameron Passmore: So one of the giants of the indexed fund industry spoke up last week on the capital allocators podcast that you discovered.

Ben Felix: Yeah, it was a good episode. So it was Charley Ellis. He's been around for a very long time. He entered the investment industry in the 1960s, and he's in his eighties now, and still working. And that's one of the things he actually talks about in the podcast, is that this financial services and investment management is such an attractive business to be in. And it's a business you don't have to get out of. So he talks about that as one of the reasons that he doesn't think active management will go away. But that's beside the point of what I want to talk about for this bit.

So he was talking about the things that have changed since he started in the investment management business in the 1960s. And these are all things that make it harder today for active managers than it's ever been in the past. Not that we need more convincing of why passive makes sense and active doesn't, but these were pretty interesting data points.

Cameron Passmore: No, because so many people say the debate is over. And frankly, I don't really do the debate anymore with people. People that we meet kind of get it. It's so logical. And our appetite to try to change people's minds is virtually nil.

Ben Felix: Yeah. Yeah, the interviewer for the podcast, he is actually a consultant, and I think he does have some beliefs around active management. So he made some comments to Charlie, basically saying that he does believe there are some good managers, but that's his own problem, that's his own bias. So he kind of recognizes that he's probably wrong, but still has those beliefs anyway. So Charlie says it in the 1960s, about 10% of trading, at most, was done by institutions, and 90% of trading was done by individuals. And the way that he describes in the podcast is quite funny. He says, "Who are those individuals? They were nice people." So there are people investing their savings in stocks, not doing a whole ton of research, maybe reading the newspaper. So if we think about the world of active investing, you need to have people to exploit. You need to have people who are making bad investment decisions. I think Charlie calls them, "Willing losers," in the podcast. So back then, sure. Maybe if you're an active manager, there are willing losers to exploit,

Cameron Passmore: But you had no technology either back then to get the information.

Ben Felix: Sure. True. You think about an active manager, they might have more resources than the guy coming home from work, reading the paper, and buying some AT&T shares or whatever he was buying. So today, Charlie says, and I didn't find anything to this up, but we'll take it for what it is, Charlie says that 99% of all trading today is done by computers. And most of the investors behind those computers are highly skilled and have instant access to information. So another way of looking at that is that back in the 1960s, there were a lot of easy people to exploit. And today, that's not the case. There's nobody to exploit. Everybody-

Cameron Passmore: There's no dummies on the other side of the trade.

Ben Felix: Right. In the past, it was possible for an analyst to set up a private meeting.

Cameron Passmore: I love this.

Ben Felix: Yeah, it's so interesting.

Cameron Passmore: Remember those ads you'd see on TV where the manager would fly around the world to meet managers?

Ben Felix: Yeah. So you used to be able to do that. And the management would actually give you information that maybe wasn't public yet. But I think it was in 2000, I believe, that regulation FD, in the States. I'm sure we have the Canadian equivalent, I didn't look into what it's called. But the SCC now requires that any material information that is disclosed to an analyst or whatever must be disclosed publicly. So under reg FD, it is not possible legally to get a competitive information advantage. So no matter how good your technology is, even if you had a way to get an edge, you can't. You can't have it. Charlie estimates that in the 1960s, there were less than 5,000 people in the active investment management business. And today, he estimates there are over 1 million. Pretty crazy. He also mentioned CFA charter holders. I looked at that number. There are 154,000 CFA charter holders in the world today. Not all of them are necessarily in investment management, but still, that's a whole lot of people.

Cameron Passmore: But you think of these asset managers and firms, like fidelity. Their revenue is enormous. Whatever technology a manager wants, for sure they can acquire.

Ben Felix: Any good manager.

Cameron Passmore: All the best people they can get make huge salaries. Think of Goldman Sachs. Think of all these different companies. That's pretty fierce competition, pretty fierce price discovery.

Ben Felix: Well, it's the whole thing about the paradox of skill. So this is a case and it happens in other things too. In one of our previous episodes, we talked about LeBron James playing one-on-one against himself, and how those games are going to be won by luck, not skill. It's the same thing in investment management. You get more and more skilled people with better and better information, and it just gets harder. It doesn't get easier. It's not good for investors who are investing in active funds. A couple of other points that Charlie made. Back in the 1960s, a firm, a securities firm, would have 10 or 12 analysts. And those analysts weren't researching on behalf of their clients. They were researching to find good investments for the partners of the firm. So trying to find some good small cap stocks to make a profit on. And they weren't publishing their research.

So they go and identify a great company and they wouldn't publish the research. They'd bring it to the partners and the partners might invest. Today, securities firms, which there are many of, have hundreds of analysts all over the world, and they've got all sorts of different expertise. You've got economists, you've got behavioral economists, you've got financial analysts, whatever you can think of, and they're publishing their research constantly. So that makes it, again, just harder to have an information edge. And the last point that was kind of interesting. Back then, there were about 3 million shares traded each day. And today, there are more than 5 billion shares traded each day.

Cameron Passmore: I think it's like over 80 to a 100 million trades per day.

Ben Felix: Yep. 85 million trades.

Cameron Passmore: Just go look at the ticker in our office here to see trades go through on different stock. It's just mind boggling how many, how fast they go through.

Ben Felix: And like Charlie says, a lot of that's going through algorithms. So even though people are initiating the trades, it's being processed by algorithms. I thought it was interesting to point out too, that the SPIVA report, which Standard and Poor's puts out twice a year, it kind of backs up this whole idea that-

Cameron Passmore: Every year it backs it up. It never changed. This story has never changed.

Ben Felix: Yeah. We've looked at the report all over the world too. I think that Ray, our director of research at PWL, is actually going to start doing a wrap-up of all the SPIVA reports to look at how it looks globally. But you look at ten-year performance, so Canadian equity mutual funds who are trying to perform the S&P TSX composite index, 8.14% of them have been successful. So about 92% of funds failed to outperform the index over 10 years.

Cameron Passmore: Either didn't outperform or they just shut down in the past 10 years.

Ben Felix: Right. True.

Cameron Passmore: 8% of the funds that were here 10 years ago in the Canadian marketplace beat the Canadian index.

Ben Felix: Yep. I don't have the stat in front of me, but I've looked at it fairly recently. I think it's about, overall, across all fund categories, it's about a 50% survivorship rate over 10 years.

Cameron Passmore: Look at the global equity numbers. 2.45% of the funds that were here 10 years ago beat the relative index.

Ben Felix: Yep. Look at US equity. 1.67%. Why people still invest in active funds is beyond me. There was a neat interview by CFA Institute with Danny Kahneman. This was earlier this year. It's not new, but I saw it for the first time recently. So Daniel Kahneman is a behavioral economist. He kind of fathered that whole...

Cameron Passmore: Wrote the great book, Thinking Fast and Slow. Just a great, great book.

Ben Felix: So behavior is often cited by active managers as a reason that they can beat the market. So they can predict investor behavior, herding behavior, and things like that to produce an edge. And I thought it was pretty funny that Kahneman said in the interview, "All behavioral economists are against active investing because they think the market is unpredictable or very, very difficult to predict." So the guy who fathered behavioral economics is saying that you can't use it to invest actively to produce consistent outperformance.

Ben Felix: He also talks about intuition in stock picking. So you'll talk to someone who, maybe they have had a successful career in stock baking, but Kahneman basically says you cannot have intuition in stock picking, because markets are random. If you have intuition, you've got your own bias.

Cameron Passmore: Based on your own experience. So if your experience was successful, you'll take that intuition as being strong and start relying on that. But it's not a good decision. He was pretty emphatic in that interview.

Ben Felix: Yeah, he was. He does mention that in venture capital, maybe you can build intuition. But in any efficient market, so any liquid-

Cameron Passmore: Right. Because you can add value in the venture capital world. You can't add value in capital markets. Anything by Danny Kahneman is worth reading, worth checking out.

Ben Felix: Yeah. For sure. Definitely. Touch on briefly the Sears pensioners, they've had their payments cut by 30%, which was actually more of a cut than they were expecting. That's going to go for 20 months. I think they had a bit of a claw back. But the pension is about 80% funded. So over the long-term, they would expect to get about 20% unless they win in court and get that funded. So Sears filed for bankruptcy protection in June, 2017, the pensioners lost their health benefits at that time. And now they're fighting to keep their, or to get more of, their DB pension plan topped up in the court proceedings.

Cameron Passmore: Yeah. And most people in this town have a DB plan from federal provincial governments. So those would be a different level of safety, of course. But we all live through the Nortel, many Nortel pensioners in town, that lost some of their benefits.

Ben Felix: Yeah. And we've seen a lot of that. So it is a bit of, I guess, a cautionary tale, that even if, assuming it's a corporate defined benefit pension plan, which there are less and less of, but even those... You think about it, a corporate DB pension plan is kind of like a bond, being a longer bond.

Cameron Passmore: But it's a huge liability to the company.

Ben Felix: Well, that's what I mean. It's a big long bond in the company. They've got to make their payments. But if the company goes under and they don't have any more capital and the pension is underfunded-

Cameron Passmore: But there's so few private company DB plans anymore. Everyone's going to DC, defined contributions, if at all.

Ben Felix: Yeah. FSCO does a report, Financial Services Commission of Ontario, they do a report quarterly on the funded status of pensions in Ontario. As of March 31st, which was their last update, the median funded status was 95%, so pretty good. Even if those companies went under and could no longer make contributions, the existing pensioners would be okay.

Cameron Passmore: So that's a wrap for this week. Anybody has suggestions, send us a note. Either put it in the comments down below or drop us a note directly.

Cameron Passmore: Terrific.